Final Results Part 2 of 2

Drax Group PLC 08 March 2006 Drax Group plc Preliminary Results for the year ended 31 December 2005 FINANCIAL REVIEW Overview Drax Group plc was introduced to the Official List of the UK Listing Authority and its ordinary shares commenced trading on the London Stock Exchange on 15 December 2005. Drax Group plc is the ultimate holding company of Drax Power Limited, the owner of Drax Power Station. The principal activity of Drax is the operation of the power station and the trading of the electricity it produces. Drax is the largest coal-fired power station in Western Europe, with a nominal capacity of 3,960MW and a registered generating capacity of 3,870MW. All electricity generated is sold in the wholesale market or through the balancing mechanism, or used by the power station. Fuel is purchased from a variety of UK and international sources. CO2 emissions allowances required by the Group in excess of its allocation under the UK National Allocation Plan (the 'UK NAP') are also purchased from a variety of UK and international sources. For the year ended 31 December 2005, Drax produced an EBITDA of £239 million and an operating profit of £354 million (including exceptional items and unrealised losses on derivative contracts which together improved operating profit by £146 million). For the year ended 31 December 2004 EBITDA was £90 million and operating profit was £55 million. Results of operations Year ended 31 December 2005 compared to year ended 31 December 2004 Year ended 31 December 2005 2004 £ million £ million Revenue Revenue from generation 848.8 549.3 Revenue associated with power 79.8 74.8 purchases 928.6 624.1 Fuel costs(1) Fuel costs in respect of generation (459.7) (309.9) Costs of power purchases (79.8) (74.8) (539.5) (384.7) Gross margin 389.1 239.4 Other operating expenses excluding (149.7) (151.9) depreciation , amortisation and exceptional items(2) Other income - 2.5 EBITDA(3) 239.4 90.0 Depreciation and amortisation (31.2) (35.0) Other operating income - net 263.3 - exceptional credit Unrealised losses on derivative (117.0) - contracts Operating profit 354.5 55.0 Interest receivable 23.5 4.6 Interest payable and similar charges (114.4) (101.2) Profit/(loss) before tax 263.6 (41.6) Tax credit 18.8 35.1 Profit/(loss) for the period 282.4 (6.5) attributable to equity shareholders from continuing operations (1) Fuel costs comprises the fuel costs incurred in the generation process, predominantly coal, together with oil and, since 2003, biomass costs. Since 1 January 2005, CO2 emissions allowance costs have also become a substantial component of fuel costs. Fuel costs also include the cost of power purchased to meet power sale commitments. (2) Other operating expenses excluding depreciation, amortisation and exceptional items principally include salaries, maintenance costs, connection charges (BSUoS, TNUoS) and business rates. (3) EBITDA is defined as profit before interest, tax, depreciation and amortisation, exceptional items and unrealised losses on derivative contracts (as defined in IAS 39). Drax Group's revenues from generation during the year ended 31 December 2005 were £849 million, compared to £549 million during the corresponding period in 2004, an increase of £300 million (or 55%). This increase was mainly due to increases in average electricity capture prices over the period. Power sold in the year ended 31 December 2005 was 23.2TWh, compared to 22.9TWh in the corresponding period in 2004. Included within revenues from generation are revenues from the sale of by-products (ash and gypsum), the provision ancillary services, the sale of ROCs, LECs and SO2 emissions allowances. In 2005 these revenues totalled £32 million compared with £26 million in 2004. Drax purchases power in the market when the cost of power in the market is below Drax's marginal costs of production in respect of power previously contracted by the Group and to cover any shortfall in generation. The cost of purchased power has remained relatively constant between each of the two years.Under IFRS, the costs of power purchased is treated as fuel costs, and revenue has been adjusted accordingly. Drax's fuel costs in respect of generation during the year ended 31 December 2005 were £460 million, compared to £310 million during the comparable period in 2004, an increase of £150 million (or 48%). This increase was primarily due to the cost of CO2 emissions allowances (£87 million in 2005) and an increase in the cost of coal and other fuels. Reflecting the above factors, Drax's gross margin, being revenues less fuel costs, increased from £239 million in the year ended 31 December 2004 to £389 million in the year ended 31 December 2005, an increase of £150 million (or 63%). Drax's other operating expenses excluding depreciation, amortisation and exceptional items were broadly flat at £152 million in the year ended 31 December 2004 and £150 million in the corresponding period in 2005. EBITDA was £239 million in 2005 which was £149 million higher than for 2004. The improvement in EBITDA reflected the improvement in gross margin. Depreciation and amortisation in the year ended 31 December 2005 was £4 million lower at £31 million compared with the same period in 2004. The depreciation and amortisation charge for 2004 included £2 million in respect of losses on disposal of property, plant and equipment. Exceptional operating income for the year ended 31 December 2005 of £263 million, is comprised of credits of £19 million due to the reversal of provisions relating to impairment of tangible fixed assets and £311 million as a result of three distributions received by Drax under the TXU Claim. These items were partially offset by a charge for cash and share-based payment transactions under the Group's Long Term Incentive Plan ('LTIP') of £38 million, as well as costs incurred with respect to the Refinancing and Admission of £29 million. Additional information relating to these exceptional items is included in the Notes to the Consolidated Financial Statements. Drax had no exceptional operating income or expenses in the year ended 31 December 2004. IAS 32 and IAS 39, the International Financial Reporting Standards in respect of derivatives and financial instruments, are applicable to Drax for the period from 1 January 2005. As a result of applying these standards, unrealised losses of £223 million and unrealised gains of £8 million on derivative contracts were recognised within liabilities and assets respectively at 31 December 2005 (as compared to unrealised losses of £20 million and unrealised gains of £15 million at 1 January 2005). The unrealised losses principally relate to the mark-to-market of Drax's forward contracts for power yet to be delivered and some coal contracts, which meet the definition of derivatives under IAS 39. The out-of-the-money position mainly reflects prices in Drax's forward sales contracts for power against rising market prices for power. For the period from 1 January 2005 to 30 June 2005, mark-to-market movements on these contracts were reflected directly in the income statement, as appropriate hedge accounting documentation had not been put in place. This resulted in an expense of £117 million relating to unrealised losses on derivative contracts being recognised in the income statement for 2005. For the purposes of IAS 39, from 1 July 2005, the Group has put in place appropriate hedge accounting documentation to enable it to achieve hedge accounting for a large proportion of its commodity contracts. As a result, mark-to-market movements on contracts which are now considered to be effective hedges are recognised through the hedge reserve. Reflecting the above factors, Drax's operating profit, increased from £55 million in the year ended 31 December 2004 to £354 million in the year ended 31 December 2005, an increase of £299 million. Operating profit for 2005 includes exceptional operating income of £263 million and unrealised losses on derivative contracts of £117 million as described above. Interest payable and similar charges in the year ended 31 December 2005 were £114 million, compared to £101 million in the same period in 2004, an increase of £13 million (or 13%). The increase reflects a reduction in interest payable on borrowings, principally as a result of repayments of the Group's B Debt following receipts under the TXU Claim, offset by a charge of £23 million resulting from the termination of interest rate swap contracts on Refinancing and Admission. Interest receivable of £24 million in the year ended 31 December 2005 includes a credit of £18 million in respect of previously recognised unrealised losses on the terminated swap contracts, accounted for under IAS 39 from 1 January 2005. Drax's tax credit during the year ended 31 December 2005 was £19 million, compared to a tax credit of £35 million during the comparable period in 2004. The tax credit in 2005 reflects the utilisation of tax losses brought forward from earlier years, which more than offsets the profit before tax for the year. The tax credit for 2004 reflects the loss for the year and the tax effect of the financing structure. Reflecting the above factors, Drax had a profit for the year from continuing operations of £282 million in the year ended 31 December 2005, compared to a loss of £7 million in the year ended 31 December 2004. Refinancing and Admission The Refinancing and Admission took place on 15 December 2005, resulting in the creation of a new holding company, Drax Group plc. Pursuant to the schemes of arrangement under which the Refinancing and Admission was implemented, the existing debt of the Group was settled, partially through the issue of new debt, and partially through the issue of ordinary shares in Drax Group plc. Also on 15 December 2005, Drax Group plc was introduced to the Official List of the UK Listing Authority and its ordinary shares commenced trading on the London Stock Exchange. The Refinancing and Admission involved a cash payment of £112 million to A2 Debt holders in respect of an equal amount of A2 Debt, and an exchange of the balance of A2 and A3 Debt of £433 million for new ordinary shares in Drax Group plc. In addition, the existing ordinary shares of Drax Group Limited, the previous holding company, were exchanged for new ordinary shares in Drax Group plc. The outstanding A1 Debt of £388 million and B Debt of £82 million was repaid at par, and previously deferred interest on B Debt and accrued interest on each of the tranches of debt of £63 million was repaid in full. Interest rate swap contracts with a notional value of £400 million, principally related to the A1 Debt, were also cancelled, resulting in a termination payment of £23 million. The new ordinary shares in Drax Group plc issued to A2/A3 Debt holders and existing shareholders of Drax Group Limited were issued by way of schemes of arrangement, and therefore did not constitute an offer of securities to the public. Consequently, Admission took place by way of an introduction. At the same time, the Group entered into new debt facilities, which included a Term loan of £500 million and a Bridge loan of £77 million, as well as a letter of credit facility of £200 million and a revolving credit facility of £100 million. The Term loan is subject to a fixed amortisation profile beginning on 30 June 2006 and ending on 31 December 2010. The Bridge loan has first priority over the TXU claim and the proceeds thereof.The total costs of the Refinancing and Admission amounted to £45 million, of which £29 million has been included within exceptional other operating expenses in the income statement. The remaining amount of £16 million has been deducted from debt and is being amortised to interest payable over the duration of the Group's new debt facilities. TXU Claim In 1999, whilst owned by AES Corporation, Drax entered into the TXU Hedging Contract, a 15-year power purchase agreement with TXU Europe Energy Limited ('TXU'). TXU defaulted on the contract in 2002, and together with certain other members of the TXU Group, filed for administration in the UK. On terminating the contract, Drax issued a claim (the 'TXU Claim'), ultimately agreed by the Administrators of TXU at approximately £348 million (including VAT), in respect of unpaid power purchased by TXU and liquidated damages for default under the contract. On 30 March 2005, the Group received a first distribution of £205 million (net of VAT and a payment by the Group to TXU Europe Limited) under the TXU Claim. This amount was subsequently paid to B Debt holders on 15 April 2005. On 2 August 2005, the Group received a second distribution of £51 million (net of VAT) under the TXU Claim. This amount was subsequently paid to B Debt holders on 17 August 2005. On 19 January 2006, the Group received a third distribution of £55 million (net of VAT) under the TXU Claim. The third distribution has been recognised in the income statement for the year ended 31 December 2005, and together with the first and second distribution, resulted in exceptional operating income of £311 million for the year. The third distribution is included as a receivable balance at 31 December 2005 and was used to make a prepayment of the Group's Bridge loan facility on 23 January 2006. At the time of approving the financial statements the Group had a further £26 million (including VAT) outstanding under the TXU Claim. The directors have reasonable expectations that the Group will receive repayment of this amount broadly in full by early 2007. Liquidity and Capital Resources Net debt reduced to £462 million in 2005 from £1,208 million in 2004. The main reasons for the reduction were the improvement in gross margin, receipt of distributions from the TXU Claim and the exchange of debt for equity as part of the Refinancing and Admission. Cash and cash equivalents stood at £88 million on 31 December 2005 compared with £38 million on 31 December 2004. The increase in cash and cash equivalents is analysed in the table below. Analysis of Cash Flows Year ended 31 December 2005 2004 £ million £ million Net cash 348.5 17.1 generated from operating activities Net cash used in (25.0) (13.7) investing activities Net cash (used (273.2) 0.5 in)/ generated from financing activities Net increase in 50.3 3.9 cash and cash equivalents (1) (1) For the purposes of the cash flow statements, cash and cash equivalents excludes amounts held in escrow as at 31 December 2005 and in debt service reserve accounts as at 31 December 2004. The movements in these acounts are included as a component of net cash generated from operating activities. Net cash generated from operating activities was £349 million in the year ended 31 December 2005, compared to £17 million for the corresponding period in 2004, an increase of £332 million. The increase includes the first and second distributions received in 2005 under the TXU Claim of £256 million, as well as the impact of improved business performance, gross margin having increased by £150 million in 2005. These items were partially offset by an increase in interest paid of £66 million, which includes payment of previously deferred interest of £25 million as well as £23 million related to the termination of interest rate swap contracts on Refinancing and Admission. Net cash used in investing activities was £25 million in the year ended 31 December 2005, compared to £14 million for the corresponding period in 2004. This reflected higher levels of capital expenditure in 2005. Net cash used in financing activities was £273 million in the year ended 31 December 2005, compared to net cash generated from financing activities for the corresponding period in 2004 of £0.5 million. 2005 includes repayment of borrowings prior to the Refinancing and Admission of £268 million, which comprises repayment of B Debt of £256 million funded out of the first and second distributions under the TXU Claim, as well as a prepayment of £12 million of A1 Debt on 30 June 2005. Also included in 2005 is repayment of borrowings on Refinancing and Admission of £583 million, which comprises A1 and B Debt repayment at par of £388 million and £82 million respectively, as well as A2 cash consideration of £112 million. These debt repayments were partially met by new debt issued on Refinancing and Admission of £577 million. Reflecting the above factors, cash and cash equivalents increased by £50 million in the year ended 31 December 2005, compared to £4 million for the corresponding period in 2004. Cash and cash equivalents was £88 million at 31 December 2005, compared to £38 million at 31 December 2004. Drax's policy is to invest available cash in short term bank deposits. Capital Resources On 15 December 2005 the Group's existing debt was replaced by new debt facilities comprising a £500 million 5 year amortising Term loan facility, a £200 million letter of credit facility, a £100 million revolving credit facility, and a £77 million Bridge loan facility. The Term loan facility is secured on a pari passu basis with the letter of credit facility and the revolving credit facility and any other permitted secured indebtedness. The Group's debt is guaranteed and secured directly by each of the principal subsidiaries of the Company and also by the Company. Standard & Poor's Ratings Group ('S&P') has assigned a BBB senior secured debt rating with a recovery rating of '1' to the Term loan facility, the letter of credit facility and the revolving credit facility. Drax is required to fund a debt service reserve account if it does not meet the specified historic annual debt service cover ratio on any of the six-monthly calculation dates, with the first calculation date being on 31 December 2006. The letter of credit facility can be used to provide letters of credit to counterparties or exchanges in relation to Drax's trading business. The final maturity date of the letter of credit facility is 15 December 2012. The Group guarantees the obligations of a number of banks in respect of the letters of credit issued by those banks to counterparties of the Group. As at 31 December 2005 the Group's contingent liability in respect of these guarantees amounted to £77 million (2004: £27 million). The revolving credit facility can be used to finance working capital requirements. It may also be used to provide letters of credit up to a maximum of £100 million or provide cash collateral, to the extent that counterparties do not accept letters of credit, up to a maximum of £20 million. The final maturity date is 15 December 2010. The Bridge loan facility must be repaid in full by 31 December 2008. Proceeds under the TXU Claim must be applied to repay the Bridge loan facility. Following a third distribution under the TXU Claim on 19 January 2006, £55 million of the Bridge loan was repaid on 23 January 2006 leaving a balance of £22 million outstanding. The third distribution has been recognised in the income statement for the year ended 31 December 2005 and has been included as a receivable balance at 31 December 2005. The debt which was repaid on 23 January 2006 has been shown as repayable within one year at 31 December 2005. Under the new debt facilities, the group can incur further financial indebtedness up to an aggregate of £100 million so long as S&P provides written confirmation that the Term loan facility will maintain an investment grade credit rating of at least BBB- following the incurrence of the further secured indebtedness. In addition, Drax can enter into additional finance leases up to an aggregate value of £10 million. The Group can also incur overdraft and other short term borrowings or facilities not to exceed £15 million and subject to certain other restrictions. The new debt facilities may be prepaid without penalty. Capital Expenditure Capital expenditure was £25 million in 2005 compared with £14 million in 2004. The increase in capital expenditure in 2005 was in support of fuel diversification (biomass and petcoke), environmental compliance and meeting improved reliability and safety targets. We plan to invest £30 million in core capital expenditure in 2006, although we continue to explore other value added opportunities within the business. Off-balance Sheet Arrangements Other than the letters of credit referred to above, no member of the Group has entered into any transactions with unconsolidated entities concerning financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose Drax to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to Drax. Profit Forecast for the Year Ended 31 December 2005 The prospectus prepared in connection with the Refinancing and Admission included a forecast of EBITDA, profit before interest and tax ('Operating Profit'), and net profit before interest expense and tax (together ''the Forecast'') for the year ended 31 December 2005. The basis of preparation and principal assumptions for the Forecast are set out on pages 154 and 155 of the prospectus. The assumptions included that the Forecast was based on average prices of electricity and coal prevailing over the five days up to and including 21 October 2005 and it was assumed that there would be no change in the future prices of electricity and coal. In addition, following the completion of a structured contract with EDF Trading Limited in October 2005, the prospectus noted that the Group had substantially fixed the cost of CO2 emissions allowances for 2005. The following table provides a comparison of the Forecast to the actual results for the year ended 31 December 2005 and also compares forecast and actual EBITDA excluding exceptional items and unrealised losses on derivative contracts. Year ended 31 December Forecast Actual Variance £ £ £ million million million EBITDA - before exceptional items and unrealised 220 239 19 losses on derivative contracts Exceptional credit related to termination of TXU 275 330 55 Contract and financial restructuring LTIP expenses arising from cash and share-based (38) (38) - payment transactions Estimated fees and expenses of the Refinancing (27) (29) (2) and Admission Unrealised losses on derivative contracts (119) (117) 2 EBITDA - after exceptional items and unrealised 311 385 74 losses on derivative contracts Depreciation and amortisation (32) (31) 1 Operating profit 279 354 75 Interest income (1) 5 6 1 Net profit before interest expense and tax 284 360 76 (1) Interest income excludes a credit of £18 million included in interest receivable in respect of previously recognised unrealised losses on interest rate swap contracts terminated on Refinancing and Admission. This credit is offset by a charge of £23 million included in interest payable representing the cash cost of terminating the swap contracts. EBITDA before exceptional items and unrealised losses on derivative contracts was £19 million higher than forecast largely due to an improvement of approximately £17 million in gross margin, principally reflecting higher electricity prices captured for November and December compared to market prices on 21 October 2005, and increased generation as a result of lower than forecast forced outages for the final quarter of 2005. The significant increase in EBITDA after exceptional items and unrealised losses on derivative contracts is largely due to the improvement in gross margin noted above and £55 million of exceptional operating income arising from the third distribution under the TXU Claim, received on 19 January 2006. As previously noted, the third distribution has been recognised in the income statement for the year ended 31 December 2005. Distribution Policy The Board has established a distribution policy which recognises Drax's exposure to commodity markets and comprises two elements. The Board intends that Drax will pay a stable amount (£50 million) by way of ordinary dividends each year (the base dividend). The base dividend will comprise an interim dividend and a final dividend and it is expected that the interim dividend will represent approximately one third of the total anticipated base dividend for each year. Drax expects to pay its first interim dividend for the half year ending 30 June 2006 in Autumn 2006. In addition to the base dividend, substantially all of any remaining cash flow subject to the availability of reserves and after making provision for debt payments, debt service requirements (if any), capital expenditure, and other expected business requirements will be distributed to shareholders. A significant cash surplus is expected to arise in 2006. The amount will be dependent on a number of factors including commodity prices and plant performance. Work has commenced to identify the most appropriate method for returning surplus cash to shareholders and it is expected that the proposed method of return will be advised at the company's AGM in May 2006 and that this will be followed by an indication of the likely range of distribution, timing and shareholder approval process in a Trading Update given at the end of June. Consolidated income statements Years ended 31 December Notes 2005 2004 £'m £'m Continuing operations Revenue 928.6 624.1 Fuel costs (539.5) (384.7) Other operating expenses excluding (180.9) (186.9) exceptional items Other exceptional operating income 2 329.9 - Other exceptional operating expenses 2 (66.6) - Total other operating 82.4 (186.9) income / (expenses) Other income - 2.5 Unrealised losses on (117.0) - derivative contracts Operating profit 354.5 55.0 Interest payable and (114.4) (101.2) similar charges Interest receivable 23.5 4.6 Profit / (loss) before tax 263.6 (41.6) Tax credit 3 18.8 35.1 Profit / (loss) for the year attributable 282.4 to equity shareholders from continuing operations (6.5) Earnings per share from continuing operations expressed in pence per share - Basic and diluted 4 98.0 (2.4) The results above relate to the continuing operations of the Group. Consolidated statements of recognised income and expense Years ended 31 December Notes 2005 2004 £'m £'m Profit / (loss) for the year 282.4 (6.5) Actuarial losses on defined benefit (8.2) (6.1) pension schemes Deferred tax on actuarial losses on defined benefit pension schemes 3 2.5 1.8 Initial recognition of net mark-to-market liability on adoption of IAS 32 and IAS 39 (5.6) - Deferred tax recognised on adoption 3 1.7 - of IAS 32 and IAS 39 Fair value losses on cash flow (109.7) - hedges Deferred tax recognised on fair value losses on cash flow hedges 3 32.9 - Net losses not recognised in income (86.4) (4.3) statement Total recognised income / (expense) for the year attributable to equity shareholders 196.0 (10.8) Consolidated balance sheets As at 31 December Notes 2005 2004 £'m £'m Assets Non-current assets Property, plant & equipment 1,050.5 1,037.7 Derivative financial 0.3 - instruments 1,050.8 1,037.7 Current assets Inventories 67.8 45.2 Trade and other receivables 192.9 69.5 Derivative financial 7.7 - instruments Cash at bank and in hand 5 99.1 75.7 367.5 190.4 Liabilities Current liabilities Financial liabilities: - Borrowings 6 101.4 204.7 - Derivative financial 173.0 - instruments Trade and other payables 176.1 66.9 Current tax liabilities 5.2 2.5 455.7 274.1 Net current liabilities (88.2) (83.7) Non-current liabilities Financial liabilities: - Borrowings 6 460.1 1,078.6 - Derivative financial 49.6 - instruments Deferred tax liabilities 185.3 246.7 Retirement benefit 44.7 36.5 obligations Other non-current liabilities 0.7 25.8 Provisions 2.0 0.5 742.4 1,388.1 Net assets / (liabilities) 220.2 (434.1) Shareholders' equity Issued equity 40.7 - Share premium 420.7 0.5 Merger reserve 710.8 445.1 Capital reserve - 293.5 Hedge reserve (76.8) - Retained losses (875.2) (1,173.2) Total shareholders' equity 7 220.2 (434.1) Consolidated cash flow statements Years ended 31 December Notes 2005 2004 £'m £'m Cash generated from operations 8 462.3 73.4 Income taxes paid (2.8) (0.4) Decrease in restricted cash 5 26.9 16.9 Interest paid prior to the Refinancing (57.5) (77.4) and Admission Interest paid on the Refinancing and 6 (86.2) - Admission Interest received 5.8 4.6 Net cash generated from operating 348.5 17.1 activities Cash flows from investing activities Purchase of property, plant and (25.0) (13.7) equipment Net cash used in investing activities (25.0) (13.7) Cash flows from financing activities Repayment of borrowings prior to the 6 (267.6) - Refinancing and Admission Repayment of borrowings on the 6 (582.6) - Refinancing and Admission Debt issued as a result of the 6 577.0 - Refinancing and Admission Net proceeds on issue of ordinary - 0.5 share capital Net cash (used in) / generated from (273.2) 0.5 financing activities Net increase in cash and cash 50.3 3.9 equivalents Cash and cash equivalents at beginning 5 37.5 33.6 of the period Cash and cash equivalents at end of 5 87.8 37.5 the period Notes to the consolidated financial information 1 Basis of preparation a) General Information The consolidated financial information for Drax Group plc (the 'Company') and its subsidiaries (together 'the Group') set out in this preliminary announcement has been derived from the audited consolidated financial statements of the Group for the year ended 31 December 2005 (the 'financial statements'). This preliminary announcement does not constitute the financial statements. The financial statements were approved by the Board of directors on 7 March 2006. The report of the auditors on the financial statements was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. The Annual Report will be posted to shareholders by 7 April 2006 and will be available on request from the Company Secretary, Drax Group plc, Drax Power Station, PO Box 3, Selby, North Yorkshire, YO8 8PQ. The Annual General Meeting will be held at The City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP at 11.00am on 12 May 2006. The financial statements will be delivered to the Registrar of Companies following the Annual General Meeting. b) International Financial Reporting Standards ('IFRS') The financial statements have been prepared on the basis of all applicable IFRS including all International Accounting Standards ('IAS'), and all applicable Standing Interpretations Committee ('SIC') and International Financial Reporting Interpretations Committee ('IFRIC') interpretations issued by the International Accounting Standards Board ('IASB') and endorsed by the EU. The financial statements are the first prepared by the Group in accordance with accounting standards as adopted for use in the EU and as such take account of the requirements and options in IFRS1 'First-time Adoption of International Financial Reporting Standards' as they relate to the comparative financial information. In particular, in accordance with the transitional arrangements set out in IFRS 1, the Group has elected not to restate the comparative financial information to show the effect of IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' and, as a consequence, for the year ended 31 December 2004, financial instruments continue to be accounted for in accordance with the Group's previous policies for financial instruments under UK GAAP. In contrast, for the year ended 31 December 2005, IAS 32 and IAS 39 have been applied. For the purposes of IAS 39, from 1 July 2005, the Group has put in place appropriate hedge accounting documentation to enable it to achieve hedge accounting for a large proportion of its commodity contracts. As a result, mark-to-market movements on contracts which are now considered to be effective hedges are recognised through the hedge reserve. For the period from 1 January 2005 to 30 June 2005, mark-to-market movements on these contracts were reflected directly in the income statement, as appropriate hedge documentation had not been put in place. c) Refinancing and Admission The Group underwent a financial restructuring (the 'Refinancing and Admission') effective on 15 December 2005 which resulted in the creation of a new holding company, Drax Group plc. Pursuant to the schemes of arrangement under which the Refinancing and Admission was implemented, the existing debt of the Group was settled, partially through the issue of new debt and partially through the issue of ordinary shares in Drax Group plc. Also on 15 December 2005, Drax Group plc was introduced to the Official List of the UK Listing Authority and its ordinary shares commenced trading on the London Stock Exchange. Under IFRS 3 'Business Combinations', the insertion of Drax Group plc as the new holding company has been accounted for as a reverse acquisition, whereby Drax Group Limited (being the previous Group holding company), the legal subsidiary, acquired Drax Group plc, the legal parent company. The impact of the Refinancing and Admission on the Group's debt and share capital is illustrated in notes 6 and 7 respectively. Notes to the consolidated financial information 2 Other exceptional operating income and expenses Years ended 31 December 2005 2004 £'m £'m Other exceptional operating income: Income from TXU administration 310.9 - Reversal of impairment of tangible fixed 19.0 - assets Total other exceptional operating income 329.9 - Other exceptional operating expenses: LTIP expenses arising on cash and (37.6) - share-based transactions Refinancing and Admission fees and (29.0) - expenses Total other exceptional operating expenses (66.6) - Income from TXU administration Income from the TXU administration represents the first three distributions received by the Group from the Administrators of TXU. Proceeds from the first two distributions of £204.7 million and £51.1m (both net of VAT) were subsequently paid to B Debt holders on 15 April 2005 and 17 August 2005 respectively. The third distribution of £55.1 million (net of VAT) received on 19 January 2006 has been recognised in the income statement for the year ended 31 December 2005 and is included as a receivable balance at 31 December 2005. This amount was used to make a prepayment of the Group's Bridge loan facility on 23 January 2006 (note 6). Reversal of impairment of tangible fixed assets During the year to 31 December 2002, the Group performed an impairment review following the loss of its long term power purchase agreement with TXU and its related income streams. This resulted in the write down of goodwill to nil, and a provision for impairment of £20.4 million against tangible fixed assets, to write down the assets to their estimated recoverable amount. In accordance with IAS 36 'Impairment of assets', the Group assessed at each subsequent reporting date whether there was any indication that the impairment loss recognised at 31 December 2002 should be reversed. As a result of the assessment performed at 30 June 2005 for the purposes of the financial information prepared in connection with the Refinancing and Admission, which highlighted significant increases in wholesale electricity prices that the Group has been able to achieve in its forward contractual position, the Group recorded a reversal of the tangible fixed asset impairment of £19.0 million. This represents a reversal of the total impairment loss recognised in respect of tangible fixed assets at 31 December 2002 after adjusting for depreciation. Long Term Incentive Plan ('LTIP') expenses arising on cash and share-based transactions Costs recognised in the income statement in relation to the Group's LTIP include expenses arising on share-based payment transactions of £25.2 million, expenses arising on cash-based payment transactions of £4.7 million and social security costs arising on share and cash-based payment transactions of £7.7 million. Refinancing and Admission fees and expenses The total costs of the Refinancing and Admission, including costs and expenses of or incidental to preparation of the Prospectus, Admission costs, registration fees and costs of printing and distribution as well as fees and expenses related to the Group's new debt facilities amounted to £44.7 million. £29.0 million of these costs have been included within other exceptional operating expenses in the income statement. The remaining £15.7 million has been deducted from debt and is being amortised to interest payable over the duration of the Group's new debt facilities (note 6). 3 Taxation Years ended 31 December 2005 2004 £'m £'m Tax credit comprises: Current tax (5.5) 2.3 Deferred tax 24.3 32.8 18.8 35.1 Years ended 31 December 2005 2004 £'m £'m Tax on items charged to equity: Deferred tax on actuarial 2.5 losses on defined benefit pension schemes 1.8 Deferred tax recognised 1.7 - on adoption of IAS 32 and IAS 39 Deferred tax recognised 32.9 - on fair value losses on cash flow hedges 37.1 1.8 Notes to the consolidated financial information The tax differs from the standard rate of corporation tax in the UK (30% for both years). The differences are explained below: Years ended 31 December 2005 2004 £'m £'m 263.6 Profit / (loss) before tax (41.6) Profit / (loss) before tax 79.1 multiplied by rate of corporation tax in the UK (12.5) (30% for both years) Effects of: Adjustments in respect of (6.2) (2.3) prior periods LTIP tax deduction (9.4) - Expenses not deductible for 2.9 - tax purposes Tax effect of funding (0.8) (21.6) arrangements Other (0.1) 1.3 Tax losses utilised (84.3) - Total taxation (continuing (18.8) (35.1) operations) 4 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. The calculation of weighted average number of ordinary shares outstanding assumes that the ordinary shares in Drax Group plc issued to the existing shareholders of Drax Group Limited on Refinancing and Admission were in issue either at 1 January 2004 (to the extent that the related Drax Group Limited shares were in issue at 1 January 2004), or from the date of issue of Drax Group Limited shares (to the extent that the related Drax Group Limited shares were issued after 1 January 2004). The Group has no contingently issuable shares. Accordingly, there is no difference between basic and diluted earnings per share. Reconciliations of the earnings and weighted average number of shares used in the calculation are set out below. Years ended 31 December 2005 2004 Earnings attributable to equity holders of the Company 282.4 (6.5) (£'m) Weighted average number of shares (millions) 288.2 275.2 Basic and diluted earnings per share (pence per share) 98.0 (2.4) 5 Cash at bank and in hand As at 31 December 2005 2004 £'m £'m Cash at bank and in hand: Unrestricted cash at bank 87.8 37.5 and in hand Debt service reserve account - 38.2 Escrow account 11.3 - 99.1 75.7 Debt service reserve account balances were restricted cash deposits which could only be used for the purpose of debt service under the terms of the Group's previous debt facilities. The escrow account represents cash paid into escrow prior to 15 December 2005 with respect to certain fees and expenses related to the Refinancing and Admission. The directors expect substantially all such fees and expenses will have been paid out of the escrow account by 31 March 2006. Cash and cash equivalents includes the following for the purposes of the cash flow statement: As at 31 December 2005 2004 £'m £'m Cash and cash equivalents: Cash at bank and in hand per 99.1 75.7 above Less: debt service reserve (11.3) (38.2) and escrow accounts 87.8 37.5 Notes to the consolidated financial information 6 Financial liabilities - borrowings As at 31 December 2005 2004 £'m £'m Current: Term loan 46.3 - Bridge loan 55.1 - B Debt - 204.7 101.4 204.7 As at 31 December 2005 2004 £'m £'m Non-current: Term loan 438.2 - Bridge loan 21.9 - A Debt - 944.9 B Debt - 133.7 460.1 1,078.6 Following a prepayment of £11.7 million on 30 June 2005, £388.2 million of A1 Debt principal and £12.8 million of interest was outstanding prior to the Refinancing and Admission. Also prior to the Refinancing and Admission, £545.1 million of A2/A3 principal and £22.2 million of interest was outstanding. Following partial repayments of £204.7 million on 15 April 2005 after the first distribution from the Administrators of TXU and £51.1 million on 17 August 2005 after the second distribution, £82.4 million B Debt principal and £28.1 million of interest was outstanding prior to the Refinancing and Admission. Refinancing and Admission Pursuant to the schemes of arrangement under which the Refinancing and Admission was implemented, the Group's debt was restructured on 15 December 2005. The particular elements of the restructuring relating to the Group's debt are illustrated below: As at 15 December 2005 Principal Interest £'m £'m Previous debt facilities: A1 Debt prepayment 388.2 12.8 B Debt prepayment 82.4 28.1 A2 Debt cash 112.0 - consideration A2/A3 Debt interest - 22.2 payment Interest rate swap termination - 23.1 payment 582.6 86.2 New debt facilities: Term loan 500.0 - Bridge loan 77.0 - 577.0 - Outstanding principal and interest in relation to A1 and B Debt was repaid in full. In addition, interest rate swap contracts with a notional value of £400 million, principally related to A1 Debt, were terminated. A2/A3 Debt holders contributed their A2/A3 Debt in exchange for cash and ordinary shares of 10 pence each in Drax Group plc. In total, A2 Debt holders received cash consideration of £112.0 million and A2/A3 Debt holders received 124,164,221 ordinary shares of 10 pence each in Drax Group plc. Outstanding interest on A2/A3 Debt was repaid in full. The Group settled the remaining nominal value of A2/A3 Debt, after deduction of the A2 cash consideration, of £433.1 million in exchange for issuing the 124,164,221 ordinary shares in Drax Group plc. The directors determined that the nominal value of A2/A3 Debt approximated its fair value by reference to the terms of the debt, principally the ability to prepay at nominal value. The nominal value of shares issued of £12.4 million was therefore lower than the fair value of the asset acquired of £433.1 million. Under section 130 of the Companies Act 1985, the shares are treated as issued fully paid up and the difference of £420.7 million is recorded as share premium (note 7). Notes to the consolidated financial information The total cash outflows related to the Refinancing and Admission were partially funded by a new Term loan of £500.0 million and a Bridge loan of £77.0 million as described below. The remaining cash outflows, including the payment of fees and expenses (note 2), were principally funded by cash generated from operations. Borrowings at 31 December 2005 Borrowings at 31 December 2005 consisted of bank loans held by the Company's subsidiary undertaking Drax Finance Limited as follows: As at 31 December 2005 Borrowings Deferred Net before finance borrowings deferred costs finance £'m costs (note 2) £'m £'m Term loan 500.0 (15.5) 484.5 Bridge loan 77.0 - 77.0 Total borrowings 577.0 (15.5) 561.5 Less current portion of (105.1) 3.7 (101.4) debt Non-current borrowings 471.9 (11.8) 460.1 The Term loan is subject to a fixed amortisation profile beginning on 30 June 2006 and ending on 31 December 2010. The Bridge loan has a first priority over the TXU Claim and the proceeds thereof, which are its primary source of repayment. Following a third distribution under the TXU claim on 19 January 2006, £55.1 million of the Bridge loan was repaid on 23 January 2006. The third distribution has been recognised in the income statement for the year ended 31 December 2005 and has been included as a receivable balance at 31 December 2005. The debt which was repaid on 23 January 2006 has been shown as repayable within one year at 31 December 2005. The Bridge loan has no fixed amortisation profile. Any outstanding principal balance falls due for payment on 31 December 2008. 7 Shareholders' funds and statement of changes in shareholders' equity Share Share Merger Capital Hedge Retained Total capital premium reserve reserve reserve losses £'m £'m £'m £'m £'m £'m £'m At 1 January 2004 - - 445.1 293.5 - (1,162.4) (423.8) Loss for the period - - - - - (6.5) (6.5) Actuarial losses on defined benefit pension schemes - - - - - (6.1) (6.1) Deferred tax on actuarial losses on defined benefit - - - - - 1.8 1.8 pension schemes LTIP - proceeds on - 0.5 - - - - 0.5 shares issued At 31 December 2004 - 0.5 445.1 293.5 - (1,173.2) (434.1) Profit for the period - - - - - 282.4 282.4 Actuarial losses on - - - - - (8.2) (8.2) defined benefit pension schemes Deferred tax on - - - - - 2.5 2.5 actuarial losses on defined benefit pension schemes Initial recognition of - - - - - (5.6) (5.6) net mark to market liability on adoption of IAS 32 and 39 Deferred tax - - - - - 1.7 1.7 recognised on adoption of IAS 32 and 39 Fair value losses on - - - - (109.7) - (109.7) cash flow hedges Deferred tax - - - - 32.9 - 32.9 recognised on fair value losses on cash flow hedges Share capital issued 40.7 - - - - - 40.7 on Refinancing and Admission Share premium arising - 420.7 - - - - 420.7 on Refinancing and Admission Reverse acquisition - (0.5) (27.8) - - - (28.3) adjustments: - Share for share exchange - Transfer of capital - - 293.5 (293.5) - - - reserve LTIP - credit to - - - - - 25.2 25.2 equity for share-based payment (note 2) At 31 December 2005 40.7 420.7 710.8 - (76.8) (875.2) 220.2 Notes to the consolidated financial information 8 Cash flow from operating activities Years ended 31 December 2005 2004 Continuing operations £'m £'m Profit / (loss) for the 282.4 (6.5) year Adjustments for: Interest payable and 114.4 101.2 similar charges Interest receivable (23.5) (4.6) Tax credit (18.8) (35.1) Depreciation 31.0 33.0 Reversal of impairment of (19.0) - tangible fixed assets Loss on disposal of 0.2 property, plant and equipment 2.0 Unrealised losses on 117.0 - derivative contracts LTIP - credit to equity for 25.2 - share-based payments Operating cash flows before movement 508.9 90.0 in working capital Changes in working capital: Increase in inventories (22.6) (9.8) Increase in receivables (123.4) (9.6) Increase in payables 99.8 1.0 Increase in pensions - 1.4 (Decrease) / increase in (0.4) 0.4 provisions Cash generated from 462.3 73.4 operations END This information is provided by RNS The company news service from the London Stock Exchange

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