Final Results - Part Two
Drax Group PLC
04 March 2008
4 March 2008
DRAX GROUP PLC
(Symbol: DRX)
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 - PART TWO
Introduction
During 2007, we continued to deliver sound operational and financial
performance, the latter despite dramatic price changes across the commodity
markets which are critical to our business. As a result of an exceptionally warm
Winter the electricity wholesale price weakened which, together with rising coal
and freight prices, reduced the margins previously available to coal-fired
generators. These, amongst other factors, contributed towards an EBITDA of £506
million, some £77 million lower than in 2006. In 2007, we effected our policy to
return surplus cash to shareholders through a combination of an ordinary
dividend, special dividend and a share buy-back, together totalling £160
million.
Our strategy is to grow shareholder value by exploiting the strategic and
commercial value of Drax Power Station and by deploying and developing our core
competencies to deliver additional value through fuel diversification and carbon
abatement. The strategic priorities we set ourselves for the year focused our
attention on the areas of trading, production and investment in improving
existing plant performance and increasing fuel optionality.
In 2007, we made good progress with our two major investment programmes to
upgrade the high and low pressure turbines of all six generating units and to
increase significantly our renewable biomass throughput; both importantly
contributing to our commitment to reduce our emissions of carbon dioxide ('CO2')
and helping to combat climate change.
We continued to execute with success our trading strategy, progressively hedging
our output whilst targeting market or better dark green spreads and retaining
balanced market exposure. Throughout the year, we maintained our focus on
delivering added value from our trading capability. This year saw us enter into
our first power option, first ship charter and first Kyoto instrument trade. On
top of these we have made full use of the flexibility and reliability of the
plant through taking advantage of opportunities presented by the ancillary
services market including, for the first time, selling some forward contracts
for frequency response services.
We achieved good results on plant reliability and availability and once again
delivered a strong performance which ranked us highly amongst our sector peers.
We undertook two major planned maintenance outages during the year along with a
substantial capital expenditure investment programme. Our safety record compares
favourably with that of our peers and international benchmarks. In 2007, our
safety programmes generally delivered sound performance, but to our regret there
was a fatality following an incident at our site involving a contractor
undertaking some civil works. Delivering the highest standards in safety
management remains a key area of focus and is central to our operating
philosophy.
Trading overview
Our practice is to sell approximately one-third of our power in the near-term
markets and the remaining two-thirds in the liquid forward markets. We broadly
match our power sales with corresponding carbon and fuel positions. As a result,
annual profitability is influenced by past, present and future commodity prices.
Commodity prices at the end of 2007 were dramatically different to those at the
start of the year and within-year volatility was very high. The three commodity
prices that most strongly influence the electricity wholesale market of Great
Britain continue to be international traded prices for oil, coal and carbon.
During the year there was a 70% rise in international crude oil prices. In the
same period, and in contrast to 2006 which saw relatively stable coal prices,
international coal prices increased by 90%. The price for carbon under the EU
Emissions Trading Scheme ('EU ETS') fell close to zero in 2007 whilst traded
prices for carbon for delivery in Phase II of the scheme, which covers
2008-2012, rose by 45%.
For most of the year, gas-fired generation plant was the price setting plant for
the electricity wholesale market of Great Britain with power prices generally
moving with changes in domestic gas wholesale prices.
Gas prices were strongly influenced by international oil prices but also
affected by weak Winter demand levels due to mild weather which, when combined
with increased supplies of gas into Great Britain and high storage levels,
resulted in some low prices in the first half of the year. The margins for
coal-fired generation were sustained at attractive levels for much of the year
except at times when the downward pressure from gas prices, combined with high
international coal prices, depressed margins.
We continued to enjoy good liquidity in the traded electricity market out to
2012. This enabled us both to manage effectively our coal and carbon positions
in line with our trading strategy and to increase the volume of our forward
sales. Compared to 2006, we have modestly increased our total forward sales
which, given the absence of liquidity in the market post 2012, is a significant
achievement.
Over the last two years we have been working hard to diversify and to optimise
our fuel sourcing. We were particularly pleased to increase the diversity of our
supplies of indigenous coal through contracts with local suppliers, Hargreaves
(UK) Services Limited and Powerfuel plc.
We now have the capability to burn a wide range of coals at Drax, bringing with
it the benefits of security of supply and preparedness for the challenges we
face now that we are operating under the tighter environmental limits of the
Large Combustion Plant Directive ('LCPD') that came into force at the start of
2008.
Production overview
Throughout the year we maintained our focus on achieving leading performances in
the areas of health and safety, environmental compliance and plant reliability.
Specifically, in delivering against our production strategy we implemented
selective investment to improve plant safety performance, improve plant
efficiency, and maintain high availability and reliability compared to our
sector peers. Through improved work processes we targeted better productivity
and we worked on delivering the capability to burn a wide range of fuels,
including a variety of coals, biomass materials and petcoke.
As we entered 2007, we were well aware of the significant challenge we faced in
managing our health and safety performance amidst two major planned outages and
an increased level of site project work, which together represented an increase
of over 30% in the hours worked by our production teams and contractors compared
to 2006.
Although our lost time injury rate worsened compared to 2006, we maintained the
much improved performance levels achieved in 2005. This demonstrates well that
the systems we have implemented over the last three years are becoming embedded
in the health and safety philosophy and are proving effective as we increase the
intensity of work at the plant.
The availability and reliability of our plant is key to delivering shareholder
value. We have set ourselves a challenging, long-term target of 4.5% for Winter
forced outages.
During the critical, high margin Winter months of 2007 we achieved better than
our long-term target by delivering a forced outage rate of 4.2%. The forced
outage rate for the full year at 6.9% was higher than that of 2006 due largely
to taking advantage of low margin Summer periods to conduct elective outages
which contributed to the calculation of our published forced outage rates. These
outages allowed additional plant inspections and repair work which have provided
us with a high degree of confidence in maintaining plant integrity.
Investment overview
Good progress was made on the two major investment projects announced at the
turn of the year. Economic carbon abatement along with fuel diversification are
key elements of our strategy to grow shareholder value. We believe that there is
strategic value in our environmental leadership position in the coal-fired
sector and, whilst holding the position of the most efficient coal-fired
generator in the UK with the lowest CO2 emissions per unit of output, we strive
for further improvement. Our decisions to invest up to £100 million to upgrade
our high and low pressure turbines and to set ourselves the challenging target
of producing 10% of our output from renewable biomass by the end of 2009 were
driven by our will and commitment to economically reduce our emissions of CO2.
On completion, these projects will save over three million tonnes of CO2 each
year in support of our strategic priorities.
In the third quarter of the year, during the second major planned outage we were
able to fast track the installation of a high pressure turbine module on one of
our units. This enabled us to gain valuable engineering experience, along with
some modest efficiency improvements, ahead of the upgrade of two high pressure
and six low pressure turbines during the major outages on two of our generating
units planned for 2008.
Our dedicated renewables co-firing project team have made good progress in
finalising the design of the new biomass handling and direct injection
facilities required to meet our 10% co-firing objective. In February 2008, we
were granted planning approval by Selby District Council for the new facilities.
Following a competitive tender process, we are on schedule to execute
Engineering, Procurement and Construction contracts for the co-firing facilities
in the second quarter of 2008, with building works expected to commence in the
second half of 2008. The facilities are planned to come on line during the
course of 2009, with full completion being at the end of 2009, in line with our
target.
In 2007, we co-fired close to 200,000 tonnes of renewable biomass and made
significant progress with sourcing and test burning different biomass materials.
During the year there was high price volatility in the agricultural markets
driven particularly by the rapeseed and grain markets. UK prices for rapeseed
rape and wheat both increased by over 75% in the year. The higher rapeseed
prices have made the economics of the proposed development of a rapeseed
crushing plant less attractive, and so we have not progressed this project. The
price increases have also had an adverse impact on some of the growth momentum
of our local perennial energy crop programmes as farmers increased annual food
crop acreage to take advantage of market opportunity.
Drax remains committed to supporting and encouraging the growth of UK energy
crops, although the significant rise in agricultural prices demonstrates the
value of the diverse sourcing strategy for biomass which we have been pursuing.
It is our strategy to secure biomass contracts from both domestic and
international sources across the spectrum of energy crop and non-energy crop
products. As part of this strategy, we are placing particular emphasis on
environmental sustainability in our sourcing plans.
In the last year we also introduced new systems and procedures for controlling
and managing projects. This is central to the successful execution of both the
strategic projects detailed above and the large number of smaller projects that
we have been implementing across the business, most notably plant enhancement
projects which deliver environmental, efficiency and reliability improvements.
These improved management systems supported our execution, within budget and on
a timely basis, of projects included in the £83 million incurred under our
capital expenditure investment programme in 2007.
Regulatory and market outlook
The Government published its Energy Bill on 10 January 2008 setting out policy
proposals in response to the UK's long-term energy challenges of tackling
climate change and ensuring secure, clean and affordable energy.
The Energy Bill is consistent with the conclusions of the May 2007 Energy White
Paper which confirmed that coal 'will continue to play a significant role in
global electricity generation for the foreseeable future', recognising both the
global abundance of coal and other important security of supply benefits that
coal brings to the energy mix, such as its ability to respond quickly to changes
in demand. We have long advocated the continuing need for coal in the energy
mix, but we have always acknowledged that there can only be a place for coal,
and other fossil fuels, if we address the environmental challenge.
The UK currently generates 4% of its electricity from renewable sources. The
Energy Bill provides for a strengthening of the Renewables Obligation ('RO') to
drive greater and more rapid deployment of renewables. This accords with the EU
objectives and the proposed target set by the EU for the UK of 15% renewable
energy by 2020. The consequent growth in renewable generation will increase the
diversity of the UK's energy mix and lower CO2 emissions from the electricity
sector.
There is clear recognition of the contribution that renewable biomass materials
can make towards the UK's renewables target. The new RO regime should support
the growth of both standalone biomass power plants and co-firing biomass with
coal. In April 2007, we saw the removal of caps and constraints on energy crop
co-firing biomass whilst the new regime provides for the doubling of the volume
of permitted co-firing of non-energy crop biomass.
We are already committed to substantially increasing the proportion of power we
generate from biomass through co-firing with coal. We believe that lessons
learnt in both understanding the technology and, more importantly, in sourcing
and logistics when combined with the incentives through the RO may present
additional opportunities for creating additional shareholder value and fuel
diversification.
The Government's energy policy recognises that substantial investment in new
generation capacity will be needed to address the emerging capacity gap left by
retiring coal, oil and nuclear power stations and to meet anticipated increases
in electricity demand.
The requirements of the EU's LCPD, which came into effect on 1 January 2008,
will bring about the closure of some 8.5GW of coal-fired capacity and some 3.4GW
of oil-fired capacity between 2012 and the end of 2015. In addition, around 7GW
of nuclear capacity is scheduled to close between now and 2020. Although some of
the capacity gap may be addressed by actions on the demand-side, it is
nevertheless expected that without new plant build, in the near term, the power
markets will tighten. The ensuing market dynamics are likely to be beneficial to
strategic generators such as Drax Power Station, with its proven technology and
expected generation life, and may also present opportunities.
In January 2008, the EU outlined its proposals for the EU ETS beyond 2012. It is
proposed that the scheme will be extended to a third phase covering the period
2013-2020. The cap on traded emissions by 2020 will be 79% of traded emissions
in 2005 with a linear reduction of 1.74% per annum. It is proposed that all of
the allowances for the electricity sector will be auctioned. We support a traded
price for carbon but we oppose full auctioning for the electricity sector in
Phase III.
We consider that to introduce full auctioning from 2013 is likely to prove a
precipitous move which could be destabilising for the electricity sector and
could lead to the early closure of less efficient plant at a time when the
reserve capacity margins across the EU are forecast to reach critically low
levels. The proposals now must be approved by both the Council of the EU and the
European Parliament in order to become law.
Our people
It is the commitment and enthusiasm of our people that have secured the progress
that we have made during 2007, and we recognise only too well their contribution
to delivering against our strategy and delivering value to our shareholders.
In keeping with our significant developments made throughout the year, we have
increased our headcount by around 10%. As in the previous year, we continued to
recruit specialists with the skills and experience to take our business forward.
In particular, the areas of business development, IT, risk management and
trading have seen the largest growth; it is these areas that will enable us to
explore and exploit new opportunities.
We placed particular emphasis on the development of our people during 2007,
ensuring that all development needs identified during our appraisal process were
addressed. Through a tailored competency-based management development programme
for all staff with supervisory responsibilities we targeted all first line
supervisors and during 2008 our plans are to target all our staff with a
leadership role. The target set at the outset of the year for training events
was exceeded and we shall be assessing the effectiveness of the development
programme initiated as part of the 2008 performance appraisals.
Looking ahead
During the last two years our primary focus has been on delivering the strategy
for the business which we laid out on listing the Company in December 2005. This
focused on the strong alignment between our trading and production strategies
and the achievement of leading performance in both areas. We believe that we
have successfully delivered this.
Our strategic focus is now on producing value growth for our shareholders whilst
maintaining leading performances in trading and production. We plan to increase
shareholder value by developing our core competencies to deliver significant
fuel diversification and carbon abatement. In the near term this will be through
the successful implementation of our existing two major strategic projects,
upgrading our turbines and biomass co-firing.
We believe that our biomass handling and sourcing capabilities are areas of
emerging competence which have the potential to produce significant value. We
therefore intend to further develop our biomass procurement and handling
capability with a view to potentially expanding significantly our generation
from renewable biomass fuels. This would achieve both additional carbon
abatement and increased fuel diversification.
We also believe that the purchase of Kyoto instruments in place of CO2 emissions
allowances could provide significant value potential for Drax, particularly in
Phase III of the EU ETS when there should be greater opportunity for these
trades, provided that there is a new international agreement on greenhouse gas
emissions. We will ensure that we are well placed to capture this value
potential and will work to further build our Kyoto instrument trading and
origination capabilities.
All the analysis that we have done reinforces our view that the electricity
wholesale market of Great Britain will provide increasing returns to available
capacity as the retirement of some of the older plant reduces the margin of
installed capacity above system demand. This will be positive for Drax and we
believe that our strategic position and focus will give us the ability and
opportunity to deliver value growth to our shareholders relative to the
commodity markets in which we operate.
Results of operations
Year ended Year ended
31 December 2007 31 December
2006
Continuing operations £m £m
Total revenue 1,247.4 1,387.0
Fuel costs(1)
Fuel costs in respect of generation (470.6) (547.5)
Costs of power purchases (75.5) (93.8)
(546.1) (641.3)
Gross profit 701.3 745.7
Other operating expenses excluding depreciation,
amortisation, unrealised gains on derivative contracts and
exceptional items(2) (195.7) (162.7)
EBITDA(3) 505.6 583.0
Depreciation and amortisation (43.7) (34.9)
Other operating income - exceptional credit 6.2 19.0
Unrealised gains on derivative contracts 3.3 90.8
Operating profit 471.4 657.9
Interest payable and similar charges (34.3) (37.1)
Interest receivable 11.4 13.4
Profit before tax 448.5 634.2
Tax charge
- Before impact of reduction in tax rate on (113.4) (170.7)
deferred tax
- Impact of reduction in tax rate on deferred tax 17.9 -
(95.5) (170.7)
Profit for the year attributable to equity shareholders 353.0 463.5
Pence per share Pence per share
Earnings per share (4)
- Basic and diluted 99 116
Notes:
(1) Fuel costs comprise the fuel costs incurred in the generation process,
predominantly coal and CO2 emissions allowances, together with oil and biomass.
Fuel costs also include the cost of power purchased to meet power sales
commitments.
(2) Other operating expenses excluding depreciation, amortisation, unrealised
gains on derivative contracts and exceptional items principally include
salaries, maintenance costs, grid connection and use of system charges
('TNUoS'), balancing services use of system charges ('BSUoS') and business
rates.
(3) EBITDA is defined as profit before interest, tax, depreciation and
amortisation, exceptional items and unrealised gains on derivative contracts.
(4) During the year the Group has amended the calculation of earnings per share
to reflect share consolidations associated with special dividends from the date
of the consolidation only. Comparatives have been amended accordingly (see note
7 to the consolidated financial information below).
Total revenue for the year ended 31 December 2007 was £1,247 million compared to
£1,387 million in 2006. Power sales were £1,204 million for the year ended 31
December 2007 compared to £1,327 million in 2006, reflecting a fall in our
average achieved electricity price (see Price of electricity) and a reduction in
net power sold to 24.9TWh, compared to 25.2TWh in 2006.
In addition to power sales, total revenue also includes income from the
provision of ancillary services, the sale of by-products (ash and gypsum), and
the sale of ROCs, LECs and sulphur dioxide ('SO2') emissions allowances. In the
year ended 31 December 2007, these revenues were £43 million compared to £60
million in 2006, reflecting the timing of ROC sales, partially offset by higher
ancillary services income. Although we burnt more biomass in 2007 compared to
2006, a proportion of the associated ROC sales will not be made until 2008,
which has resulted in a reduction in ROC revenues in 2007 when compared to 2006.
Fuel costs in respect of generation during the year ended 31 December 2007 were
£471 million, compared to £548 million in 2006. The decrease was primarily due
to the impact of lower prices for CO2 emissions allowances and lower generation,
partially offset by an increase in the cost of coal and other fuels (see Price
of coal and other fuels and CO2 emissions allowances).
We purchase power in the market when the cost of power in the market is below
our marginal costs of production in respect of power previously contracted for
generation and delivery by us, and to cover any shortfall in generation. The
costs of power purchased are treated as fuel costs. For the year ended 31
December 2007, the cost of purchased power decreased to £76 million compared to
£94 million in 2006, primarily due to lower market prices for electricity.
Gross profit for the year ended 31 December 2007 was therefore £701 million
compared to £746 million in 2006.
Other operating expenses excluding depreciation, amortisation, unrealised gains
on derivative contracts and exceptional items were £196 million for the year
ended 31 December 2007 compared to £163 million in 2006. The increase of £33
million includes significantly higher maintenance costs, with two units
undergoing a major planned outage in 2007 compared to just one unit in 2006. We
also experienced an increase in business interruption insurance costs due to
higher margins in 2006 and the first six months of 2007, and we have
significantly increased our expenditure on site security following the Camp for
Climate Action in August 2006. We also incurred higher grid connection and use
of system charges ('TNUoS').
Increased operating expenses also includes a one-time payment of £3 million made
in April 2007 (equating to £5,000 per eligible employee) in order to secure a
two-year pay agreement with Trades Unions, following expiry of the previous
two-year pay agreement. The pay award recognised the importance of retaining a
skilled workforce at a time of competition for those skills locally and in the
workplace at large, and recognised that in a number of areas Drax had fallen
behind market rates. In addition, our average monthly headcount increased to 658
in 2007 compared to 619 in 2006, primarily as a result of planned investments in
the business.
EBITDA (defined as profit before interest, tax, depreciation, amortisation,
exceptional items and unrealised gains on derivative contracts) for the year
ended 31 December 2007 was accordingly £506 million compared to £583 million in
2006.
Depreciation and amortisation for the year ended 31 December 2007 was £44
million compared to £35 million in 2006. The increase primarily reflected
accelerated depreciation of plant and equipment we expect to replace under our
capital expenditure investment programme.
Exceptional operating income of £6 million for the year ended 31 December 2007
related to our final distribution under the TXU Claim received in April 2007,
bringing the total received to date to £336 million, representing full recovery
of the claim. Income recognised under the claim in the year ended 31 December
2006 amounted to £19 million. All amounts are net of VAT and costs, with
proceeds used to prepay debt secured against the claim, which has now been
repaid in full.
The Group recognises unrealised gains and losses on forward contracts which meet
the definition of derivatives under IAS 32, IAS 39 and IFRS 7, the International
Accounting Standards in respect of derivatives and financial instruments. The
unrealised gains and losses principally relate to the mark-to-market of our
forward contracts for power yet to be delivered.
Unrealised gains on derivative contracts recorded in the income statements were
£3 million for the year ended 31 December 2007 compared to £91 million in 2006.
The unrealised gains primarily represent the unwinding of unrealised losses
originally reflected in the income statement in 2005, prior to the Group
implementing hedge accounting under IAS 39, as power was delivered in accordance
with underlying derivative contracts.
Mark-to-market movements on a large proportion of our commodity contracts,
considered to be effective hedges under IAS 39, have been recognised through the
hedge reserve, a component of shareholders' equity in the balance sheet. The
unrealised losses recognised through the hedge reserve in the year ended 31
December 2007 were £584 million compared to unrealised gains of £468 million in
2006.
Movements between the balance sheet position reported at 31 December 2007 and 31
December 2006 are mainly the result of unwinding mark-to-market movements
relating to power delivered during 2007, and recording mark-to-market movements
on power yet to be delivered. As a consequence of the decline in power prices
over the last six months of 2006, the average price relating to power which had
been contracted but had yet to be delivered at 31 December 2006 was
significantly higher than market prices at that time, resulting in the
recognition of a net unrealised gain of £344 million in the balance sheet. By
comparison, following increases in power prices over the last quarter of 2007,
the average price relating to power which had been contracted but had yet to be
delivered at 31 December 2007 was lower than market prices at that time,
resulting in the recognition of a net unrealised loss of £237 million in the
balance sheet.
Operating profit for the year ended 31 December 2007 was £471 million compared
to £658 million in 2006.
Interest payable and similar charges for the year ended 31 December 2007 were
£34 million compared to £37 million in 2006, as a result of lower debt levels
partially offset by the impact of higher interest rates.
The tax charge for the year ended 31 December 2007 was £96 million, compared to
£171 million in 2006. The tax charge for 2007 includes a one-off credit of £18
million to reflect the impact on deferred tax of a reduction in the rate of UK
corporation tax from 30% to 28% with effect from 1 April 2008.
Reflecting the above factors, profit attributable to equity shareholders for the
year ended 31 December 2007 was £353 million compared to £464 million in 2006,
and basic and diluted earnings per share was 99 pence compared to 116 pence in
2006, as calculated in accordance with note 7 to the consolidated financial
information below.
Key factors affecting the business
Price of electricity
The table below shows the average achieved electricity price realised for the
years ended 31 December 2006 and 31 December 2007, together with the market
closing price on the last day each season illustrated was traded as a product.
Year ended Year ended
31 December 31 December
2007 2006
Average achieved price (£/MWh) 45.3 48.9
2007 2006
Summer baseload market close (£/MWh) 23.0 45.5
2007/2008 2006/2007
Winter baseload market close (£/MWh) 40.4 51.7
Average achieved price for the year ended 31 December 2007 was £45.3 per MWh
compared to £48.9 per MWh in 2006. Average capture price (being the price
attained prior to Balancing Mechanism activity) for the year ended 31 December
2007 was £44.2 per MWh compared to £47.7 per MWh in 2006. The forward baseload
power prices for Summer 2008 and Winter 2008/2009 were approximately £54.2 per
MWh and £61.2 per MWh respectively as at 22 February 2008.
The fall in average achieved price primarily reflected the impact from forward
sales contracts secured in the last six months of 2006 and early in 2007, during
which time power prices were generally falling relative to the levels of late
2005 and early 2006, for power now delivered in 2007.
Price of coal and other fuels
We burnt approximately 9.8 million tonnes of coal in the year ended 31 December
2007 compared to approximately 10.2 million tonnes in 2006. This coal was
purchased from a variety of domestic and international sources under either fixed
or variable priced contracts with different maturities.
Spot prices for internationally traded coal delivered into North West Europe (as
reflected by the TFS API 2 index) rose steadily from US$68 per tonne on 31
December 2006 to US$79 per tonne by 30 June 2007, but then increased
dramatically over the last six months of the year reaching US$127 per tonne on
31 December 2007. This reflected tight markets for both coal and freight,
especially in the Pacific Basin, caused by strong demand from China and India,
combined with some production and logistical issues in Indonesia and Australia.
We also burn biomass, petcoke and fuel oil, although coal comprised around 95%
of total fuel costs in 2007 (excluding CO2 emissions allowances) compared to 93%
in 2006, primarily reflecting higher coal prices in 2007. The average cost of
fuel per MWh (excluding CO2 emissions allowances) for the year ended 31 December
2007 was £18.5 compared to £17.1 in 2006, with coal prices continuing to rise
throughout the year.
CO2 emissions allowances
Our CO2 emissions allowances requirement for the year ended 31 December 2007, in
excess of those allocated under the UK NAP, was approximately 7.6 million tonnes
compared to approximately 8.2 million tonnes in 2006, with the reduction largely
due to lower generation.
The price for Phase I (2005-2007) CO2 emissions allowances began the year at
approximately €6.6 per tonne, and as a result of oversupply, fell steadily over
the first six months of the year to €0.13 per tonne on 30 June 2007, subsequently
falling away further to €0.04 per tonne by 31 December 2007. The average price
expensed for CO2 emissions allowances during the year ended 31 December 2007 was
£1.5 per tonne compared to £14.3 per tonne in 2006.
Outages and plant utilisation levels
Year ended Year ended
31 December 31 December
2007 2006
Winter forced outage rate (%) 4.2 4.7
Forced outage rate (%) 6.9 5.8
Planned outage rate (%) 8.1 4.8
Total outage rate(1) (%) 14.3 10.4
Availability (%) 85.7 89.6
Electrical output (net sales) (TWh) 24.9 25.2
Load factor (%) 75.0 75.9
Notes:
(1) The forced outage rate is expressed as a percentage of planned capacity
available (that is, it includes a reduction for planned losses). The planned
outage rate is expressed as a percentage of registered capacity. Accordingly,
the aggregation of the forced outage rate and planned outage rate will not
equate to the total outage rate.
Plant availability in the year ended 31 December 2007 was 86% compared to 90% in
2006, primarily as a result of an increase in the planned outage rate with two
major planned outages taking place in 2007 compared to one in 2006.
Our maintenance regime includes a major planned outage for each unit every four
years. Consequently, there is an irregular pattern to planned outages and
associated expenditure, since in two of the four years; two units will undergo a
major planned outage. Two major planned outages (units 2 and 3) were completed
during 2007, whereas one major planned outage (unit 4) took place during 2006.
The planned outage rate achieved for the year ended 31 December 2007 was 8.1%
compared to 4.8% in 2006. Two units will each undergo a major planned outage
in 2008.
The Winter forced outage rate in 2007 was 4.2% (4.7% in 2006). The forced outage
rate for the full year was 6.9% (5.8% in 2006), of which approximately 0.8% was
due to a decision to undertake a number of elective forced outages during low
margin periods to inspect boiler tubes following a tube failure at an older UK
coal-fired power station.
These outages also allowed additional plant inspections and repair work to be
undertaken which have provided us with a high degree of confidence in maintaining
plant integrity.
We have targeted improvements in forced outage rates by focusing on preventing
minor predictable failures and seeking to avoid major failures by using
historical Drax operating data together with original equipment manufacturer and
industry experience. We believe further progress can be made in both areas and
will continue the programmes to improve performance, with the objective of
achieving a sustainable average Winter forced outage rate of 4.5%.
Health and safety
The lost time injury rate was 0.34 for the year ended 31 December 2007 compared
to 0.08 in 2006. Although this represents a deterioration, we maintained the
much improved performance levels achieved in 2005, despite a 53% increase in
hours worked by our production teams and contractors in 2007 compared to 2005.
This demonstrates that the safety programmes implemented in the last few years
are becoming well entrenched and are delivering sound performance, and our
safety record compares favourably to our sector peers and international
benchmarks.
Liquidity and capital resources
Net debt was £337 million as at 31 December 2007 compared to £321 million at 31
December 2006.
Cash and cash equivalents were £60 million as at 31 December 2007 compared to
£155 million at 31 December 2006. The changes in cash and cash equivalents are
analysed in the following table.
Analysis of cash flows
Year ended Year ended
31 December 31 December
2007 2006
Net cash generated from operating activities 312.8 525.1
Net cash used in investing activities (67.8) (27.0)
Net cash used in financing activities (340.1) (431.1)
Net (decrease)/increase in cash and cash (95.1) 67.0
equivalents
Net cash generated from operating activities was £313 million in the year ended
31 December 2007 compared to £525 million in 2006. The decrease reflected a
reduction of £77 million in EBITDA in 2007, lower cash received under the TXU
Claim (£6 million cash received under the claim in the year ended 31 December
2007 compared to £74 million in 2006), an increase of £55 million in income
taxes paid and increased working capital utilisation in 2007, including a higher
coal stock build and a significantly lower liability with respect to CO2
emissions allowances.
Net cash used in investing activities, which represented payments in respect of
capital expenditure in both periods, was £68 million for the year ended 31
December 2007 compared to £27 million in 2006 (see Capital expenditure).
Net cash used in financing activities was £340 million in the year ended 31
December 2007 compared to £431 million in 2006. The 2007 amounts included equity
dividends paid of £171 million and payments under the share buyback programme of
£84 million (inclusive of all expenses), together representing returns to
shareholders totalling £255 million. Also included were term loan repayments of
£40 million in June 2007 and £40 million in December 2007, the final bridge loan
prepayment of £3 million, and purchases of our own shares to meet commitments
under share-based incentive plans of £2 million. The 2006 amounts included new
debt raised of £100 million, offset by equity dividends paid of £342 million,
term loan repayments of £58 million in June 2006 and £58 million in December
2006 and bridge loan prepayments of £55 million and £19 million in January and
July 2006 respectively.
The decrease in cash and cash equivalents was therefore £95 million in the year
ended 31 December 2007, compared to an increase of £67 million in 2006. Drax's
policy is to invest available cash in short-term bank, building society or other
low risk deposits.
Capital resources and refinancing
Since Listing in December 2005, senior secured debt has fallen from £500 million
to £405 million at 31 December 2007 (both before deferred financing costs),
through a combination of scheduled debt repayments and the raising of additional
secured debt. Scheduled debt repayments for 2008 are £35 million.
The Board continues to monitor developments in the debt markets and is committed
to maintaining balance sheet efficiency. In September 2007, the Board announced
its intention to undertake a refinancing of the Group's current debt facilities
(subject to market conditions). As a result of continuing turbulence in the debt
markets the Board decided to postpone the refinancing until such time as it
judges market conditions have improved and the Group will be able to secure more
attractive terms.
Seasonality of borrowing
Our business is seasonal with higher electricity prices and despatch in the
Winter period and lower despatch in the Summer months, when prices are lower and
plant availability is affected by planned outages. Accordingly, cash flow during
the Summer months is materially reduced due to the combined effect of lower
prices and output, while maintenance expenditures are increased during this
period due to major planned outages. The Group's £100 million revolving credit
facility assists in managing the cash low points in the cycle where required.
The revolving credit facility was undrawn at 31 December 2007.
Contractual commitments
The following table illustrates our contractual obligations, excluding interest,
as they fall due as at 31 December 2007.
Payments due by period
Total 2008 2009 2010 2011-2014
£m £m £m £m £m
Debt 405.0 10.0 15.0 380.0 -
Fuel purchases 996.5 461.7 293.6 124.3 116.9
Contracted capital 94.8 33.3 26.6 20.3 14.6
expenditure
Support contract payments 45.6 29.6 9.1 4.5 2.4
Total 1,541.9 534.6 344.3 529.1 133.9
Capital expenditure
At the turn of the year we announced that we expected to incur total capital
expenditure of approximately £260 million over the three years 2007 to 2009. Of
this, around £150 million specifically related to the turbines upgrade project,
condenser and feed system plant improvements and investments in extending our
biomass capability. The remainder comprised smaller value enhancing investments
and other expected capital expenditure in support of current operations.
Following capital expenditure of £83 million in 2007, we remain on track to
achieve this target.
We now expect to incur capital expenditure of approximately £250 million over
the three years 2008 to 2010, of which around £150 million specifically relates
to the turbines upgrade project and investments in extending our biomass
capability. We plan to fund this capital expenditure investment programme from a
combination of operational cash flows and debt.
In relation to the turbines upgrade project, we expect to invest up to £100
million over a five year period, including approximately £70 million over the
three years 2008 to 2010, to upgrade the high pressure and low pressure turbine
modules on all six generating units to improve efficiency. Using proven
technology we expect to achieve an overall baseload efficiency (that is, the
ratio of energy out to energy in when operating at full capacity) approaching
40%. This represents a 5% improvement on current baseload efficiency of around
38%.
When complete, the project is expected to deliver annual savings of one million
tonnes of CO2 emissions allowances and approximately half a million tonnes of
coal.
Installation, which is being undertaken during the planned outage programme,
commenced in the third quarter of 2007, when we were able to fast track the
upgrade of a high pressure turbine module on one of our units. The early start
to the programme enabled valuable engineering experience to be gained, along
with some modest efficiency gains, ahead of the upgrade of two high pressure and
six low pressure turbines during the major outages on two of our generating
units planned for 2008.
With regard to extending our biomass capability, we expect to invest around £80
million to meet our target to produce 10% of our output from burning biomass by
the end of 2009. The largest single investment included in the £80 million
programme relates to extending our direct injection capability from one
generating unit to all six generating units, and to install the necessary
processing and handling infrastructure to ensure we are able to handle up to 1.5
million tonnes of biomass material per annum. In addition, we expect to make
investments in off site processing facilities.
Achievement of the 10% target is expected to result in savings of over two
million tonnes of CO2 emissions allowances, the displacement of approximately
one million tonnes of coal and the generation of in excess of two and a half
million ROCs per annum. Our dedicated renewables co-firing project team have made
good progress in finalising the design of the new biomass handling and direct
injection facilities required to meet our 10% co-firing objective.
In February 2008, we were granted planning approval by Selby District Council
for the new facilities. Following a competitive tender process, we are on
schedule to execute Engineering, Procurement and Construction contracts for the
co-firing facilities in the second quarter of 2008, with building works
commencing in the second half of 2008. The facilities will come on line during
the course of 2009 with full completion being at the end of 2009 in line with
our target.
In addition, we will continue to evaluate other investment opportunities which
may result in additional capital expenditure. Further investment will be
required beyond 2009 and prior to 2016 to meet the requirements of the LCPD.
Share-based incentive plans
Costs charged in the income statement in relation to share-based payments were
£3.1 million in the year ended 31 December 2007, compared to £1.7 million in
2006.
Under the 2007 SIP Free share award, the Company purchased a total of 195,810
shares in April 2007 to be held in trust on behalf of qualifying employees,
equating to 305 shares with a cash value of approximately £2,500 per employee
based on the Company's share price at the time of the award. The fair value of
the 2007 Free share award (determined at the award date) of £1.6 million was
charged to the income statement in full in the year ended 31 December 2007, on
the basis that employees were granted specific rights in relation to shares held
in trust on their behalf. Similarly, the fair value of the 2006 Free share award
of £1.3 million was charged to the income statement in full in the year ended 31
December 2006.
In March 2007, the SIP was extended by introducing two further elements:
Partnership shares and Matching shares. Qualifying employees can buy up to
£1,500 worth (subject to an overriding maximum of 10% of salary) of Partnership
shares (out of pre tax pay) in any one tax year. Matching shares are awarded to
employees to match any Partnership shares they buy. Under the Drax SIP the ratio
is one to one for the 2007/2008 tax year, with the cost of matching shares borne
by the Group. As at 31 December 2007, a total of 104,367 matching shares had
been purchased and were held in trust on behalf of qualifying employees. The
fair value of matching shares awarded up to 31 December 2007 (determined at the
award dates) of £0.8 million is being charged to the income statement on a
straight-line basis over a one-year vesting period (matching shares are
forfeited if an employee leaves Drax within one year of the award).
ESIP awards over 361,582 shares were granted to executive directors and other
senior staff in 2007, with performance measured over the three years to 31
December 2009 and potential vesting in April 2010. The fair value of the 2007
ESIP awards (determined at the grant date) of £0.9 million, which takes into
account the estimated probability of different levels of vesting, is being
charged to the income statement on a straight-line basis over the three-year
vesting period to 19 April 2010. Similarly, the fair value of the 2006 ESIP
award of £1.9 million is being charged to the income statement on a
straight-line basis over the three-year vesting period to 19 September 2009.
There have been no further offers under the SAYE Plan since that made in July
2006. No shares have been issued or purchased to date with respect to the SAYE
or ESIP.
Taxation
In December 2007, HM Revenue & Customs issued a consultation document entitled
'Principles based approach to financial products avoidance: a consultation
document' which is expected to lead to the introduction of new legislation
concerning 'disguised interest' from 1 April 2008.
It is thought likely that the new rules, if introduced in the form currently
envisaged, could adversely impact the future tax efficiency of the Group's
existing financing structure. Until the consultation process is completed and
the legislation drafted, however, it is not possible to predict with any
certainty how the proposed legislation, if and when enacted, might affect the
Group tax rate, and the Group is therefore keeping the situation under review.
EBITDA forecast for the year ended 31 December 2007 and closing cash position
guidance
We issued a Trading Update on 18 December 2007 which reported our contracted
position for 2007, 2008 and 2009 in respect of power, coal and CO2 emissions
allowances. In addition, we reported management's expectation that EBITDA for
the year ended 31 December 2007 would be around £500 million and that the cash
position as at 31 December 2007 would be in the range £55 million to £60 million
(together the 'Forecast'). EBITDA was defined as profit before interest, tax,
depreciation and amortisation, exceptional items and unrealised gains on
derivative contracts.
In arriving at the Forecast, we took account of market prices as of 11 December
2007 for the uncontracted portion of power sales, and coal and CO2 emissions
allowances purchases for the period to 31 December 2007. The Forecast also
assumed that there would be no significant unplanned outages for the period to 31
December 2007.
Reported EBITDA of £506 million includes the impact on gross margin of a small
improvement in dark green spreads between 11 December 2007 and 31 December 2007.
The reported cash position as at 31 December 2007 was £60 million.
Contracted position for 2008, 2009 and 2010
Since issuing the Trading Update on 18 December 2007, we have continued to trade
in line with expectations and to follow our stated trading strategy of making
steady forward power sales with corresponding purchases of CO2 emissions
allowances and coal purchases. Our aim is to deliver market level or better dark
green spreads across all traded market periods and, as part of this strategy, we
retain power to be sold into the prompt (within season) power markets.
As at 22 February 2008, the contracted position for 2008, 2009 and 2010 was
follows:
2008 2009 2010
Power sales (TWh) comprising: 20.5 15.4 10.4
- Fixed price power sales (TWh) 16.0 10.1 5.1
at an average achieved at at at
price (per MWh) £47.9 £43.0 £45.3
- Fixed margin power sales (TWh) 4.5 5.3 5.3
CO2 emissions allowances hedged, including UK NAP 20.5 15.1 18.0
allocation, market purchases, structured contracts,
and benefit of biomass co-firing (TWh equivalent)
Solid fuel at fixed price/hedged, including structured 22.2 16.6 12.1
contracts (TWh equivalent)
Fixed price power sales include approximately 0.8TWh supplied to Centrica in the
period 1 January 2008 to 22 February 2008 under the five-and-a-quarter year
baseload contract with Centrica which commenced on 1 October 2007.
Fixed margin power sales include approximately 4.5TWh in 2008 and 5.3TWh in each
of 2009 and 2010 in connection with the contract. Under this contract the Group
will supply power on terms which include Centrica paying for coal, based on
international coal prices, and delivering matching CO2 emissions allowances
amounting to approximately 4.8 million tonnes per annum. The contract provides
the Group with a series of fixed dark green spreads which were agreed in the first
quarter of 2006.
We will provide the next update on our contracted position in our Interim
Management Statement which is expected to be issued on 19 May 2008.
Distribution policy
The Board has previously stated that the Group will pay a stable amount (£50
million) by way of ordinary dividends each year (the base dividend) subject to
availability of cash and appropriate reserves. In addition to the base dividend,
the Board has also previously stated that 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.
Dividends paid
On 7 March 2007, the Board resolved to pay a final dividend for the year ended 31
December 2006 of 9.1 pence per share (equivalent to £34 million). Also on 7
March 2007, the Board resolved, subject to the approval by shareholders of a
resolution to effect a share consolidation considered at the Annual General
Meeting on 26 April 2007, to pay a further interim dividend as a special
dividend of 32.9 pence per share (equivalent to £121 million). The share
consolidation, under which shareholders received 64 new ordinary shares of
11 16/29 pence each for every 67 existing ordinary shares of 11 1/29 pence, became
effective on 30 April 2007. These final and special dividends were subsequently
paid on 16 May 2007.
On 5 September 2007, the Board resolved to pay an interim dividend for the six
months ended 30 June 2007 of 4.7 pence per share (equivalent to approximately
£16 million). This interim dividend was subsequently paid on 24 October 2007.
Special distribution - share buy-back programme (completed)
On 5 September 2007, the Board resolved to make a special distribution of
approximately £83 million to be undertaken through the introduction of a share
buy-back programme. The buy-back programme represented approximately 3.5% of the
Company's issued capital as of 6 September 2007. The programme was completed
between 7 September 2007 and 13 December 2007, and resulted in the repurchase
and cancellation of 13,005,304 ordinary shares for an aggregate consideration
(inclusive of all expenses) of £83.5 million.
Dividends proposed
At the forthcoming Annual General Meeting the Board is recommending to
shareholders that a resolution is passed to approve payment of a final dividend
for the year ended 31 December 2007 of 9.9 pence per share (equivalent to £33.6
million) payable on or before 7 May 2008. Shares will be marked ex-final dividend
on 16 April 2008.
The Board has declared a further interim dividend (payable as a special
dividend) of 7.8 pence per share (equivalent to £26.5 million), also payable on
or before 7 May 2008. Shares will be marked ex-special dividend on 16 April
2008.
Consolidated financial information
Consolidated income statements
Years ended 31 December
2007 2006
Notes £m £m
Continuing operations
Revenue 1,247.4 1,387.0
Fuel costs (546.1) (641.3)
701.3 745.7
Other operating expenses excluding exceptional items 4 (239.4) (197.6)
Exceptional operating income 3 6.2 19.0
Total other operating expenses, net (233.2) (178.6)
Unrealised gains on derivative contracts 3.3 90.8
Operating profit 4 471.4 657.9
Interest payable and similar charges (34.3) (37.1)
Interest receivable 11.4 13.4
Profit before tax 448.5 634.2
Tax charge 5 (95.5) (170.7)
Profit for the year attributable to equity 353.0 463.5
shareholders from continuing operations
pence pence
Earnings per share from continuing operations per share per share
- Basic and diluted 7 99 116
Consolidated statements of recognised income and expense
Years ended 31 December
2007 2006
Notes £m £m
Profit for the year 353.0 463.5
Actuarial (losses)/gains on defined benefit pension scheme (3.3) 8.6
Deferred tax on actuarial losses/gains on defined benefit
pension scheme 5 0.9 (2.6)
Impact of reduction in tax rate on deferred tax on defined
benefit pension scheme 5 (0.4) -
Fair value (losses)/gains on cash flow hedges (584.3) 468.2
Deferred tax on fair value losses/gains on cash flow hedges 5 171.1 (140.5)
Impact of reduction in tax rate on deferred tax on fair
value losses/gains on cash flow hedges 5 1.0 -
Net (losses)/gains recognised in equity (415.0) 333.7
Total recognised (expense)/income for the year attributable
to equity shareholders (62.0) 797.2
Consolidated balance sheets
As at 31 December
2007 2006
Notes £m £m
Assets
Non-current assets
Property, plant and equipment 1,080.4 1,042.2
Derivative financial instruments 1.6 93.9
1,082.0 1,136.1
Current assets
Inventories 108.3 76.9
Trade and other receivables 129.6 171.4
Derivative financial instruments 15.0 257.2
Cash and cash equivalents 59.7 154.8
312.6 660.3
Liabilities
Current liabilities
Financial liabilities:
- Borrowings 8 9.9 19.8
- Derivative financial instruments 145.6 6.8
Trade and other payables 94.1 166.8
Current tax liabilities 70.4 63.2
320.0 256.6
Net current (liabilities)/assets (7.4) 403.7
Non-current liabilities
Financial liabilities:
- Borrowings 8 387.0 456.4
- Derivative financial instruments 107.7 -
Deferred tax liabilities 201.6 390.9
Retirement benefit obligations 13.5 12.5
Other non-current liabilities 1.4 0.7
Provisions 2.4 2.2
713.6 862.7
Net assets 361.0 677.1
Shareholders' equity
Issued equity 39.2 40.7
Capital redemption reserve 1.5 -
Share premium 420.7 420.7
Merger reserve 710.8 710.8
Hedge reserve (161.3) 250.9
Retained losses (649.9) (746.0)
Total shareholders' equity 9 361.0 677.1
Consolidated cash flow statements
Years ended 31 December
2007 2006
Notes £m £m
Cash generated from operations 10 437.7 586.5
Income taxes paid (104.7) (50.0)
Decrease in restricted cash - 11.2
Interest paid (31.3) (36.1)
Interest received 11.1 13.5
Net cash generated from operating activities 312.8 525.1
Cash flows from investing activities
Purchase of property, plant and equipment (67.8) (27.0)
Net cash used in investing activities (67.8) (27.0)
Cash flows from financing activities
Equity dividends paid (171.3) (342.0)
Purchase of own shares under share buy-back (83.5) -
programme
Repayment of borrowings 8 (82.9) (189.1)
Debt issued 8 - 100.0
Purchase of own shares held by employee trust (2.4) -
Net cash used in financing activities (340.1) (431.1)
Net (decrease)/increase in cash and cash equivalents (95.1) 67.0
Cash and cash equivalents at 1 January 154.8 87.8
Cash and cash equivalents at 31 December 59.7 154.8
Notes to the consolidated financial information
1. 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 2007 (the 'financial statements'). This
preliminary announcement does not constitute the full financial statements
prepared in accorance with International Financial Reporting Standards ('IFRSs').
The financial statements were approved by the Board of directors on 3 March 2008.
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 the end of March 2008 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 11am on 17 April 2008. The financial statements for the year ended
31 December 2007, will be delivered to the Registrar of Companies following the
Annual General Meeting.
2. Basis of preparation
The financial statements have been prepared in accordance with the prior year
accounting policies and IFRSs. The financial statements have also been
prepared in accordance with IFRSs adopted by the European Union and therefore
the consolidated financial statements comply with Article 4 of the EU IAS
Regulations.
The financial statements have been prepared under the historical cost basis,
except for the revaluation of financial assets and liabilities under IAS 39
'Financial instruments: recognition and measurement'.
3. Exceptional operating income
Years ended 31 December
2007 2006
£m £m
Distributions under the TXU Claim 6.2 19.0
The Group received £6.2 million under the TXU Claim in April 2007, bringing the
total received to date to £336 million, representing full recovery of the claim.
All amounts above are net of VAT and costs, and all proceeds have been used to
prepay debt secured against the claim, which has now been repaid in full.
4. Operating profit
Years ended 31 December
2007 2006
£m £m
The following charges have been included in arriving at
operating profit:
Staff costs 42.9 34.6
Depreciation of property, plant and equipment (all 43.7 34.9
owned assets)
Repairs and maintenance expenditure on property, plant 50.4 34.1
and equipment
Other operating expenses 102.4 94.0
Total other operating expenses excluding exceptional
items and unrealised gains on derivative contracts 239.4 197.6
5. Taxation
The income tax expense reflects the estimated effective tax rate on profit
before taxation for the Group for the year ending 31 December 2007 and the
movement in the deferred tax balance in the period, so far as it relates to
items recognised in the income statement.
In June 2007, the Finance Bill was presented to Parliament for approval. The
Bill proposed a reduction in the rate of UK corporation tax from 30% to 28% with
effect from 1 April 2008. At 31 December 2007 the rate reduction was
substantively enacted, and accordingly the tax charge for the year ended 31
December 2007 includes a credit of £17.9 million to reflect the impact on
deferred tax. This rate reduction will also reduce the amount of tax payable on
future profits.
Although amendments to the industrial buildings allowance regime were also
proposed in the 2007 budget announcement, these amendments were not
substantively enacted at 31 December 2007 and accordingly have not been
reflected in the Group's results for the year ended 31 December 2007. The
directors have estimated that, had these amendments been reflected in the
Group's results for the year ended 31 December 2007, the effect would be to
increase the deferred tax liability held in the balance sheet by approximately
£13 million.
HM Revenue & Customs ('HMRC') issued a consultation document in December 2007
entitled 'Principles based approach to financial products avoidance: a
consultation document' which is expected to lead to the introduction of new
legislation concerning 'disguised interest' from 1 April 2008. It is thought
likely that the new rules, if introduced in the form currently envisaged, could
adversely impact the future tax efficiency of the Group's existing financing
stucture. Until the consultation process is completed and the legislation
drafted, however, it is not possible to predict with any certainty how the
proposed legislation, if and when enacted, might affect the Group tax rate, and
the Group is therefore keeping the situation under review.
Years ended 31 December
2007 2006
£m £m
Tax charge comprises:
Current tax 112.2 108.2
Deferred tax:
- Before impact of reduction in tax rate 1.2 62.5
- Impact of reduction in tax rate (17.9) -
95.5 170.7
Years ended 31 December
2007 2006
£m £m
Tax on items credited/(charged) to equity:
Deferred tax on actuarial losses/gains on defined benefit
pension scheme 0.9 (2.6)
Impact of reduction in tax rate on deferred tax on defined
benefit pension scheme (0.4) -
Deferred tax on fair value losses/gains on cash flow hedges 171.1 (140.5)
Impact of reduction in tax rate on deferred tax on fair value
losses/gains on cash flow hedges 1.0 -
172.6 (143.1)
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
2007 2006
£m £m
Profit before tax 448.5 634.2
Profit before tax multiplied by rate of corporation tax in the 134.6 190.3
UK (30% for both years)
Effects of:
Adjustments in respect of prior periods (0.4) 1.2
Expenses not deductible for tax purposes 1.5 0.5
Tax effect of funding arrangements (22.9) (20.9)
Other 0.6 (0.4)
Change in UK tax rate (17.9) -
Total taxation 95.5 170.7
In addition to the foregoing, under the current financing structure, Drax
Holdings Limited is partially funded by a Eurobond payable to another group
company, with a tax deduction being claimed for all of the corresponding
interest charged in the Drax Holdings Limited income statement. Were HMRC to
successfully challenge the deductions claimed in respect of the Eurobond coupons
for open years to 31 December 2007, it is estimated that the additional tax
liability would be up to £85 million, together with interest and penalties.
Further details of the Group's financing structure, and related contingent tax
liability described above are included on pages 78 and 79 of the listing
particulars issued on 28 October 2005 in respect of the introduction of Drax
Group plc to the Official List of the UK Listing Authority.
6. Dividends
Years ended 31 December
2007 2006
£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 2007 of 4.7
pence per share paid on 24 October 2007 (2006: 4.0 pence per
share paid on 25 October 2006) 16.3 16.3
Final dividend for the year ended 31 December 2006 of 9.1 pence
per share paid on 16 May 2007 33.6 -
Special interim dividends for the year ended 31 December 2006 of
32.9 pence per share paid on 16 May 2007 (2006: 80.0 pence per
share paid on 25 October 2006) 121.4 325.7
171.3 342.0
Years ended 31 December
2007 2006
£m £m
Amounts not recognised as distributions to equity holders in the
year:
Proposed final dividend for the year ended 31 December 2007 of
9.9 pence per share (2006: 9.1 pence per share paid on 16 May
2007) 33.6 33.6
Declared special interim dividend for the year ended 31 December
2007 of 7.8 pence per share (2006: 32.9 pence per share paid on
16 May 2007) 26.5 121.4
60.1 155.0
The Company undertook share consolidations in connection with the special
interim dividends paid on 16 May 2007 and 25 October 2006.
At the forthcoming Annual General Meeting the Board is recommending to
shareholders that a resolution is passed to approve payment of a final dividend
for the year ended 31 December 2007 of 9.9 pence per share (equivalent to
approximately £33.6 million) payable on or before 7 May 2008.
The Board has declared a further interim dividend (payable as a special
dividend) of 7.8 pence per share (equivalent to approximately £26.5 million),
also payable on or before 7 May 2008.
The final dividend of 9.9 pence per share and the special dividend of 7.8 pence
per share have not been included as liabilities as at 31 December 2007.
7. Earnings per share
During the year the Group has amended the calculation of earnings per share.
Previously, the calculation of the weighted average number of ordinary shares
outstanding assumed that share consolidations took place at the beginning of the
relevant period. However, to better reflect the linkage between the special
dividends and the related share consolidations, the number of shares in issue is
now only amended from the date of the share consolidation. This change affects
disclosure only and has no effect on profits, assets, liabilities or cash flows.
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 to take account of outstanding share options in relation to the Group's
Savings-Related Share Option Plan ('SAYE') and contingently issuable shares
under the Group's Executive Share Incentive Plan ('ESIP').
Reconciliations of the earnings and weighted average number of shares used in
the calculation are set out below.
Years ended 31 December
2007 2006
£m £m
Earnings attributable to equity holders of the Company for 353.0 463.5
the purposes of basic and diluted earnings
Years ended 31 December
2007 2006
Number of shares:
Weighted average number of ordinary shares for the purposes
of basic earnings per share (millions) 354.9 400.0
Effect of dilutive potential ordinary shares under share options 0.1 0.1
Weighted average number of ordinary shares for the purposes
of diluted earnings per share (millions) 355.0 400.1
The effect of the amendments to the Group's calculation of earnings per share
can be summarised as follows:
Years ended 31 December
2007 2006
Number of shares:
Weighted average number of ordinary shares for the purposes
of basic earnings per share as previously reported (millions) 349.6 368.9
Effect of share consolidations from beginning of relevant
period (millions) 5.3 31.1
Weighted average number of ordinary shares for the purposes
of basic earnings per share under revised basis (millions) 354.9 400.0
Earnings attributable to equity holders of the Company for
the purposes of basic and diluted earnings (£ millions) 353.0 463.5
Basic earnings per share as previously reported (pence per share) 101 126
Basic earnings per share under revised basis (pence per share) 99 116
The effect of this amendment in respect of diluted earnings per share is the
same as set out above.
8. Borrowings
As at 31 December
2007 2006
£m £m
Current:
Term loans 9.9 19.8
As at 31 December
2007 2006
£m £m
Non-current:
Term loans 387.0 453.5
Bridge loan - 2.9
387.0 456.4
Maturity of borrowings
The following table details the remaining contractual maturity, including
interest payments, for the Group's borrowings at the balance sheet dates:
As at 31 December
2007 2006
£m £m
In less than one year 33.0 48.4
In more than one year but not more than two years 28.5 36.2
In more than two years but not more than five years 393.8 478.9
Total contractual maturity 455.3 563.5
Less interest payments (58.4) (87.3)
Carrying amount of borrowings 396.9 476.2
Interest payments are calculated based on forward interest rates estimated at
the balance sheet date based on publicly available information.
The interest rates payable at the balance sheet dates were as follows:
As at 31 December
2007 2006
% %
Term loans 6.01 6.01
Bridge loan - 6.28
Analysis of borrowings
Borrowings at 31 December 2007 and 31 December 2006 consisted of bank loans held
by the Company's subsidiary Drax Finance Limited as follows:
As at 31 December 2007
Borrowings
before Deferred
deferred finance Net
finance costs costs borrowings
£m £m £m
Term loans 405.0 (8.1) 396.9
Total borrowings 405.0 (8.1) 396.9
Less current portion of debt (10.0) 0.1 (9.9)
Non-current borrowings 395.0 (8.0) 387.0
As at 31 December 2006
Borrowings
before Deferred
deferred finance Net
finance costs costs borrowings
£m £m £m
Term loans 485.0 (11.7) 473.3
Bridge loan 2.9 - 2.9
Total borrowings 487.9 (11.7) 476.2
Less current portion of debt (20.0) 0.2 (19.8)
Non-current borrowings 467.9 (11.5) 456.4
The term loans are subject to a fixed amortisation profile ending on 31 December
2010 and debt service payments are made semi-annually on 30 June and 31
December. Payment profiles for repayment of debt set out above are based on the
fixed minimum repayment profile. Repayments above the fixed minimum repayment
profile are permitted subject to the amount of cash available for debt service.
Term loans repayments of £40.0 million were made on each of 29 June 2007 and 31
December 2007. Previously, repayments of £57.5 million were made on each of 30
June 2006 and 29 December 2006. All repayments have been made in line with the
target repayment profile as a result of the levels of cash available for debt
service.
The bridge loan was repaid in full following receipt of the final distribution
under the TXU Claim in April 2007.
On 11 May 2006, the Group entered into a new credit facility agreement providing
a further £100.0 million term loan on similar terms and with a similar repayment
profile to the existing term borrowings. The facility was drawn down in full on
3 July 2006 and partially used to make a payment of £22.5 million into the
employee pension scheme to reduce the actuarial deficit.
The Group's debt is guaranteed and secured directly by each of the principal
subsidiary undertakings of the Company, as set out in note 3 to the Company's
separate financial statements. Drax Group plc is not a guarantor of the Group's
debt, but has granted a charge over the shares in its subsidiary, Drax Finance
Limited.
Letter of credit facility and revolving credit facility
In addition to its borrowings, the Group has access to a letter of credit
facility which provides credit support of up to £200.0 million to the Group's
trading activities. The letter of credit facility, which has a final maturity
date of 15 December 2012, provides a mechanism whereby it may be extended for a
further 12 months at any time after 15 December 2007, but no later than one year
before the final maturity date. 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 2007 the Group's contingent
liability in respect of these guarantees amounted to £133.3 million (2006:
£153.6 million).
In addition, the Group has access to an undrawn £100.0 million revolving credit
facility, which may be used to issue letters of credit or for working capital,
with a final maturity date of 15 December 2010.
9. Shareholders' funds and statement of changes in shareholders' equity
Capital
Share redemption Share Merger Hedge Retained
capital reserve premium reserve reserve losses Total
£m £m £m £m £m £m £m
At 1 January 2006 40.7 - 420.7 710.8 (76.8) (875.2) 220.2
Profit for the year - - - - - 463.5 463.5
Equity dividends paid - - - - - (342.0) (342.0)
Actuarial gains on
defined benefit pension
scheme - - - - - 8.6 8.6
Deferred tax on
actuarial gains on
defined benefit pension
scheme - - - - - (2.6) (2.6)
Fair value gains on cash
flow hedges - - - - 468.2 - 468.2
Deferred tax on fair
value gains on cash flow
hedges - - - - (140.5) - (140.5)
Movements in equity
associated with
share-based payments - - - - - 1.7 1.7
At 1 January 2007 40.7 - 420.7 710.8 250.9 (746.0) 677.1
Profit for the year - - - - - 353.0 353.0
Equity dividends paid - - - - - (171.3) (171.3)
Purchase and redemption
of own shares under
share buy-back programme (1.5) 1.5 - - - (83.5) (83.5)
Actuarial losses on
defined benefit pension
scheme - - - - - (3.3) (3.3)
Deferred tax on
actuarial losses on
defined benefit pension
scheme - - - - - 0.9 0.9
Impact of reduction in
tax rate on deferred tax
on defined benefit
pension scheme - - - - - (0.4) (0.4)
Fair value losses on
cash flow hedges - - - - (584.3) - (584.3)
Deferred tax on fair
value losses on cash
flow hedges - - - - 171.1 - 171.1
Impact of reduction in
tax rate on deferred tax
on fair value losses on
cash flow hedges - - - - 1.0 - 1.0
Movement in equity
associated with
share-based payments - - - - - 3.1 3.1
Own shares held by
employee trust - - - - - (0.8) (0.8)
Own shares purchased and
vested with employees - - - - - (1.6) (1.6)
At 31 December 2007 39.2 1.5 420.7 710.8 (161.3) (649.9) 361.0
10. Cash flow from operating activities
Years ended 31 December
2007 2006
£m £m
Profit for the year 353.0 463.5
Adjustments for:
Interest payable and similar charges 34.3 37.1
Interest receivable (11.4) (13.4)
Tax charge 95.5 170.7
Depreciation 43.7 34.9
Unrealised gains on derivative contracts (3.3) (90.8)
Non-cash charge for share-based payments 3.1 1.7
Operating cash flows before movement in working capital 514.9 603.7
Changes in working capital:
Increase in inventories (31.4) (9.1)
Decrease in receivables 43.8 19.7
Decrease in payables (87.7) (4.4)
Decrease in pensions (2.1) (23.6)
Increase in provisions 0.2 0.2
Cash generated from operations 437.7 586.5
Glossary
Ancillary services Services provided by National Grid used for balancing
supply and demand or maintaining secure electricity
supplies within acceptable limits. They are described in
Connection Condition 8 of the Grid Code.
Availability Average percentage of time the units were available for
generation.
Average achieved price Power revenues divided by volume of net sales (includes
imbalance charges).
Average capture price Revenue derived from bilateral contracts divided by
volume of net merchant sales.
Balancing Mechanism The period during which the System Operator can call
upon additional generation/consumption or reduce
generation/consumption, through market participants'
bids and offers, in order to balance the system minute
by minute.
Baseload Running 24 hours per day, seven days per week remaining
permanently synchronised to the system.
Bilateral contracts Contract with counterparties and power exchange trades.
Company Drax Group plc.
Dark green spread The difference between the price available in the market
for sales of electricity and the marginal cost of
production (being the cost of coal and other fuels
including C02 emissions allowances).
EBITDA Profit before interest, tax, depreciation and
amortisation, exceptional items and unrealised gains/
(losses) on derivative contracts.
ESIP The Drax Group plc Restricted Share Plan, also known as
the Drax Group plc Executive Share Incentive Plan.
EU ETS The EU Emissions Trading Scheme is a mechanism policy
introduced across the EU to reduce emissions of CO2; the
scheme is capable of being extended to cover all
greenhouse gas emissions.
Forced Outage Any reduction in plant availability excluding planned
outages.
Forced Outage Rate The capacity which is not available due to forced
outages or restrictions expressed as a percentage of the
maximum theoretical capacity, less planned outage
capacity.
Frequency Response Service Services purchased by The National Grid Company used to
maintain system frequency.
Group Drax Group plc and its subsidiaries.
IASs International Accounting Standards.
IFRSs International Financial Reporting Standards.
LECs Levy Exemption Certificates. Evidence of Climate Change
Levy exempt electricity supplies generated from
qualifying renewable sources.
Load factor Net sent out generation as a percentage of maximum
sales.
Net Balancing Mechanism Net volumes attributable to accepted bids and offers in
the Balancing Mechanism.
Net merchant sales Net volumes attributable to bilateral contracts and
power exchange trades.
Net sales The aggregate of net merchant sales and net Balancing
Mechanism.
Occupational health and The OHSAS specification gives requirements for an
safety assessment series occupational health and safety (OH&S) safety assessment
(OHSAS) series management system, to enable an organisation to
control its OH&S risks and improve its performance.
Planned Outage A period during which scheduled maintenance is executed
according to the budget set at the outset of the year.
Planned Outage Rate The capacity not available due to planned outages
expressed as a percentage of the maximum theoretical
capacity.
Power exchange trades Power sales or purchases transacted on the APX UK power
trading platform.
Power revenues The aggregate of bilateral contracts and Balancing
Mechanism income/expense.
Refinancing and Listing The financial restructuring of the Group effective 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 Listing 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.
ROCs Renewables Obligation Certificates. Under the current
regime, one ROC is issued to eligible generators for
every MWh of electricity generated from renewable
sources.
SAYE Plan The Drax Group plc Approved Savings-Related Share Option
Plan.
SIP The Drax Group plc Approved Share Incentive Plan.
Summer The calendar months April to September.
Summer baseload market close Market price on the last day that the season was traded
as a product.
Technical Availability Total availability after planned and forced outages.
TXU TXU Europe Energy Trading Limited (in administration and
subject to a company voluntary arrangement).
TXU Claim The claim issued by the Group, ultimately agreed by the
Administrators of TXU at approximately £336.0 million
(excluding VAT) in respect of unpaid power purchased by
TXU and liquidated damages under the TXU Contract.
TXU Contract A 15 year power purchase agreement with TXU.
UK NAP UK National Allocation Plan.
Winter The calendar months October to March.
Winter baseload market close Market price on the last day that the season was traded
as a product.
This information is provided by RNS
The company news service from the London Stock Exchange
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