Annual Financial Report
15 March 2011
DRAX GROUP PLC
('Drax' or the 'Company')
(Symbol: DRX)
MAILING OF ANNUAL REPORT AND ACCOUNTS
ANNUAL GENERAL MEETING
KEY DATES RELATING TO THE FINAL DIVIDEND
Mailing of the Annual Report and Accounts 2010 and ancillary documents to shareholders
The following documents are being mailed today to the registered shareholders of Drax Group plc:
· Annual Report and Accounts 2010;
· Notice of the 2011 Annual General Meeting; and
· Form of Proxy for the 2011 Annual General Meeting.
In accordance with Listing Rule 9.6.1 a copy of each of these documents have been submitted to the National Storage Mechanism and will be available for viewing shortly.
The Annual Report and Accounts 2010 and the Notice of the 2011 Annual General Meeting will also be available from 16 March 2010 as follows:
· for viewing on the Company's website, www.draxgroup.plc.uk; and/or
· by writing to the Company Secretary at the Registered Office; Drax Power Station, Selby, North Yorkshire YO8 8PH.
Compliance with Disclosure and Transparency Rule 6.3.5 ("DTR 6.3.5") - Extracts from the Annual Report and Accounts 2010
The information below (in Appendices A and B), which is extracted from the Annual Report and Accounts 2010, is included solely for the purpose of complying with DTR 6.3.5 and the requirements it imposes on how to make public, Annual Financial Reports. It should be read in conjunction with the Company's Preliminary Announcement issued on 22 February 2011 (available at www.draxgroup.plc.uk/investors/regulatory_news/). Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Annual Report and Accounts 2010. All page numbers and cross-references in the extracted information below refer to page numbers in the Annual Report and Accounts 2010.
The information contained in this announcement and in the Preliminary Announcement does not constitute the Group's statutory accounts, but is derived from those statutory accounts. The statutory accounts for the year ended 31 December 2010 have been approved by the Board and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors have reported on those statutory accounts and their report was unqualified.
Appendix A - Principal Risks and Uncertainties
Our assessment of the most significant risks and uncertainties which could impact long-term performance is detailed below. These risks are not set out in any order of priority and they do not comprise all the risks and uncertainties the Group faces.
Commodity market risk
|
Context · Commodity markets in 2010 remained challenging. Risk · We are exposed to the effect of fluctuations in commodity prices, particularly the price of electricity and gas, the price of coal and biomass (and other fuels), and the price of CO2 emissions allowances. |
Potential impact · Volatility in financial results. Associated objective and key priorities · Maximising the value of the Drax business. |
Examples of mitigating activities · Well understood progressive hedging strategy: forward power sales with corresponding purchases of fuel and CO2 emissions allowances when profitable to do so. |
Counterparty risk
|
Context · The recent recession and uncertain economic growth potentially impact on counterparty risk. Risk · We rely on third party suppliers for the delivery of fuel and other goods and services. We purchase a significant quantity of our coal under contracts with a number of large UK suppliers, so are exposed to the risk of non-performance by these suppliers. · We enter into fixed price and fixed margin contracts for the sale of electricity to a number of counterparties, so are exposed to the risk of failure of one or more of these counterparties. |
Potential impact · Additional costs associated with securing fuel and other goods and services from other suppliers. · Failure to secure coal from other suppliers resulting in limitation of operations. · Adverse effect on cash flow and earnings arising from the failure of one or more of the counterparties to whom we sell power. Associated objective and key priorities · Maximising the value of the Drax business. |
Examples of mitigating activities · Diversified coal supply in terms of source and counterparties. · Good portion of purchases at market indexed prices (no mark-to-market exposure). · Diversified logistics routes. · Target to optimise holding of coal stocks. · Close monitoring and reporting of concentration risk in suppliers. · Full suite of power counterparties with strong credit ratings. · Close monitoring and reporting of concentration risk in power counterparties. · Trading contracts generally include provisions that force counterparties to post collateral if they drop below investment grade. |
Ratings risk
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Context · Our business model currently assumes investment grade debt. Risk · Our investment grade debt rating currently underpins our ability to deliver optimal value from our trading strategy. A downgrade of our debt rating to sub-investment grade could impact our business model. |
Potential impact · Requirement to post collateral for current and future trading positions. · Additional restrictions within facilities agreements. Associated objective and key priorities · Maintain an optimal supporting capital structure. |
Examples of mitigating activities · Strengthened capital structure through share placing and subsequent refinancing in 2009. · Refinement to trading strategy to trade on credit‑efficient terms. · Grow direct sales through Haven Power, our electricity supply business. · Additional access to collateral through the £135 million trading facility signed in 2010. · Maintain relatively low levels of debt. |
Environmental and health and safety risk
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Context · Laws and regulations are complex, frequently changing and becoming ever more stringent. Risk · The EU, UK and local environmental and health and safety laws and regulations cover many aspects of our operations including limits on emissions to air and water, noise, soil/groundwater contamination, waste, and health and safety standards. |
Potential impact · Increased compliance costs. · Additional capital expenditure. · Fines, penalties, civil or criminal liability. · Limitation or suspension of operations. Associated objective and key priorities · Maintain operational excellence. · Deliver carbon abatement. |
· Examples of mitigating activities · Robust systems to ensure compliance and improve performance. · Regular third party assurance over system effectiveness. · Strong safety culture and related training. |
Electricity wholesale market risk
|
Context · Liquidity in the market for wholesale electricity is dependent on there being a sufficient number of counterparties willing to trade actively. Risk · Changes in the market structure or consolidation of the existing generation and supply businesses in the UK could result in a reduction in the number of active participants in the market with whom we are able to trade. |
Potential impact · Inability to hedge short- to medium-term exposure to electricity prices through wholesale market trading. · Increased exposure to short-term market volatility. · Inability to sell all of our output. · Lower revenues and increased costs to achieve trading objectives. Associated objective and key priorities · Grow our retail customer base. · Maximising the value of the Drax business. · Influence the regulatory framework. |
Examples of mitigating activities · Grow direct sales through Haven Power, our electricity supply business. · Initiatives to be active, responsive and provide good credit towards counterparties make Drax an attractive business partner. · Oppose structural changes that impact our market access, such as clearing and margining. · Work with other independent generators (via Independent Generators Group) to achieve positive market and regulatory changes to improve liquidity. |
Biomass strategy risk
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Context · Biomass is well placed to provide the UK with low cost and flexible renewable power, and contribute to meeting carbon reduction targets. Risk · We may not secure an appropriate regulatory framework and specific support mechanisms from Government, which underpin the economics of biomass. · We could fail to secure biomass supplies and logistics arrangements which meet our hurdle return rates, sustainability criteria and banking requirements. · Technical and cost uncertainty exists over our ability to burn significantly enhanced volumes of biomass in the existing coal plant. · We may fail to find an appropriate commercial structure that would secure the necessary equity and/or debt to fund our biomass strategy. · We may not be able to secure planning permits, or contract for the engineering design and construction ("EPC") of the dedicated biomass-fired plants at prices which meet our hurdle return rates. |
Potential impact · Inability to progress the biomass growth strategy. Associated objective and key priorities · Develop our biomass operations. · Influence the regulatory framework. |
Examples of mitigating activities · Engage with Government through the 2011 Banding Review process to obtain the right framework and grandfathered support from April 2013. · Advanced discussions with large creditworthy feedstock suppliers. · Focus on maximising UK term contract sources including energy crop volumes and active in global markets identifying diverse fuel sourcing opportunities. · Significant knowledge gained building existing co‑firing capability. · Continuation of research and development work in 2011. · Development of commercial structures to manage price exposures that enable pursuit of multiple sources of debt and equity. · Planning applications for two sites already submitted and robust contracting strategy well advanced and currently in the process of finalising EPC costs and commercial terms. |
Plant operating risk
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Context · Forced outages impact on our ability to generate electricity. Risk · Forced outages may be caused by the underperformance or outright failure of our power generation plant, or transmission assets or other equipment and components including the IT systems used to operate the plant or conduct trading activities. The duration of forced outages is influenced by the lead time to manufacture and procure replacement components and to carry out repairs. |
Potential impact · Lower revenues. · Increased costs and contractual penalties. · Adverse effect on financial results. Associated objective and key priorities · Maintain operational excellence. |
Examples of mitigating activities · Comprehensive risk-based plant investment and maintenance programme. · Target to optimise holding of spare components for use in the event of plant failure particularly long lead time items. · Business continuity plan for IT systems. |
Regulatory and political risk
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Context · The Government's market reform agenda is driven predominantly by the need to deliver a low carbon economy and security of supply over the longer term. Risk · The recent DECC Electricity Market Reform publication together with the HM Treasury consultation on the introduction of a carbon floor price represent the biggest change to the electricity sector since privatisation of the industry in 1990. The changes implemented are likely to result in coal generation becoming progressively and relatively less economic than other major forms of generation. |
Potential impact · Less funding available for plant retrofit/investment costs to meet increasingly stringent environmental requirements. · Lower load factors/generation levels. · Adverse effect on financial results. Associated objective and key priorities · Influence the regulatory framework. · Develop our biomass operations. · Deliver carbon abatement. |
Examples of mitigating activities · Integration of strategic and near-term investment planning. · Progress our biomass strategy. · Briefing, representation and engagement at EU and UK level. · Development of abatement and alternative generation options. |
Tax risk
|
Context · Previous financing structure unwind currently being agreed with HMRC. Risk · A full description of the tax risks which relate to the Group's previous financing structure, and the unwinding of it, is set out in note 6 to the consolidated financial statements. |
Potential impact · Adverse effect on cash flow arising from successful HMRC challenge to historic interest deductions claimed under the structure. · Failure to realise significant tax asset if HMRC disallows interest deductions arising as a result of unwinding the structure. Associated objective and key priorities · Maintain an optimal supporting capital structure. |
Examples of mitigating activities · Structure unwound in December 2008 following proposed changes to tax legislation. · Active engagement and dialogue with HMRC over structure and subsequent unwind. |
Appendix B - Directors' Responsibility Statement pursuant to Disclosure and Transparency Rule 4
The following statement is extracted from page 54 of the Annual Report and Accounts 2010 and is repeated here for the purposes of compliance with DTR 6.3.5. This statement relates solely to the Annual Report and Accounts 2010 and is not connected to the extracted information set out in this announcement or the Preliminary Announcement.
We confirm that to the best of our knowledge:
1. the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
2. the Business review, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Annual General Meeting
The Company is to hold its Annual General Meeting at 11.30am on Wednesday 13 April 2011, at The City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP.
Key dates relating to the final dividend
Detailed below are the key dates regarding the final dividend.
· 27 April 2011 - ordinary shares marked ex- dividend.
· 3 May 2011 - record date for entitlement to the dividend.
· 13 May 2010 - payment date for the dividend.
The rate of the final divided is 17.9 pence per share.
Philip Hudson
Company Secretary
15 March 2011
This information is provided by RNS