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