Final Results

RNS Number : 2853A

Drax Group PLC

18 February 2014

 



18 February 2014     

DRAX GROUP PLC (Symbol: DRX)

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013

Transformation to a predominantly renewable power provider well underway

Year ended 31 December	2013	2012
Key financial performance measures
EBITDA (£ million)(1)	230	298
Underlying earnings (£ million)(2)	142	193
Underlying earnings per share (pence)(2)	35.3	51.9
Total dividends (pence per share)(3)	17.6	25.3
Statutory accounting measures
Profit before tax (£ million)	32	190
Reported basic earnings per share (pence)	13	44

Financial and Operational Highlights

·     2013 underlying earnings ahead of expectations, reflecting good operations and healthy spreads

·     Year on year reduction in earnings driven by increase in carbon costs

·     2014 outlook - spreads weaker with mild winter

Biomass Transformation Highlights

·     First unit converted in April - operating performance surpassing expectations

·     Good progress with unit optimisation - now expect output of 630MW, efficiency only 0.5% less
 than coal

·     All construction projects on schedule and budget:

-  Drax site biomass storage and delivery systems fully operational for first unit

-  In the US, two pellet plants (aggregate capacity 900,000 tonnes p.a.) and port facility on track

·     Plan to modify a further unit to burn increased biomass as an enhanced co-firing unit from May 2014, earning 0.9ROCs, in advance of unit conversion targeted in April 2015

·     CfD Investment Contracts, subject to EU State Aid clearance, will underpin the investment required to secure
 the sustainable biomass supply chain for future unit conversions

Dorothy Thompson, Chief Executive of Drax, said:

"As expected, the increasing cost of carbon drove earnings down year on year. Recognising this, we have been investing significant capital to transform Drax into one of the world's largest renewable generators, burning sustainable biomass. At the same time we have delivered strong operating performance across the business, including notably, good output, efficiency and reliability from our first converted unit.

"We are well placed to secure CfD Investment Contracts for our second and third unit conversions. We look forward to the conclusion of the government's contract award process this Spring. These contracts will underpin the investment required to secure the sustainable biomass supply chain for our second and third unit conversions. We are targeting April 2015, when these contracts become effective, for our next unit conversion and quarter four of 2015 at the earliest, for the third.

"In 2016, we expect half of Drax to be fuelled by sustainable biomass, some 4% of the UK's electricity. In delivering this transformation, we will provide cost-effective, reliable renewable power to consumers, secure jobs at Drax and across the UK supply chain and deliver attractive returns for our investors."

2013 Review

Financial

·     EBITDA for 2013 down 23% at £230 million

-  Year on year reduction reflects increasing carbon costs

·     Underlying earnings per share decreased 32% to 35 pence

-  Includes impact of higher number of shares in issue following October 2012 placing

·     Low effective tax rate on underlying profits reflects impact of lower corporation tax rates on deferred tax liability, and research and development tax relief

-  Expect underlying tax rate for 2014 to be more closely aligned with standard corporate rate

·     Capital investment on track

-  Transformation and IED⁽⁴⁾ guidance unchanged at £650 - £700 million

-  2013 total capital investment of £290 million

-  2014 total capital investment guidance: c.£200 million

-  Outlook includes additional investment to optimise biomass units: £90 million (2014 - 2016)

·     Developing plans for further capital investment in supply chain and fourth unit conversion

·     Final dividend of 8.9 pence per share, or £36 million (2012: 10.9 pence per share,
or £44 million), in line with policy to distribute 50% of underlying earnings

·     Strong balance sheet, with net cash of £71 million

Operational

Year ended 31 December	2013		2012
Key operational performance measures	Biomass	Coal	Group
Forced outage rate (%)	6.8	6.8	4.8
Planned outage rate (%)	5.4	10.0	9.6
Availability (%)	88	84	86
Electrical output (net sales) (TWh)	2.9	23.3	27.1

·      Good safety performance

Coal

·      Load factor 80% - continued high output due to good availability and plant despatch economics

First Converted Unit

·     Technical performance - unit performing very well

·     Load factor 75% - start up logistics constraints

·     Phased commissioning of new facilities from October - fully operational from December 2013

Notes:

(1)   EBITDA is profit before interest, tax, depreciation, amortisation and unrealised gains/losses on derivative contracts.

(2)   2013 underlying earnings exclude unrealised losses on derivative contracts of £110 million (2012: £36 million) and the associated tax.

(3)   Based on 50% of underlying earnings.

(4)   Industrial Emissions Directive.

~~~~~~~~~~~~~~~~~~~~~~

Forward Looking Statements

This announcement may contain certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Drax Group plc ("Drax") and its subsidiaries (the "Group") are not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although Drax believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors, many of which are beyond the control of the Group, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, factors such as: future revenues being lower than expected; increasing competitive pressures in the industry; and/or general economic conditions or conditions affecting the relevant industry, both domestically and internationally, being less favourable than expected. We do not intend to publicly update or revise these projections or other forward-looking statements to reflect events or circumstances after the date hereof, and we do not assume any responsibility for doing so.

~~~~~~~~~~~~~~~~~~~~~~~

Results presentation meeting and call-in arrangements

Management will host a presentation for analysts and investors at 9:00am (UK Time) today, at Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

Would anyone wishing to attend please confirm by either e-mailing [e-mail] or calling Holly Abd'ee at Brunswick Group on [phone].

The meeting can also be accessed remotely via a conference call or alternatively via a live webcast, as detailed below.  After the meeting, a video webcast and recordings of the call will be made available and access details for these recordings are also set out below.

A copy of the presentation will be made available from 7:00am (UK time) today for download at: www.drax.com>>investors>>results_and_reports>>IR presentations>>2014 or use the link http://www.drax.com/investors/results-and-reports/ir-presentations/

Event Title:	Drax Group plc: Preliminary Results
Event Date:	Tuesday 18 February 2014
Event Time	9:00am (UK time)
UK Call-In Number	0808 237 0033
International Call-In Number	[phone]
US Call-In Number:	[phone]
Webcast Live Event Link	http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/33022/Lobby/default.htm
Instant Replay
UK Call-In Number	0808 237 0026
International Call-In Number	[phone]
US Call-In Number:	[phone]
Passcode:	645606#
Start Date:	Tuesday 18 February 2014
Delete Date:	Tuesday 18 March 2014
Video Webcast
Start Date:	Tuesday 18 February 2014
Delete Date:	Tuesday 17 February 2015
Archive Link:	http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/33022/Lobby/default.htm

For further information please contact Holly Abd'ee at Brunswick Group on [phone].

Website:

www.drax.com

Chairman's introduction

In perspective

Our commitment to becoming a leading provider of sustainable power is stronger than ever. As a Group we made significant progress in this respect during 2013, from starting the construction of wood pellet plant and port facilities in the US, through the conversion of our first generating unit at Drax Power Station to burn sustainable biomass in place of coal, to increasing sales of renewable power to business customers in the UK.

The energy sector faces many challenges. Whether concerns centre on security of supply, affordability or decarbonisation, as a Group we are pleased to say that we are working hard to provide power which is secure and reliable, cost-effective and low carbon. The regulatory framework which shapes the UK energy industry fully recognises the valuable and strategic role that sustainable biomass has to play in the energy mix. Importantly, establishing that framework will unlock the potential of this new and vibrant biomass industry and promote growth through investment and job creation.

Our achievements in 2013 position us well to secure an attractive future for our business and our shareholders.

We are firmly on track to deliver the many benefits that biomass has to offer as an energy source.

Earnings and dividend

Our earnings (EBITDA(1)) for the year were ahead of expectations at £230 million.

These are lower than in 2012 (£298 million) reflecting the increasing costs of carbon (£120 million), driven by the introduction of the UK government's carbon price support mechanism from 1 April 2013 and the removal of free allowances under the EU ETS.

In accordance with our dividend policy, the Board proposes a final dividend in respect of 2013 of 8.9 pence per share, equivalent to £36 million. This would give total dividends for the year of £71 million (2012: £97 million).

The Board and governance

We have an effective Board with good and complementary skills, knowledge and experience across all directors, both executive and non-executive. The Board takes the lead in setting the tone for good governance throughout the Group. As a Board we ensure that our conduct is focused on improving our business, driving our strategic priorities, and behaving responsibly. Issues such as succession planning, career development and diversity are kept under review as a matter of course.

Our people

We report on a year that has seen unprecedented change across the Group. Significant achievements have been made by our people and my sincere thanks go to all Group staff for their tireless commitment and hard work.

(1)   EBITDA is defined as profit before interest, tax, depreciation, amortisation and unrealised gains and losses on derivative contracts.

 

Chief Executive's statement

Review of the year

Drax is evolving from its beginnings as a power station owner and operator to a Group producing predominantly renewable power with activities that span the supply chain for the provision of biomass generated renewable power that is sustainable, low carbon, cost-effective and reliable. During 2013, we made important progress in our journey to deliver this transformation of the Group.

Our vision for Drax is to be a bold, customer oriented power generation and retail business, driven by biomass innovation. Our key initiatives in 2013 to enable us to achieve our vision were: our biomass fuel supply business in the US, our biomass conversion project at Drax Power Station, and our programme for the expansion of Haven Power Limited ("Haven Power") through growing our electricity sales to businesses. In each of these we made notable progress during the year bringing us closer to both achieving our vision and delivering on our overriding objective of maximising the value of the Drax Group.

Earnings

Our earnings for 2013 reflect good operations and good progress in delivering reliable biomass generation. As expected, at £230 million EBITDA is down on last year (2012: £298 million) as a result of increased carbon costs through both the cessation of the carbon emissions allocation under the EU ETS and the introduction of the UK government's carbon price support mechanism in April 2013.

Securing sustainable biomass supplies

Our developments in the US are an important part of our business model. They help us to optimise the biomass supply chain from North America which is still in its infancy, but is the main source of sustainable biomass fuel. The drivers for our upstream investments are twofold: securing the timely delivery of reliable wood pellet supplies to Drax Power Station and consolidating third party and own supplies to secure more efficient and cost-effective delivery logistics.

Construction of two 450 thousand tonnes per annum wood pellet plants - Amite (Mississippi) and Morehouse (Louisiana) - and a port facility at Baton Rouge (Louisiana) progressed well during the year. All three construction projects are progressing to schedule and budget. We are targeting the first quarter of 2015 for the start of commercial operations at Amite and Baton Rouge and the second quarter for Morehouse, with full capacity reached six months later.

Aside from our investments to secure a self-supply of sustainable biomass, we have made good progress towards securing near-term volumes of wood pellets from suppliers in the market with more than 4 million tonnes contracted for April 2014 to March 2015. We continue our negotiations for long-term volumes.

Sustainability is critical to our biomass strategy. All our biomass, whether in raw fibre or pellet form is procured against our own robust sustainability criteria. These include requirements for high greenhouse gas emission reduction and habitats and biodiversity protection, as well as due consideration for the important socio-economic factors in the source areas.

A programme of independent audits verifies that all our suppliers comply with our sustainability criteria.

Our calculations show that the range of sustainable biomass materials we have burnt over the last few years has a low carbon footprint. In 2013, the average greenhouse gas emissions were significantly below 79gCO2/MJ which is the maximum under the UK government's framework for sustainability requirements for biomass that are expected to become mandatory in 2015.

UK biomass logistics

Initial long-term contracts have been secured with UK port operators to provide us with biomass import facilities. Further contracts are under negotiation. The development of these facilities is on schedule.

We have concluded our first long-term freight contracts at fixed prices. We were particularly pleased to be able to secure through these contracts good protection against future increases in oil-related freight costs, typically a major component of total freight costs. The first 50 of the bespoke biomass rail wagons are operational transporting biomass from the ports to the power station.

Biomass conversion

The conversion of our first generating unit to burn sustainable biomass in place of coal is proving successful.

The converted unit was initially fuelled using existing storage and distribution systems originally built to facilitate biomass co-firing. Construction of new bespoke facilities for the receipt, storage and distribution of biomass remained on schedule and within budget throughout the year. From September 2013, we began to commission the new systems.

By the end of the year the facilities were fully supporting the first converted unit, overcoming many of the expected reliability issues with fuel delivery we experienced in the first half of the year. This contributed to the improved load factor seen in the second half of the year, giving a load factor for the full year of 75%.

Coal-fired generation performance

As in previous years, our load factor at 80% was high compared to other thermal capacity on the system and we delivered strong generation output for the fourth consecutive year. With good availability and reliability throughout 2013 we were able to continue to deliver additional value to the business through providing flexible generation output and balancing services to the System Operator, National Grid, in support of system stability and security.

For the year, our forced outage rate, which measures any reduction in plant availability excluding planned outages, was 6.8%. This is higher than our long-term target of 5%. In the first half of the year we had a forced outage rate of 7.6%. During this period we carried out performance tests on our boilers using a wide range of marginal coal material to establish the most economic fuel diet. This resulted in a higher number of plant integrity issues than we would typically expect. The forced outage rate in the second half of the year was lower and more in line with our long-term target. This has been set through extensive benchmarking with UK and international coal-fired plants to determine the optimum balance between performance and cost.

Health and safety

Two planned unit outages were undertaken during 2013, and both were completed on time and to budget without any recordable injuries. With two outages and considerable biomass project work activity, the number of engineering man-hours worked throughout the year was significant. Our safety statistics for the Group continued to be industry-leading, reflecting the emphasis we place on safety.

However, we have experienced weaker performance in our construction activities, particularly at two of our construction sites in the US which led to an increase in the total recordable injury rate. Working with our contractors we have significantly increased the safety management and supervision at these sites.

Retail performance

Selling our output through Haven Power continues to provide us with a credit-efficient route to market for our power sales compared to the wholesale electricity market. It also provides a good route to market for the Renewables Obligation Certificates and Levy Exemption Certificates earned when we generate renewable power.

During 2013 Haven Power delivered another year of substantial growth in a highly competitive market with retail sales 59% higher, in volume, than in 2012. Sales growth remains a key priority for the business.

An excellent standard of customer service is central to our proposition for this business. We are a consistent high performer in the Datamonitor Energy Users survey and have a good renewals record.

Legislative framework - contracts for difference and capacity market

In December 2013, the Energy Act became law. At the heart of the Act is electricity market reform, which will see, amongst other things, the introduction of Contracts for Difference ("CfD") providing long-term contracts and a stable revenue stream enabling investment in low carbon generating technologies. Electricity market reform also includes the introduction of a capacity mechanism into the electricity market to mitigate future risks to the security of electricity supplies.

The government plans to award early CfD contracts in Spring 2014. These enable investment in advance of the CfD mechanism coming into force and importantly underpin further work on our second and third unit conversions.

The contracts provide the necessary certainty to underpin the long-term commitments required to secure the supply chain for sustainable biomass fuel for these units. This includes term contracts for UK port facilities, pellet supplies and overseas logistics facilities, as well as further direct investment by Drax in the supply chain in the UK and overseas.

Our applications for early CfDs for the conversion of two of our units were successful with the units provisionally ranked equal first amongst 16 projects. The strike price for these contracts has been confirmed as £105/MWh (in 2012 prices). Currently, the contracts are scheduled to become effective, and so allow the first payments, in April 2015, subject to EU State Aid clearance. Against this timetable we are now targeting the conversion of our second and third units to biomass in April 2015 and, at the earliest, the fourth quarter of 2015. In advance of these conversions we intend to modify one of our coal units at the power station to operate as an enhanced co-firing unit from May of this year. As an enhanced co-firing unit it will attract 0.9ROC/MWh under the Renewables Obligation ("RO"). This unit will then be used for the second unit conversion in April 2015.

During 2014, we will progress the construction works necessary to support these conversions as well as the required development of the supply chain, including further UK port development and the fabrication in the UK of more bespoke railway wagons. Our target is for three converted units to be fully operational and supplied with sustainable biomass through a well secured supply chain in 2016.

Applications for enduring CfDs are to be made in the second half of 2014. Any units not converted under the RO or the early CfDs will be eligible to apply. The government is currently consulting on proposals for the contract allocation process and budget management under the Levy Control Framework which sets the limits on the total amount of subsidy available.

The government continues to work on its proposals to introduce a capacity market for electricity. These have not yet been finalised, but it is our view that the current designs do not make a compelling economic case for the Drax coal units.

Legislative framework - sustainability criteria

In January 2014, the government published the draft RO (Amendment) Order 2014 which includes the requirement for the Office for Gas and Electricity Markets ("Ofgem") to produce guidance on sustainability criteria for biomass. We continue to engage with government and Ofgem on the implementation of these criteria.

We firmly believe that robust, mandatory sustainability criteria are vital to maintain and enhance public acceptance, and ensure that sustainable practices are implemented. Together with six other European biomass users we are involved in the work of the Sustainable Biomass Partnership which aims to establish and manage a biomass assurance framework to demonstrate that solid biomass is derived from legal and sustainable sources.

Carbon capture and storage

Together Drax, Alstom UK Limited and BOC (a member of The Linde Group) have formed the project company, Capture Power Limited ("Capture Power"). In December 2013, the government awarded Capture Power a Front End Engineering and Design ("FEED") contract for its planned, state-of-the-art 426MW carbon capture and storage ("CCS") demonstration project - the White Rose CCS Project. The FEED contract also includes the planned development of a carbon dioxide ("CO2") transportation and storage solution - the Yorkshire Humber CCS pipeline - to be undertaken by National Grid.

The award of the contract marks a major next step in the UK CCS Commercialisation Programme. The FEED study is a two-year programme of detailed engineering, planning, commercial and financial work to finalise and de-risk all aspects of the proposal ahead of taking the final investment decision and proceeding to financial close and the commencement of construction.

The project will be dependent on successful outcomes from external funding processes and electricity market reform mechanisms to incentivise low carbon technologies.

Looking ahead

As noted above, from May this year one of our coal units will operate as an enhanced co-firing unit burning at least 85% biomass. We will use this unit to conduct further research and development into the types of biomass that can be effectively burnt, to develop our optimum nitrogen oxides ("NOx") abatement solution on converted units, and to build up biomass supplies for the second unit conversion in April 2015.

During the year we will make further investments in improving the performance of our biomass units. Through these investments we are confident that we will now be able to deliver capacity to the grid from a converted unit of 630MW burning standard biomass. This is only 15MW less than when fuelled with coal. At this output our efficiency rates will be just 0.5% less than coal efficiency rates. This is materially better performance than we originally expected reflecting further technical progress and investment.

Our overall target is to achieve a capacity of 645MW using standard woody biomass. We have already demonstrated that we can achieve this higher output under special conditions when using particularly high calorific sustainable wood pellets.

In March this year, we expect to have two domes, half of our new 300,000 tonne biomass storage facility, fully operational. We expect the full capacity to be operational in the third quarter. We anticipate that the Port of Hull facility will be fully operational in March 2014 and the Port of Immingham by the end of the year. In the second quarter of 2014 we envisage there being 100 biomass rail freight wagons in operation.

At the earliest, we now expect to convert our third unit in the fourth quarter of 2015. The initial load factor for this unit will depend on biomass supply chain development. We are moving forward with the engineering designs, planning and biomass sourcing strategy for the conversion of a fourth unit and would hope to be able to progress the investment decision on this unit as soon as the regulatory position is clear, with a view to conversion in 2016.

We believe that there is significant value to the Group in increasing our own supplies of wood pellets. We are now moving forward with the development of new sites to establish additional wood pellet plants in the US.

We plan to continue to grow our retail sales through Haven Power, which is on track to achieve 12-15TWh of annual sales over the next few years.

During 2013, we arrived at a lead case technical solution to ensure compliance with the more stringent emissions standards of the Industrial Emissions Directive from 2016. The solution involves low NOX burners on all six units, selective non-catalytic reduction ("SNCR") technology and more selective coal procurement. We will trial SNCR and low NOX burners on one coal unit and our enhanced co-firing biomass unit during this year to verify our analysis.

As we move from being a coal generator burning some biomass to become an integrated Group sourcing biomass, generating renewable electricity and selling it to business customers, the commercial structure of the Group will change. As we progress this transformation we will remain committed to developing in parallel the optimal capital structure for the Group.

We are confident that this transformation will deliver an attractive future for the business and our shareholders. It will also deliver a significant amount of cost-effective renewable power to UK consumers and make a meaningful contribution to the UK's 2020 climate change targets.

Operational and financial performance

Introduction

Our EBITDA for the year ended 31 December 2013 was £230 million, compared to £298 million in 2012. This reflects the increased carbon costs incurred through the ending of free carbon dioxide ("CO2") emissions allowances and the introduction of the carbon price support ("CPS") mechanism. Together these measures added £120 million to our fuel costs in 2013.

Our continued strength in operations has allowed us to benefit from attractive dark green spreads during the year, mitigating to some extent the impact of additional carbon costs.

2013 was a year of significant project activity across our operations. We undertook a double outage during the year, our first unit was converted to run fully on biomass in April and construction work continues in the UK and has commenced in the US on our biomass transformation project.

At Haven Power Limited ("Haven Power"), our retail business, we have continued to deliver good sales volume growth, with 8.1TWh of sales in the year ended 31 December 2013, compared to 5.1TWh in 2012.

During 2013, £286 million was invested on capital expenditure projects, of which £228 million related to our biomass transformation plans. At the Drax Power Station site this includes the new biomass receipt, storage and distribution facilities. Commissioning for the facilities required to fuel our first biomass unit was completed at the end of 2013. In the US Gulf, work commenced on the development of two wood pellet plants and a port operation, targeting commercial operations dates in the first half of 2015.

In support of our biomass transformation plans, in April 2013 we announced that we had secured a £75 million amortising loan facility with Friends Life, underpinned by a guarantee from HM Treasury under the Infrastructure UK Guarantee scheme.

This replaced £50 million of the £100 million amortising loan facility agreed with the UK Green Investment Bank in December 2012. Alongside these facilities we have a £100 million amortising loan facility with M&G UK Companies Financing Fund, secured in 2012, and our £400 million working capital and letter of credit facility.

With £225 million of loans drawn down, net cash at 31 December 2013 was £71 million. Supported by the proceeds of our share placing in 2012 this provides the financial platform from which we are realising our biomass transformation.

At the forthcoming Annual General Meeting, the Board will recommend a final dividend for 2013 of 8.9 pence per share, taking total dividends for the year to £71 million.

This review includes further explanation and commentary in relation to our principal performance indicators and results for the year.

Generation

Commodity markets

The margins of our generation business are driven by commodity market movements and the timing of our fuel purchases and power sales. For our coal generation capacity the margins available are reflected in the dark green spread, the difference between the price of power we sell and the cost of the coal and carbon we purchase. For our newly converted biomass unit, the margins available are reflected in the bark spread, the difference between the price of power we sell plus renewable support and the cost of the biomass we purchase.

The trends in commodity prices witnessed in the last few years are described in the following paragraphs.

Power and gas

Following a period of volatility in 2011 and early 2012, power prices have remained relatively stable over the 18 months to 31 December 2013. The gas market continues to drive power prices.

The impact of the Fukushima disaster and limited Japanese nuclear generation continued to provide support to the global liquefied natural gas ("LNG") market throughout 2013. UK gas prices remained strong and stable through 2013 with prices being pulled upwards towards oil indexed European prices (and international LNG prices) in order to attract imports.

European and UK gas prices remain at a premium to US prices, where advances in technology are leading to a large supply of low priced shale gas, adding to already significant reserves. However, shale gas developments outside the US are in their infancy and will in all probability, therefore, have little impact in the short to medium term. Furthermore, demand for gas is rising rapidly so that even with the possibility of increased shale gas production, global markets may well remain strong.

Coal

Market prices for international coal have fallen steadily from a peak in mid-2011.

Whilst global demand has grown through 2013, the low US gas prices described above forced increases in US coal exports. Combined with rising supplies from Indonesia and Australia, this has resulted in a weak global short-term market characterised by low international prices and high stocks in Europe. With high stock levels also being held in China, any increase in Asian demand has been insufficient to absorb the excess supply.

These market dynamics, as well as increasing operating costs, have continued to put pressure on UK domestic coal producers.

Carbon

Following the dramatic fall in market prices for EU ETS carbon allowances in the second half of 2011, amid fears for the Eurozone economies, the downward trend continued through 2012 and 2013.

The combination of slow economic growth and any Phase II surplus bankable into Phase III, drove carbon prices to new lows during 2013 before they recovered slightly towards the end of the year.

With an over-supplied market, the main price driver is political intervention and the "back-loading" debate (postponing the sales of emissions allowances to restrict current supplies). Although the back-loading proposals are not finalised the likelihood of implementation has increased with the EU providing the required authorisation for the European Commission. However, the timing and the profile of the volumes to be removed still remains uncertain.

Biomass

The majority of biomass used for large scale power generation is priced in US dollars or euros. Movements in these exchange rates have driven the changes in biomass costs during the period.

At the start of 2013 we saw a weak US dollar, relative to sterling, driving market biomass prices down. The dollar recovered mid-way through the year, but weakened again towards the end of the year. As explained in Unrealised gains and losses below, the extensive foreign currency hedging programme we are putting in place provides us with some protection from these fluctuations in exchange rates. However, as a result this will inevitably drive some volatility through the unrealised gains and losses line in our income statement (a non-cash item, excluded from underlying earnings).

Dark green spread and bark spread

As a result of the relatively stable power prices and low coal and carbon prices, we have seen attractive dark green spreads during 2013. However, the introduction of both full auctioning of EU emission allowances from the start of the year and the CPS mechanism from April has increased costs for coal-fired generators.

Having fallen during the year, market bark spreads rose at the year end to levels similar to those at the start of the year. The movements have principally been driven by currency effects described above.

Looking forward, the UK government's CPS mechanism, whilst strengthening the case for biomass generation, is likely to erode the competitive position of coal-fired plant. Our biomass transformation project means the bark spread will become an increasingly important element of our gross margin.

Generation gross profit

Generation gross profit	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
Revenue
Power sales	1,668.9	1,527.4
ROC and LEC sales	62.8	62.6
Ancillary services income	12.1	14.5
Other income(1)	36.1	25.5
	1,779.9	1,630.0
Cost of sales
Fuel costs in respect of generation	(945.8)	(929.2)
Cost of power purchases	(334.1)	(138.4)
Grid charges	(70.4)	(66.3)
	(1,350.3)	(1,133.9)
Gross profit	429.6	496.1

(1) Includes £28 million (2012: £17 million) of fuel sales.

The generation gross profit for the year ended 31 December 2013 was £430 million, compared to £496 million in 2012. Whilst the dark green spreads, which currently account for the majority of our gross profit, remained strong the impact of additional carbon costs meant that profits for 2013 were lower.

The introduction of the UK CPS mechanism from April 2013 adds a levy to our coal purchases and increases the cost of the coal we burn. In addition, from 2013 we entered Phase III of the EU ETS with the removal of free CO2 emissions allowances, compared to the 9.5 million tonnes of free CO2 allowances received in 2012 under Phase II. The combined cost of these measures added £120 million to our fuel costs in 2013.

The rising cost of carbon will continue to erode the profit margins of coal generating plant. This very much supports the economic case for the strategy we have developed to become a predominantly biomass-fuelled power generator.

Revenue

Total generation revenue for the year ended 31 December 2013 was £1,780 million, compared to £1,630 million in 2012.

Excluding £334 million of power purchased in the market (2012: £138 million), our generation revenue of £1,335 million was lower than the equivalent comparative for 2012 (£1,389 million). This decrease reflects the reduction in net power sold (electrical output), at an average achieved electricity price (£51.0 per MWh) broadly in line with last year (£51.3 per MWh). The output in 2012 represented a record level for the plant as a result of the combination of high availability and good margins available in the market.

Generation revenue also includes sales of Renewables Obligation Certificates ("ROCs") and Levy Exempt Certificates ("LECs"), totalling £63 million in both 2013 and 2012.

We recognise the value of the ROCs and LECs earned as generated, reducing fuel costs in respect of generation. The recognition of a sale is matched by a corresponding cost of sale. The ROCs and LECs, earned through generating electricity from burning biomass, are held on our balance sheet until sold.

The timing of ROC sales is largely driven by a combination of Renewables Obligation ("RO") deadlines and commercial considerations. Consequently, the majority of the ROCs generated in 2013 will be sold in 2014.

In April 2013, we converted our first unit to run fully on biomass under the ROC regime. As a result of the increased biomass burn and as demonstrated by the table below, we have generated considerably more ROCs and LECs during the year ended 31 December 2013, than during 2012.

ROC and LEC assets on the balance sheet	2013 £m	2012 £m
As at 1 January	18.7	32.1
ROCs and LECs generated	143.9	32.0
ROCs and LECs purchased	37.6	11.4
ROCs and LECs sold/utilised	(60.7)	(56.8)
As at 31 December	139.5	18.7

Total generation revenue includes sales fulfilled by purchasing power in the market. We purchase power when the cost of power in the market is below our marginal cost of production in respect of power previously contracted for generation and delivery by us, and to cover any shortfall in generation during outages. The cost of these purchases is included in cost of sales.

Whilst net power sold at 26.2TWh in 2013 reflects a reduction from 27.1TWh in 2012, this gross up for power purchased in the market resulted in the overall increase in total generation revenue.

Cost of sales

Our fuel costs are driven by a combination of market prices at the time of securing the fuel and the mix of different fuels burnt during the period. In addition, as noted above UK and EU legislation (CPS mechanism and Phase III of the EU ETS) to incentivise renewable energy has increased the cost of burning coal.

Our average cost of fuel (excluding CO2 emissions allowances) for the year ended 31 December 2013 was £27.9 per MWh, compared to £30.6 per MWh in 2012. As the largest component of our fuel burnt, coal prices still drive the average fuel cost, with a falling international market price contributing to the decrease in the year.

Biomass accounted for 12% of our total fuel burnt by heat content in 2013 (2012: 5%), the increase reflecting the conversion of our first unit fuelled by biomass from April 2013. As we progress our transformation, biomass costs will account for a greater proportion of the fuel costs in respect of generation.

Within costs of sales, net biomass costs are made up of the cost of the fuel delivered to site less the value of renewable support received. The cost of the fuel includes raw material and delivery costs. The renewable support reflects the value assigned to ROCs and LECs earned through generating electricity from burning biomass. The value of the renewable support therefore reduces the net biomass cost.

As described in Revenue above, upon sale of the ROCs and LECs the income is recognised in revenue and the value of the ROC or LEC (previously held in the balance sheet) is recorded separately in cost of sales.

Also included within fuel costs in respect of generation is the cost of CO2 emissions allowances purchased. For Phase III of the EU ETS (2013-2020) we have no free carbon allowances (2012: 9.5 million tonnes) and are therefore required to meet the full cost of CO2 tonnes emitted from coal generation through purchases of allowances in the market. This resulted in the increase in our purchased allowances requirement from 13.1 million tonnes (at an average price of £6.3 per tonne) in 2012 to 20.3 million tonnes in 2013 (at an average price of £6.1 per tonne), although this is offset by the increase in biomass burn, reducing our total CO2 emissions allowances requirement.

Generation cost of sales also includes grid charges, which continue to rise as more intermittent generation impacts on system balancing costs, and power purchases - the cost of power purchased in the market as outlined above.

Generation operating performance

Health and safety

A significant amount of project work has been undertaken during 2013, with a double planned outage and the conversion of our first unit to run on biomass, in place of coal. In addition we completed the build of our biomass receipt, storage and distribution systems to support this first converted unit, whilst in the US work continues apace on the construction of two pellet plants and a port facility.

Against this backdrop we have continued to deliver good safety statistics with a lost time injury rate and total recordable injury rate of 0.09 and 0.29, respectively, for the year ended 31 December 2013 compared to 0.06 and 0.17 in 2012. Our safety performance in the UK continues to be industry-leading. However, performance at our US construction sites is not yet meeting Drax standards. As described in the Chief Executive's statement we have taken action to bring US performance up to our UK standards.

Outage and plant utilisation levels

		2013	2012
	Biomass	Coal
Planned outage rate (%)	5.4	10.0	9.6
Forced outage rate (%)	6.8	6.8	4.8
Availability (%)	88	84	86
Electrical output (net sales) (TWh)	2.9	23.3	27.1

Biomass

Our first unit was converted to biomass in April using, on a temporary basis, the storage and distribution systems originally built for biomass co-firing. Through the final quarter we began commissioning our new on-site biomass receipt, storage and distribution systems, with those systems required to support our first converted unit being completed towards the end of the year.

Planned outages, mainly in the first half of the year, for scheduled inspections and to allow for planned upgrades to the rail loop, resulted in a planned outage rate of 5.4% for our biomass unit. The forced outage rate for the period of 6.8% largely reflects expected issues for a newly converted unit, and we have seen a steady improvement through the period as we gained more experience. Availability for the biomass plant for the period was therefore 88%.

The load factor for our biomass unit was initially constrained by the use of temporary systems, which resulted in expected reliability issues with fuel delivery. Many of these issues were overcome through the introduction of the new facilities towards the end of the year. As a result the load factor for the period was 75%.

Coal

We have continued to deliver good operating performance from our coal units. The planned outage rate for our coal plant for the year ended 31 December 2013 was 10%, compared to 9.6% in 2012, reflecting the two unit outages undertaken in both years. Our maintenance regime includes a major planned outage for each of our six units once 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 each undergo a major planned outage. One unit will undergo a major outage in 2014.

The forced outage rate for our coal plant of 6.8% for the year ended 31 December 2013 (2012: 4.8%) was higher than our long-term target of 5%. We have continued to test a wide variety of advantaged fuels, for example coals with lower cost than the standard bituminous coal that we burn. In the first half of the year, some of these fuels have resulted in a higher number of plant integrity issues than we typically experience. However, the testing work is an important component of our drive to optimise value from our fuel mix, as well as the work to define our solution for compliance with the Industrial Emissions Directive (see Chief Executive's statement).

Coal plant availability for the year ended 31 December 2013 was therefore 84%. Although slightly lower than availability of 86% for 2012, this continues to demonstrate a leadership position amongst coal-fired plant. With strong plant despatch economics, the resulting load factor of 80% compares favourably with the average for other UK coal and gas plants.

The load factor of 80% for the plant as a whole for the year ended 31 December 2013 was down by 2% on 2012, reflecting a decrease in electrical output (net sales) to 26.2TWh in 2013, compared with the record output of 27.1TWh in 2012.

Retail

Retail gross profit

Retail gross profit	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
Revenue	750.6	451.4
Cost of sales
Cost of power purchases	(455.1)	(278.9)
Grid charges	(168.4)	(101.5)
Other retail costs	(111.6)	(56.2)
	(735.1)	(436.6)
Gross profit	15.5	14.8

Growth

The strategic value to the Group of Haven Power, the Group's retail business, is the alternative credit-efficient route to market it provides for our power, ROCs and LECs.

Whilst margins in the I&C market are very tight, the volumes available are much greater with c. 50% of the total electricity supplied in the UK in 2013 being delivered to the I&C market, compared to c. 15% delivered to the SME market. In total, the business electricity market is c.190TWh per annum, and differs from the wholesale market in that collateral support is not usually required for forward power sales. In selling power into the retail market, rather than wholesale, the Group swaps collateral risk for credit risk, which is managed by assessing the financial strength of our customers.

In addition, Haven Power provides access through this market for the Group's renewable power. The ROCs and LECs, earned through burning biomass in the generation business, can be utilised by the retail business.

We are on track to deliver retail sales of 12-15TWh by 2015 at Haven across the I&C and SME markets. Haven Power has well established credit management policies, with both strong initial acceptance criteria and robust credit management processes, coupled with regular monitoring and independent review. This is evident from our low bad debt experience to date. During the year we completed the migration of customers onto our new billing system, which together with our strong account management model, provides the foundation to grow our customer base.

Renewable power and climate change levy exempt power together currently account for c.50% of Haven Power sales. With our growth targets for the business, Haven Power should utilise all the ROCs generated from our current converted unit and a substantial proportion of the LECs from the planned unit conversions.

Gross margin

As Haven Power continues to deliver good volume growth, movements in the financial metrics are largely driven by volumes. In the year ended 31 December 2013, sales volumes rose 59% from 5.1TWh in 2012, to 8.1TWh. This drove an increase in revenue from £451 million in 2012, to £751 million in 2013.

The majority of the growth at Haven Power has come from the more competitive I&C market which has a lower gross margin than the SME market. In addition, rising grid charges and other retail costs of sales including Feed-in Tariff costs, driven up by increasing amounts of intermittent renewable generation, combined to drive a gross profit of £16 million, up marginally on £15 million in 2012.

Group summary financial performance

Group results	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
Generation gross profit	429.6	496.1
Retail gross profit	15.5	14.8
Total gross profit	445.1	510.9
Operating and administrative expenses	(215.1)	(212.5)
EBITDA	230.0	298.4
Depreciation	(64.8)	(58.5)
Unrealised losses on derivative contracts	(110.2)	(36.1)
Operating profit	55.0	203.8
Finance costs	(23.2)	(13.6)
Profit before tax	31.8	190.2
Tax credit/(charge)	19.6	(26.4)
Profit after tax	51.4	163.8
	pence per share	pence per share
Basic earnings per share	13	44
Underlying earnings per share	35	52

Group operating and administrative expenses

Group operating and administrative expenses before depreciation were £215 million for the year ended 31 December 2013 compared to £213 million in 2012, reflecting an inflationary increase in our cost base and investment in the growth of both our retail business and the operations in the US.

2012 operating costs included £5 million in relation to compliance measures under the Community Energy Savings Programme ("CESP") which completed last year.

We remain focused on achieving strong operational cost performance and we will continue to carefully control our underlying cost base.

Group EBITDA

The Group EBITDA is primarily driven by the factors influencing the gross margin. The fall in EBITDA for the year ended 31 December 2013 to £230 million, from £298 million in 2012, is therefore a result of the increasing costs of carbon following the removal of free carbon allowances under Phase III of the EU ETS and the introduction of the CPS mechanism during 2013.

Whilst these additional costs and the government's trajectory for increasing CPS over time, erode the profitability of our coal-fired generation plant, they strengthen the case for biomass generation. We are making a significant investment in our biomass transformation; however our financial performance must be viewed in this context until our biomass operations reach an appropriate scale.

Depreciation

Depreciation was £65 million for the year ended 31 December 2013, compared to £59 million in 2013. As we continue to invest in our biomass transformation, our depreciation charge will increase as new investment comes on stream over the coming years.

Unrealised gains and losses on derivative contracts

The Group enters into forward contracts for the sale of power and the purchase of coal, biomass and carbon emissions allowances which are the elements which make up the gross profit of the business. In addition, where contracts for the purchase of fuel or carbon allowances are denominated in a foreign currency, the Group enters into forward foreign currency contracts.

These contracts aim to de-risk the business, providing secure cash flows into the future. The accounting for these contracts at rising volumes increases volatility in the unrealised gains and losses line in the income statement.

Where possible, we take the own use exemption for contracts entered into and held for our own purchase, sale or usage requirements, including forward domestic coal and biomass contracts and therefore we do not reflect their value in our accounts until the contracts close out (unlike derivatives which we mark-to-market).

Forward contracts which meet the definition of derivatives under IFRSs and do not qualify for the own use exemption, are included in our accounts at their fair value at the balance sheet date, derived largely by reference to market prices at that date. Unrealised gains and losses arise on the movements in the fair value of these contracts between balance sheet dates.

Where the derivative contracts meet the definition of an effective hedge under IFRSs, the movement in their fair value is recognised through the hedge reserve, a component of shareholders' equity in the balance sheet. This is largely the case for our forward power and carbon contracts, as well as some of our forward foreign exchange contracts.

Where they do not meet the definition of an effective hedge (from an accounting perspective, even though they represent an economic hedge), the movement in their fair value is reflected in the income statement as an unrealised gain or loss on derivative contracts. This encompasses some of our forward foreign exchange and financial coal contracts.

Unrealised losses on derivative contracts recognised through the income statement were £110 million in the year ended 31 December 2013 compared to £36 million in 2012. In both years the figure was largely driven by movements in the fair value of our forward foreign exchange contracts.

These contracts reflect an extensive hedging programme to support our biomass procurement activities. The programme covers all contracted and a substantial proportion of as yet un-contracted but forecast purchases and provides a significant degree of protection from adverse currency movements.

A weakening US dollar at both year ends resulted in unrealised losses on these contracts, as market rates were preferential in comparison to contracted rates. The volumes of these contracts have increased significantly during the year as we look to de-risk the business by securing our cash flows in sterling.

In considering mark-to-market movements, it is important to recognise that profitability is driven by our strategy to deliver market level dark green or bark spreads, not by the absolute price of any single commodity at any given date. We therefore look to underlying profit (excluding unrealised gains and losses on derivative contracts) as our performance indicator.

Interest

Net finance costs for the year ended 31 December 2013 were £23 million compared to £14 million in 2012, the increase predominantly arising from the interest paid on borrowings, as we drew down £100 million in December 2012 and a further £125 million in April 2013.

Tax

Tax reconciliation 2013		Statutory		Underlying
	£m	%	£m	%
Profit before tax	31.8		142.0
Tax at 23.25%	7.4	23	33.0	23
Reconciling items:
Impact of rate change	(22.3)	(70)	(28.6)	(20)
Prior year adjustments	(7.3)	(23)	(7.3)	(5)
Other	2.6	9	2.6	2
Total tax (credit)/charge	(19.6)	(61)	0.3	0

The 2013 tax credit of £20 million, compares to a £26 million tax charge in 2012. The reduction is driven by the £22 million impact of a 3% reduction in corporation tax rates (2012: £15 million from a 2% reduction). In addition, the 2013 tax charge includes the impact of research and development claims, now agreed with HMRC, resulting in a credit of £7 million in respect of prior years. 2012 includes the impact of a revision to previous years' capital allowances claims agreed with HMRC, resulting in a tax credit of £8 million recognised in the comparative period.

The underlying effective rate of tax (excluding the after tax impact of unrealised gains and losses on derivative contracts) is 0% in 2013, compared to 15% in 2012, the difference arising predominantly from the impact of the corporation tax rate changes as described above.

In 2014 we expect underlying rates to more closely align with UK corporation tax rates.

The tax paid during the year was £18 million (2012: £54 million), principally reflecting lower profitability and tax rates in 2013 as described in Liquidity and capital resources. These payments were offset by tax refunds in respect of prior year credits noted above, bringing net taxes paid for 2013 to £11 million (2012: £51 million).

Profit after tax and earnings per share

Profit after tax for the year ended 31 December 2013 was £51 million, compared to £164 million in 2012, driving basic earnings per share of 13 pence in 2013, compared to 44 pence in 2012.

We measure underlying earnings per share (excluding the after tax impact of unrealised gains and losses) as this strips out the volatility on our derivative contracts (non-cash items) which do not meet hedge effectiveness criteria under IFRSs as described above. With underlying profit after tax of £142 million in 2013 (2012: £193 million), underlying earnings per share for the year ended 31 December 2013 was 35 pence per share, compared to 52 pence in 2012.

The reduction in underlying earnings per share in 2013 principally reflects the impact of additional costs of carbon on our profitability as outlined above.

Liquidity and capital resources

Analysis of cash flows

	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
EBITDA	230.0	298.4
(Increase)/decrease in ROC assets	(120.8)	13.4
Decrease/(increase) in carbon assets	12.5	(39.0)
Increase/(decrease) in working capital	48.0	(9.3)
Other	0.8	(0.3)
Cash generated from operations	170.5	263.2
Income taxes paid	(10.6)	(50.6)
Other gains/(losses)	2.2	(0.8)
Net interest paid	(19.8)	(8.7)
Net cash from operating activities	142.3	203.1
Cash flows from investing activities:
Purchases of property, plant and equipment	(301.7)	(206.0)
Short-term investments	10.0	-
Net cash used in investing activities	(291.7)	(206.0)
Cash flows from financing activities:
Equity dividends paid	(78.8)	(95.7)
Proceeds from issue of share capital	1.9	187.7
Repayment of borrowings	(0.7)	(10.5)
New borrowings	125.0	100.0
Other financing costs paid	(2.4)	(9.7)
Net cash from financing activities	45.0	171.8
Net (decrease)/increase in cash and cash equivalents	(104.4)	168.9
Cash at 1 January	371.7	202.8
Cash at 31 December	267.3	371.7
Short-term investments at 31 December	20.0	30.0
Borrowings at 31 December	(216.1)	(90.7)
Net cash at 31 December	71.2	311.0

Cash generated from operations

Cash generated from operations of £171 million in 2013, compared to £263 million in 2012, incorporates a fall in EBITDA caused by the rising cost of carbon. This is compounded by the increase in ROC and LEC assets of £121 million, following the conversion of our biomass unit. As noted above, the value of our ROCs and LECs generated is held in the balance sheet until the assets are sold to a third party - the timing of which is driven by RO deadlines and commercial considerations. This outflow was only partially mitigated by the inflows from reductions in carbon assets and working capital.

Net cash flows from operating activities

Falling profits, lower corporation tax rates and higher capital allowances arising from our capital investment have resulted in lower net income taxes paid at £11 million in the year. 2013 taxes paid relate to settlement of the 2012 liability and 2013 payments on account, and are shown net of £7 million of refunds in relation to previous years, arising from the research and development claims agreed with HMRC during the period.

Net cash used in investing activities

Purchases of property, plant and equipment of £302 million in 2013 (2012: £206 million) are reflective of the significant amount of investment across the business as we continue to invest in our biomass transformation.

Net cash flows from financing activities

In order to support our biomass transformation we completed a refinancing, which included a share placing and the drawing down of £100 million against our loan facilities towards the end of 2012, subsequently enhanced in 2013 with the drawing down of an additional £125 million against our loan facilities, as described in Financing and cash flow management.

Net cash

From £402 million at 31 December 2012 the decrease in cash and cash equivalents of £105 million during the year leaves cash and short-term investments of £287 million at 31 December 2013. Increased borrowings have been used to support cash generated from operations in funding the capital investment programme. As such net cash (after deducting borrowings) is lower at 31 December 2013 at £71 million compared to £311 million in 2012.

Financing and cash flow management

In April 2013, we agreed a new £75 million amortising term loan facility with Friends Life, underpinned by a guarantee from HM Treasury under the Infrastructure UK Guarantee Scheme. This replaced £50 million of the £100 million amortising term loan facility agreed with the Green Investment Bank, signed in December 2012.

The new loan facility enhances the existing financing structure executed last year by providing additional liquidity to the Group and ensuring a smoother profile of debt maturities. Furthermore, the all-in cost of the new facility is very competitive.

The financing structure also incorporates the remaining £50 million amortising term loan from the Green Investment Bank, a £100 million amortising term loan facility with the M&G UK Companies Financing Fund and a £400 million working capital and letter of credit facility. The term loans have varying maturity profiles ranging from four to eight years, whilst the working capital and letter of credit facility is due to mature in April 2016.

In addition, a commodity trading facility also executed in December 2012, allows us to transact prescribed volumes of commodity trades (dark green spreads) at attractive prices without the requirement to post collateral. This facility has been operating well, offering trading counterparties access to the security package available to our senior lenders. Combined with other steps taken over the past three years to limit our requirements to post collateral, this is allowing the Group to operate comfortably with a sub-investment grade business model.

Finally, towards the end of 2013 we completed our first ROC monetisation facility. As described above, cash for ROC sales can often flow back to renewable generators some time after the associated power was produced. This can result in significant working capital absorption, with ROC income often received more than twelve months after we have paid for the related biomass. We have agreed an £80 million facility with Lloyds Bank Commercial Finance Limited, which allows Drax to sell ROC receivables.

Capital expenditure

Fixed asset additions were £286 million in the year ended 31 December 2013, compared to £224 million in 2012. This includes £228 million on our biomass transformation project (2012: £180 million).

At the Drax Power Station site we completed the commissioning of the new receipt, storage and distribution systems for our first converted unit by the end of 2013, and we expect to have largely completed the on-site investment required to support three converted units by the end of 2014. These systems will provide us with the ability to unload rail wagons efficiently, store up to around 300 thousand tonnes of biomass on-site and deliver it direct to the combustion system.

Our investment in upstream supply chain infrastructure continues, with the construction of our two pellet plants in Mississippi and Louisiana and our port development at Baton Rouge (also Louisiana) having started in the Summer. All three projects remain on schedule and on budget. We are targeting the first half of 2015 for commercial operations to begin reaching full capacity within six months.

We expect to spend £650-£700 million in total on progressively converting three generating units to biomass together with the supporting infrastructure and systems required, completing the two US pellet plants and port facility and ensuring compliance with the requirements of the Industrial Emissions Directive ("IED").

Extensive research has been undertaken over the past few years to determine the optimal solution for IED compliance. As described in the Chief Executive's statement, a lead solution has been identified and initial trials towards this will commence in 2014. The estimated capital cost is approximately £75 million to £100 million over four years.

In addition, as described in the Chief Executive's statement, we have now developed technical solutions to deliver output of 630MW in a biomass unit, with efficiency only 0.5% lower than that of a coal unit. We estimate that capital investment of approximately £90 million (over three years) is required to secure these performance improvements. Beyond this, we are evaluating further investments in the supply chain, (including options for additional pelleting facilities in the US) and the conversion of a fourth unit to biomass.

Other information

Going concern

The Group's business activities, together with the factors likely to affect future developments, performance and position including principal risks and uncertainties are set out in the Chief Executive's statement, this Operational and financial performance review and the Principal risks and uncertainties section which follows. Our cash flows and borrowing facilities are described above.

We have significant headroom in our new banking facilities, a recent history of cash generation, strong covenant compliance, and good visibility in near-term forecasts, due to our progressive hedging strategy. Our Business Plan, taking account of our capital investment plans and reasonably possible changes in trading performance, demonstrates that we expect to be able to operate within the level of our current banking facilities.

Accordingly, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and continue to adopt the going concern basis of accounting when preparing these financial statements.

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 £400 million working capital and letter of credit facility assists in managing the cash low points in the cycle where required (see Financing and cash flow management).

Contingent liability

We were obliged under CESP to deliver energy saving measures to domestic consumers in specific low income areas of Great Britain during the period 1 October 2009 to 31 December 2012. We entered into an agreement with a third party, pursuant to which the third party was obliged to deliver our CESP obligation for a total cost of £17 million. The third party failed to comply fully with its obligation under the agreement, leaving a significant shortfall against our CESP obligation. Having notified the counterparty of our contractual claim for breach of contract we continue to consider legal options available to us. We entered into further agreements with additional third parties in order to rectify this shortfall so far as practicable.

At this stage it is not possible to predict whether any enforcement action may be imposed. No additional provisions have been recognised in respect of this matter as we are not able to reliably measure what the financial impact, if any, might be.

Future developments

Regulatory developments

As set out in the Chief Executive's statement, in December we received confirmation from the government that two Drax units are provisionally ranked equal first among the applications for Investment Contracts under the Final Investment Decision Enabling Contracts for Difference ("CfD").

Looking forward, if awarded, this would result in our units operating under three different regimes; coal, biomass under the RO and biomass under the CfD. We are participating in the CfD process as it develops through to finalised Investment Contracts, which are expected to take effect from April 2015.

As outlined in the Chief Executive's statement, we will modify one of our coal units during 2014 to operate as an enhanced co-firing unit, enabling us to support a full conversion in April 2015. However, in the interim, the operation of one of our units as enhanced co-firing, receiving 0.9ROC/MWh, rather than 1ROC/MWh applicable to a converted unit, will have a corresponding impact on the profits achievable in the near-term.

Also in December 2013 Capture Power Limited, the consortium of Drax, Alstom UK Limited and BOC (a member of The Linde Group) was awarded the Front End Engineering and Design contract, for its planned 426MW oxy-combustion demonstration project located on the Drax Power Station site.

A two-year process now commences with the negotiation of an engineering, procurement and construction contract and a CfD contract, all dependent on successful funding applications and adequate incentives for low carbon technologies from the electricity market reform. Drax has committed to invest £4 million in the project during this initial phase.

Positions under contract

As at 10 February 2014, the positions under contract for the sale of power for 2014 and 2015:	2014	2015
Power sales (TWh) comprising:	22.1	7.2
- Fixed price power sales (TWh) at an average achieved price (per MWh)	19.7 at £52.9	5.3 at £55.5
- Fixed margin and structured power sales (TWh)	2.4	1.9

Distributions

Distribution policy

The Board has previously committed to distribute 50% of underlying earnings (being profit attributable to equity shareholders adjusted to exclude the after tax impact of unrealised gains and losses on derivative contracts) in each year. Underlying earnings for the year ended 31 December 2013 were £142 million.

As detailed in the Chief Executive's statement, we are transforming our business to become a predominantly biomass-fuelled power generator, vertically integrated through the biomass supply chain to retail sales to business customers. As our business model changes we will develop, in parallel, an optimal capital structure and distribution policy, aligned to the future of the business.

Dividends paid

On 18 February 2013 the Board resolved, subject to approval by shareholders at the Annual General Meeting ("AGM") on 24 April 2013, to pay a final dividend for the year ended 31 December 2012 of 10.9 pence per share (£44 million). The final dividend was paid on 17 May 2013.

On 29 July 2013, the Board resolved to pay an interim dividend for the six months ended 30 June 2013 of 8.7 pence per share (£35 million), representing 50% of underlying earnings for the period. The interim dividend was paid on 11 October 2013.

Dividends proposed

At the forthcoming AGM the Board will recommend to shareholders that a resolution is passed to approve payment of a final dividend for the year ended 31 December 2013 of 8.9 pence per share (£36 million), payable on or before 16 May 2014.

Shares will be marked ex-dividend on 23 April 2014.

Principal risks and uncertainties

The effective management of risks within the Group underpins the delivery of our key priorities.

The Group has a comprehensive system of governance controls in place to manage risks. Policies have been established in key areas of the business such as trading, treasury, production and health and safety to ensure that these risks are managed in a controlled manner and in accordance with the policies set by the Board.

Commodity market price risk

Context

The commodity markets in which we trade are inherently volatile, and generation remunerated through the Renewables Obligation increases the risk in relation to the ROC market.

Risk

- We are exposed to the effect of fluctuations in commodity prices, particularly the price of electricity and gas, the price of coal and sustainable biomass (and other fuels), the price of CO2 emissions allowances and the market price of ROCs.

Potential impact

- Volatility in financial results.

Associated objective and key priorities

- Maximise the value of the Drax business

Examples of mitigating activities

- Well understood progressive hedging strategy with forward power and ROC sales combined with corresponding purchases of fuel and CO2 emissions allowances when profitable and appropriate to do so.

- Apply for conversions under the CfD regime, removing some income volatility from key commodity exposures.

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 fuel under contracts with a number of large UK and international 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 fuel 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

- Maximise the value of the Drax business

Examples of mitigating activities

- Diversified fuel supply in terms of source and counterparties.

- Diversified logistics routes.

- Target to optimise holding of fuel stocks.

- Close monitoring and reporting of concentration risk in suppliers and power counterparties.

- Full suite of power counterparties with strong credit ratings.

- Power trading contracts generally include provisions that force counterparties to post collateral where their credit rating drops, subject to certain restrictions.

- Close monitoring and reporting of potential credit and collateral risk.

Power and renewables market liquidity risk

Context

Liquidity in the power and ROC markets is dependent on there being a sufficient number of counterparties willing to trade actively

Risk

- The market structure and 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 power and other commodities, including ROCs.

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 electricity output, or ROCs.

- Lower revenues and increased costs to achieve trading objectives.

- Adverse effect on financial results and cash flows.

Associated objective and key priorities

- Grow our retail business

- Maximise the value of the Drax business

- Maximise profitability from our coal generation capacity

- Deliver our biomass strategy

Examples of mitigating activities

- Grow direct sales through Haven Power, our electricity supply business.

- Initiatives to be active and responsive 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.

- Secure longer-term structured deals when profitable to do so.

- Apply for conversions under the CfD regime, reducing our reliance on the liquidity of the ROC market.

Biomass market risk

Context

The biomass market is still in its relative infancy and investment in the supply chain is required

Risk

- We could fail to secure sustainable biomass supplies and/or logistics arrangements which meet our hurdle return rates and operational requirements.

- Most of the sustainable biomass that we can procure is priced in foreign currency which increases our exposure to fluctuations against sterling and poses a risk to profitability.

Potential impact

- Inability to progress the biomass growth strategy.

- Adverse effect on financial results and cash flows.

Associated objective and key priorities

Deliver our biomass strategy

Examples of mitigating activities

- Contract with suppliers where a robust operational plant and logistics infrastructure is already in place; work with new suppliers to help develop such infrastructure.

- Invest in the supply chain whilst in its infancy to ensure security and timing of supplies.

- Hedge currency exposures or secure contracts in sterling to the extent that it is appropriate.

Plant operating risk

Context

Equipment failure and the impact on personnel and operations

Risk

- Plant failure may be caused by the underperformance or outright failure of plant, transmission assets or other equipment and components including the IT systems used to operate the plant or conduct trading activities. The duration of the resultant forced outages is influenced by the lead time to manufacture and procure replacement components and to carry out repairs.

- As we progress our plans to convert to a predominantly biomass-fuelled generator, we are exposed to a broader range, and increased level, of technical risk. Whilst successful first conversion of a unit to biomass has been achieved, further units are planned.

- Good progress has been made on our US investments however, project execution risk remains.

Potential impact

- Personnel injury.

- Lower revenues.

- Increased costs and contractual penalties.

- Adverse effect on financial results and cash flows.

Associated objective and key priorities

- Maintain operational excellence

- Deliver excellent people leadership across our operations

Examples of mitigating activities

- Comprehensive risk-based plant investment and maintenance programme.

- Maintaining a trained and competent workforce.

- Strong health and safety culture.

- 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.

- Ensure adequate insurance in place to cover losses from plant failure where possible.

- Significant amounts of research and development work have been undertaken in terms of handling and burning biomass.

Regulatory and political risk

Context

The government's market reform agenda is driven predominantly by the need to move to a sustainable, low carbon energy sector which delivers affordable supplies to customers whilst maintaining security of supply over the longer term. Laws and regulations are many and complex, are frequently changing, and becoming ever more stringent, particularly in relation to environmental matters

Risk

- Changes to the current regulatory regime surrounding renewables, CPS mechanism and other legislation could adversely affect our biomass strategy.

- 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

- Less funding available for plant retrofit/investment costs to meet increasingly stringent environmental requirements.

- Lower load factors/generation levels.

- Adverse effect on financial results and cash flows.

Associated objective and key priorities

- Deliver our biomass strategy

- Maintain operational excellence

Examples of mitigating activities

- Briefing, representation and engagement at EU and UK level.

- Development of abatement and alternative generation options.

- Apply for conversions under the CfD regime and grandfathered ROC regime to provide increased certainty over future revenue streams.

- Pricing of biomass contracts to allow for adverse commodity market movements.

- Regular third party assurance over system effectiveness.

- Strong safety culture and related training.

Responsibility statement of the directors on the annual report

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ended 31 December 2013. Certain parts thereof are not included within this announcement.

We confirm that to the best of our knowledge:

- 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;

- the strategic 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; and

- the Annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

The responsibility statement was approved by the Board of Directors on 18 February 2014 and is signed on its behalf by:

 

 

 

Dorothy Thompson CBE                                           

Chief Executive

 

 

 

Tony Quinlan

Finance Director

 

 

Consolidated income statement

			Years ended 31 December
		Notes	2013 £m	2012 £m
	Revenue		2,062.1	1,779.8
	Fuel costs in respect of generation		(945.8)	(929.2)
	Cost of power purchases		(352.5)	(141.7)
	Grid charges		(238.8)	(167.8)
	Other retail costs		(79.9)	(30.2)
	Total cost of sales		(1,617.0)	(1,268.9)
	Gross profit		445.1	510.9
	Operating and administrative expenses		(215.1)	(212.5)
	EBITDA(1)		230.0	298.4
	Depreciation and amortisation		(64.8)	(58.5)
	Unrealised losses on derivative contracts		(110.2)	(36.1)
	Operating profit		55.0	203.8
	Interest payable and similar charges		(24.8)	(15.3)
	Interest receivable		1.6	1.7
	Profit before tax		31.8	190.2
	Tax:
	- Before effect of changes in rate of corporation tax	4	(2.7)	(41.5)
	- Effect of changes in rate of corporation tax	4	22.3	15.1
	Total tax credit/(charge)		19.6	(26.4)
	Profit for the year attributable to equity holders		51.4	163.8
	Underlying profit for the year(2)	6	142.3	192.8
	Earnings per share		pence	pence
	- Basic and diluted	6	13	44

All results relate to continuing operations.

1.     EBITDA is defined as profit before interest, tax, depreciation and amortisation and unrealised gains or losses on derivative contracts.

2.     Underlying earnings and underlying earnings per share are set out in note 6.

 

Consolidated statement of comprehensive income

		Years ended 31 December
	Notes	2013 £m	2012 £m
Profit for the year		51.4	163.8
Actuarial losses on defined benefit pension scheme		(2.8)	(9.0)
Deferred tax on actuarial losses on defined benefit pension scheme	4	0.6	2.1
Exchange differences on translation of foreign operations		2.0	-
Fair value losses on cash flow hedges		(58.7)	(105.7)
Deferred tax on cash flow hedges before corporation tax rate change	4	8.6	26.0
Impact of corporation tax rate change on deferred tax on cash flow hedges	4	2.6	-
Other comprehensive expense		(47.7)	(86.6)
Total comprehensive income for the year attributable to equity holders		3.7	77.2

Consolidated balance sheet

		As at 31 December
	Notes	2013 £m	2012 £m
Assets
Non-current assets
Goodwill and other intangible assets		37.2	49.7
Property, plant and equipment		1,581.4	1,360.6
Derivative financial instruments		8.7	7.7
		1,627.3	1,418.0
Current assets
Inventories		196.5	157.6
ROC and LEC assets		139.5	18.7
Trade and other receivables		246.2	224.8
Derivative financial instruments		29.6	37.6
Short-term investments		20.0	30.0
Cash and cash equivalents		267.3	371.7
		899.1	840.4
Liabilities
Current liabilities:
Trade and other payables		365.5	275.9
Current tax liabilities		9.7	14.6
Borrowings	7	0.2	0.3
Derivative financial instruments		105.2	100.4
		480.6	391.2
Net current assets		418.5	449.2
Non-current liabilities:
Borrowings	7	215.9	90.4
Derivative financial instruments		212.1	55.2
Provisions		32.4	31.5
Deferred tax liabilities		133.8	170.7
Retirement benefit obligations		41.7	42.1
		635.9	389.9
Net assets		1,409.9	1,477.3
Shareholders' equity:
Issued equity		46.5	46.4
Capital redemption reserve		1.5	1.5
Share premium		422.5	420.7
Merger reserve		710.8	710.8
Hedge reserve		(63.9)	(16.4)
Retained profits		292.5	314.3
Total shareholders' equity		1,409.9	1,477.3

Consolidated statement of changes in equity

	Issued equity £m	Capital redemption reserve £m	Share premium £m	Merger reserve £m	Hedge reserve £m	Retained profits £m	Total £m
At 1 January 2012	42.1	1.5	420.7	710.8	63.3	65.0	1,303.4
Profit for the year	-	-	-	-	-	163.8	163.8
Other comprehensive expense	-	-	-	-	(79.7)	(6.9)	(86.6)
Total comprehensive (expense)/income for the year	-	-	-	-	(79.7)	156.9	77.2
Equity dividends paid (note 5)	-	-	-	-	-	(95.7)	(95.7)
Issue of share capital	4.3	-	-	-	-	183.4	187.7
Movement in equity associated with share-based payments	-	-	-	-	-	4.7	4.7
At 1 January 2013	46.4	1.5	420.7	710.8	(16.4)	314.3	1,477.3
Profit for the year	-	-	-	-	-	51.4	51.4
Other comprehensive expense	-	-	-	-	(47.5)	(0.2)	(47.7)
Total comprehensive (expense)/income for the year	-	-	-	-	(47.5)	51.2	3.7
Equity dividends paid (note 5)	-	-	-	-	-	(78.8)	(78.8)
Issue of share capital	0.1	-	1.8	-	-	-	1.9
Movement in equity associated with share-based payments	-	-	-	-	-	5.8	5.8
At 31 December 2013	46.5	1.5	422.5	710.8	(63.9)	292.5	1,409.9

Consolidated cash flow statement

		Years ended 31 December
	Notes	2013 £m	2012 £m
Cash generated from operations	8	170.5	263.2
Income taxes paid		(10.6)	(50.6)
Other gains/(losses)		2.2	(0.8)
Interest paid		(21.3)	(10.6)
Interest received		1.5	1.9
Net cash from operating activities		142.3	203.1
Cash flows from investing activities
Purchases of property, plant and equipment		(301.7)	(206.0)
Short-term investments		10.0	-
Net cash used in investing activities		(291.7)	(206.0)
Cash flows from financing activities
Equity dividends paid	5	(78.8)	(95.7)
Proceeds from issue of share capital		1.9	187.7
Repayment of borrowings		(0.7)	(10.5)
New borrowings	7	125.0	100.0
Other financing costs paid		(2.4)	(9.7)
Net cash generated from financing activities		45.0	171.8
Net (decrease)/increase in cash and cash equivalents		(104.4)	168.9
Cash and cash equivalents at 1 January		371.7	202.8
Cash and cash equivalents at 31 December		267.3	371.7

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 2013 (the "financial statements").

This preliminary announcement does not constitute the full financial statements prepared in accordance with International Financial Reporting Standards ("IFRSs"). The financial statements were approved by the Board of directors on 18 February 2014. Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 will be delivered in due course.

The report of the auditors on the financial statements was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006 or equivalent preceding legislation.

2.  Basis of preparation

The financial statements have 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 on a going concern basis, and on the historical cost basis, except for certain financial assets and liabilities that have been measured at fair value.

3.  Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set in the 2013 Annual report and accounts. These policies have been consistently applied to both years presented.

4.  Taxation

The tax credit/charge reflects the estimated effective tax rate on profit before tax for the Group for the year ended 31 December 2013 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the income statement.

Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax payable or recoverable on the difference between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is considered more likely than not that taxable profit will be available against which deductible temporary differences can be utilised.

Changes in the rate of corporation tax

Following the announcement of the 2013 Budget, the Finance Act 2013 (the "Act") was enacted by Parliament in July 2013. The Act confirmed reductions in the rate of corporation tax from 23% to 21% from 1 April 2014, and a further reduction in corporation tax to 20% from 1 April 2015, both of which were substantively enacted during the year, and therefore have been reflected in the deferred tax balances below.

	Years ended 31 December
	2013 £m	2012 £m
Tax (credit)/charge comprises:
Current tax	5.5	31.4
Deferred tax
- Before impact of corporation tax rate change	(2.8)	10.1
- Impact of corporation tax rate change	(22.3)	(15.1)
Tax (credit)/charge	(19.6)	26.4

	Years ended 31 December
	2013 £m	2012 £m
Tax on items credited to other comprehensive income:
Deferred tax on actuarial losses on defined benefit pension scheme	(0.6)	(2.1)
Deferred tax on cash flow hedges	(8.6)	(26.0)
Impact of corporation tax rate change on deferred tax on cash flow hedges	(2.6)	-
	(11.8)	(28.1)

UK corporation tax is calculated at 23.25% (2012: 24.5%) of the estimated assessable profit for the year. Tax for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The (credit)/charge for the year can be reconciled to the profit per the income statement as follows:

	Years ended 31 December
	2013 £m	2012 £m
Profit before tax	31.8	190.2
Profit before tax multiplied by the rate of corporation tax in the UK of 23.25% (2012: 24.5%)	7.4	46.6
Effects of:
Adjustments in respect of prior periods	(7.3)	(7.6)
Expenses not deductible for tax purposes	1.2	1.3
Other	1.4	1.2
Impact of change to corporation tax rate	(22.3)	(15.1)
Total tax (credit)/charge	(19.6)	26.4

5.   Dividends

	Years ended 31 December
	2013 £m	2012 £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 2013 of 8.7 pence per share paid on 11 October 2013 (2012: 14.4 pence per share paid on 12 October 2012)	35.0	52.6
Final dividend for the year ended 31 December 2012 of 10.9 pence per share paid on 17 May 2013 (2012: 11.8 pence per share paid on 11 May 2012)	43.8	43.1
	78.8	95.7

At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment of a final dividend for the year ended 31 December 2013 of 8.9 pence per share (equivalent to approximately £36 million) payable on or before 17 May 2014. The final dividend has not been included as a liability as at 31 December 2013.

6.   Earnings per share

Earnings per share ("EPS") represents the amount of our earnings (post-tax profits) that are attributable to each ordinary share we have in issue. Basic EPS is calculated by dividing our earnings by the weighted average number of ordinary shares that were in issue during the year. Diluted EPS demonstrates the impact if all outstanding share options (such as those to be issued under our employee share schemes) that are expected to vest on their future maturity dates were exercised and treated as ordinary shares as at the balance sheet date.

In addition to EPS, we calculate underlying EPS as it reflects the figures upon which our annual dividends are calculated (note 5). Underlying EPS removes the post-tax effect of fair value movements on derivative contracts, from earnings. Multiplying underlying basic EPS by 50% will give the total dividends per share for the period.

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:

	Years ended 31 December
	2013 £m	2012 £m
Earnings:
Earnings attributable to equity holders of the Company for the purposes of basic and diluted earnings	51.4	163.8
After tax impact of unrealised gains and losses on derivative contracts	90.9	29.0
Underlying earnings attributable to equity holders of the Company	142.3	192.8

	Years ended 31 December
	2013 £m	2012 £m
Number of shares:
Weighted average number of ordinary shares for the purposes of basic earnings per share (millions)	402.3	371.7
Effect of dilutive potential ordinary shares under share plans	4.6	3.5
Weighted average number of ordinary shares for the purposes of diluted earnings per share (millions)	406.9	375.2
Earnings per share - basic (pence)	13	44
Earnings per share - diluted (pence)	13	44
Underlying earnings per share - basic (pence)	35	52
Underlying earnings per share - diluted (pence)	35	51

7.   Borrowings

Borrowings are chiefly comprised of bank loans with fixed maturity repayment profiles between 2016 and 2020.

Maintaining an optimal capital structure - In 2012 we executed a refinancing of our existing facilities, replacing them with a £400 million revolving credit facility which matures in April 2016, two new term loans of £100 million each with Prudential M&G and the UK Green Investment Bank, and a commodities trading line that allows trading counterparties to benefit from the security package offered to our senior lenders instead of us posting collateral for certain volumes of trades.

In April 2013, we agreed a new £75 million amortising term loan facility with Friends Life, underpinned by a guarantee from HM Treasury under the Infrastructure UK Guarantee Scheme. This replaced £50 million of the £100 million facility with the UK Green Investment Bank, above.

The new loan facilities, which were fully drawn at the year end, enhance the financing structure executed in 2012 by providing additional liquidity and a smoother profile of debt maturities.

The Group measures all debt instruments, whether financial assets or financial liabilities, initially at the fair value of the consideration paid or received. Subsequent to initial measurement, debt instruments are measured at amortised cost using the effective interest method. Transaction costs (any such costs incremental and directly attributable to the issue of the financial instrument) are included in the calculation of the effective interest rate and are, in effect, amortised through the income statement over the life of the instrument.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs.

	As at 31 December
	2013 £m	2012 £m
Current:
Finance lease liabilities	0.2	0.3
	0.2	0.3

	As at 31 December
	2013 £m	2012 £m
Non-current:
Term loans	215.8	90.3
Finance lease liabilities	0.1	0.1
	215.9	90.4

Analysis of borrowings

Borrowings at 31 December 2013 and 31 December 2012 consisted principally of amounts drawn down against bank loans.

	As at 31 December 2013
	Borrowings before deferred finance costs £m	Deferred finance costs £m	Net borrowings £m
Term loans	225.0	(9.2)	215.8
Finance lease liabilities	0.3	-	0.3
Total borrowings	225.3	(9.2)	216.1
Less current portion	(0.2)	-	(0.2)
Non-current borrowings	225.1	(9.2)	215.9

	As at 31 December 2012
	Borrowings before deferred finance costs £m	Deferred finance costs £m	Net borrowings £m
Term loans	100.0	(9.7)	90.3
Finance lease liabilities	0.4	-	0.4
Total borrowings	100.4	(9.7)	90.7
Less current portion	(0.3)	-	(0.3)
Non-current borrowings	100.1	(9.7)	90.4

8.   Cash generated from operations

	Years ended 31 December
	2013 £m	2012 £m
Profit for the year	51.4	163.8
Adjustments for:
Interest payable and similar charges	24.8	15.3
Interest receivable	(1.6)	(1.7)
Tax (credit)/charge	(19.6)	26.4
Depreciation and amortisation	64.8	58.5
Unrealised losses on derivative contracts	110.2	36.1
Defined benefit pension scheme current service cost	5.8	5.7
Non-cash charge for share-based payments	5.8	4.7
Operating cash flows before movement in working capital	241.6	308.8
Changes in working capital:
Increase in inventories	(38.9)	(19.9)
(Increase)/decrease in receivables	(21.4)	44.5
Increase/(decrease) in payables	108.3	(33.9)
Total decrease/(increase) in working capital	48.0	(9.3)
Decrease/(increase) in carbon assets	12.5	(39.0)
(Increase)/decrease in ROC assets	(120.8)	13.4
Defined benefit pension scheme contributions	(10.8)	(10.7)
Cash generated from operations	170.5	263.2

Glossary

Advantaged fuels

Fuel that gives a price advantage against standard bituminous coals. Such fuels include pond fines, off-specification coal and petcoke.

Ancillary services

Services provided to 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).

Balancing Mechanism

The sub-set of the market through 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.

Bark spread

The difference between the power price and the cost of biomass, net of renewable support.

Bilateral contracts

Contracts with counterparties and power exchange trades.

Carbon price support mechanism (or carbon price floor or carbon tax)

A tax upon fossil fuels (including coal) used to generate electricity. It is charged as a levy on coal delivered to the power station.

Company

Drax Group plc.

Contracts for Difference (CfD)

A mechanism to support investment in low-carbon electricity generation. The CfD works by stabilising revenues for generators at a fixed price level known as the 'strike price'. Generators will receive revenue from selling their electricity into the market as usual. However, when the market reference price is below the strike price they will also receive a top-up payment from suppliers for the additional amount. Conversely if the reference price is above the strike price, the generator must pay back the difference.

Dark green spread

The difference between the power price and the cost of coal and carbon.

EBITDA

Profit before interest, tax, depreciation and amortisation, gains or losses on disposal of property, plant and equipment and unrealised gains or losses on derivative contracts.

EU ETS

The EU Emissions Trading Scheme is a mechanism introduced across the EU to reduce emissions of CO2; the scheme is capable of being extended to cover all greenhouse gas emissions.

Feed-in Tariff

A long-term contract set at a fixed level where variable payments are made to ensure the generator receives an agreed tariff. The Feed-in Tariff payment would be made in addition to the generator's revenues from selling electricity in the market.

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.

Grid charges

Includes transmission network use of system charges ("TNUoS"), balancing services use of system charges ("BSUoS") and distribution use of system charges ("DUoS").

Group

Drax Group plc and its subsidiaries.

IFRSs

International Financial Reporting Standards.

LECs

Levy Exemption Certificates. Evidence of Climate Change Levy exempt electricity supplies generated from qualifying renewable sources.

Levy Control Framework

A control framework for DECC levy-funded spending intended to make sure that DECC achieves its fuel poverty, energy and climate change goals in a way that is consistent with economic recovery and minimising the impact on consumer bills.

Load factor

Net sent out generation as a percentage of maximum sales.

Lost time injury rate

The frequency rate is calculated on the following basis: lost time injuries/hours worked times 100,000. Lost time injuries are defined as occurrences where the injured party is absent from work for more than 24 hours.

Net Balancing Mechanism

Net volumes attributable to accepted bids and offers in the Balancing Mechanism.

Net cash/(debt)

Comprises cash and cash equivalents, short-term investments less overdrafts and borrowings net of deferred finance costs.

Net sales

The aggregate of net volumes attributable to bilateral contracts, power exchange trades and net Balancing Mechanism.

Planned outage

A period during which scheduled maintenance is executed according to the plan 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.

ROCs

A Renewables Obligation Certificate (ROC) is a certificate issued to an accredited generator for electricity generated from eligible renewable sources. The Renewables Obligation is currently the main support scheme for renewable electricity projects in the UK.

Summer

The calendar months April to September.

System operator

National Grid Electricity Transmission. Responsible for the co-ordination of electricity flows onto and over the transmission system, balancing generation supply and user demand.

Total recordable injury rate (TRIR)

The frequency rate is calculated on the following basis: (lost time injuries + worst than first aid)/hours worked x 100,000.

Underlying financial measures

We report financial measures described as 'underlying' such as profit after tax and earnings per share. Underlying measures are adjusted to exclude the impact of gains and losses on derivative contracts and the associated tax.

Winter

The calendar months October to March.

 

END

 

 

FR FMGMZMNFGDZZ