Interim Results
Drax Group PLC
12 September 2006
DRAX GROUP PLC
(Symbol: DRX)
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2006
(London - 12 September 2006) Drax Group plc, the UK power generator, announces
its interim results for the six months ended 30 June 2006 and reports on key
developments to date.
Highlights:
• Revenue from generation increased to £603 million (2005: £366 million)(1)
• EBITDA(3)(4) of £239 million (2005: £72 million)
• Operating profit of £329 million (2005: £69 million)
• Basic and diluted earnings per share of 57 pence (2005: 32 pence)
• Interim dividend of 4 pence per share
• Special dividend of 80 pence per share
• Improved forward contracted power sales volume and price
Six months ended 30 June 2006 compared to six months ended 30 June 2005
Six months ended 30 June
2006 2005
£ million £ million
Revenue from generation (1) 603 366
Total revenue 650 404
Gross profit (2) 320 140
EBITDA (3)(4) 239 72
EBITDA (after exceptional items)(5) 347 87
Operating Profit 329 69
Profit before tax 317 13
(1) Revenue from generation excludes revenues associated with power purchases
of £47 million (2004: 38 million).
(2) Gross profit is defined as total revenues less total fuel costs.
(3) EBITDA is profit before interest, tax, depreciation and amortisation,
exceptional items and unrealised gains/losses on derivative contracts.
(4) Exceptional items in 2006 comprise income of £19 million received under the
TXU Claim. Exceptional items in 2005 comprise income of £19 million due to
the reversal of provisions relating to impairment of tangible fixed assets
and £256 million received under the TXU Claim, partially offset by a charge
for share-based payment transactions under the LTIP of £11 million.
Unrealised gains on derivative contracts in 2006 were £89 million.
Unrealised losses on derivative contracts in 2005 were £249 million.
(5) EBITDA (after exceptional items) is profit before interest, tax,
depreciation and amortisation.
Commenting on the results, Dorothy Thompson, Chief Executive of Drax, said:
'I am pleased to announce that we are successfully delivering on our strategy
and that the Group is performing well. We are reporting a strong operating,
trading and financial performance and announcing a special dividend of 80 pence
per share plus an interim dividend of 4 pence per share to be paid in October.'
Management Presentation and Conference Call
Management will host a presentation for analysts and investors at 9:00am (UK
Time) today, 12 September 2006, at the City Presentation Centre, 4 Chiswell
Street, Finsbury Square, London, EC1Y 4UP.
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) on
Tuesday 12 September for download at www.draxgroup.plc.uk (>>Financial Results
2006).
Event Title: Drax Group plc: Half Year Results
Event Date: Tuesday 12 September 2006
Event Time: 9:00am (UK time)
UK Call In Number: 020 7162 0025
International Call In Number: +44 7162 0025
US Call In Number: +1 334 323 6201
Webcast details
Live Event Link: http://events.webeventservices.com/Drax/2006/09/12/
UK Instant Replay
Start Date: 12 September 2006
Delete Date: 12 October 2006
Dial In Number: 020 7031 4064
Freephone number (UK only): 0800 358 1860
Passcode: 714791
US Instant Replay
Start Date: 12 September 2006
Delete Date: 12 October 2006
Dial In Number: +1 954 334 0342
Freephone number: +1 888 365 0240
Passcode: 714791
Video Webcast
Start Date: 12 September 2006
Delete Date: 13 December 2006
Archive Link: http://events.webeventservices.com/Drax/2006/09/12/
For further information please contact:
On the day Thereafter
Dorothy Thompson, Chief Executive
Gordon Boyd, Finance Director +44(0)207353 4200 +44(0)1757 618381
Andrew Jones, Investor Relations +44(0)207353 4200 +44(0)1757 612938
Melanie Wedgbury, Media Contact +44(0)207353 4200 +44(0)1757 612438
Tulchan Communications
David Trenchard and Peter Hewer +44(0)207353 4200
Website: www.draxgroup.plc.uk
Notes to Editors
1. High resolution images of Dorothy Thompson are available to download free of
charge from www.vismedia.co.uk
Chairman's Statement
Drax continues to develop as a listed company with the benefit of its revised
capital structure providing greater access to the markets in which it operates.
The level of contracted power sales demonstrates that we are delivering our
strategy and the dividends declared evidence our commitment to shareholder
return.
The six months results show the group performing well. Profitability has
increased, our trading strategy is being implemented successfully and we are
seeing the benefits of investments made to enhance trading performance and
reliability.
The Board of directors has declared an interim base dividend in respect of the
six months ended 30 June 2006 of 4 pence per share, being approximately £16
million.
As foreshadowed in our June Trading Update, and in line with our policy to
distribute substantially all of any remaining cash flow subject to the
availability of reserves and after making provision for debt payments, debt
service requirements (if any), capital expenditure, and other expected business
requirements, the Board of directors has also declared a further interim
dividend as a special dividend of 80 pence per share, being approximately £326
million, conditional upon a share consolidation to be put to shareholders for
approval at an Extraordinary General Meeting to be held on 6 October 2006, which
aims to provide comparability of financial measures and to preserve the position
of the participants under certain of the Drax share plans.
Both dividends are expected to be paid on 25 October 2006.
I would like to recognise once again the continuing commitment of our employees.
Over the last six months our employees have performed to the highest standards
and I would like to express my appreciation for their enthusiasm and commitment
to the Drax business.
Gordon Horsfield
Chairman
Chief Executive's Statement
Introduction
The Group produced robust performance in the six months ended 30 June 2006
resulting in an operating profit of £329 million and EBITDA of £239 million.
Both measures show a substantial improvement on the performance in the first six
months of last year reflecting both improved margins and improved operating
performance.
These results have been delivered against a background where commodity market
developments were driven by a progressive rise in crude oil prices. Natural gas
prices were particularly high in the early part of the year, influenced by oil
prices and a tighter demand/supply balance as the UK has moved to a greater
reliance on imported gas. High gas prices have meant that gas fired generation
continued to be the principal price setting plant in the UK power market and had
a strong upward influence on the power price. The price of CO2 emissions
allowances has been extremely volatile with severe market shocks in late April/
early May 2006 following the publication of 2005 EU CO2 emission data which
indicated lower CO2 emissions across Europe than anticipated. During the period
there were significant developments in the regulatory and legislative areas
applicable to Drax with the resolution of the Large Combustion Plant Directive
('LCPD') elections for 2008-2015 and the publication of a new Energy Review by
the UK Government.
In March 2005 we advised investors that we had identified a range of projects
which had the potential to improve Drax's EBITDA by £30 million to £50 million
per annum by the end of 2007. Overall, good progress has been made towards
delivering the targeted improvements, particularly in the areas which relate to
delivering sustainable improvements to capturing value from our principal
revenue source of generating and trading electricity. We estimate that £25
million of EBITDA realised in the six months ended 30 June 2006 is attributable
to EBITDA enhancement projects, with an estimated £6 million resulting from
changes in commodity prices.
Trading
Over the last 18 months we have invested in both staff and systems in the
trading and risk management areas. This will continue to be an area of
investment as we deliver our trading strategy with particular focus on realising
market or better dark green spreads and enhancing our ability to capture value
from plant flexibility and improved plant reliability. We have also reviewed and
revised our risk management controls and, as a result, revised our Risk
Management Policy, replacing the Trading and Risk Management Committee of the
Drax Group plc Board with a Risk Management Committee of the Board of our
trading subsidiary, Drax Power Limited. The responsibilities of the Audit
Committee of the Board of Drax Group plc include oversight of the risk
management arrangements for the group as a whole.
Energy Sales and Contracted Position
In the six months ended 30 June 2006, Drax Power made net sales of 12.4TWh
(2005: 11.6TWh) of electricity at an average achieved price of £45.7 per MWh
(2005: £30.1 per MWh). The average achieved price reflects the impact of power
sold forward in 2004 and 2005 for delivery in 2006, as well as market prices
prevailing in the first six months of 2006, together with the net impact of the
balancing mechanism activity. Power prices rose significantly during the period
as reflected in the Drax average achieved price.
Since the revised capital structure was put in place at the time of listing,
Drax has capitalised on its improved credit status to implement its trading
strategy. As at 5 September 2006 Drax had contracted power sales of 93%, 65% and
52% of expected output for 2006, 2007 and 2008 respectively. Contracted power
sales comprise sales where the price of power is fixed and sales where the
margin is fixed but the power price may vary.
Fixed price sales were 93%, 59% and 29% of expected output at an average price
of £48.1 per MWh, £50.1 per MWh and £49.7 per MWh for 2006, 2007 and 2008
respectively with the balance comprising fixed margin sales. Fixed margin sales
include sales to Centrica under the agreement announced on 11 April 2006. This
agreement was on standard market terms to provide 600MW of baseload power for a
five and a quarter year period commencing October 2007 and equates to around
27.6TWh of power. It provides Drax with fixed dark green spreads consistent with
Drax's trading strategy. The volume is equivalent to a load factor of
approximately 16% for the period October 2007 to December 2012.
Drax continues to execute smaller structured deals in both the season and long
term markets in line with its stated trading strategy.
Market Commentary
Prompt power prices were in a range of £50-60 per MWh for most of the first
quarter compared to an average of £32 per MWh in the first quarter of 2005.
During March prices spiked caused by high gas prices, resulting from cold
weather across Europe and the unavailability of the Rough gas storage facility.
Prices fell into the summer settling in a range of £30-40 per MWh on normal
summer demand levels and adequate plant availability.
In the forward power market, prices were influenced by the strong UK forward gas
market, which was in turn influenced by continued strength in oil prices. In
late April power prices fell following a sharp downwards adjustment in the
carbon price. Forward winter prices then drifted lower during the second quarter
following gas, as fears of gas supply tightness reduced. Summer forward prices
have been relatively stable through the first half.
Coal prices have trended upwards during the first half. Prices have been driven
by strong worldwide demand for both coal and freight with spot API 2 rising from
$54 per tonne at the beginning of the year to $63 per tonne at 30 June 2006.
The price of EU carbon emissions allowances started the year in excess of €20
per tonne rising to a peak of €31 per tonne in April. In late April 2006 CO2
emissions data from several EU member states began to emerge that recorded a
lower level of EU wide emissions than anticipated by the market. This led to a
sharp price adjustment with prices falling to a low of €8 per tonne. Since May
prices have stabilised somewhat settling in a range of €15-20 per tonne.
The fluctuations in the three commodities described above have resulted in
volatility in the forward dark green spreads in the first half, but overall the
spreads at 30 June 2006 finished at similar or higher levels to their opening
positions. Forward winter spreads were impacted by falling carbon prices and
falling power prices; the two effects resulting in spreads ending the half year
where they started. With forward summer power prices being more stable, the
falling carbon price resulted in forward summer dark green spreads rising over
the half year.
Operations
Health and Safety
Health and safety remains our highest priority. Recordable personal injury rates
continue to fall and the Drax performance now compares favourably with industry
practice. We believe that a strong safety culture, in addition to promoting the
safety of our workforce, has an important part to play in delivering the targets
for plant performance.
Plant Availability and Load Factor
We target profitability rather than production volumes and generate electricity
only when it is profitable to do so. A key performance metric for the plant is
availability and the most important availability metric is the forced outage
rate. The first half of the year saw further improvement in forced outage rate
at 4.8% (2005: 6.3%) with the critical first quarter at 3.3% being comfortably
ahead of our long term objective of 4.5%. The plant availability for the six
month period was 87.0% (2005: 88.1%) with a load factor (based on net sales) of
76.0% (2005: 70.8%). Availability in the first half of the year was impacted by
the planned outage falling mostly in the second quarter of 2006 whereas the 2005
planned outage was largely in the third quarter of 2005. For the eight months to
31 August 2006 the forced outage rate was 5.3%.
Investment
As with trading, we continue to invest in people, systems, and equipment with
four main objectives in mind: to meet future environmental legislative
requirements; to facilitate fuel diversity; to improve plant reliability; and to
improve plant efficiency.
Environmental
On 3 February 2006, under LCPD regulations, approximately 20GW of UK coal plant
''opted in'' with a further 13GW ''opted out'' and will be subject to a lifetime
limit of 20,000 operating hours from 2008. Drax ''opted in'' under the National
Emissions Reduction Plan as we believe this will serve to retain the optionality
and flexibility of the plant and thereby the opportunity to add value. To meet
the LCPD requirements for oxides of nitrogen emissions standards we have
continued our programme to install Boosted Over Fire Air equipment on each of
the six units, of which three units are now complete.
Fuel Diversity
Fuel diversity projects include petcoke and biomass. Drax has invested in
petcoke handling and blending facilities and commenced an 18 month trial burn on
one unit in June 2005. Air quality monitoring has shown that there has been no
material increase in pollutants measured. We expect to apply for a licence for
commercial burn to commence in 2007. Although the results from the trials are
encouraging, there can be no guarantee that consent to burn petcoke in some or
all of the units will be granted.
Drax retains the ability to obtain value from the co-firing of biomass and
energy crops should the outcome of the consultation arising from the Energy
Review referred to below prove positive. A biomass ''Direct Injection'' system
was installed on one unit during August 2005 and has proved to be an effective
way of delivering larger volumes of prepared biomass to the boiler than is
possible through the coal pulverising mills. Drax has the potential to install,
at modest cost, such a system on each unit should the investment be justified on
economic grounds. In addition, consideration is being given to other biomass
related projects including a processing plant.
Reliability
We have continued with our programmes of targeted improvements in forced outage
rates by focusing on preventing minor predictable failures and seeking to avoid
major failures by using historical Drax operating data together with original
equipment manufacturer and industry experience. These programmes include:
improved inspection and equipment monitoring; better quality repairs; equipment
upgrades; and the improved provision of critical spares. Good progress has been
made to date as demonstrated by the forced outage rate which remains on target
for a long-run average of 4.5% from 2007. At the beginning of this year we
launched a comprehensive process improvement project for our maintenance
management systems which is already delivering early benefits in mill
availability and maintenance cost management.
Efficiency and CO2 Emissions
Drax recognises the potential to improve operating and thermal efficiency
leading to reduced emission rates and coal costs. We continue to evaluate value
enhancing opportunities some of which may involve significant investment in
excess of the three year £100 million core capital expenditure previously
announced. We have committed a further £17 million to condenser and feed system
plant improvements to improve efficiency and reliability. The work will be
undertaken during planned outages in 2007 and 2008 and has an expected payback
of 4 to 5 years. We are currently evaluating the feasibility of refurbishing the
high pressure and low pressure turbines on all six generating units to improve
efficiency thereby reducing the amount of coal consumed and CO2 emitted per MWh.
The investment will be formally considered by the Board by the end of the year
and, if approved, is estimated to result in additional investment, which would
be material in the context of our current programme, over a 4 to 5 year period
commencing in 2007.
Regulatory Matters
Energy Review
In January 2006 the UK Government launched its Energy Review (the ''Review'').
The Review findings were published in July 2006 and confirmed, amongst other
things, that the Government believed coal to have a long term role in the UK
energy mix. The report also supported the view that co-firing should be part of
the drive to reduce carbon emissions on a long term basis. The co-firing
proposals arising from the Review are now subject to consultation. In the short
term, the proposal for the removal of constraints on the burning of energy crops
could be effective from April 2007. In the medium term, the proposal to
introduce ''banding'' of the Renewables Obligation to provide different levels
of financial support to the different methods of renewable generation could be
effective from April 2009. Drax supports both these proposals and views the
report as positive for coal-fired generation. We look forward to working with
the UK Government on the detail.
EU Emissions Trading Scheme
In August 2006 the UK Government submitted its National Allocation Plan for
Phase II to the EU. The proposed installation allocation for Drax is 9.6 million
tonnes per annum of EU Allowances which, if confirmed, would represent a
shortfall of 11.2 million tonnes per annum assuming 2005 generation levels. The
shortfall will be covered from 4.7 million tonnes per annum to be delivered
under the Centrica contract with the balance to be purchased in the open market.
The UK NAP allows for Drax to buy 0.9 million tonnes per annum of alternative
Kyoto instruments to make up part of this shortfall.
The European Union is currently reviewing countries' proposals on National
Allocation Plans with the aim (at the least) to ensure the Kyoto commitment is
achieved. In Phase II each EU country will be required to place a cap on the
amount of Clean Development Mechanism certificates to be used during the Phase.
Whilst guidance is now available on Phase II allocations for all the major
participant countries in the scheme, both the supply of allowances and the
potential for using Clean Development Mechanism certificates to meet compliance
will remain uncertain until final approval of all National Allocation Plans by
the European Union.
Outlook
Performance in the first half of the year has been strong and Drax continues to
trade in line with expectations. Against a backdrop of favourable commodities
markets, we have invested, and will continue to invest, in people, systems and
plant to improve on our current level of performance and to deliver shareholder
value.
We will remain active in the regulatory debate particularly with regard to the
consultation processes arising from the Energy Review. We believe coal is
critical to the UK energy mix going forward if the Government is to achieve its
objectives of delivering security of supply, affordability and tackling climate
change, where biomass and energy crop burning with coal has much to contribute.
Dorothy Thompson
Chief Executive
Operating and Financial Review
Results of Operations
For the six months ended 30 June 2006, Drax recorded an EBITDA of £239 million
and an operating profit of £329 million (£221 million excluding exceptional
items and unrealised gains on derivative contracts). For the six months ended 30
June 2005 EBITDA was £72 million and operating profit was £69 million (£54
million excluding exceptional items and unrealised losses on derivative
contracts).
Six months ended 30 June 2006 compared Six months ended
to six month ended 30 June 2005 30 June
2006 2005
£'m £'m
Revenue
Revenue from generation 602.8 365.7
Revenue associated with power purchases 47.2 37.9
650.0 403.6
Fuel costs(1)
Fuel costs in respect of generation (282.7) (226.1)
Costs of power purchases (47.2) (37.9)
(329.9) (264.0)
Gross profit 320.1 139.6
Other operating expenses excluding depreciation,
amortisation, unrealised gains/(losses) on derivative
contracts and exceptional items(2) (81.5) (67.9)
EBITDA(3) 238.6 71.7
Depreciation and amortisation (17.5) (17.8)
Other operating income - net exceptional credit 19.0 263.5
Unrealised gains/(losses) on derivative contracts 89.1 (248.5)
Operating profit 329.2 68.9
Interest payable and similar charges (18.2) (58.9)
Interest receivable 5.7 2.7
Profit before tax 316.7 12.7
Tax (charge)/credit (85.0) 77.1
Profit for the period attributable to equity 231.7 89.8
shareholders from continuing operations
(1) Fuel costs comprise the fuel costs incurred in the generation process,
predominantly coal and CO2 emissions allowances, together with oil and biomass.
Fuel costs also include the cost of power purchased to meet power sales
commitments.
(2) Other operating expenses excluding depreciation, amortisation, unrealised
gains/(losses) on derivative contracts and exceptional items principally include
salaries, maintenance costs, grid connection charges (TNUoS), balancing services
costs (BSUoS) and business rates.
(3) EBITDA is defined as profit before interest, tax, depreciation and
amortisation, exceptional items and unrealised gains/losses on derivative
contracts.
Drax Group's revenues from generation during the six months ended 30 June 2006
were £603 million, compared to £366 million for the corresponding period in
2005. This increase was mainly due to increases in average achieved electricity
prices over the period (see Price of Electricity below). Net power sold in the
six months ended 30 June 2006 was 12.4TWh, compared to 11.6TWh in the
corresponding period in 2005. Included within revenues from generation are
revenues from the sale of by-products (ash and gypsum), the provision of
ancillary services, and the sale of ROCs, LECs and SO2 allowances. In the period
ended 30 June 2006 these revenues totalled £36 million compared with £19 million
for the corresponding period in 2005.
Drax purchases power in the market when the cost of power in the market is below
Drax's marginal costs of production in respect of power previously contracted by
the Group, and to cover any shortfall in generation. The costs of power
purchased is treated as fuel costs, and revenue has been adjusted accordingly.
The cost of purchased power increased by £9 million to £47 million for the first
six months of 2006 compared to the corresponding period in 2005, primarily due
to the impact of higher market prices.
Drax's fuel costs in respect of generation during the six months ended 30 June
2006 were £283 million, compared to £226 million for the corresponding period in
2005, an increase of £57 million. This increase was primarily due to increased
generation, the impact of higher prices for CO2 emissions allowances, and an
increase in the cost of coal and other fuels (see Price of Coal and Other Fuels
and CO2 Emissions Allowances below).
Reflecting the above factors, Drax's gross profit increased from £140 million
for the six months ended 30 June 2005 to £320 million for the six months ended
30 June 2006.
Drax's other operating expenses excluding depreciation, amortisation, unrealised
gains/losses on derivative contracts and exceptional items were £82 million for
the six months ended 30 June 2006, compared to £68 million for the corresponding
period in 2005, an increase of £14 million. The increase primarily reflected the
timing of expenditure related to Drax's maintenance regime, in particular
planned outages, and higher balancing services costs (BSUoS).
Drax's EBITDA (defined as profit before interest, tax, depreciation,
amortisation, exceptional items and unrealised gains/losses on derivative
contracts) increased from £72 million for the six months ended 30 June 2005 to
£239 million for the six months ended 30 June 2006.
Exceptional operating income of £19 million for the six months ended 30 June
2006 related to a further distribution received under the TXU Claim on 20 July
2006. Exceptional operating income for the six months ended 30 June 2005 of £264
million included credits of £19 million due to the reversal of provisions
relating to impairment of tangible fixed assets and £256 million received under
the TXU Claim. Exceptional operating income in 2005 was partially offset by a
charge for share-based payment transactions under the LTIP of £11 million.
Additional information relating to these exceptional items is included in the
notes to the condensed consolidated financial statements.
IAS 32 and IAS 39, the International Accounting Standards in respect of
derivatives and financial instruments, were applicable to Drax for the period
from 1 January 2005. As a result of applying these standards, unrealised gains
of £81 million and unrealised losses of £74 million on derivative contracts were
recognised within assets and liabilities respectively at 30 June 2006 as
compared to unrealised losses of £263 million at 30 June 2005. The unrealised
gains and losses principally relate to the mark-to-market of Drax's forward
contracts for power yet to be delivered, and some coal contracts, which meet the
definition of derivatives under IAS 39.
For the period from 1 January 2005 to 30 June 2005, mark-to-market movements on
these contracts were reflected directly in the income statement, as appropriate
hedge accounting documentation was not in place. This resulted in an expense of
£249 million relating to unrealised losses on derivative contracts being
recognised in the income statement for the six months to 30 June 2005.
Subsequently, credits of £132 million and £89 million were recognised in the
income statements for the six month periods ended 31 December 2005 and 30 June
2006 respectively, representing the unwind of the June 2005 position, as power
and coal was delivered in accordance with the underlying derivative contracts.
From 1 July 2005, the Group put in place appropriate documentation to enable it
to achieve hedge accounting for a large proportion of its commodity contracts.
As a result, from 1 July 2005 mark-to-market movements on contracts considered
to be effective hedges have been recognised through the hedge reserve.
Drax's operating profit increased from £69 million for the six months ended 30
June 2005 to £329 million for the six months ended 30 June 2006.
Interest payable and similar charges in the six months ended 30 June 2006 were
£18 million, compared to £59 million for the corresponding period in 2005. The
decrease principally reflected a reduction in interest payable on borrowings as
a result of lower debt and interest rates following the Refinancing and Listing.
Drax's tax charge during the six months ended 30 June 2006 was £85 million,
compared to a tax credit of £77 million for the corresponding period in 2005.
The tax credit in 2005 reflected the benefit of the Group's funding structure
and utilisation of tax losses brought forward from earlier years, which more
than offset the current tax charge for the prior period. Although the tax charge
for 2006 also included the benefit of the Group's funding structure, tax losses
brought forward from earlier years were exhausted during the period resulting in
a higher tax charge.
Reflecting the above factors, Drax's profit from continuing operations increased
from £90 million for the six months ended 30 June 2005 to £232 million for the
six months ended 30 June 2006.
Key Factors Affecting the Business
Price of Electricity
The table below shows the average achieved price Drax realised for the six
months ended 30 June 2005 and 30 June 2006, together with the market closing
price for each season.
Six months ended 30 June
2006 2005
Average achieved price (£/MWh) 45.7 30.1
2006 2005
Summer base load market close (£/MWh) 45.0 29.0
2005/2006 2004/2005
Winter base load market close (£/MWh) 49.2 45.7
Average achieved price rose from £30.1 per MWh for the six months ended 30 June
2005 to £45.7 per MWh for the six months ended 30 June 2006. Average capture
price (being the price attained prior to balancing mechanism activity) rose from
£29.1 per MWh to £44.5 MWh for the respective periods. The forward baseload
power prices for Winter 2006/07 and Summer 2007 were approximately £54.8 per MWh
and £42.1 per MWh respectively as at 5 September 2006.
Price of Coal and Other Fuels
Drax burnt approximately 5.0 million tonnes of coal in the six months ended 30
June 2006 and approximately 4.6 million tonnes during the corresponding period
in 2005. This coal was purchased from a variety of domestic and international
sources on either fixed or variable priced contracts with different maturities.
Spot prices for internationally traded coal delivered into North West Europe (as
reflected by the TFS API 2 index) are volatile. For example, prices per tonne
fell from US$60 at the end of June 2005 to US$54 at the end of December 2005,
but then increased to US$63 at the end of June 2006.
Drax also burns biomass, petcoke and fuel oil, although coal comprises more than
90% of total fuel costs (excluding CO2 emissions allowances). The average cost
of fuel per MWh (excluding CO2 emissions allowances) for the six months ended 30
June 2006 was £17.0 compared with £16.1 for the corresponding period in 2005.
CO2 Emissions Allowances
Drax's CO2 emissions allowances requirement for the six months ended 30 June
2006, in excess of those allocated under the UK NAP, was approximately 4.0
million tonnes, compared to approximately 3.5 million tonnes for the
corresponding period in 2005.
During the six months ended 30 June 2006, the price for CO2 emissions allowances
has been volatile. The price began the year at approximately €22 per tonne
rising to a high of €31 per tonne in April. Towards the end of April and early
May the price fell dramatically, reaching a low of €8 per tonne. Since mid-May
the price has been less volatile, generally in a range between €15 per tonne and
€20 per tonne.
The average price expensed by Drax for CO2 emissions allowances during the six
months ended 30 June 2006 was £18.2 per tonne compared with £11.7 per tonne
during the six months ended 30 June 2005.
Outages and Plant Utilisation Levels
Six months ended 30 June
2006 2005
Forced outage rate (%) 4.8 6.3
Planned outage rate (%) 8.6 6.0
Total outage rate(1) (%) 13.0 11.9
Availability (%) 87.0 88.1
Electrical output (net sales) (TWh) 12.4 11.6
Load factor (%) 76.0 70.8
(1) The forced outage rate is expressed as a percentage of planned capacity
available (i.e. this includes a reduction for planned losses). The planned
outage rate is expressed as a percentage of registered capacity, therefore, the
aggregation of the forced outage rate and planned outage rate will not equate to
the total outage rate.
Lost generation capacity in the first six months of 2006 from forced outages was
0.7TWh, compared to 1.0TWh for the corresponding period in 2005, resulting in a
forced outage rate of 4.8% compared to 6.3% in 2005. Management have targeted
improvements in forced outage rates by focusing on preventing minor predictable
failures and seeking to avoid major failures by using historical Drax operating
data together with original equipment manufacturer and industry experience. In
the six months to 30 June 2006 progress has been made in both areas and Drax
management believe further progress can be made and will continue the programmes
to improve performance with the objective of achieving a sustainable forced
outage rate of 4.5% by 2007.
Drax's maintenance regime includes a major planned outage for each unit every
four years. Consequently, there is an irregular pattern of planned outages and
associated expenditure, since in two of the four years, two units will undergo a
major outage. A major planned outage (unit 4) was completed mostly in the second
quarter of 2006, whereas a major planned outage (unit 6) took place largely in
the third quarter of 2005. As there are no other major planned outages scheduled
for the remainder of 2006, the full year planned outage rate is expected to be
approximately 4.6%, compared to 7.1% for the year to 31 December 2005.
TXU Claim
Drax received £19 million under the TXU Claim in July 2006 (which was recognised
as income in the six months ended 30 June 2006) and £55 million in January 2006
(which was recognised as income in the year ended 31 December 2005), bringing
the total received to date to £330 million. All amounts are net of VAT and costs
and all proceeds have been used to prepay debt secured against the claim.
At the time of approving these interim financial statements the Group had a
further £6 million (including VAT) outstanding under the TXU Claim, which has
not been recognised in the income statement at 30 June 2006.
Liquidity and Capital Resources
Net debt reduced to £152 million as at 30 June 2006 from £462 million as at 31
December 2005. The main reasons for the reduction were the strong realised gross
margin and the receipt of distributions from the TXU Claim.
Cash and cash equivalents were £298 million on 30 June 2006 compared with £88
million on 31 December 2005, an increase of £210 million. The increase in cash
and cash equivalents is analysed in the table below.
Analysis of Cash Flows Six months ended 30 June
2006 2005
£'m £'m
Net cash generated from operating activities 335 269
Net cash used in investing activities (12) (12)
Net cash used in financing activities (113) (217)
---------- --------
Net increase in cash and cash equivalents(1) 210 40
---------- --------
(1) For the purposes of the cash flow statements, cash and cash equivalents
excludes amounts held in escrow and debt service reserve accounts. The movements
in these accounts are included as a component of net cash generated from
operating activities.
Net cash generated from operating activities was £335 million in the six months
ended 30 June 2006, compared to £269 million for the corresponding period in
2005, an increase of £66 million. The increase reflected the impact of improved
business performance, EBITDA having increased by £167 million in 2006, and a
reduction of £38 million in interest payments following the Refinancing and
Listing, offset by a reduction in cash received under the TXU Claim (£55 million
cash received under the claim in the six months ended 30 June 2006 compared to
£205 million for the corresponding period in 2005).
Net cash used in investing activities, which represented capital expenditure in
both periods, was flat at £12 million for the six months ended 30 June 2006 and
the corresponding period for 2005.
Net cash used in financing activities was £113 million in the six months ended
30 June 2006, compared to £217 million for the corresponding period in 2005. The
2006 amounts included a Bridge loan prepayment of £55 million on 23 January 2006
and a Term loan repayment of £58 million on 30 June 2006. The 2005 amounts
included a prepayment of B Debt of £205 million on 15 April 2005 and a
prepayment of A Debt of £12 million on 30 June 2005, both under the Group's
previous debt facilities.
The increase in cash and cash equivalents was £210 million in the six months
ended 30 June 2006, compared to £40 million for the corresponding period in
2005. Drax's policy is to invest available cash in short term bank deposits.
On 11 May 2006, the Group entered into a new credit facility agreement providing
a further £100 million borrowing facility on similar terms and with a similar
repayment profile to the existing term borrowings. The facility was drawn down
in full on 3 July 2006 and partially utilised to make a payment of £22.5 million
into the employee pension scheme to reduce the actuarial deficit. Drax will
utilise the remainder of the facility to partially fund the interim and special
dividends to be paid on 25 October 2006 (see Distribution Policy below).
Seasonality of Borrowing
Drax faces seasonality in its business with higher economic dispatch in the
winter period and lower economic dispatch in the summer months. Accordingly,
cash flow during the summer months is materially reduced due to the combined
effect of lower prices and output, while maintenance expenditures are increased
during this period due to major planned outages. The Group's £100 million
revolving credit facility will assist in managing the cash low points in the
cycle where required.
Capital Expenditure
Capital expenditure was £12 million in both the six months ended 30 June 2006
and the corresponding period in 2005. As previously announced, Drax expects to
incur core capital expenditure of approximately £100 million in the plant over
the period 2006 to 2008 in support of current operations. It is also expected
that additional expenditure will be incurred ahead of the requirements of the
Large Combustion Plant Directive from 2016. Drax also intends to evaluate other
opportunities which may result in additional expenditure (see Business
Enhancements below).
Business Enhancements
Drax advised investors in March 2005 that it had identified a range of projects
which had the potential to improve EBITDA by £30 million to £50 million per
annum by the end of 2007. The projects were focused on the following areas:
trading; operations (planned and forced outages); alternative fuels (petcoke);
by-product sales; procurement savings; and exploiting the Drax site. Overall,
good progress has been made with an estimated £25 million of EBITDA realised in
the six months ended 30 June 2006 attributable to the EBITDA enhancement project
(with an estimated £6 million resulting from changes in commodity prices).
Greatest progress has been made in trading, where we have invested in both
people and systems and have been able to take advantage of the increasing
reliability of the plant. Plans to exploit the Drax site continue to progress.
The results from the test burning of petcoke on one unit are encouraging.
Although the price differential between petcoke and coal has narrowed since the
trial commenced (and, if sustained, will reduce the benefits from extending the
burning of petcoke to the other five units, assuming consent is given by the
Environment Agency) there remains significant benefit. To date this narrowing of
the price differential has been more than offset by higher than planned benefits
being achieved elsewhere (particularly trading and plant availability).
Management initiated a series of programmes at the end of 2004 aimed at reducing
forced outage, with a target of achieving a forced outage rate of 4.5% by the
end of 2007. Results to date have been better than expected, although until we
are confident that the improvement is sustainable, we have not attributed the
full improvement in realised EBITDA enhancements against our target.
We continue to evaluate other value enhancing opportunities, some of which may
involve significant investment in excess of the £100 million of core capital
expenditure previously announced for the period 2006 to 2008. For example, we
have already committed a further £17 million to condenser and feed system plant
improvements to enhance efficiency and reliability. The work will be undertaken
during planned outages in 2007 and 2008 and has an expected payback of 4 to 5
years. In addition, we are currently evaluating tenders from a number of
international turbine manufacturers to upgrade the high pressure and low
pressure turbine rotors on all six generating units to improve efficiency,
thereby reducing the amount of coal consumed and CO2 emitted per MWh. It is
expected that this investment will be formally considered by the Board by the
end of the year and, if approved, would result in expenditure material in the
context of the current capital expenditure programme, spread over a 4 to 5 year
period commencing in 2007.
Employee Share Plans
On 23 May 2006, the Company issued 157,734 ordinary shares of 10 pence each in
Drax Group plc at par to a trust on behalf of qualifying employees under the
Group's Share Incentive Plan. Each qualifying employee received 254 free shares,
equating to a cash value of approximately £2,000 based on a price of £7.89,
being the average closing price over the five dealing days immediately preceding
23 May 2006.
In addition, participation in three and five year Savings Related Share Option
Plans was offered to all qualifying employees. The plans commenced on 1 July
2006 and are expected to result in the issue of 298,898 options to acquire
ordinary shares in Drax Group plc at a price of £6.36 exercisable at the end of
three year savings contracts, and a further 600,498 options to acquire ordinary
shares in Drax Group plc at a price of £6.36 exercisable at the end of five year
saving contracts.
Contracted Position for 2006, 2007 and 2008
Since issuing a Trading Update on 30 June 2006, Drax has continued to trade in
line with expectations and to follow the stated trading strategy of making
steady forward power sales with matching carbon and coal purchases. Drax's aim
is to deliver market level or better dark green spreads across all traded market
periods and, as part of this strategy, Drax retains power to be sold into the
prompt (within season) power markets.
As at 5 September 2006 the contracted power sales for 2006, 2007 and 2008 were
as follows:
2006 2007 2008
Output - percentage of expected
annual production hedged 93% 65% 52%
comprising:
- Fixed price power sales at an 93% at £48.1 59% at £50.1 29% at £49.7
average achieved price per MWh
- Fixed margin power sales - 6% 23%
CO2 emissions allowances -
percentage of expected annual
requirement (including UK NAP
allocation, market purchases and
structured contracts) 93% 72% 67%
Coal - percentage of expected
annual requirement hedged 100% 63% 54%
Fixed margin power sales include approximately 1.3TWh in 2007 and 5.3TWh in 2008
under the five and a quarter year baseload contract with Centrica which
commences on 1 October 2007. Under this contract Drax will supply power on terms
which include Centrica paying Drax for coal, based on international coal prices,
and delivering matching CO2 emissions allowances. The contract provides Drax
with a series of fixed dark green spreads.
Drax expects to issue a trading update on or around 13 December 2006.
Distribution Policy
The Board has previously stated that Drax will pay a stable amount (£50 million)
by way of ordinary dividends each year (the base dividend) subject to
availability of cash and appropriate reserves. Accordingly, on 11 September 2006
the Board resolved to pay an interim dividend for the six months ended 30 June
2006 of 4 pence per share (equivalent to £16 million) on 25 October 2006. These
shares will be marked ex-interim dividend on 4 October 2006.
In addition to the base dividend, the Board has also previously stated that
substantially all of any remaining cash flow, subject to the availability of
reserves and after making provision for debt payments, debt service requirements
(if any), capital expenditure, and other expected business requirements, will be
distributed to shareholders. Accordingly, on 11 September 2006 the Board
resolved, subject to the approval by shareholders of a resolution to effect a
share consolidation to be considered at an Extraordinary General Meeting on 6
October 2006, to pay a further interim dividend as a special dividend of 80
pence per share (equivalent to £326 million), also on 25 October 2006. The
shares will be marked ex-special dividend on 9 October 2006.
This review was approved by the Board on 11 September 2006.
Gordon Boyd
Finance Director
Condensed Consolidated Income Statements
Six months ended Year ended
30 June 31 December
Notes 2006 2005 2005
(Unaudited)
£'m £'m £'m
Continuing operations
Revenue 650.0 403.6 928.6
Fuel costs (329.9) (264.0) (539.5)
Other operating expenses
excluding exceptional items (99.0) (85.7) (180.9)
Other exceptional operating 5 19.0 274.8 329.9
income
Other exceptional operating 5 - (11.3) (66.6)
expenses
Total other operating (expenses) (80.0) 177.8 82.4
/income
Unrealised gains/(losses) on
derivative contracts 89.1 (248.5) (117.0)
Operating profit 329.2 68.9 354.5
Interest payable and similar (18.2) (58.9) (114.4)
charges
Interest receivable 5.7 2.7 23.5
Profit before tax 316.7 12.7 263.6
Tax (charge)/credit 6 (85.0) 77.1 18.8
Profit for the period attributable 231.7 89.8 282.4
to equity shareholders from
continuing operations
Earnings per share from continuing
operations expressed in pence per share
- Basic 7 56.9 31.8 98.0
- Diluted 56.9 31.8 98.0
The results above relate to the continuing operations of the Group.
Condensed Consolidated Statement of Recognised Income and Expense
Six months ended Year ended
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Profit for the period 231.7 89.8 282.4
Actuarial gains/(losses) on defined
benefit pension schemes 9.8 (0.2) (8.2)
Deferred tax on actuarial (gains)/losses
on defined benefit pension schemes (2.9) 0.1 2.5
Initial recognition of net mark-to-market
liability on adoption of IAS 32 and IAS 39 - (5.6) (5.6)
Deferred tax recognised on adoption of IAS
32 and IAS 39 - 1.7 1.7
Fair value gains/(losses) on cash flow 132.6 - (109.7)
hedges
Deferred tax recognised on fair value
(gains)/losses on cash flow hedges (39.8) - 32.9
Net gains/(losses) not recognised in
income statement 99.7 (4.0) (86.4)
Total recognised income for the period
attributable to equity shareholders 331.4 85.8 196.0
Condensed Consolidated Balance Sheets
Notes As at As at
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Assets
Non-current assets
Property, plant and equipment 1,044.5 1,051.3 1,050.5
Derivative financial instruments 19.5 - 0.3
1,064.0 1,051.3 1,050.8
Current assets
Inventories 75.6 56.8 67.8
Trade and other receivables 110.0 109.5 192.9
Derivative financial instruments 61.7 0.4 7.7
Cash at bank and in hand 298.2 109.7 99.1
545.5 276.4 367.5
Liabilities
Current liabilities
Financial liabilities:
- Borrowings 10 25.3 51.1 101.4
- Derivative financial 47.8 250.4 173.0
instruments
Trade and other payables 174.4 101.6 176.1
Current tax liabilities 32.1 0.9 5.2
279.6 404.0 455.7
Net current assets/(liabilities) 265.9 (127.6) (88.2)
Non-current liabilities
Financial liabilities:
- Borrowings 10 425.3 1,015.7 460.1
- Derivative financial 26.4 12.9 49.6
instruments
Deferred tax liabilities 287.2 167.8 185.3
Retirement benefit obligations 35.0 36.9 44.7
Other non-current liabilities 1.0 25.9 0.7
Provisions 2.1 1.5 2.0
777.0 1,260.7 742.4
Net assets/(liabilities) 552.9 (337.0) 220.2
Shareholders' equity
Issued equity 11 40.7 - 40.7
Share premium 420.7 0.5 420.7
Merger reserve 710.8 445.1 710.8
Capital reserve - 293.5 -
Hedge reserve 16.0 - (76.8)
Retained losses (635.3) (1,076.1) (875.2)
Total shareholders' equity 552.9 (337.0) 220.2
Condensed Consolidated Statement of Changes in Equity
Share Share Merger Capital Hedge Retained Total
capital premium reserve reserve reserve losses
£'m £'m £'m £'m £'m £'m £'m
At 1 January
2005 - 0.5 445.1 293.5 - (1,173.2) (434.1)
Profit for the
period - - - - - 282.4 282.4
Actuarial losses
on defined benefit
pension schemes - - - - - (8.2) (8.2)
Deferred tax on
actuarial losses
on defined benefit
pension schemes - - - - - 2.5 2.5
Initial recognition
of net mark-to-market
liability on adoption
of IAS 32 and 39 - - - - - (5.6) (5.6)
Deferred tax
recognised on
adoption of
IAS 32 and 39 - - - - - 1.7 1.7
Fair value losses
on cash flow hedges - - - - (109.7) - (109.7)
Deferred tax
recognised on
fair value losses
on cash flow hedges - - - - 32.9 - 32.9
Share capital issued
on Refinancing
and Listing 40.7 - - - - - 40.7
Share premium
arising on
Refinancing
and Listing - 420.7 - - - - 420.7
Reverse acquisition
adjustments:
- Share for
share exchange - (0.5) (27.8) - - - (28.3)
- Transfer of
capital reserve - - 293.5 (293.5) - - -
LTIP - value of
services provided - - - - - 25.2 25.2
At 31 December
2005 40.7 420.7 710.8 - (76.8) (875.2) 220.2
At 1 January
2005 - 0.5 445.1 293.5 - (1,173.2) (434.1)
Profit for the
period - - - - - 89.8 89.8
Actuarial losses
on defined benefit
pension schemes - - - - - (0.2) (0.2)
Deferred tax on
actuarial losses on
defined benefit
pension schemes - - - - - 0.1 0.1
Initial recognition
of net mark-to-market
liability on adoption
of IAS 32 and 39 - - - - - (5.6) (5.6)
Deferred tax
recognised on
adoption of
IAS 32 and 39 - - - - - 1.7 1.7
LTIP - value of
services provided - - - - - 11.3 11.3
At 30 June 2006 - 0.5 445.1 293.5 - (1,076.1) (337.0)
At 1 January
2006 40.7 420.7 710.8 - (76.8) (875.2) 220.2
Profit for the
period - - - - - 231.7 231.7
Actuarial gains
on defined benefit
pension schemes - - - - - 9.8 9.8
Deferred tax on
actuarial gains on
defined benefit
pension schemes - - - - - (2.9) (2.9)
Fair value gains on
cash flow hedges - - - - 132.6 - 132.6
Deferred tax
recognised on
fair value gains on
cash flow hedges - - - - (39.8) - (39.8)
Share-based payments
- value of
services provided - - - - - 1.3 1.3
At 30 June 2006 40.7 420.7 710.8 - 16.0 (635.3) 552.9
Condensed Consolidated Cash Flow Statements
Six months ended Year ended
30 June 31 December
Notes 2006 2005 2005
(Unaudited)
£'m £'m £'m
Cash generated from operations 12 338.3 320.2 462.3
Income taxes received/(paid) 1.1 (1.7) (2.8)
Decrease in restricted cash 11.3 5.6 26.9
Interest paid on the Refinancing
and Listing - - (86.2)
Interest paid (20.2) (58.4) (57.5)
Interest received 4.7 2.8 5.8
Net cash generated from operating 335.2 268.5 348.5
activities
Cash flows from investing activities
Purchase of property, plant and (12.2) (12.4) (25.0)
equipment
Net cash used in investing (12.2) (12.4) (25.0)
activities
Cash flows from financing activities
Repayment of borrowings (112.6) - -
Repayment of borrowings prior to
the Refinancing and Listing - (216.5) (267.6)
Repayment of borrowings on the
Refinancing and Listing - - (582.6)
Debt issued as a result of the
Refinancing and Listing - - 577.0
Net cash used in financing (112.6) (216.5) (273.2)
activities
Net increase in cash and cash 210.4 39.6 50.3
equivalents
Cash and cash equivalents at
beginning of the period 87.8 37.5 37.5
Cash and cash equivalents at end of
the period 12 298.2 77.1 87.8
Notes to the Condensed Consolidated Financial Statements
1 General Information
Drax Group plc (the ''Company'') is a company incorporated in England and Wales
under the Companies Act 1985. Drax Group plc and its subsidiaries (together the
''Group'') operate in the electricity generation industry within the UK. The
address of Drax Group plc's registered office and principal establishment is
Drax Power Station, Selby, North Yorkshire, YO8 8PQ, United Kingdom.
2 Basis of Preparation
The condensed consolidated financial statements have been prepared using
accounting policies consistent with International Financial Reporting Standards
in accordance with IAS 34 ''Interim Financial Reporting''.
The Refinancing and Listing of the Group, effective on 15 December 2005,
resulted in the creation of a new holding company, Drax Group plc. Under IFRS 3,
the insertion of Drax Group plc as the new holding company was accounted for as
a reverse acquisition, whereby Drax Group Limited (being the previous Group
holding company), the legal subsidiary, acquired Drax Group plc, the legal
parent company.
The information for the year ended 31 December 2005 does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. A copy
of the statutory accounts for that year has been delivered to the Registrar of
Companies. The auditors' report on those accounts was not qualified and did not
contain statements under section 237(2) or (3) of the Companies Act 1985.
The interim financial statements were approved by the Board of directors on 11
September 2006.
3 Significant Accounting Policies
The accounting policies adopted are consistent with those followed in the
preparation of the Group's annual financial statements for the year ended 31
December 2005. The Group does not expect any significant changes in accounting
policies in the remainder of 2006.
4 Segmental Reporting
Turnover comprises primarily sales of electricity generated by the Group to the
electricity wholesale market in England and Wales. As such, the Group has only
one business segment and one geographical segment.
5 Other Exceptional Operating Income and Expenses
Six months ended Year ended
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Other exceptional operating income:
Distributions under the TXU Claim received
in:
-March 2005 - 204.7 204.7
-August 2005 - 51.1 51.1
-January 2006 - - 55.1
-July 2006 19.0 - -
Reversal of impairment of tangible fixed
assets - 19.0 19.0
Total other exceptional operating income 19.0 274.8 329.9
Other exceptional operating expenses:
LTIP expenses arising on share-based
transactions - (11.3) (32.9)
LTIP expenses arising on cash-based
transactions - - (4.7)
Refinancing and Listing fees and expenses - - (29.0)
Total other exceptional operating expenses - (11.3) (66.6)
Distributions under the TXU Claim
The Group received £19.0 million under the TXU Claim in July 2006 (which was
recognised as income in the six months ended 30 June 2006) and £55.1 million in
January 2006 (which was recognised as income in the year ended 31 December
2005), bringing the total received to date to £329.9 million. All amounts are
net of VAT and costs and all proceeds have been used to prepay debt secured
against the claim.
At the time of approving the condensed consolidated financial statements the
Group had a further £6.4 million (including VAT) outstanding under the TXU
Claim. The directors have reasonable expectations that the Group will receive
repayment of this amount broadly in full by mid-2007. However, due to the
contingent nature of insolvency proceedings, there remains uncertainty over the
timing and amount of further distributions to be determined by the TXU
Supervisors, and consequently these further amounts have not been recognised in
the income statement at 30 June 2006.
Reversal of impairment of tangible fixed assets
In accordance with IAS 36, the Group assessed at each reporting date whether
there was any indication that impairment losses recognised during the year to 31
December 2002, following the loss of the TXU Contract, should be reversed. As a
result of the assessment performed at 30 June 2005 for the purposes of the
financial information prepared in connection with the Refinancing and Listing,
the Group recorded a reversal of tangible fixed asset impairment of £19.0
million (£13.3 million net of tax). This represents a reversal of the total
impairment loss recognised in respect of tangible fixed assets at 31 December
2002 after adjusting for depreciation.
Refinancing and Listing fees and expenses
The total costs of the Refinancing and Listing amounted to £44.7 million. £29.0
million (£20.3 million net of tax) of these costs were included within other
exceptional operating expenses in the income statement for the year ended 31
December 2005. The remaining £15.7 million was deducted from debt and is being
amortised to interest payable over the duration of the Group's new debt
facilities.
LTIP expenses arising on share and cash-based transactions
The LTIP expense arising from share-based payment transactions was determined
based on the Group's estimate of the market value of the shares included in the
scheme. This was charged in full following vesting of the awards on Refinancing
and Listing on 15 December 2005.
The LTIP expense arising from cash-based payment transactions reflected the
expected total cash cost of the scheme. This was charged in full following
vesting of the awards on Refinancing and Listing on 15 December 2005.
6 Taxation
The income tax expense reflects the estimated effective rate on profit before
taxation for the Group for the year ending 31 December 2006 and the movement in
the deferred tax balance in the period so far as it relates to items recognised
in the income statement.
Six months ended Year ended
30 June 31 December
2006 2005 2005
(Unaudited)
'm £'m £'m
Tax (charge)/credit comprises:
Current tax (25.8) - (5.5)
Deferred tax (59.2) 77.1 24.3
(85.0) 77.1 18.8
7 Earnings Per Share
Basic earnings per share is calculated by dividing the earnings attributable to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. The calculation of weighted average number of
ordinary shares outstanding assumes that the ordinary shares in Drax Group plc
issued to the existing shareholders of Drax Group Limited on Refinancing and
Listing were in issue either at 1 January 2005 (to the extent that the related
Drax Group Limited shares were in issue at 1 January 2005), or from the date of
issue of Drax Group Limited shares (to the extent that the related Drax Group
Limited shares were issued after 1 January 2005).
Reconciliations of the earnings and weighted average number of shares used in
the calculation are set out below.
Six months ended Year ended
30 June 31 December
2006 2005 2005
(Unaudited)
Earnings:
Earnings attributable to equity holders of
the Company for the purposes of basic and
diluted earnings (£'m) 231.7 89.8 282.4
Six months ended Year ended
30 June 31 December
2006 2005 2005
(Unaudited)
Number of shares:
Weighted average number of ordinary shares
for the purposes of basic earnings per
share (millions) 407.0 282.8 288.2
Effect of dilutive potential ordinary shares - - -
under share options
Weighted average number of ordinary shares
for the purposes of diluted earnings per
share (millions) 407.0 282.8 288.2
Outstanding share options in relation to the Group's Savings Related Share
Option Plans have been considered in calculating the diluted weighted average
share capital as at 30 June 2006.
8 Dividends
On 11 September 2006 the Board resolved to pay an interim dividend for the six
months ended 30 June 2006 of 4 pence per share on 25 October 2006. Also on 11
September 2006 the Board resolved, subject to the approval by shareholders of a
resolution to effect a share consolidation to be considered at an Extraordinary
General Meeting on 6 October 2006, to pay a further interim dividend as a
special dividend of 80 pence per share, also on 25 October 2006.
The interim dividend of 4 pence per share and special dividend of 80 pence per
share have not been included as liabilities as at 30 June 2006. No dividends
were proposed in respect of the year ended 31 December 2005.
9 Pension
The most recent actuarial valuation of the approved defined benefit scheme
operated on behalf of the Drax Power Group of the Electricity Supply Pension
Scheme was updated as at 30 June 2006 to reflect relevant changes in
assumptions. The principal change from those assumptions adopted at 31 December
2005 was a change in the discount rate from 4.7% to 5.2% reflecting market
conditions at that date.
10 Financial Liabilities - Borrowings
As at As at
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Current:
Term loan 6.3 - 46.3
Bridge loan 19.0 - 55.1
B Facility Debt - 51.1 -
25.3 51.1 101.4
As at As at
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Non-current:
Term loan 422.4 - 438.2
Bridge loan 2.9 - 21.9
A Facility Debt - 933.3 -
B Facility Debt - 82.4 -
425.3 1,015.7 460.1
Payment profiles for repayment of the Term loan are based on the fixed minimum
repayment profile. Repayments above the fixed minimum repayment profile are
permitted subject to the amount of cash available for debt service. £57.5
million of the Term loan was repaid on 30 June 2006 in line with the target
repayment profile as a result of the levels of cash available for debt service.
The Bridge loan has a first priority over the TXU Claim and the proceeds
thereof, which are its primary source of repayment. Following a third
distribution under the TXU Claim on 19 January 2006, £55.1 million of the Bridge
loan was repaid on 23 January 2006. The distribution was recognised as income in
the year ended 31 December 2005. Following a fourth distribution on 20 July
2006, £19.0 million of the Bridge loan was repaid on 25 July 2006. The fourth
distribution was recognised as income in the six months ended 30 June 2006.
On 11 May 2006, the Group entered in to a new credit facility agreement
providing a further £100 million borrowing facility on similar terms and with a
similar repayment profile to the existing borrowings. The facility was drawn
down in full on 3 July 2006 and partially utilised to make a payment of £22.5
million into the employee pension scheme to reduce the actuarial deficit. The
Group expects to utilise the remainder of the facility to partially fund the
interim and special dividends to be paid on 25 October 2006 (note 8).
11 Called up Share Capital
As at As at
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Authorised:
1,000,000,000 ordinary shares of 0.001 pence each - - -
999,500,020 ordinary shares of £0.10 each 100.0 - 100.0
Issued and fully paid:
30 June 2005-94,254,480 ordinary shares of
0.001 pence each - - -
31 December 2005-406,927,661 ordinary shares of
£0.10 each - - 40.7
30 June 2006-407,085,395 ordinary shares of
£0.10 each 40.7 - -
40.7 - 40.7
Under IFRS 3, the insertion of Drax Group plc as the new holding company on
Refinancing and Listing was accounted for as a reverse acquisition, whereby Drax
Group Limited (being the previous holding company), the legal subsidiary,
acquired Drax Group plc, the legal parent company. Therefore, the share capital
in the condensed consolidated balance sheet at 30 June 2005 reflected that of
Drax Group Limited prior to the reverse acquisition.
On 23 May 2006, the Company issued 157,734 ordinary shares of 10 pence each in
Drax Group plc at par to a trust on behalf of qualifying employees under the
Share Incentive Plan. Each qualifying employee received 254 free shares,
equating to a cash value of approximately £2,000 each based on a price of £7.89,
being the average closing price over the five dealing days immediately preceding
23 May 2006.
12 Cash Flow from Operating Activities
Six months ended Year ended
30 June 31 December
Continuing operations 2006 2005 2005
(Unaudited)
£'m £'m £'m
Profit for the period 231.7 89.8 282.4
Adjustments for:
Interest payable and similar charges 18.2 58.9 114.4
Interest receivable (5.7) (2.7) (23.5)
Tax charge/(credit) 85.0 (77.1) (18.8)
Depreciation 17.5 15.8 31.0
Reversal of impairment of tangible fixed assets - (19.0) (19.0)
Loss on disposal of property, plant and equipment - 2.0 0.2
Unrealised (gains)/losses on derivative contracts (89.1) 248.5 117.0
Credit to equity for share-based payments 1.3 11.3 25.2
Operating cash flows before movement in
working capital 258.9 327.5 508.9
Changes in working capital:
Increase in inventories (6.2) (11.6) (22.6)
Decrease/(increase) in receivables 83.9 (40.0) (123.4)
Increase in payables 1.5 43.1 99.8
Increase in pensions 0.1 0.2 -
Increase/(decrease) in provisions 0.1 1.0 (0.4)
Cash generated from operations 338.3 320.2 462.3
Cash and cash equivalents includes the following for the purposes of the cash
flow statement:
As at As at
30 June 31 December
2006 2005 2005
(Unaudited)
£'m £'m £'m
Cash and cash equivalents:
Cash at bank and in hand 298.2 109.7 99.1
Less: debt service reserve and escrow accounts - (32.6) (11.3)
298.2 77.1 87.8
Independent Review Report to Drax Group plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2006 which comprises the condensed consolidated
income statements, the condensed consolidated balance sheets, the condensed
consolidated statement of total recognised income and expense, the condensed
consolidated statement of changes in equity, the condensed consolidated cash
flow statements and related notes 1 to 12. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the Company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the Company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority and the requirements of IAS 34 which
require that the accounting policies and presentation applied to the interim
figures are consistent with those applied in preparing the preceding annual
accounts except where any changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2006.
Deloitte & Touche LLP
Chartered Accountants
London
11 September 2006
Glossary
Availability Average percentage of time the units were available for generation.
Average Power revenues divided by volume of net sales.
achieved
price
Average Revenue derived from bilateral contracts divided by volume of net
capture merchant sales.
price
Bilateral Revenue resulting from bilateral contract and power exchange
contracts trades.
Balancing Income or expense resulting from accepted bids and offers in the
mechanism balancing mechanism.
income/
expense
Dark green The difference between the price available in the market for sales
spread of electricity and the marginal cost of production (being the cost
of coal and other fuels including CO2 emissions allowances.)
EU ETS EU Emissions Trading Scheme; establishing a scheme for greenhouse
gas emission allowance trading within the EU.
Forced Average percentage of time the units were not available for
outage rate generation at full capacity due to an unplanned failure or
conditions requiring the unit to be removed from service.
IAS International Accounting Standards.
IFRS International Financial Reporting Standards.
Load factor Percentage of actual net sales to potential maximum net generation.
LTIP The Drax Group Limited Long Term Incentive Plan.
Net Net volumes attributable to accepted bids and offers in the
balancing balancing mechanism.
mechanism
Net merchant Net volumes attributable to bilateral contract and power exchange
sales trades.
Net sales The aggregate of net merchant sales and net balancing mechanism.
Planned Percentage of planned outages to maximum generation.
outage rate
Power The aggregate of bilateral contracts and balancing mechanism income
revenues /expense.
Refinancing The financial restructuring of the Group effective on 15 December
and Listing 2005 resulting in the creation of a new holding company, Drax Group
plc. Pursuant to the schemes of arrangement under which the
Refinancing and Listing was implemented, the existing debt of the
Group was settled partially through the issue of new debt and
partially through the issue of ordinary shares in Drax Group plc.
Also on 15 December 2005, Drax Group plc was introduced to the
Official List of the UK Listing Authority and its ordinary shares
commenced trading on the London Stock Exchange.
Summer base Market price on the last day that the season was traded as a
load market product.
close
The Company Drax Group plc.
The Group Drax Group plc and its subsidiaries.
TXU TXU Europe Energy Trading Limited (in administration and subject to
a company voluntary arrangement).
TXU Claim The claim issued by the Group, ultimately agreed by the
Administrators of TXU at approximately £348 million (including VAT)
in respect of unpaid power purchased by TXU and liquidated damages
under the TXU Contract.
TXU Contract A 15-year power purchase agreement with TXU.
UK NAP UK National Allocation Plan.
Winter base Market price on the last day that the season was traded as a
load market product.
close
Shareholder Information
Registered Office and Trading Address
Drax Power Station
PO Box 3, Selby, North Yorkshire YO8 8PQ
Registration Details
Registered in England and Wales
Company Number: 5562053
Company Website
www.draxgroup.plc.uk
Financial Calendar
At the date of publication of this document, the following are the proposed key
dates in the 2006 financial calendar and outline dates for 2007:
2006
4 October Existing ordinary shares marked ex-interim dividend
6 October Record date for interim dividend, special dividend and share
consolidation
6 October Extraordinary General Meeting
9 October Existing ordinary shares marked ex-special dividend and admission
of new ordinary shares
25 October Payment date for interim dividend and special dividend
13 December Trading update
31 December Financial year end
2007
March Preliminary results announcement
Late April Annual General Meeting
30 June Financial half year end
Other significant dates, or amendments to the proposed dates above, will be
posted on the Company's website as and when they become available.
This information is provided by RNS
The company news service from the London Stock Exchange
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