8th Mar 2006 07:05
Drax Group PLC08 March 2006 Drax Group plc Preliminary Results for the year ended 31 December 2005 (London - 8 March 2006) Drax Group plc, the UK independent power generator,announces its preliminary results for the year ended 31 December 2005 andreports on key developments to date. Highlights: • Refinancing and listing - successfully completed in 15 December 2005 • Net sales in 2005 of 23.2TWh (22.9TWh 2004) • EBITDA of £239million, £19million higher than the forecast included in the Listing Particulars • Gross margin was 63% higher than in 2004, primarily due to higher power prices. The average capture price in 2005 was £33.9/MWh (£22.5/MWh 2004) • As at 3 March 2006, 75% of expected output in 2006 had been contracted at an average price of £46.9/MWh and 47% of expected 2007 output had been contracted at an average price of £49.2/MWh • In the 11 weeks following the enhancement of the Group's credit status on refinancing and listing, volume of forward power sales has increased by 49% reflecting improved trading counterparty interest • Base dividends to be paid later in the year in line with stated policy • First additional distribution also expected later in 2006 Year ended 31 December 2005 compared to year ended 31 December 2004 Year ended 31 December 2005 2004 £ million £ million MovementRevenue from generation (1) 849 549 +55%Total revenue 929 624 +49%Gross margin (2) 389 239 +63%EBITDA (3)(4) 239 90 +166%EBITDA (after exceptional items)(5) 385 90Operating Profit 354 55Profit/(loss) before tax 264 (42) (1) Revenue from generation excludes revenues associated with powerpurchases of £80 million (2004: 75 million). (2) Gross margin is defined as total revenues less total fuel costs of £540million (2004: £385 million). (3) EBITDA is profit before interest, tax, depreciation and amortisation,exceptional items and unrealised losses on derivative contracts. (4) Exceptional items in 2005 comprise income of £19 million due to thereversal of provisions relating to impairment of tangible fixed assets and £311million as a result of three distributions received from the Administrators ofTXU, partially offset by a charge under the Group's Long Term Incentive Plan of£38 million, and costs incurred with respect to the Refinancing and Admission of£29 million. Unrealised losses on derivative contracts were £117 million in2005. There were no exceptional items in 2004. (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 very pleased with the 2005 Drax results. During the year the companyundertook a substantial financial restructuring, including listing the DraxGroup shares on the London Stock Exchange, whilst continuing to deliver strongimprovements in operational and financial performance. We have made significantprogress since listing to build our forward power sales and expect to deliversignificant cash distributions during 2006 as we benefit from good performanceagainst a background of robust commodity markets." Management Presentation and Conference Call Management will host a presentation for analysts and institutional investors at9:00am (UK Time) today, 8 March 2006, in the Ayres Room at the offices ofDeutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB. A copy of the presentation will be made available from 7am (UK time) onWednesday 8 March for download at www.draxgroup.plc.uk (>>Financial Results2005). Event Title: Drax Group plc: Full Year ResultsEvent Date: Wednesday 8 March 2006Event Time: 9am (UK time) UK Call In Number: 020 7162 0125International Call In Number: +44 20 7162 0125US Call In Number: +1 334 323 6203 Webcast detailsLive Event Link:http://wcc.webeventservices.com/view/wl/r.htm?e=20494&s=1&k=C788DE0D38DCE7019EFD875DF6FE4774 UK Instant Replay Start Date: 8 March 2006Delete Date: 8 April 2006Dial In Number: 020 7031 4064Freephone number (UK only): 0800 358 1860Passcode: 694875 US Instant Replay Start Date: 8 March 2006Delete Date: 8 April 2006Dial In Number: +1 954 334 0342Freephone number: +1 888 365 0240Passcode: 694875 Video Webcast Start Date: 8 March 2006Delete Date: 8 June 2006Archive Link:http://wcc.webeventservices.com/view/wl/r.htm?e=20494&s=1&k=C788DE0D38DCE7019EFD875DF6FE4774 For further information please contact: On the day Thereafter Dorothy Thompson,Chief Executive +44 (0) 20 7353 4200 +44 (0) 1757 612 502 Andrew Jones,Investor Relations +44 (0) 20 7353 4200 +44 (0) 1757 612 938 Melanie Wedgbury,Media Contact +44 (0) 20 7353 4200 +44 (0) 1757 612 438 Tulchan CommunicationsDavid Trenchard and Peter Hewer +44 (0) 20 7353 4200 CHAIRMAN'S STATEMENT Introduction Through the ownership of the largest, cleanest and most efficient coal-firedpower station in the country, with a nominal output capacity of 3,960MW, theGroup provides power sufficient to meet around 7% of the electricity needs ofthe UK. The year 2005 was transformational: it saw the group refinanced and its shareslisted for the first time on the London Stock Exchange. Accordingly, this is thefirst Preliminary Results Statement for Drax Group plc which became the holdingcompany of the Drax group of companies on 15 December 2005. Re-financing and Listing In March 2005, Drax Group Limited set out its proposals to refinance and listthe business by the end of the year. The reasons were clear to the Board. Theprevailing capital structure was restricting the ability of management todevelop its trading and business strategy and in consequence management effortsto enhance shareholder value were being inappropriately constrained. Throughoutthe year in a series of investor roadshows, letters, meetings and discussionsthe Board outlined and developed its proposals to align the trading,operational, and financial strategies to deliver greater shareholder value. Mucheffort was put into engaging with investors, seeking their understanding of theplans, and receiving their feedback directly and through their representatives,all of which helped shape the final proposals. Whilst conceptuallystraightforward, the re-financing and listing were technically difficult toimplement requiring very high levels of positive shareholder and lenderapprovals within what was then a complex capital structure. During the autumn of 2005 three separate indicative offers were made for thebusiness. The Board assessed each of them against the same criteria: value,deliverability and timeliness. Having regard to these criteria, and to the viewsexpressed by investors directly, indirectly through their representatives, andsignificantly through their votes, the Board with the support of its advisersconcluded that the re-financing and listing was the best option and the bidswere either rejected or fell away. The Group now enjoys a robust and simple capital structure appropriate to abusiness operating within commodity markets and its shares trade in atransparent and liquid market. I am pleased to note that the refinancing andlisting delivered the expected investment grade ratings for the Group debt andfor the principal operating subsidiary, Drax Power Limited. The resulting creditstanding with trading counterparties, together with our enhanced ability toprovide credit support where necessary, is already delivering significanttrading and operational benefits. Results for 2005 The Group produced a strong performance in 2005 delivering an Operating Profit(before exceptional items and mark-to-market adjustments on forward contracts)of £208 million, a substantial improvement on the previous year's performance.EBITDA of £239 million was £19 million better than the forecast £220 millionEBITDA included in our Listing Particulars which were published in October 2005and updated on 11 November 2005. Including exceptional items and mark-to-marketadjustments would increase both Operating Profit and EBITDA by £146 million. Returns to Shareholders In our 2005 Listing Particulars the Company put forward Drax as a 'cashconversion' story. It laid out its intention to make distributions toshareholders in the form of an annual base dividend of £50 million (payable inline with normal listed company practice) and in addition to distributesubstantially all of any remaining cash flow subject to the availability ofreserves and after making provision for debt payments, debt service requirements(if any), capital expenditure, and other expected business requirements. In respect of our base dividend we intend to pay an interim dividend in respectof the six months to 30 June 2006 of 4 pence per share being approximately £16.3million. This will be paid in autumn 2006. As regards the additional distribution, work has commenced to identify the mostappropriate method for returning surplus cash. We expect to advise shareholdersof the proposed method of return at our AGM in May, followed by an indication ofthe likely range of distribution, timing and any shareholder approval process ina Trading Update given at the end of June. Our People The sustained commitment and dedication of all our employees has been a crucialpart of our success over the last three years. The old and new skills brought toDrax combined as one team, and their efforts against the backdrop of improvingmarkets has seen the business develop strongly. Our people at Drax rose to thenew challenges and opportunities posed by the impending refinancing and listing.I should like to thank all of them for their contribution, flexibility andenthusiasm in what proved to be an eventful and successful year. Gordon Horsfield Chairman CHIEF EXECUTIVE'S STATEMENT Introduction In 2005 commodity market developments dominated the UK energy landscape. Energycommodity prices have been strong, led by the price of crude oil. Natural gasprices were particularly high towards the end of the year, influenced by oil anda tighter demand/supply balance as the UK moved to a greater reliance onimported gas. High gas prices have meant that gas fired generation became theprincipal price setting plant in the power market and had a strong upwardinfluence on the power price. The year also saw the introduction of the EUEmissions Trading Scheme with carbon becoming a traded commodity and a new costto fossil fuelled power plant, so also influencing the price of power upwards. Against this background of strong commodity markets, Drax began to realise someearly returns from investments in plant management and maintenance. Theimprovement of plant performance compared to 2004 was very positive and directlytranslated into improved safety, availability and reliability. Energy Sales and Other Income In the year, Drax Power made net sales of 23.2TWh (2004: 22.9TWh) of electricityat an average capture price of £33.9/MWh (2004: £22.5/MWh). The capture priceachieved reflects the impact of power sold forward in 2003 and 2004 for deliveryin 2005, as well as market prices prevailing in 2005. Power prices rose significantly during 2005 as reflected in the Drax captureprice. For instance, the price of the forward contract for power delivered inthe six months starting October 2005 rose 49% between the beginning of the yearand the start of delivery in October. Drax makes sales of other products and services as well as contracted power. In2005 these sales totalled £32 million. Fuel Procurement Coal Drax burnt approximately 9.3 million tonnes of coal in 2005, with around 60%being sourced from the UK and 40% internationally. During 2005 we paid anaverage price of £37.28/tonne (2004: £32.74/tonne) for our coal, including thecost of delivery to the power station. International coal prices fell from apeak of $75/tonne early in the year to about $52/tonne at the close. Biomass - Naturally Grown Fuel As well as coal Drax burns renewable biomass material which has the twinbenefits of reducing CO2 emissions and providing an additional revenue sourcethrough the sales of ROCs and LECs. During 2005 we burnt over 235,000 tonnes ofbiomass compared with 95,000 tonnes in 2004. We made significant progress duringthe year in the development of energy crops grown by local farmers. Contractsare being arranged to grow and to deliver energy crops over the next decade.Work continues to source additional energy crops and other cost effectivebiomass. EU Emissions Trading Scheme On 1 January 2005 the EU Emissions Trading Scheme in respect of carbonallowances commenced. Phase I of the scheme covers 2005-2007 and Phase II willcover 2008-2012. Drax has an annual allocation granted by the UK Government of14.55 million tonnes of allowances in Phase I. In 2005 we purchased a further6.3 million tonnes of allowances as power was generated at volumes beyond thosesupported by the allocation. Carbon prices rose through 2005, opening the yearat around €8/tonne and closing at over €20/tonne. Trading The trading function covers all the commodity aspects of our operationsincluding power, fuel, carbon allowances, renewable generation incentives, andgrid services. The principal objectives of our trading strategy are to optimisethe physical inputs and outputs of the plant, and to enhance the value of thebusiness while delivering some stability in value through commodity pricecycles. An important aspect of capturing value is exploiting the optionality ofthe power plant through its flexibility. Drax's access to commodity markets was greatly constrained during the year bythe relatively poor credit status of Drax Power Limited, the tradingcounterparty. This was a result of the high leverage of the Drax Group. On therefinancing of the Group on 15 December 2005, the credit status of Drax PowerLimited was greatly improved as reflected in the investment grade rating grantedto the entity by Standard & Poors. Operations Health and Safety Health and safety remains our highest priority. The year 2005 was the first fullyear operating the DuPont(TM)STOP(TM)behaviour based safety system which we haveimplemented as a vehicle to deliver a step change in safety culture. Inaddition, we have focussed on developing simple clear systems, improvedcommunication, detailed safety incident reporting and follow-up. Overall,recordable personal injury rates have reduced by some 40% versus 2004. Load Factor and Availability The plant load factor for the year was 73.9% (2004: 69.1%) with an availabilityof 87.2% (2004: 81.3%). We only seek to generate electricity when it isprofitable to do so. Thus we target profitability rather than productionvolumes. A key performance metric for the plant is availability. Last year sawimprovements in both the planned and forced outage rates, with a strong downwardtrend in forced outage rate over the four quarters of 2005 resulting in the bestfull year performance since 1997. Investment in Operations We continue to invest in plant and equipment with four main objectives in mind:to meet future environmental and safety legislative requirements; to facilitatefuel diversity; to support reductions in the forced outage rate; and to improveplant efficiency. To meet the 2008 Large Combustion Plant Directive ("LCPD") requirements foroxides of nitrogen emissions standards we have a programme to install BoostedOver Fire Air ("BOFA") equipment on each of the six units. During 2005, twounits have had BOFA installed; one of the units has been commissioned and hassuccessfully completed all of its performance tests meeting the designspecification in full. Construction will start in 2006 to install BOFA systemson the remaining four units in time for the 2008 change. New process controlsystems together with BOFA and new instrumentation, designed to delivercontinuous emissions monitoring across the units, will ensure compliance withLCPD limits for oxides of sulphur and nitrogen, and particulates. Fuel diversity projects include petcoke and biomass. Drax has invested inpetcoke handling and blending facilities during the year and commenced an 18month trial burn on one unit in June 2005. Air quality monitoring both beforeand during the trial has shown that there has been no material increase inpollutants measured. We expect to apply for a licence for commercial burncommencing in 2007. Although the early results from the trials are encouraging,there can be no guarantee that consent to burn petcoke in some or all of theunits will be granted. A biomass "Direct Injection" system was installed on oneunit during August and has proved to be an effective way of delivering largervolumes of prepared biomass to the boiler than is possible through the coalpulverising mills. Drax has the potential to install at modest cost such asystem on each unit should the investment criteria be met. Drax recognises the potential to improve operating and thermal efficiencyleading to reduced fuel costs and emission rates. Examples of work undertaken in2005 are investment in the flue gas desulphurisation facility to improvescrubbing efficiency and a project to improve boiler heat transfer when burningimported coal. Looking forward Drax is exploring several turbine enhancementsand feed system upgrades with the objective of further improving efficiency andreducing consumption. Regulatory Matters Energy Review On 23 January 2006, the UK Government launched its Energy Review (the"Review"). The Review promises to be broad in scope, considering both energysupply and demand and, importantly, within it, all energy sources for powergeneration. We welcome the Review as an opportunity to increase awareness ofthe need for coal-fired generation in the long term energy mix of the country.Given the right policy framework, we believe that coal-fired generation cancontribute to the Government's key energy policy objectives of deliveringsecurity of supply and affordability, and tackling climate change. We are fullyengaged with the Government on the Review. We will be seeking clarity andconsistency of policy from Government to support term investments in the sector,the maintenance of an open and competitive market for power generation andequality for all forms of renewable generation. In particular we will be seekinga relaxation of the 10% cap on co-fired biomass Renewables ObligationCertificates which becomes effective on 1 April 2006. Large Combustion Plant Directive On 3 February 2006, under LCPD regulations, approximately 20GW of UK coal plant"opted in" with a further 12GW "opted out". Those opted in will be required tocomply with the emissions regulations set down in the LCPD. Those opted out arelimited to 20,000 operating hours post 2007. Drax "opted in" under the NationalEmissions Reduction Plan the ("NERP"), the alternative being Emission LimitValues ("ELV") on the basis that this will serve to retain the optionality andflexibility of the plant and therefore the opportunity to add value. Under theNERP, coal generators are subject to annual emission limits relative to historicgeneration levels whilst under ELV, there is a 48 hour emission constraint. EU Emissions Trading Scheme During the course of 2006, across the European Union each country's NationalAllocation Plan ("NAP") for Phase II of the Emissions Trading Scheme will beannounced. Drax is active in the UK Government's consultation process on the UKPhase II NAP. Outlook The refinancing of the Group together with the listing on 15 December 2005transformed the capital structure of Drax. The new capital structure enables usto align the operational, trading and financial strategies of the business todeliver greater shareholder value. The focus going forward is to deliver thisvalue. Key to our success will be the sustained performance of the Drax team to improveon the good results achieved in 2005. We will continue to invest in thedevelopment of our staff with a keen focus on the performance culture that isnow well established. Within the business, work will continue on improving plant performance andseeking areas to enhance the business by further developing fuel and productoptionality. There are a number of EBITDA enhancement projects which weidentified in 2005 which we will work to deliver in 2006 and 2007. In addition,the improvement in credit status has significantly enhanced our ability to tradein the power, coal and carbon markets. It has provided access to greater depthand tenor in all of these markets. Our strategy is to extend our forwardcontracts whilst retaining a significant exposure to the commodity markets inorder to exploit the full value of the optionality of the power plant and theexpertise of the Drax trading team. As at 3 March 2006 Drax had contracted 75% of expected 2006 output at an averageprice of £46.9/MWh, and 47% of expected 2007 output at an average price of £49.2/MWh. Corresponding fixed price coal and carbon have been secured to underpinthese sales. Overall our volume of forward power sales has grown by over 49% inthe 11 weeks from 15 December to 3 March 2006 reflecting both our increasedcredit capacity and counterparty interest. Given current trading expectations and the continued development of hedgeposition coupled with effective cash management, we expect during 2006 to startto deliver on our commitment to return substantially all excess cash flow to ourshareholders. We will remain active in the regulatory debate. We believe coal is critical tothe UK energy mix going forward if the Government is to achieve its objectivesof delivering security of supply, affordability and tackling climate changewhere biomass burning with coal has much to contribute. We will be seekingclarity, coherence and consistency of Government policy and an equal treatmentof biomass co-fired generation with other renewable energy. Dorothy ThompsonChief Executive PART 2 TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Drax