8th Mar 2006 07:05
Drax Group PLC08 March 2006 Drax Group plc Preliminary Results for the year ended 31 December 2005 FINANCIAL REVIEW Overview Drax Group plc was introduced to the Official List of the UK Listing Authorityand its ordinary shares commenced trading on the London Stock Exchange on 15December 2005. Drax Group plc is the ultimate holding company of Drax PowerLimited, the owner of Drax Power Station. The principal activity of Drax is the operation of the power station and thetrading of the electricity it produces. Drax is the largest coal-fired powerstation in Western Europe, with a nominal capacity of 3,960MW and a registeredgenerating capacity of 3,870MW. All electricity generated is sold in thewholesale market or through the balancing mechanism, or used by the powerstation. Fuel is purchased from a variety of UK and international sources. CO2emissions allowances required by the Group in excess of its allocation under theUK National Allocation Plan (the "UK NAP") are also purchased from a variety ofUK and international sources. For the year ended 31 December 2005, Drax produced an EBITDA of £239 million andan operating profit of £354 million (including exceptional items and unrealisedlosses on derivative contracts which together improved operating profit by £146million). For the year ended 31 December 2004 EBITDA was £90 million andoperating profit was £55 million. Results of operations Year ended 31 December 2005 compared to year ended 31 December 2004 Year ended 31 December 2005 2004 £ million £ millionRevenueRevenue from generation 848.8 549.3Revenue associated with power 79.8 74.8purchases 928.6 624.1Fuel costs(1)Fuel costs in respect of generation (459.7) (309.9)Costs of power purchases (79.8) (74.8) (539.5) (384.7) Gross margin 389.1 239.4 Other operating expenses excluding (149.7) (151.9)depreciation , amortisation andexceptional items(2)Other income - 2.5 EBITDA(3) 239.4 90.0 Depreciation and amortisation (31.2) (35.0)Other operating income - net 263.3 -exceptional creditUnrealised losses on derivative (117.0) -contracts Operating profit 354.5 55.0 Interest receivable 23.5 4.6Interest payable and similar charges (114.4) (101.2) Profit/(loss) before tax 263.6 (41.6)Tax credit 18.8 35.1Profit/(loss) for the period 282.4 (6.5)attributable to equity shareholdersfrom continuing operations (1) Fuel costs comprises the fuel costs incurred in the generation process,predominantly coal, together with oil and, since 2003, biomass costs. Since 1January 2005, CO2 emissions allowance costs have also become a substantialcomponent of fuel costs. Fuel costs also include the cost of power purchased tomeet power sale commitments. (2) Other operating expenses excluding depreciation, amortisation andexceptional items principally include salaries, maintenance costs, connectioncharges (BSUoS, TNUoS) and business rates. (3) EBITDA is defined as profit before interest, tax, depreciation andamortisation, exceptional items and unrealised losses on derivative contracts(as defined in IAS 39). Drax Group's revenues from generation during the year ended 31 December 2005were £849 million, compared to £549 million during the corresponding period in2004, an increase of £300 million (or 55%). This increase was mainly due toincreases in average electricity capture prices over the period. Power sold inthe year ended 31 December 2005 was 23.2TWh, compared to 22.9TWh in thecorresponding period in 2004. Included within revenues from generation arerevenues from the sale of by-products (ash and gypsum), the provision ancillaryservices, the sale of ROCs, LECs and SO2 emissions allowances. In 2005 theserevenues totalled £32 million compared with £26 million in 2004. Drax purchases power in the market when the cost of power in the market is belowDrax's marginal costs of production in respect of power previously contracted bythe Group and to cover any shortfall in generation. The cost of purchased powerhas remained relatively constant between each of the two years.Under IFRS, thecosts of power purchased is treated as fuel costs, and revenue has been adjustedaccordingly. Drax's fuel costs in respect of generation during the year ended 31 December2005 were £460 million, compared to £310 million during the comparable period in2004, an increase of £150 million (or 48%). This increase was primarily due tothe cost of CO2 emissions allowances (£87 million in 2005) and an increase inthe cost of coal and other fuels. Reflecting the above factors, Drax's gross margin, being revenues less fuelcosts, increased from £239 million in the year ended 31 December 2004 to £389million in the year ended 31 December 2005, an increase of £150 million (or63%). Drax's other operating expenses excluding depreciation, amortisation andexceptional items were broadly flat at £152 million in the year ended 31December 2004 and £150 million in the corresponding period in 2005. EBITDA was £239 million in 2005 which was £149 million higher than for 2004. Theimprovement in EBITDA reflected the improvement in gross margin. Depreciation and amortisation in the year ended 31 December 2005 was £4 millionlower at £31 million compared with the same period in 2004. The depreciation andamortisation charge for 2004 included £2 million in respect of losses ondisposal of property, plant and equipment. Exceptional operating income for the year ended 31 December 2005 of £263million, is comprised of credits of £19 million due to the reversal ofprovisions relating to impairment of tangible fixed assets and £311 million as aresult of three distributions received by Drax under the TXU Claim. These itemswere partially offset by a charge for cash and share-based payment transactionsunder the Group's Long Term Incentive Plan ("LTIP") of £38 million, as well ascosts incurred with respect to the Refinancing and Admission of £29 million.Additional information relating to these exceptional items is included in theNotes to the Consolidated Financial Statements. Drax had no exceptionaloperating income or expenses in the year ended 31 December 2004. IAS 32 and IAS 39, the International Financial Reporting Standards in respect ofderivatives and financial instruments, are applicable to Drax for the periodfrom 1 January 2005. As a result of applying these standards, unrealised lossesof £223 million and unrealised gains of £8 million on derivative contracts wererecognised within liabilities and assets respectively at 31 December 2005 (ascompared to unrealised losses of £20 million and unrealised gains of £15 millionat 1 January 2005). The unrealised losses principally relate to themark-to-market of Drax's forward contracts for power yet to be delivered andsome coal contracts, which meet the definition of derivatives under IAS 39. Theout-of-the-money position mainly reflects prices in Drax's forward salescontracts for power against rising market prices for power. For the period from 1 January 2005 to 30 June 2005, mark-to-market movements onthese contracts were reflected directly in the income statement, as appropriatehedge accounting documentation had not been put in place. This resulted in anexpense of £117 million relating to unrealised losses on derivative contractsbeing recognised in the income statement for 2005. For the purposes of IAS 39, from 1 July 2005, the Group has put in placeappropriate hedge accounting documentation to enable it to achieve hedgeaccounting for a large proportion of its commodity contracts. As a result,mark-to-market movements on contracts which are now considered to be effectivehedges are recognised through the hedge reserve. Reflecting the above factors, Drax's operating profit, increased from £55million in the year ended 31 December 2004 to £354 million in the year ended 31December 2005, an increase of £299 million. Operating profit for 2005 includesexceptional operating income of £263 million and unrealised losses on derivativecontracts of £117 million as described above. Interest payable and similar charges in the year ended 31 December 2005 were£114 million, compared to £101 million in the same period in 2004, an increaseof £13 million (or 13%). The increase reflects a reduction in interest payableon borrowings, principally as a result of repayments of the Group's B Debtfollowing receipts under the TXU Claim, offset by a charge of £23 millionresulting from the termination of interest rate swap contracts on Refinancingand Admission. Interest receivable of £24 million in the year ended 31 December 2005 includes acredit of £18 million in respect of previously recognised unrealised losses onthe terminated swap contracts, accounted for under IAS 39 from 1 January 2005. Drax's tax credit during the year ended 31 December 2005 was £19 million,compared to a tax credit of £35 million during the comparable period in 2004.The tax credit in 2005 reflects the utilisation of tax losses brought forwardfrom earlier years, which more than offsets the profit before tax for the year.The tax credit for 2004 reflects the loss for the year and the tax effect of thefinancing structure. Reflecting the above factors, Drax had a profit for the year from continuingoperations of £282 million in the year ended 31 December 2005, compared to aloss of £7 million in the year ended 31 December 2004. Refinancing and Admission The Refinancing and Admission took place on 15 December 2005, resulting in thecreation of a new holding company, Drax Group plc. Pursuant to the schemes ofarrangement under which the Refinancing and Admission was implemented, theexisting 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 15December 2005, Drax Group plc was introduced to the Official List of the UKListing Authority and its ordinary shares commenced trading on the London StockExchange. The Refinancing and Admission involved a cash payment of £112 million to A2 Debtholders in respect of an equal amount of A2 Debt, and an exchange of the balanceof A2 and A3 Debt of £433 million for new ordinary shares in Drax Group plc. Inaddition, the existing ordinary shares of Drax Group Limited, the previousholding company, were exchanged for new ordinary shares in Drax Group plc. Theoutstanding A1 Debt of £388 million and B Debt of £82 million was repaid at par,and previously deferred interest on B Debt and accrued interest on each of thetranches of debt of £63 million was repaid in full. Interest rate swap contractswith a notional value of £400 million, principally related to the A1 Debt, werealso cancelled, resulting in a termination payment of £23 million. The new ordinary shares in Drax Group plc issued to A2/A3 Debt holders andexisting shareholders of Drax Group Limited were issued by way of schemes ofarrangement, and therefore did not constitute an offer of securities to thepublic. Consequently, Admission took place by way of an introduction. At the same time, the Group entered into new debt facilities, which included aTerm loan of £500 million and a Bridge loan of £77 million, as well as a letterof credit facility of £200 million and a revolving credit facility of £100million. The Term loan is subject to a fixed amortisation profile beginning on30 June 2006 and ending on 31 December 2010. The Bridge loan has first priorityover the TXU claim and the proceeds thereof.The total costs of the Refinancingand Admission amounted to £45 million, of which £29 million has been includedwithin exceptional other operating expenses in the income statement. Theremaining amount of £16 million has been deducted from debt and is beingamortised to interest payable over the duration of the Group's new debtfacilities. TXU Claim In 1999, whilst owned by AES Corporation, Drax entered into the TXU HedgingContract, a 15-year power purchase agreement with TXU Europe Energy Limited("TXU"). TXU defaulted on the contract in 2002, and together with certain othermembers of the TXU Group, filed for administration in the UK. On terminating thecontract, Drax issued a claim (the "TXU Claim"), ultimately agreed by theAdministrators of TXU at approximately £348 million (including VAT), in respectof unpaid power purchased by TXU and liquidated damages for default under thecontract. On 30 March 2005, the Group received a first distribution of £205 million (netof VAT and a payment by the Group to TXU Europe Limited) under the TXU Claim.This amount was subsequently paid to B Debt holders on 15 April 2005. On 2August 2005, the Group received a second distribution of £51 million (net ofVAT) under the TXU Claim. This amount was subsequently paid to B Debt holders on17 August 2005. On 19 January 2006, the Group received a third distribution of £55 million (netof VAT) under the TXU Claim. The third distribution has been recognised in theincome statement for the year ended 31 December 2005, and together with thefirst and second distribution, resulted in exceptional operating income of £311million for the year. The third distribution is included as a receivable balanceat 31 December 2005 and was used to make a prepayment of the Group's Bridge loanfacility on 23 January 2006. At the time of approving the financial statements the Group had a further £26million (including VAT) outstanding under the TXU Claim. The directors havereasonable expectations that the Group will receive repayment of this amountbroadly in full by early 2007. Liquidity and Capital Resources Net debt reduced to £462 million in 2005 from £1,208 million in 2004. The mainreasons for the reduction were the improvement in gross margin, receipt ofdistributions from the TXU Claim and the exchange of debt for equity as part ofthe Refinancing and Admission. Cash and cash equivalents stood at £88 million on 31 December 2005 compared with£38 million on 31 December 2004. The increase in cash and cash equivalents isanalysed in the table below. Analysis of Cash Flows Year ended 31 December 2005 2004 £ million £ million Net cash 348.5 17.1generated fromoperatingactivitiesNet cash used in (25.0) (13.7)investingactivitiesNet cash (used (273.2) 0.5in)/ generatedfrom financingactivities Net increase in 50.3 3.9cash and cash equivalents (1) (1) For the purposes of the cash flow statements, cash and cash equivalentsexcludes amounts held in escrow as at 31 December 2005 and in debt servicereserve accounts as at 31 December 2004. The movements in these acounts areincluded as a component of net cash generated from operating activities. Net cash generated from operating activities was £349 million in the year ended31 December 2005, compared to £17 million for the corresponding period in 2004,an increase of £332 million. The increase includes the first and seconddistributions received in 2005 under the TXU Claim of £256 million, as well asthe impact of improved business performance, gross margin having increased by£150 million in 2005. These items were partially offset by an increase ininterest paid of £66 million, which includes payment of previously deferredinterest of £25 million as well as £23 million related to the termination ofinterest rate swap contracts on Refinancing and Admission. Net cash used in investing activities was £25 million in the year ended 31December 2005, compared to £14 million for the corresponding period in 2004.This reflected higher levels of capital expenditure in 2005. Net cash used in financing activities was £273 million in the year ended 31December 2005, compared to net cash generated from financing activities for thecorresponding period in 2004 of £0.5 million. 2005 includes repayment ofborrowings prior to the Refinancing and Admission of £268 million, whichcomprises repayment of B Debt of £256 million funded out of the first and seconddistributions under the TXU Claim, as well as a prepayment of £12 million of A1Debt on 30 June 2005. Also included in 2005 is repayment of borrowings onRefinancing and Admission of £583 million, which comprises A1 and B Debtrepayment at par of £388 million and £82 million respectively, as well as A2cash consideration of £112 million. These debt repayments were partially met bynew debt issued on Refinancing and Admission of £577 million. Reflecting the above factors, cash and cash equivalents increased by £50 millionin the year ended 31 December 2005, compared to £4 million for the correspondingperiod in 2004. Cash and cash equivalents was £88 million at 31 December 2005,compared to £38 million at 31 December 2004. Drax's policy is to investavailable cash in short term bank deposits. Capital Resources On 15 December 2005 the Group's existing debt was replaced by new debtfacilities comprising a £500 million 5 year amortising Term loan facility, a£200 million letter of credit facility, a £100 million revolving creditfacility, and a £77 million Bridge loan facility. The Term loan facility issecured on a pari passu basis with the letter of credit facility and therevolving credit facility and any other permitted secured indebtedness. TheGroup's debt is guaranteed and secured directly by each of the principalsubsidiaries of the Company and also by the Company. Standard & Poor's RatingsGroup ("S&P") has assigned a BBB senior secured debt rating with a recoveryrating of "1" to the Term loan facility, the letter of credit facility and therevolving credit facility. Drax is required to fund a debt service reserveaccount if it does not meet the specified historic annual debt service coverratio on any of the six-monthly calculation dates, with the first calculationdate being on 31 December 2006. The letter of credit facility can be used to provide letters of credit tocounterparties or exchanges in relation to Drax's trading business. The finalmaturity date of the letter of credit facility is 15 December 2012. The Groupguarantees the obligations of a number of banks in respect of the letters ofcredit issued by those banks to counterparties of the Group. As at 31 December2005 the Group's contingent liability in respect of these guarantees amounted to£77 million (2004: £27 million). The revolving credit facility can be used to finance working capitalrequirements. It may also be used to provide letters of credit up to a maximumof £100 million or provide cash collateral, to the extent that counterparties donot accept letters of credit, up to a maximum of £20 million. The final maturitydate is 15 December 2010. The Bridge loan facility must be repaid in full by 31 December 2008. Proceedsunder the TXU Claim must be applied to repay the Bridge loan facility. Followinga third distribution under the TXU Claim on 19 January 2006, £55 million of theBridge loan was repaid on 23 January 2006 leaving a balance of £22 millionoutstanding. The third distribution has been recognised in the income statementfor the year ended 31 December 2005 and has been included as a receivablebalance at 31 December 2005. The debt which was repaid on 23 January 2006 hasbeen shown as repayable within one year at 31 December 2005. Under the new debt facilities, the group can incur further financialindebtedness up to an aggregate of £100 million so long as S&P provides writtenconfirmation that the Term loan facility will maintain an investment gradecredit rating of at least BBB- following the incurrence of the further securedindebtedness. In addition, Drax can enter into additional finance leases up toan aggregate value of £10 million. The Group can also incur overdraft and othershort term borrowings or facilities not to exceed £15 million and subject tocertain other restrictions. The new debt facilities may be prepaid withoutpenalty. Capital Expenditure Capital expenditure was £25 million in 2005 compared with £14 million in 2004.The increase in capital expenditure in 2005 was in support of fueldiversification (biomass and petcoke), environmental compliance and meetingimproved reliability and safety targets. We plan to invest £30 million in corecapital expenditure in 2006, although we continue to explore other value addedopportunities within the business. Off-balance Sheet Arrangements Other than the letters of credit referred to above, no member of the Group hasentered into any transactions with unconsolidated entities concerning financialguarantees, subordinated retained interests, derivative instruments or othercontingent arrangements that expose Drax to material continuing risks,contingent liabilities, or any other obligation under a variable interest in anunconsolidated entity that provides financing, liquidity, market risk or creditrisk support to Drax. Profit Forecast for the Year Ended 31 December 2005 The prospectus prepared in connection with the Refinancing and Admissionincluded a forecast of EBITDA, profit before interest and tax ("OperatingProfit"), and net profit before interest expense and tax (together ''theForecast'') for the year ended 31 December 2005. The basis of preparation and principal assumptions for the Forecast are set outon pages 154 and 155 of the prospectus. The assumptions included that theForecast was based on average prices of electricity and coal prevailing over thefive days up to and including 21 October 2005 and it was assumed that therewould be no change in the future prices of electricity and coal. In addition,following the completion of a structured contract with EDF Trading Limited inOctober 2005, the prospectus noted that the Group had substantially fixed thecost of CO2 emissions allowances for 2005. The following table provides a comparison of the Forecast to the actual resultsfor the year ended 31 December 2005 and also compares forecast and actual EBITDAexcluding exceptional items and unrealised losses on derivative contracts. Year ended 31 December Forecast Actual Variance £ £ £ million million million EBITDA - before exceptional items and unrealised 220 239 19losses on derivative contracts Exceptional credit related to termination of TXU 275 330 55Contract and financial restructuringLTIP expenses arising from cash and share-based (38) (38) -payment transactionsEstimated fees and expenses of the Refinancing (27) (29) (2)and AdmissionUnrealised losses on derivative contracts (119) (117) 2 EBITDA - after exceptional items and unrealised 311 385 74losses on derivative contractsDepreciation and amortisation (32) (31) 1Operating profit 279 354 75Interest income (1) 5 6 1Net profit before interest expense and tax 284 360 76 (1) Interest income excludes a credit of £18 million included in interestreceivable in respect of previously recognised unrealised losses on interestrate swap contracts terminated on Refinancing and Admission. This credit isoffset by a charge of £23 million included in interest payable representing thecash cost of terminating the swap contracts. EBITDA before exceptional items and unrealised losses on derivative contractswas £19 million higher than forecast largely due to an improvement ofapproximately £17 million in gross margin, principally reflecting higherelectricity prices captured for November and December compared to market priceson 21 October 2005, and increased generation as a result of lower than forecastforced outages for the final quarter of 2005. The significant increase in EBITDAafter exceptional items and unrealised losses on derivative contracts is largelydue to the improvement in gross margin noted above and £55 million ofexceptional operating income arising from the third distribution under the TXUClaim, received on 19 January 2006. As previously noted, the third distributionhas been recognised in the income statement for the year ended 31 December 2005. Distribution Policy The Board has established a distribution policy which recognises Drax's exposureto commodity markets and comprises two elements. The Board intends that Drax will pay a stable amount (£50 million) by way ofordinary dividends each year (the base dividend). The base dividend willcomprise an interim dividend and a final dividend and it is expected that theinterim dividend will represent approximately one third of the total anticipatedbase dividend for each year. Drax expects to pay its first interim dividend forthe half year ending 30 June 2006 in Autumn 2006. In addition to the base dividend, substantially all of any remaining cash flowsubject to the availability of reserves and after making provision for debtpayments, debt service requirements (if any), capital expenditure, and otherexpected business requirements will be distributed to shareholders. Asignificant cash surplus is expected to arise in 2006. The amount will bedependent on a number of factors including commodity prices and plantperformance. Work has commenced to identify the most appropriate method forreturning surplus cash to shareholders and it is expected that the proposedmethod of return will be advised at the company's AGM in May 2006 and that thiswill be followed by an indication of the likely range of distribution, timingand shareholder approval process in a Trading Update given at the end of June. Consolidated income statements Years ended 31 December Notes 2005 2004 £'m £'mContinuing operationsRevenue 928.6 624.1Fuel costs (539.5) (384.7) Other operating expenses excluding (180.9) (186.9)exceptional items Other exceptional operating income 2 329.9 - Other exceptional operating expenses 2 (66.6) -Total other operating 82.4 (186.9)income / (expenses) Other income - 2.5 Unrealised losses on (117.0) -derivative contracts Operating profit 354.5 55.0 Interest payable and (114.4) (101.2)similar charges Interest receivable 23.5 4.6 Profit / (loss) before tax 263.6 (41.6) Tax credit 3 18.8 35.1Profit / (loss) for the year attributable 282.4to equity shareholders from continuingoperations (6.5) Earnings per share from continuingoperations expressed in pence per share- Basic and diluted 4 98.0 (2.4) The results above relate to the continuing operations of the Group. Consolidated statements of recognised income and expense Years ended 31 December Notes 2005 2004 £'m £'m Profit / (loss) for the year 282.4 (6.5)Actuarial losses on defined benefit (8.2) (6.1)pension schemesDeferred tax on actuarial losses ondefined benefit pension schemes 3 2.5 1.8Initial recognition of netmark-to-market liability on adoptionof IAS 32 and IAS 39 (5.6) -Deferred tax recognised on adoption 3 1.7 -of IAS 32 and IAS 39Fair value losses on cash flow (109.7) -hedgesDeferred tax recognised on fairvalue losses on cash flow hedges 3 32.9 -Net losses not recognised in income (86.4) (4.3)statementTotal recognised income / (expense)for the year attributable to equityshareholders 196.0 (10.8) Consolidated balance sheets As at 31 December Notes 2005 2004 £'m £'mAssetsNon-current assetsProperty, plant & equipment 1,050.5 1,037.7Derivative financial 0.3 -instruments 1,050.8 1,037.7 Current assetsInventories 67.8 45.2Trade and other receivables 192.9 69.5Derivative financial 7.7 -instrumentsCash at bank and in hand 5 99.1 75.7 367.5 190.4 LiabilitiesCurrent liabilitiesFinancial liabilities:- Borrowings 6 101.4 204.7- Derivative financial 173.0 -instrumentsTrade and other payables 176.1 66.9Current tax liabilities 5.2 2.5 455.7 274.1 Net current liabilities (88.2) (83.7) Non-current liabilitiesFinancial liabilities:- Borrowings 6 460.1 1,078.6- Derivative financial 49.6 -instrumentsDeferred tax liabilities 185.3 246.7Retirement benefit 44.7 36.5obligationsOther non-current liabilities 0.7 25.8Provisions 2.0 0.5 742.4 1,388.1Net assets / (liabilities) 220.2 (434.1) Shareholders' equityIssued equity 40.7 -Share premium 420.7 0.5Merger reserve 710.8 445.1Capital reserve - 293.5Hedge reserve (76.8) -Retained losses (875.2) (1,173.2)Total shareholders' equity 7 220.2 (434.1) Consolidated cash flow statements Years ended 31 December Notes 2005 2004 £'m £'m Cash generated from operations 8 462.3 73.4Income taxes paid (2.8) (0.4)Decrease in restricted cash 5 26.9 16.9Interest paid prior to the Refinancing (57.5) (77.4)and AdmissionInterest paid on the Refinancing and 6 (86.2) -AdmissionInterest received 5.8 4.6Net cash generated from operating 348.5 17.1activities Cash flows from investing activitiesPurchase of property, plant and (25.0) (13.7)equipmentNet cash used in investing activities (25.0) (13.7) Cash flows from financing activitiesRepayment of borrowings prior to the 6 (267.6) -Refinancing and AdmissionRepayment of borrowings on the 6 (582.6) -Refinancing and AdmissionDebt issued as a result of the 6 577.0 -Refinancing and AdmissionNet proceeds on issue of ordinary - 0.5share capitalNet cash (used in) / generated from (273.2) 0.5financing activities Net increase in cash and cash 50.3 3.9equivalentsCash and cash equivalents at beginning 5 37.5 33.6of the periodCash and cash equivalents at end of 5 87.8 37.5the period Notes to the consolidated financial information 1 Basis of preparation a) General Information The consolidated financial information for Drax Group plc (the "Company") andits subsidiaries (together "the Group") set out in this preliminary announcementhas been derived from the audited consolidated financial statements of the Groupfor the year ended 31 December 2005 (the "financial statements"). Thispreliminary announcement does not constitute the financial statements. Thefinancial statements were approved by the Board of directors on 7 March 2006.The report of the auditors on the financial statements was unqualified and didnot contain a statement under Section 237 (2) or (3) of the Companies Act 1985. The Annual Report will be posted to shareholders by 7 April 2006 and will beavailable on request from the Company Secretary, Drax Group plc, Drax PowerStation, PO Box 3, Selby, North Yorkshire, YO8 8PQ. The Annual General Meetingwill be held at The City Presentation Centre, 4 Chiswell Street, London EC1Y 4UPat 11.00am on 12 May 2006. The financial statements will be delivered to theRegistrar of Companies following the Annual General Meeting. b) International Financial Reporting Standards ("IFRS") The financial statements have been prepared on the basis of all applicable IFRSincluding all International Accounting Standards ("IAS"), and all applicableStanding Interpretations Committee ("SIC") and International Financial ReportingInterpretations Committee ("IFRIC") interpretations issued by the InternationalAccounting Standards Board ("IASB") and endorsed by the EU. The financial statements are the first prepared by the Group in accordance withaccounting standards as adopted for use in the EU and as such take account ofthe requirements and options in IFRS1 "First-time Adoption of InternationalFinancial Reporting Standards" as they relate to the comparative financialinformation. In particular, in accordance with the transitional arrangements set out in IFRS1, the Group has elected not to restate the comparative financial information toshow the effect of IAS 32 "Financial Instruments: Disclosure and Presentation"and IAS 39 "Financial Instruments: Recognition and Measurement" and, as aconsequence, for the year ended 31 December 2004, financial instruments continueto be accounted for in accordance with the Group's previous policies forfinancial instruments under UK GAAP. In contrast, for the year ended 31 December2005, IAS 32 and IAS 39 have been applied. For the purposes of IAS 39, from 1 July 2005, the Group has put in placeappropriate hedge accounting documentation to enable it to achieve hedgeaccounting for a large proportion of its commodity contracts. As a result,mark-to-market movements on contracts which are now considered to be effectivehedges are recognised through the hedge reserve. For the period from 1 January2005 to 30 June 2005, mark-to-market movements on these contracts were reflecteddirectly in the income statement, as appropriate hedge documentation had notbeen put in place. c) Refinancing and Admission The Group underwent a financial restructuring (the "Refinancing and Admission")effective on 15 December 2005 which resulted in the creation of a new holdingcompany, Drax Group plc. Pursuant to the schemes of arrangement under which theRefinancing and Admission was implemented, the existing debt of the Group wassettled, partially through the issue of new debt and partially through the issueof ordinary shares in Drax Group plc. Also on 15 December 2005, Drax Group plcwas introduced to the Official List of the UK Listing Authority and its ordinaryshares commenced trading on the London Stock Exchange. Under IFRS 3 "Business Combinations", the insertion of Drax Group plc as the newholding company has been accounted for as a reverse acquisition, whereby DraxGroup Limited (being the previous Group holding company), the legal subsidiary,acquired Drax Group plc, the legal parent company. The impact of the Refinancingand Admission on the Group's debt and share capital is illustrated in notes 6and 7 respectively. Notes to the consolidated financial information 2 Other exceptional operating income and expenses Years ended 31 December 2005 2004 £'m £'mOther exceptional operating income:Income from TXU administration 310.9 -Reversal of impairment of tangible fixed 19.0 -assetsTotal other exceptional operating income 329.9 - Other exceptional operating expenses:LTIP expenses arising on cash and (37.6) -share-based transactionsRefinancing and Admission fees and (29.0) -expensesTotal other exceptional operating expenses (66.6) - Income from TXU administration Income from the TXU administration represents the first three distributionsreceived by the Group from the Administrators of TXU. Proceeds from the firsttwo distributions of £204.7 million and £51.1m (both net of VAT) weresubsequently paid to B Debt holders on 15 April 2005 and 17 August 2005respectively. The third distribution of £55.1 million (net of VAT) received on19 January 2006 has been recognised in the income statement for the year ended31 December 2005 and is included as a receivable balance at 31 December 2005.This amount was used to make a prepayment of the Group's Bridge loan facility on23 January 2006 (note 6). Reversal of impairment of tangible fixed assets During the year to 31 December 2002, the Group performed an impairment reviewfollowing the loss of its long term power purchase agreement with TXU and itsrelated income streams. This resulted in the write down of goodwill to nil, anda provision for impairment of £20.4 million against tangible fixed assets, towrite down the assets to their estimated recoverable amount. In accordance with IAS 36 "Impairment of assets", the Group assessed at eachsubsequent reporting date whether there was any indication that the impairmentloss recognised at 31 December 2002 should be reversed. As a result of theassessment performed at 30 June 2005 for the purposes of the financialinformation prepared in connection with the Refinancing and Admission, whichhighlighted significant increases in wholesale electricity prices that the Grouphas been able to achieve in its forward contractual position, the Group recordeda reversal of the tangible fixed asset impairment of £19.0 million. Thisrepresents a reversal of the total impairment loss recognised in respect oftangible fixed assets at 31 December 2002 after adjusting for depreciation. Long Term Incentive Plan ("LTIP") expenses arising on cash and share-basedtransactions Costs recognised in the income statement in relation to the Group's LTIP includeexpenses arising on share-based payment transactions of £25.2 million, expensesarising on cash-based payment transactions of £4.7 million and social securitycosts arising on share and cash-based payment transactions of £7.7 million. Refinancing and Admission fees and expenses The total costs of the Refinancing and Admission, including costs and expensesof or incidental to preparation of the Prospectus, Admission costs, registrationfees and costs of printing and distribution as well as fees and expenses relatedto the Group's new debt facilities amounted to £44.7 million. £29.0 million ofthese costs have been included within other exceptional operating expenses inthe income statement. The remaining £15.7 million has been deducted from debtand is being amortised to interest payable over the duration of the Group's newdebt facilities (note 6). 3 Taxation Years ended 31 December 2005 2004 £'m £'mTax credit comprises:Current tax (5.5) 2.3Deferred tax 24.3 32.8 18.8 35.1 Years ended 31 December 2005 2004 £'m £'mTax on items charged toequity:Deferred tax on actuarial 2.5losses on defined benefitpension schemes 1.8Deferred tax recognised 1.7 -on adoption of IAS 32 andIAS 39Deferred tax recognised 32.9 -on fair value losses oncash flow hedges 37.1 1.8 Notes to the consolidated financial information The tax differs from the standard rate of corporation tax in the UK (30% forboth years). The differences are explained below: Years ended 31 December 2005 2004 £'m £'m 263.6 Profit / (loss) before tax (41.6)Profit / (loss) before tax 79.1multiplied by rate ofcorporation tax in the UK (12.5)(30% for both years)Effects of:Adjustments in respect of (6.2) (2.3)prior periodsLTIP tax deduction (9.4) -Expenses not deductible for 2.9 -tax purposesTax effect of funding (0.8) (21.6)arrangementsOther (0.1) 1.3Tax losses utilised (84.3) -Total taxation (continuing (18.8) (35.1)operations) 4 Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. The calculation of weighted average number ofordinary shares outstanding assumes that the ordinary shares in Drax Group plcissued to the existing shareholders of Drax Group Limited on Refinancing andAdmission were in issue either at 1 January 2004 (to the extent that the relatedDrax Group Limited shares were in issue at 1 January 2004), or from the date ofissue of Drax Group Limited shares (to the extent that the related Drax GroupLimited shares were issued after 1 January 2004). The Group has no contingently issuable shares. Accordingly, there is nodifference between basic and diluted earnings per share. Reconciliations of theearnings and weighted average number of shares used in the calculation are setout below. Years ended 31 December 2005 2004Earnings attributable to equity holders of the Company 282.4 (6.5)(£'m)Weighted average number of shares (millions) 288.2 275.2Basic and diluted earnings per share (pence per share) 98.0 (2.4) 5 Cash at bank and in hand As at 31 December 2005 2004 £'m £'mCash at bank and in hand:Unrestricted cash at bank 87.8 37.5and in handDebt service reserve account - 38.2Escrow account 11.3 - 99.1 75.7 Debt service reserve account balances were restricted cash deposits which couldonly be used for the purpose of debt service under the terms of the Group'sprevious debt facilities. The escrow account represents cash paid into escrow prior to 15 December 2005with respect to certain fees and expenses related to the Refinancing andAdmission. The directors expect substantially all such fees and expenses willhave been paid out of the escrow account by 31 March 2006. Cash and cash equivalents includes the following for the purposes of the cashflow statement: As at 31 December 2005 2004 £'m £'mCash and cash equivalents:Cash at bank and in hand per 99.1 75.7aboveLess: debt service reserve (11.3) (38.2)and escrow accounts 87.8 37.5 Notes to the consolidated financial information 6 Financial liabilities - borrowings As at 31 December 2005 2004 £'m £'mCurrent:Term loan 46.3 -Bridge loan 55.1 -B Debt - 204.7 101.4 204.7 As at 31 December 2005 2004 £'m £'mNon-current:Term loan 438.2 -Bridge loan 21.9 -A Debt - 944.9B Debt - 133.7 460.1 1,078.6 Following a prepayment of £11.7 million on 30 June 2005, £388.2 million of A1Debt principal and £12.8 million of interest was outstanding prior to theRefinancing and Admission. Also prior to the Refinancing and Admission, £545.1million of A2/A3 principal and £22.2 million of interest was outstanding.Following partial repayments of £204.7 million on 15 April 2005 after the firstdistribution from the Administrators of TXU and £51.1 million on 17 August 2005after the second distribution, £82.4 million B Debt principal and £28.1 millionof interest was outstanding prior to the Refinancing and Admission. Refinancing and Admission Pursuant to the schemes of arrangement under which the Refinancing and Admissionwas implemented, the Group's debt was restructured on 15 December 2005. Theparticular elements of the restructuring relating to the Group's debt areillustrated below: As at 15 December 2005 Principal Interest £'m £'mPrevious debtfacilities:A1 Debt prepayment 388.2 12.8B Debt prepayment 82.4 28.1A2 Debt cash 112.0 -considerationA2/A3 Debt interest - 22.2paymentInterest rate swap termination - 23.1payment 582.6 86.2New debt facilities:Term loan 500.0 -Bridge loan 77.0 - 577.0 - Outstanding principal and interest in relation to A1 and B Debt was repaid infull. In addition, interest rate swap contracts with a notional value of £400million, principally related to A1 Debt, were terminated. A2/A3 Debt holders contributed their A2/A3 Debt in exchange for cash andordinary shares of 10 pence each in Drax Group plc. In total, A2 Debt holdersreceived cash consideration of £112.0 million and A2/A3 Debt holders received124,164,221 ordinary shares of 10 pence each in Drax Group plc. Outstandinginterest on A2/A3 Debt was repaid in full. The Group settled the remaining nominal value of A2/A3 Debt, after deduction ofthe A2 cash consideration, of £433.1 million in exchange for issuing the124,164,221 ordinary shares in Drax Group plc. The directors determined that thenominal value of A2/A3 Debt approximated its fair value by reference to theterms of the debt, principally the ability to prepay at nominal value. Thenominal value of shares issued of £12.4 million was therefore lower than thefair value of the asset acquired of £433.1 million. Under section 130 of theCompanies Act 1985, the shares are treated as issued fully paid up and thedifference of £420.7 million is recorded as share premium (note 7). Notes to the consolidated financial information The total cash outflows related to the Refinancing and Admission were partiallyfunded by a new Term loan of £500.0 million and a Bridge loan of £77.0 millionas described below. The remaining cash outflows, including the payment of feesand expenses (note 2), were principally funded by cash generated fromoperations. Borrowings at 31 December 2005 Borrowings at 31 December 2005 consisted of bank loans held by the Company'ssubsidiary undertaking Drax Finance Limited as follows: As at 31 December 2005 Borrowings Deferred Net before finance borrowings deferred costs finance £'m costs (note 2) £'m £'m Term loan 500.0 (15.5) 484.5Bridge loan 77.0 - 77.0Total borrowings 577.0 (15.5) 561.5Less current portion of (105.1) 3.7 (101.4)debtNon-current borrowings 471.9 (11.8) 460.1 The Term loan is subject to a fixed amortisation profile beginning on 30 June2006 and ending on 31 December 2010. The Bridge loan has a first priority overthe TXU Claim and the proceeds thereof, which are its primary source ofrepayment. Following a third distribution under the TXU claim on 19 January2006, £55.1 million of the Bridge loan was repaid on 23 January 2006. The thirddistribution has been recognised in the income statement for the year ended 31December 2005 and has been included as a receivable balance at 31 December 2005.The debt which was repaid on 23 January 2006 has been shown as repayable withinone year at 31 December 2005. The Bridge loan has no fixed amortisation profile.Any outstanding principal balance falls due for payment on 31 December 2008. 7 Shareholders' funds and statement of changes in shareholders' equity Share Share Merger Capital Hedge Retained Total capital premium reserve reserve reserve losses £'m £'m £'m £'m £'m £'m £'mAt 1 January 2004 - - 445.1 293.5 - (1,162.4) (423.8)Loss for the period - - - - - (6.5) (6.5)Actuarial losses ondefined benefitpension schemes - - - - - (6.1) (6.1)Deferred tax onactuarial losses ondefined benefit - - - - - 1.8 1.8pension schemesLTIP - proceeds on - 0.5 - - - - 0.5shares issuedAt 31 December 2004 - 0.5 445.1 293.5 - (1,173.2) (434.1)Profit for the period - - - - - 282.4 282.4Actuarial losses on - - - - - (8.2) (8.2)defined benefitpension schemesDeferred tax on - - - - - 2.5 2.5actuarial losses ondefined benefitpension schemesInitial recognition of - - - - - (5.6) (5.6)net mark to marketliability on adoptionof IAS 32 and 39Deferred tax - - - - - 1.7 1.7recognised on adoptionof IAS 32 and 39Fair value losses on - - - - (109.7) - (109.7)cash flow hedgesDeferred tax - - - - 32.9 - 32.9recognised on fairvalue losses on cashflow hedgesShare capital issued 40.7 - - - - - 40.7on Refinancing andAdmissionShare premium arising - 420.7 - - - - 420.7on Refinancing andAdmissionReverse acquisition - (0.5) (27.8) - - - (28.3)adjustments: - Share for shareexchange- Transfer of capital - - 293.5 (293.5) - - -reserveLTIP - credit to - - - - - 25.2 25.2equity for share-basedpayment (note 2)At 31 December 2005 40.7 420.7 710.8 - (76.8) (875.2) 220.2 Notes to the consolidated financial information 8 Cash flow from operating activities Years ended 31 December 2005 2004Continuing operations £'m £'m Profit / (loss) for the 282.4 (6.5)yearAdjustments for:Interest payable and 114.4 101.2similar chargesInterest receivable (23.5) (4.6)Tax credit (18.8) (35.1)Depreciation 31.0 33.0Reversal of impairment of (19.0) -tangible fixed assetsLoss on disposal of 0.2property, plant andequipment 2.0Unrealised losses on 117.0 -derivative contractsLTIP - credit to equity for 25.2 -share-based paymentsOperating cash flows before movement 508.9 90.0in working capitalChanges in workingcapital:Increase in inventories (22.6) (9.8)Increase in receivables (123.4) (9.6)Increase in payables 99.8 1.0Increase in pensions - 1.4(Decrease) / increase in (0.4) 0.4provisionsCash generated from 462.3 73.4operations END This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Drax