4th Mar 2008 07:02
Drax Group PLC04 March 2008 4 March 2008 DRAX GROUP PLC (Symbol: DRX) PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 - PART TWO Introduction During 2007, we continued to deliver sound operational and financialperformance, the latter despite dramatic price changes across the commoditymarkets which are critical to our business. As a result of an exceptionally warmWinter the electricity wholesale price weakened which, together with rising coaland freight prices, reduced the margins previously available to coal-firedgenerators. These, amongst other factors, contributed towards an EBITDA of £506million, some £77 million lower than in 2006. In 2007, we effected our policy toreturn surplus cash to shareholders through a combination of an ordinarydividend, special dividend and a share buy-back, together totalling £160million. Our strategy is to grow shareholder value by exploiting the strategic andcommercial value of Drax Power Station and by deploying and developing our corecompetencies to deliver additional value through fuel diversification and carbonabatement. The strategic priorities we set ourselves for the year focused ourattention on the areas of trading, production and investment in improvingexisting plant performance and increasing fuel optionality. In 2007, we made good progress with our two major investment programmes toupgrade the high and low pressure turbines of all six generating units and toincrease significantly our renewable biomass throughput; both importantlycontributing to our commitment to reduce our emissions of carbon dioxide ("CO2")and helping to combat climate change. We continued to execute with success our trading strategy, progressively hedgingour output whilst targeting market or better dark green spreads and retainingbalanced market exposure. Throughout the year, we maintained our focus ondelivering added value from our trading capability. This year saw us enter intoour first power option, first ship charter and first Kyoto instrument trade. Ontop of these we have made full use of the flexibility and reliability of theplant through taking advantage of opportunities presented by the ancillaryservices market including, for the first time, selling some forward contractsfor frequency response services. We achieved good results on plant reliability and availability and once againdelivered a strong performance which ranked us highly amongst our sector peers.We undertook two major planned maintenance outages during the year along with asubstantial capital expenditure investment programme. Our safety record comparesfavourably with that of our peers and international benchmarks. In 2007, oursafety programmes generally delivered sound performance, but to our regret therewas a fatality following an incident at our site involving a contractorundertaking some civil works. Delivering the highest standards in safetymanagement remains a key area of focus and is central to our operatingphilosophy. Trading overview Our practice is to sell approximately one-third of our power in the near-termmarkets and the remaining two-thirds in the liquid forward markets. We broadlymatch our power sales with corresponding carbon and fuel positions. As a result,annual profitability is influenced by past, present and future commodity prices. Commodity prices at the end of 2007 were dramatically different to those at thestart of the year and within-year volatility was very high. The three commodityprices that most strongly influence the electricity wholesale market of GreatBritain continue to be international traded prices for oil, coal and carbon.During the year there was a 70% rise in international crude oil prices. In thesame period, and in contrast to 2006 which saw relatively stable coal prices,international coal prices increased by 90%. The price for carbon under the EUEmissions Trading Scheme ("EU ETS") fell close to zero in 2007 whilst tradedprices for carbon for delivery in Phase II of the scheme, which covers2008-2012, rose by 45%. For most of the year, gas-fired generation plant was the price setting plant forthe electricity wholesale market of Great Britain with power prices generallymoving with changes in domestic gas wholesale prices. Gas prices were strongly influenced by international oil prices but alsoaffected by weak Winter demand levels due to mild weather which, when combinedwith increased supplies of gas into Great Britain and high storage levels,resulted in some low prices in the first half of the year. The margins forcoal-fired generation were sustained at attractive levels for much of the yearexcept at times when the downward pressure from gas prices, combined with highinternational coal prices, depressed margins. We continued to enjoy good liquidity in the traded electricity market out to2012. This enabled us both to manage effectively our coal and carbon positionsin line with our trading strategy and to increase the volume of our forwardsales. Compared to 2006, we have modestly increased our total forward saleswhich, given the absence of liquidity in the market post 2012, is a significantachievement. Over the last two years we have been working hard to diversify and to optimiseour fuel sourcing. We were particularly pleased to increase the diversity of oursupplies of indigenous coal through contracts with local suppliers, Hargreaves(UK) Services Limited and Powerfuel plc. We now have the capability to burn a wide range of coals at Drax, bringing withit the benefits of security of supply and preparedness for the challenges weface now that we are operating under the tighter environmental limits of theLarge Combustion Plant Directive ("LCPD") that came into force at the start of2008. Production overview Throughout the year we maintained our focus on achieving leading performances inthe areas of health and safety, environmental compliance and plant reliability.Specifically, in delivering against our production strategy we implementedselective investment to improve plant safety performance, improve plantefficiency, and maintain high availability and reliability compared to oursector peers. Through improved work processes we targeted better productivityand we worked on delivering the capability to burn a wide range of fuels,including a variety of coals, biomass materials and petcoke. As we entered 2007, we were well aware of the significant challenge we faced inmanaging our health and safety performance amidst two major planned outages andan increased level of site project work, which together represented an increaseof over 30% in the hours worked by our production teams and contractors comparedto 2006. Although our lost time injury rate worsened compared to 2006, we maintained themuch improved performance levels achieved in 2005. This demonstrates well thatthe systems we have implemented over the last three years are becoming embeddedin the health and safety philosophy and are proving effective as we increase theintensity of work at the plant. The availability and reliability of our plant is key to delivering shareholdervalue. We have set ourselves a challenging, long-term target of 4.5% for Winterforced outages. During the critical, high margin Winter months of 2007 we achieved better thanour long-term target by delivering a forced outage rate of 4.2%. The forcedoutage rate for the full year at 6.9% was higher than that of 2006 due largelyto taking advantage of low margin Summer periods to conduct elective outageswhich contributed to the calculation of our published forced outage rates. Theseoutages allowed additional plant inspections and repair work which have providedus with a high degree of confidence in maintaining plant integrity. Investment overview Good progress was made on the two major investment projects announced at theturn of the year. Economic carbon abatement along with fuel diversification arekey elements of our strategy to grow shareholder value. We believe that there isstrategic value in our environmental leadership position in the coal-firedsector and, whilst holding the position of the most efficient coal-firedgenerator in the UK with the lowest CO2 emissions per unit of output, we strivefor further improvement. Our decisions to invest up to £100 million to upgradeour high and low pressure turbines and to set ourselves the challenging targetof producing 10% of our output from renewable biomass by the end of 2009 weredriven by our will and commitment to economically reduce our emissions of CO2.On completion, these projects will save over three million tonnes of CO2 eachyear in support of our strategic priorities. In the third quarter of the year, during the second major planned outage we wereable to fast track the installation of a high pressure turbine module on one ofour units. This enabled us to gain valuable engineering experience, along withsome modest efficiency improvements, ahead of the upgrade of two high pressureand six low pressure turbines during the major outages on two of our generatingunits planned for 2008. Our dedicated renewables co-firing project team have made good progress infinalising the design of the new biomass handling and direct injectionfacilities required to meet our 10% co-firing objective. In February 2008, wewere granted planning approval by Selby District Council for the new facilities.Following a competitive tender process, we are on schedule to executeEngineering, Procurement and Construction contracts for the co-firing facilitiesin the second quarter of 2008, with building works expected to commence in thesecond half of 2008. The facilities are planned to come on line during thecourse of 2009, with full completion being at the end of 2009, in line with ourtarget. In 2007, we co-fired close to 200,000 tonnes of renewable biomass and madesignificant progress with sourcing and test burning different biomass materials.During the year there was high price volatility in the agricultural marketsdriven particularly by the rapeseed and grain markets. UK prices for rapeseedrape and wheat both increased by over 75% in the year. The higher rapeseedprices have made the economics of the proposed development of a rapeseedcrushing plant less attractive, and so we have not progressed this project. Theprice increases have also had an adverse impact on some of the growth momentumof our local perennial energy crop programmes as farmers increased annual foodcrop acreage to take advantage of market opportunity. Drax remains committed to supporting and encouraging the growth of UK energycrops, although the significant rise in agricultural prices demonstrates thevalue of the diverse sourcing strategy for biomass which we have been pursuing.It is our strategy to secure biomass contracts from both domestic andinternational sources across the spectrum of energy crop and non-energy cropproducts. As part of this strategy, we are placing particular emphasis onenvironmental sustainability in our sourcing plans. In the last year we also introduced new systems and procedures for controllingand managing projects. This is central to the successful execution of both thestrategic projects detailed above and the large number of smaller projects thatwe have been implementing across the business, most notably plant enhancementprojects which deliver environmental, efficiency and reliability improvements.These improved management systems supported our execution, within budget and ona timely basis, of projects included in the £83 million incurred under ourcapital expenditure investment programme in 2007. Regulatory and market outlook The Government published its Energy Bill on 10 January 2008 setting out policyproposals in response to the UK's long-term energy challenges of tacklingclimate change and ensuring secure, clean and affordable energy. The Energy Bill is consistent with the conclusions of the May 2007 Energy WhitePaper which confirmed that coal "will continue to play a significant role inglobal electricity generation for the foreseeable future", recognising both theglobal abundance of coal and other important security of supply benefits thatcoal brings to the energy mix, such as its ability to respond quickly to changesin demand. We have long advocated the continuing need for coal in the energymix, but we have always acknowledged that there can only be a place for coal,and other fossil fuels, if we address the environmental challenge. The UK currently generates 4% of its electricity from renewable sources. TheEnergy Bill provides for a strengthening of the Renewables Obligation ("RO") todrive greater and more rapid deployment of renewables. This accords with the EUobjectives and the proposed target set by the EU for the UK of 15% renewableenergy by 2020. The consequent growth in renewable generation will increase thediversity of the UK's energy mix and lower CO2 emissions from the electricitysector. There is clear recognition of the contribution that renewable biomass materialscan make towards the UK's renewables target. The new RO regime should supportthe growth of both standalone biomass power plants and co-firing biomass with coal. In April 2007, we saw the removal of caps and constraints on energy crop co-firing biomass whilst the new regime provides for the doubling of the volumeof permitted co-firing of non-energy crop biomass. We are already committed to substantially increasing the proportion of power wegenerate from biomass through co-firing with coal. We believe that lessonslearnt in both understanding the technology and, more importantly, in sourcingand logistics when combined with the incentives through the RO may presentadditional opportunities for creating additional shareholder value and fueldiversification. The Government's energy policy recognises that substantial investment in newgeneration capacity will be needed to address the emerging capacity gap left byretiring coal, oil and nuclear power stations and to meet anticipated increasesin electricity demand. The requirements of the EU's LCPD, which came into effect on 1 January 2008,will bring about the closure of some 8.5GW of coal-fired capacity and some 3.4GWof oil-fired capacity between 2012 and the end of 2015. In addition, around 7GWof nuclear capacity is scheduled to close between now and 2020. Although some ofthe capacity gap may be addressed by actions on the demand-side, it isnevertheless expected that without new plant build, in the near term, the powermarkets will tighten. The ensuing market dynamics are likely to be beneficial tostrategic generators such as Drax Power Station, with its proven technology andexpected generation life, and may also present opportunities. In January 2008, the EU outlined its proposals for the EU ETS beyond 2012. It isproposed that the scheme will be extended to a third phase covering the period2013-2020. The cap on traded emissions by 2020 will be 79% of traded emissionsin 2005 with a linear reduction of 1.74% per annum. It is proposed that all ofthe allowances for the electricity sector will be auctioned. We support a tradedprice for carbon but we oppose full auctioning for the electricity sector inPhase III. We consider that to introduce full auctioning from 2013 is likely to prove aprecipitous move which could be destabilising for the electricity sector andcould lead to the early closure of less efficient plant at a time when thereserve capacity margins across the EU are forecast to reach critically lowlevels. The proposals now must be approved by both the Council of the EU and theEuropean Parliament in order to become law. Our people It is the commitment and enthusiasm of our people that have secured the progressthat we have made during 2007, and we recognise only too well their contributionto delivering against our strategy and delivering value to our shareholders. In keeping with our significant developments made throughout the year, we haveincreased our headcount by around 10%. As in the previous year, we continued torecruit specialists with the skills and experience to take our business forward.In particular, the areas of business development, IT, risk management andtrading have seen the largest growth; it is these areas that will enable us toexplore and exploit new opportunities. We placed particular emphasis on the development of our people during 2007,ensuring that all development needs identified during our appraisal process wereaddressed. Through a tailored competency-based management development programmefor all staff with supervisory responsibilities we targeted all first linesupervisors and during 2008 our plans are to target all our staff with aleadership role. The target set at the outset of the year for training eventswas exceeded and we shall be assessing the effectiveness of the developmentprogramme initiated as part of the 2008 performance appraisals. Looking ahead During the last two years our primary focus has been on delivering the strategyfor the business which we laid out on listing the Company in December 2005. Thisfocused on the strong alignment between our trading and production strategiesand the achievement of leading performance in both areas. We believe that wehave successfully delivered this. Our strategic focus is now on producing value growth for our shareholders whilstmaintaining leading performances in trading and production. We plan to increaseshareholder value by developing our core competencies to deliver significantfuel diversification and carbon abatement. In the near term this will be throughthe successful implementation of our existing two major strategic projects,upgrading our turbines and biomass co-firing. We believe that our biomass handling and sourcing capabilities are areas ofemerging competence which have the potential to produce significant value. Wetherefore intend to further develop our biomass procurement and handlingcapability with a view to potentially expanding significantly our generationfrom renewable biomass fuels. This would achieve both additional carbonabatement and increased fuel diversification. We also believe that the purchase of Kyoto instruments in place of CO2 emissionsallowances could provide significant value potential for Drax, particularly inPhase III of the EU ETS when there should be greater opportunity for thesetrades, provided that there is a new international agreement on greenhouse gasemissions. We will ensure that we are well placed to capture this valuepotential and will work to further build our Kyoto instrument trading andorigination capabilities. All the analysis that we have done reinforces our view that the electricitywholesale market of Great Britain will provide increasing returns to availablecapacity as the retirement of some of the older plant reduces the margin ofinstalled capacity above system demand. This will be positive for Drax and webelieve that our strategic position and focus will give us the ability andopportunity to deliver value growth to our shareholders relative to thecommodity markets in which we operate. Results of operations Year ended Year ended 31 December 2007 31 December 2006Continuing operations £m £m Total revenue 1,247.4 1,387.0Fuel costs(1)Fuel costs in respect of generation (470.6) (547.5)Costs of power purchases (75.5) (93.8) (546.1) (641.3) Gross profit 701.3 745.7Other operating expenses excluding depreciation,amortisation, unrealised gains on derivative contracts and exceptional items(2) (195.7) (162.7) EBITDA(3) 505.6 583.0 Depreciation and amortisation (43.7) (34.9)Other operating income - exceptional credit 6.2 19.0Unrealised gains on derivative contracts 3.3 90.8 Operating profit 471.4 657.9Interest payable and similar charges (34.3) (37.1)Interest receivable 11.4 13.4 Profit before tax 448.5 634.2Tax charge- Before impact of reduction in tax rate on (113.4) (170.7)deferred tax- Impact of reduction in tax rate on deferred tax 17.9 - (95.5) (170.7) Profit for the year attributable to equity shareholders 353.0 463.5 Pence per share Pence per shareEarnings per share (4) - Basic and diluted 99 116 Notes: (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 salescommitments. (2) Other operating expenses excluding depreciation, amortisation, unrealisedgains on derivative contracts and exceptional items principally includesalaries, maintenance costs, grid connection and use of system charges("TNUoS"), balancing services use of system charges ("BSUoS") and businessrates. (3) EBITDA is defined as profit before interest, tax, depreciation andamortisation, exceptional items and unrealised gains on derivative contracts. (4) During the year the Group has amended the calculation of earnings per shareto reflect share consolidations associated with special dividends from the dateof the consolidation only. Comparatives have been amended accordingly (see note7 to the consolidated financial information below). Total revenue for the year ended 31 December 2007 was £1,247 million compared to£1,387 million in 2006. Power sales were £1,204 million for the year ended 31December 2007 compared to £1,327 million in 2006, reflecting a fall in ouraverage achieved electricity price (see Price of electricity) and a reduction innet power sold to 24.9TWh, compared to 25.2TWh in 2006. In addition to power sales, total revenue also includes income from theprovision of ancillary services, the sale of by-products (ash and gypsum), andthe sale of ROCs, LECs and sulphur dioxide ("SO2") emissions allowances. In theyear ended 31 December 2007, these revenues were £43 million compared to £60million in 2006, reflecting the timing of ROC sales, partially offset by higherancillary services income. Although we burnt more biomass in 2007 compared to2006, a proportion of the associated ROC sales will not be made until 2008,which has resulted in a reduction in ROC revenues in 2007 when compared to 2006. Fuel costs in respect of generation during the year ended 31 December 2007 were£471 million, compared to £548 million in 2006. The decrease was primarily dueto the impact of lower prices for CO2 emissions allowances and lower generation,partially offset by an increase in the cost of coal and other fuels (see Priceof coal and other fuels and CO2 emissions allowances). We purchase power in the market when the cost of power in the market is belowour marginal costs of production in respect of power previously contracted forgeneration and delivery by us, and to cover any shortfall in generation. Thecosts of power purchased are treated as fuel costs. For the year ended 31December 2007, the cost of purchased power decreased to £76 million compared to£94 million in 2006, primarily due to lower market prices for electricity. Gross profit for the year ended 31 December 2007 was therefore £701 millioncompared to £746 million in 2006. Other operating expenses excluding depreciation, amortisation, unrealised gainson derivative contracts and exceptional items were £196 million for the yearended 31 December 2007 compared to £163 million in 2006. The increase of £33million includes significantly higher maintenance costs, with two unitsundergoing a major planned outage in 2007 compared to just one unit in 2006. Wealso experienced an increase in business interruption insurance costs due tohigher margins in 2006 and the first six months of 2007, and we havesignificantly increased our expenditure on site security following the Camp forClimate Action in August 2006. We also incurred higher grid connection and useof system charges ("TNUoS"). Increased operating expenses also includes a one-time payment of £3 million madein April 2007 (equating to £5,000 per eligible employee) in order to secure atwo-year pay agreement with Trades Unions, following expiry of the previoustwo-year pay agreement. The pay award recognised the importance of retaining askilled workforce at a time of competition for those skills locally and in theworkplace at large, and recognised that in a number of areas Drax had fallenbehind market rates. In addition, our average monthly headcount increased to 658in 2007 compared to 619 in 2006, primarily as a result of planned investments inthe business. EBITDA (defined as profit before interest, tax, depreciation, amortisation,exceptional items and unrealised gains on derivative contracts) for the yearended 31 December 2007 was accordingly £506 million compared to £583 million in2006. Depreciation and amortisation for the year ended 31 December 2007 was £44million compared to £35 million in 2006. The increase primarily reflectedaccelerated depreciation of plant and equipment we expect to replace under ourcapital expenditure investment programme. Exceptional operating income of £6 million for the year ended 31 December 2007related to our final distribution under the TXU Claim received in April 2007,bringing the total received to date to £336 million, representing full recoveryof the claim. Income recognised under the claim in the year ended 31 December2006 amounted to £19 million. All amounts are net of VAT and costs, withproceeds used to prepay debt secured against the claim, which has now beenrepaid in full. The Group recognises unrealised gains and losses on forward contracts which meetthe definition of derivatives under IAS 32, IAS 39 and IFRS 7, the InternationalAccounting Standards in respect of derivatives and financial instruments. Theunrealised gains and losses principally relate to the mark-to-market of ourforward contracts for power yet to be delivered. Unrealised gains on derivative contracts recorded in the income statements were£3 million for the year ended 31 December 2007 compared to £91 million in 2006.The unrealised gains primarily represent the unwinding of unrealised lossesoriginally reflected in the income statement in 2005, prior to the Groupimplementing hedge accounting under IAS 39, as power was delivered in accordancewith underlying derivative contracts. Mark-to-market movements on a large proportion of our commodity contracts,considered to be effective hedges under IAS 39, have been recognised through thehedge reserve, a component of shareholders' equity in the balance sheet. Theunrealised losses recognised through the hedge reserve in the year ended 31December 2007 were £584 million compared to unrealised gains of £468 million in2006. Movements between the balance sheet position reported at 31 December 2007 and 31December 2006 are mainly the result of unwinding mark-to-market movementsrelating to power delivered during 2007, and recording mark-to-market movementson power yet to be delivered. As a consequence of the decline in power pricesover the last six months of 2006, the average price relating to power which hadbeen contracted but had yet to be delivered at 31 December 2006 wassignificantly higher than market prices at that time, resulting in therecognition of a net unrealised gain of £344 million in the balance sheet. Bycomparison, following increases in power prices over the last quarter of 2007,the average price relating to power which had been contracted but had yet to bedelivered at 31 December 2007 was lower than market prices at that time,resulting in the recognition of a net unrealised loss of £237 million in thebalance sheet. Operating profit for the year ended 31 December 2007 was £471 million comparedto £658 million in 2006. Interest payable and similar charges for the year ended 31 December 2007 were£34 million compared to £37 million in 2006, as a result of lower debt levelspartially offset by the impact of higher interest rates. The tax charge for the year ended 31 December 2007 was £96 million, compared to£171 million in 2006. The tax charge for 2007 includes a one-off credit of £18million to reflect the impact on deferred tax of a reduction in the rate of UKcorporation tax from 30% to 28% with effect from 1 April 2008. Reflecting the above factors, profit attributable to equity shareholders for theyear ended 31 December 2007 was £353 million compared to £464 million in 2006,and basic and diluted earnings per share was 99 pence compared to 116 pence in2006, as calculated in accordance with note 7 to the consolidated financialinformation below. Key factors affecting the businessPrice of electricity The table below shows the average achieved electricity price realised for theyears ended 31 December 2006 and 31 December 2007, together with the marketclosing price on the last day each season illustrated was traded as a product. Year ended Year ended 31 December 31 December 2007 2006 Average achieved price (£/MWh) 45.3 48.9 2007 2006 Summer baseload market close (£/MWh) 23.0 45.5 2007/2008 2006/2007 Winter baseload market close (£/MWh) 40.4 51.7 Average achieved price for the year ended 31 December 2007 was £45.3 per MWhcompared to £48.9 per MWh in 2006. Average capture price (being the priceattained prior to Balancing Mechanism activity) for the year ended 31 December2007 was £44.2 per MWh compared to £47.7 per MWh in 2006. The forward baseloadpower prices for Summer 2008 and Winter 2008/2009 were approximately £54.2 perMWh and £61.2 per MWh respectively as at 22 February 2008. The fall in average achieved price primarily reflected the impact from forwardsales contracts secured in the last six months of 2006 and early in 2007, duringwhich time power prices were generally falling relative to the levels of late2005 and early 2006, for power now delivered in 2007. Price of coal and other fuels We burnt approximately 9.8 million tonnes of coal in the year ended 31 December2007 compared to approximately 10.2 million tonnes in 2006. This coal waspurchased from a variety of domestic and international sources under either fixedor variable priced contracts with different maturities. Spot prices for internationally traded coal delivered into North West Europe (asreflected by the TFS API 2 index) rose steadily from US$68 per tonne on 31December 2006 to US$79 per tonne by 30 June 2007, but then increaseddramatically over the last six months of the year reaching US$127 per tonne on31 December 2007. This reflected tight markets for both coal and freight,especially in the Pacific Basin, caused by strong demand from China and India,combined with some production and logistical issues in Indonesia and Australia. We also burn biomass, petcoke and fuel oil, although coal comprised around 95%of total fuel costs in 2007 (excluding CO2 emissions allowances) compared to 93%in 2006, primarily reflecting higher coal prices in 2007. The average cost offuel per MWh (excluding CO2 emissions allowances) for the year ended 31 December2007 was £18.5 compared to £17.1 in 2006, with coal prices continuing to risethroughout the year. CO2 emissions allowances Our CO2 emissions allowances requirement for the year ended 31 December 2007, inexcess of those allocated under the UK NAP, was approximately 7.6 million tonnescompared to approximately 8.2 million tonnes in 2006, with the reduction largelydue to lower generation. The price for Phase I (2005-2007) CO2 emissions allowances began the year atapproximately €6.6 per tonne, and as a result of oversupply, fell steadily overthe first six months of the year to €0.13 per tonne on 30 June 2007, subsequentlyfalling away further to €0.04 per tonne by 31 December 2007. The average priceexpensed for CO2 emissions allowances during the year ended 31 December 2007 was£1.5 per tonne compared to £14.3 per tonne in 2006. Outages and plant utilisation levels Year ended Year ended 31 December 31 December 2007 2006 Winter forced outage rate (%) 4.2 4.7Forced outage rate (%) 6.9 5.8Planned outage rate (%) 8.1 4.8Total outage rate(1) (%) 14.3 10.4Availability (%) 85.7 89.6Electrical output (net sales) (TWh) 24.9 25.2Load factor (%) 75.0 75.9 Notes:(1) The forced outage rate is expressed as a percentage of planned capacityavailable (that is, it includes a reduction for planned losses). The plannedoutage rate is expressed as a percentage of registered capacity. Accordingly,the aggregation of the forced outage rate and planned outage rate will notequate to the total outage rate. Plant availability in the year ended 31 December 2007 was 86% compared to 90% in2006, primarily as a result of an increase in the planned outage rate with twomajor planned outages taking place in 2007 compared to one in 2006. Our maintenance regime includes a major planned outage for each unit every fouryears. Consequently, there is an irregular pattern to planned outages andassociated expenditure, since in two of the four years; two units will undergo amajor planned outage. Two major planned outages (units 2 and 3) were completed during 2007, whereas one major planned outage (unit 4) took place during 2006. The planned outage rate achieved for the year ended 31 December 2007 was 8.1%compared to 4.8% in 2006. Two units will each undergo a major planned outage in 2008. The Winter forced outage rate in 2007 was 4.2% (4.7% in 2006). The forced outagerate for the full year was 6.9% (5.8% in 2006), of which approximately 0.8% wasdue to a decision to undertake a number of elective forced outages during lowmargin periods to inspect boiler tubes following a tube failure at an older UKcoal-fired power station. These outages also allowed additional plant inspections and repair work to beundertaken which have provided us with a high degree of confidence in maintainingplant integrity. We have targeted improvements in forced outage rates by focusing on preventingminor predictable failures and seeking to avoid major failures by usinghistorical Drax operating data together with original equipment manufacturer andindustry experience. We believe further progress can be made in both areas andwill continue the programmes to improve performance, with the objective ofachieving a sustainable average Winter forced outage rate of 4.5%. Health and safety The lost time injury rate was 0.34 for the year ended 31 December 2007 comparedto 0.08 in 2006. Although this represents a deterioration, we maintained themuch improved performance levels achieved in 2005, despite a 53% increase inhours worked by our production teams and contractors in 2007 compared to 2005.This demonstrates that the safety programmes implemented in the last few yearsare becoming well entrenched and are delivering sound performance, and oursafety record compares favourably to our sector peers and internationalbenchmarks. Liquidity and capital resources Net debt was £337 million as at 31 December 2007 compared to £321 million at 31December 2006. Cash and cash equivalents were £60 million as at 31 December 2007 compared to£155 million at 31 December 2006. The changes in cash and cash equivalents areanalysed in the following table. Analysis of cash flows Year ended Year ended 31 December 31 December 2007 2006 Net cash generated from operating activities 312.8 525.1Net cash used in investing activities (67.8) (27.0)Net cash used in financing activities (340.1) (431.1)Net (decrease)/increase in cash and cash (95.1) 67.0equivalents Net cash generated from operating activities was £313 million in the year ended31 December 2007 compared to £525 million in 2006. The decrease reflected areduction of £77 million in EBITDA in 2007, lower cash received under the TXUClaim (£6 million cash received under the claim in the year ended 31 December2007 compared to £74 million in 2006), an increase of £55 million in incometaxes paid and increased working capital utilisation in 2007, including a highercoal stock build and a significantly lower liability with respect to CO2emissions allowances. Net cash used in investing activities, which represented payments in respect ofcapital expenditure in both periods, was £68 million for the year ended 31December 2007 compared to £27 million in 2006 (see Capital expenditure). Net cash used in financing activities was £340 million in the year ended 31December 2007 compared to £431 million in 2006. The 2007 amounts included equitydividends paid of £171 million and payments under the share buyback programme of£84 million (inclusive of all expenses), together representing returns toshareholders totalling £255 million. Also included were term loan repayments of£40 million in June 2007 and £40 million in December 2007, the final bridge loanprepayment of £3 million, and purchases of our own shares to meet commitmentsunder share-based incentive plans of £2 million. The 2006 amounts included newdebt raised of £100 million, offset by equity dividends paid of £342 million,term loan repayments of £58 million in June 2006 and £58 million in December2006 and bridge loan prepayments of £55 million and £19 million in January andJuly 2006 respectively. The decrease in cash and cash equivalents was therefore £95 million in the yearended 31 December 2007, compared to an increase of £67 million in 2006. Drax'spolicy is to invest available cash in short-term bank, building society or otherlow risk deposits. Capital resources and refinancing Since Listing in December 2005, senior secured debt has fallen from £500 millionto £405 million at 31 December 2007 (both before deferred financing costs),through a combination of scheduled debt repayments and the raising of additionalsecured debt. Scheduled debt repayments for 2008 are £35 million. The Board continues to monitor developments in the debt markets and is committedto maintaining balance sheet efficiency. In September 2007, the Board announcedits intention to undertake a refinancing of the Group's current debt facilities(subject to market conditions). As a result of continuing turbulence in the debtmarkets the Board decided to postpone the refinancing until such time as itjudges market conditions have improved and the Group will be able to secure moreattractive terms. Seasonality of borrowing Our business is seasonal with higher electricity prices and despatch in theWinter period and lower despatch in the Summer months, when prices are lower andplant availability is affected by planned outages. Accordingly, cash flow duringthe Summer months is materially reduced due to the combined effect of lowerprices and output, while maintenance expenditures are increased during thisperiod due to major planned outages. The Group's £100 million revolving creditfacility assists in managing the cash low points in the cycle where required.The revolving credit facility was undrawn at 31 December 2007. Contractual commitments The following table illustrates our contractual obligations, excluding interest,as they fall due as at 31 December 2007. Payments due by period Total 2008 2009 2010 2011-2014 £m £m £m £m £m Debt 405.0 10.0 15.0 380.0 -Fuel purchases 996.5 461.7 293.6 124.3 116.9Contracted capital 94.8 33.3 26.6 20.3 14.6expenditureSupport contract payments 45.6 29.6 9.1 4.5 2.4 Total 1,541.9 534.6 344.3 529.1 133.9 Capital expenditure At the turn of the year we announced that we expected to incur total capitalexpenditure of approximately £260 million over the three years 2007 to 2009. Ofthis, around £150 million specifically related to the turbines upgrade project,condenser and feed system plant improvements and investments in extending ourbiomass capability. The remainder comprised smaller value enhancing investmentsand other expected capital expenditure in support of current operations.Following capital expenditure of £83 million in 2007, we remain on track toachieve this target. We now expect to incur capital expenditure of approximately £250 million overthe three years 2008 to 2010, of which around £150 million specifically relatesto the turbines upgrade project and investments in extending our biomasscapability. We plan to fund this capital expenditure investment programme from acombination of operational cash flows and debt. In relation to the turbines upgrade project, we expect to invest up to £100million over a five year period, including approximately £70 million over thethree years 2008 to 2010, to upgrade the high pressure and low pressure turbinemodules on all six generating units to improve efficiency. Using proventechnology we expect to achieve an overall baseload efficiency (that is, theratio of energy out to energy in when operating at full capacity) approaching40%. This represents a 5% improvement on current baseload efficiency of around38%. When complete, the project is expected to deliver annual savings of one milliontonnes of CO2 emissions allowances and approximately half a million tonnes ofcoal. Installation, which is being undertaken during the planned outage programme,commenced in the third quarter of 2007, when we were able to fast track theupgrade of a high pressure turbine module on one of our units. The early startto the programme enabled valuable engineering experience to be gained, alongwith some modest efficiency gains, ahead of the upgrade of two high pressure andsix low pressure turbines during the major outages on two of our generatingunits planned for 2008. With regard to extending our biomass capability, we expect to invest around £80million to meet our target to produce 10% of our output from burning biomass bythe end of 2009. The largest single investment included in the £80 millionprogramme relates to extending our direct injection capability from onegenerating unit to all six generating units, and to install the necessaryprocessing and handling infrastructure to ensure we are able to handle up to 1.5million tonnes of biomass material per annum. In addition, we expect to makeinvestments in off site processing facilities. Achievement of the 10% target is expected to result in savings of over twomillion tonnes of CO2 emissions allowances, the displacement of approximatelyone million tonnes of coal and the generation of in excess of two and a halfmillion ROCs per annum. Our dedicated renewables co-firing project team have madegood progress in finalising the design of the new biomass handling and directinjection facilities required to meet our 10% co-firing objective. In February 2008, we were granted planning approval by Selby District Councilfor the new facilities. Following a competitive tender process, we are onschedule to execute Engineering, Procurement and Construction contracts for theco-firing facilities in the second quarter of 2008, with building workscommencing in the second half of 2008. The facilities will come on line duringthe course of 2009 with full completion being at the end of 2009 in line withour target. In addition, we will continue to evaluate other investment opportunities whichmay result in additional capital expenditure. Further investment will berequired beyond 2009 and prior to 2016 to meet the requirements of the LCPD. Share-based incentive plans Costs charged in the income statement in relation to share-based payments were£3.1 million in the year ended 31 December 2007, compared to £1.7 million in2006. Under the 2007 SIP Free share award, the Company purchased a total of 195,810shares in April 2007 to be held in trust on behalf of qualifying employees,equating to 305 shares with a cash value of approximately £2,500 per employeebased on the Company's share price at the time of the award. The fair value ofthe 2007 Free share award (determined at the award date) of £1.6 million wascharged to the income statement in full in the year ended 31 December 2007, onthe basis that employees were granted specific rights in relation to shares heldin trust on their behalf. Similarly, the fair value of the 2006 Free share awardof £1.3 million was charged to the income statement in full in the year ended 31December 2006. In March 2007, the SIP was extended by introducing two further elements:Partnership shares and Matching shares. Qualifying employees can buy up to£1,500 worth (subject to an overriding maximum of 10% of salary) of Partnershipshares (out of pre tax pay) in any one tax year. Matching shares are awarded toemployees to match any Partnership shares they buy. Under the Drax SIP the ratiois one to one for the 2007/2008 tax year, with the cost of matching shares borneby the Group. As at 31 December 2007, a total of 104,367 matching shares hadbeen purchased and were held in trust on behalf of qualifying employees. Thefair value of matching shares awarded up to 31 December 2007 (determined at theaward dates) of £0.8 million is being charged to the income statement on astraight-line basis over a one-year vesting period (matching shares areforfeited if an employee leaves Drax within one year of the award). ESIP awards over 361,582 shares were granted to executive directors and othersenior staff in 2007, with performance measured over the three years to 31December 2009 and potential vesting in April 2010. The fair value of the 2007ESIP awards (determined at the grant date) of £0.9 million, which takes intoaccount the estimated probability of different levels of vesting, is beingcharged to the income statement on a straight-line basis over the three-yearvesting period to 19 April 2010. Similarly, the fair value of the 2006 ESIPaward of £1.9 million is being charged to the income statement on astraight-line basis over the three-year vesting period to 19 September 2009. There have been no further offers under the SAYE Plan since that made in July2006. No shares have been issued or purchased to date with respect to the SAYEor ESIP. Taxation In December 2007, HM Revenue & Customs issued a consultation document entitled"Principles based approach to financial products avoidance: a consultationdocument" which is expected to lead to the introduction of new legislationconcerning "disguised interest" from 1 April 2008. It is thought likely that the new rules, if introduced in the form currentlyenvisaged, could adversely impact the future tax efficiency of the Group'sexisting financing structure. Until the consultation process is completed andthe legislation drafted, however, it is not possible to predict with anycertainty how the proposed legislation, if and when enacted, might affect theGroup tax rate, and the Group is therefore keeping the situation under review. EBITDA forecast for the year ended 31 December 2007 and closing cash positionguidance We issued a Trading Update on 18 December 2007 which reported our contractedposition for 2007, 2008 and 2009 in respect of power, coal and CO2 emissionsallowances. In addition, we reported management's expectation that EBITDA forthe year ended 31 December 2007 would be around £500 million and that the cashposition as at 31 December 2007 would be in the range £55 million to £60 million(together the "Forecast"). EBITDA was defined as profit before interest, tax,depreciation and amortisation, exceptional items and unrealised gains onderivative contracts. In arriving at the Forecast, we took account of market prices as of 11 December2007 for the uncontracted portion of power sales, and coal and CO2 emissionsallowances purchases for the period to 31 December 2007. The Forecast alsoassumed that there would be no significant unplanned outages for the period to 31December 2007. Reported EBITDA of £506 million includes the impact on gross margin of a smallimprovement in dark green spreads between 11 December 2007 and 31 December 2007.The reported cash position as at 31 December 2007 was £60 million. Contracted position for 2008, 2009 and 2010 Since issuing the Trading Update on 18 December 2007, we have continued to tradein line with expectations and to follow our stated trading strategy of makingsteady forward power sales with corresponding purchases of CO2 emissionsallowances and coal purchases. Our aim is to deliver market level or better darkgreen spreads across all traded market periods and, as part of this strategy, weretain power to be sold into the prompt (within season) power markets. As at 22 February 2008, the contracted position for 2008, 2009 and 2010 wasfollows: 2008 2009 2010 Power sales (TWh) comprising: 20.5 15.4 10.4- Fixed price power sales (TWh) 16.0 10.1 5.1at an average achieved at at atprice (per MWh) £47.9 £43.0 £45.3- Fixed margin power sales (TWh) 4.5 5.3 5.3CO2 emissions allowances hedged, including UK NAP 20.5 15.1 18.0allocation, market purchases, structured contracts,and benefit of biomass co-firing (TWh equivalent)Solid fuel at fixed price/hedged, including structured 22.2 16.6 12.1contracts (TWh equivalent) Fixed price power sales include approximately 0.8TWh supplied to Centrica in theperiod 1 January 2008 to 22 February 2008 under the five-and-a-quarter yearbaseload contract with Centrica which commenced on 1 October 2007. Fixed margin power sales include approximately 4.5TWh in 2008 and 5.3TWh in eachof 2009 and 2010 in connection with the contract. Under this contract the Groupwill supply power on terms which include Centrica paying for coal, based oninternational coal prices, and delivering matching CO2 emissions allowancesamounting to approximately 4.8 million tonnes per annum. The contract providesthe Group with a series of fixed dark green spreads which were agreed in the firstquarter of 2006. We will provide the next update on our contracted position in our InterimManagement Statement which is expected to be issued on 19 May 2008. Distribution policyThe Board has previously stated that the Group will pay a stable amount (£50million) by way of ordinary dividends each year (the base dividend) subject toavailability of cash and appropriate reserves. In addition to the base dividend,the Board has also previously stated that substantially all of any remainingcash flow, subject to the availability of reserves and after making provision fordebt payments, debt service requirements (if any), capital expenditure and otherexpected business requirements, will be distributed to shareholders. Dividends paidOn 7 March 2007, the Board resolved to pay a final dividend for the year ended 31December 2006 of 9.1 pence per share (equivalent to £34 million). Also on 7March 2007, the Board resolved, subject to the approval by shareholders of aresolution to effect a share consolidation considered at the Annual GeneralMeeting on 26 April 2007, to pay a further interim dividend as a specialdividend of 32.9 pence per share (equivalent to £121 million). The shareconsolidation, under which shareholders received 64 new ordinary shares of11 16/29 pence each for every 67 existing ordinary shares of 11 1/29 pence, becameeffective on 30 April 2007. These final and special dividends were subsequentlypaid on 16 May 2007. On 5 September 2007, the Board resolved to pay an interim dividend for the sixmonths ended 30 June 2007 of 4.7 pence per share (equivalent to approximately£16 million). This interim dividend was subsequently paid on 24 October 2007. Special distribution - share buy-back programme (completed)On 5 September 2007, the Board resolved to make a special distribution ofapproximately £83 million to be undertaken through the introduction of a sharebuy-back programme. The buy-back programme represented approximately 3.5% of theCompany's issued capital as of 6 September 2007. The programme was completedbetween 7 September 2007 and 13 December 2007, and resulted in the repurchaseand cancellation of 13,005,304 ordinary shares for an aggregate consideration(inclusive of all expenses) of £83.5 million. Dividends proposedAt the forthcoming Annual General Meeting the Board is recommending toshareholders that a resolution is passed to approve payment of a final dividendfor the year ended 31 December 2007 of 9.9 pence per share (equivalent to £33.6million) payable on or before 7 May 2008. Shares will be marked ex-final dividendon 16 April 2008. The Board has declared a further interim dividend (payable as a specialdividend) of 7.8 pence per share (equivalent to £26.5 million), also payable onor before 7 May 2008. Shares will be marked ex-special dividend on 16 April2008. Consolidated financial information Consolidated income statements Years ended 31 December 2007 2006 Notes £m £mContinuing operationsRevenue 1,247.4 1,387.0Fuel costs (546.1) (641.3) 701.3 745.7 Other operating expenses excluding exceptional items 4 (239.4) (197.6)Exceptional operating income 3 6.2 19.0 Total other operating expenses, net (233.2) (178.6)Unrealised gains on derivative contracts 3.3 90.8 Operating profit 4 471.4 657.9 Interest payable and similar charges (34.3) (37.1)Interest receivable 11.4 13.4 Profit before tax 448.5 634.2Tax charge 5 (95.5) (170.7)Profit for the year attributable to equity 353.0 463.5shareholders from continuing operations pence penceEarnings per share from continuing operations per share per share- Basic and diluted 7 99 116 Consolidated statements of recognised income and expense Years ended 31 December 2007 2006 Notes £m £m Profit for the year 353.0 463.5Actuarial (losses)/gains on defined benefit pension scheme (3.3) 8.6Deferred tax on actuarial losses/gains on defined benefit pension scheme 5 0.9 (2.6)Impact of reduction in tax rate on deferred tax on defined benefit pension scheme 5 (0.4) -Fair value (losses)/gains on cash flow hedges (584.3) 468.2Deferred tax on fair value losses/gains on cash flow hedges 5 171.1 (140.5)Impact of reduction in tax rate on deferred tax on fair value losses/gains on cash flow hedges 5 1.0 -Net (losses)/gains recognised in equity (415.0) 333.7Total recognised (expense)/income for the year attributable to equity shareholders (62.0) 797.2 Consolidated balance sheets As at 31 December 2007 2006 Notes £m £mAssetsNon-current assetsProperty, plant and equipment 1,080.4 1,042.2Derivative financial instruments 1.6 93.9 1,082.0 1,136.1 Current assetsInventories 108.3 76.9Trade and other receivables 129.6 171.4Derivative financial instruments 15.0 257.2Cash and cash equivalents 59.7 154.8 312.6 660.3 LiabilitiesCurrent liabilitiesFinancial liabilities:- Borrowings 8 9.9 19.8- Derivative financial instruments 145.6 6.8Trade and other payables 94.1 166.8Current tax liabilities 70.4 63.2 320.0 256.6 Net current (liabilities)/assets (7.4) 403.7Non-current liabilitiesFinancial liabilities:- Borrowings 8 387.0 456.4- Derivative financial instruments 107.7 -Deferred tax liabilities 201.6 390.9Retirement benefit obligations 13.5 12.5Other non-current liabilities 1.4 0.7Provisions 2.4 2.2 713.6 862.7 Net assets 361.0 677.1 Shareholders' equityIssued equity 39.2 40.7Capital redemption reserve 1.5 -Share premium 420.7 420.7Merger reserve 710.8 710.8Hedge reserve (161.3) 250.9Retained losses (649.9) (746.0) Total shareholders' equity 9 361.0 677.1 Consolidated cash flow statements Years ended 31 December 2007 2006 Notes £m £m Cash generated from operations 10 437.7 586.5Income taxes paid (104.7) (50.0)Decrease in restricted cash - 11.2Interest paid (31.3) (36.1)Interest received 11.1 13.5 Net cash generated from operating activities 312.8 525.1 Cash flows from investing activitiesPurchase of property, plant and equipment (67.8) (27.0) Net cash used in investing activities (67.8) (27.0) Cash flows from financing activitiesEquity dividends paid (171.3) (342.0)Purchase of own shares under share buy-back (83.5) -programmeRepayment of borrowings 8 (82.9) (189.1)Debt issued 8 - 100.0Purchase of own shares held by employee trust (2.4) - Net cash used in financing activities (340.1) (431.1) Net (decrease)/increase in cash and cash equivalents (95.1) 67.0 Cash and cash equivalents at 1 January 154.8 87.8Cash and cash equivalents at 31 December 59.7 154.8 Notes to the consolidated financial information 1. 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 2007 (the "financial statements"). Thispreliminary announcement does not constitute the full financial statements prepared in accorance with International Financial Reporting Standards ("IFRSs"). The financial statements were approved by the Board of directors on 3 March 2008.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 the end of March 2008 andwill be available on request from the Company Secretary, Drax Group plc, DraxPower Station, PO Box 3, Selby, North Yorkshire, YO8 8PQ. The Annual GeneralMeeting will be held at The City Presentation Centre, 4 Chiswell Street, LondonEC1Y 4UP at 11am on 17 April 2008. The financial statements for the year ended 31 December 2007, will be delivered to the Registrar of Companies following the Annual General Meeting. 2. Basis of preparation The financial statements have been prepared in accordance with the prior year accounting policies and IFRSs. The financial statements have also beenprepared in accordance with IFRSs adopted by the European Union and thereforethe consolidated financial statements comply with Article 4 of the EU IASRegulations. The financial statements have been prepared under the historical cost basis,except for the revaluation of financial assets and liabilities under IAS 39"Financial instruments: recognition and measurement". 3. Exceptional operating income Years ended 31 December 2007 2006 £m £m Distributions under the TXU Claim 6.2 19.0 The Group received £6.2 million under the TXU Claim in April 2007, bringing thetotal received to date to £336 million, representing full recovery of the claim.All amounts above are net of VAT and costs, and all proceeds have been used toprepay debt secured against the claim, which has now been repaid in full. 4. Operating profit Years ended 31 December 2007 2006 £m £mThe following charges have been included in arriving atoperating profit:Staff costs 42.9 34.6Depreciation of property, plant and equipment (all 43.7 34.9owned assets)Repairs and maintenance expenditure on property, plant 50.4 34.1and equipmentOther operating expenses 102.4 94.0 Total other operating expenses excluding exceptionalitems and unrealised gains on derivative contracts 239.4 197.6 5. TaxationThe income tax expense reflects the estimated effective tax rate on profitbefore taxation for the Group for the year ending 31 December 2007 and themovement in the deferred tax balance in the period, so far as it relates toitems recognised in the income statement. In June 2007, the Finance Bill was presented to Parliament for approval. TheBill proposed a reduction in the rate of UK corporation tax from 30% to 28% witheffect from 1 April 2008. At 31 December 2007 the rate reduction wassubstantively enacted, and accordingly the tax charge for the year ended 31December 2007 includes a credit of £17.9 million to reflect the impact ondeferred tax. This rate reduction will also reduce the amount of tax payable onfuture profits. Although amendments to the industrial buildings allowance regime were alsoproposed in the 2007 budget announcement, these amendments were notsubstantively enacted at 31 December 2007 and accordingly have not beenreflected in the Group's results for the year ended 31 December 2007. Thedirectors have estimated that, had these amendments been reflected in theGroup's results for the year ended 31 December 2007, the effect would be toincrease the deferred tax liability held in the balance sheet by approximately£13 million. HM Revenue & Customs ("HMRC") issued a consultation document in December 2007entitled "Principles based approach to financial products avoidance: aconsultation document" which is expected to lead to the introduction of newlegislation concerning "disguised interest" from 1 April 2008. It is thoughtlikely that the new rules, if introduced in the form currently envisaged, couldadversely impact the future tax efficiency of the Group's existing financingstucture. Until the consultation process is completed and the legislationdrafted, however, it is not possible to predict with any certainty how theproposed legislation, if and when enacted, might affect the Group tax rate, andthe Group is therefore keeping the situation under review. Years ended 31 December 2007 2006 £m £m Tax charge comprises:Current tax 112.2 108.2Deferred tax:- Before impact of reduction in tax rate 1.2 62.5- Impact of reduction in tax rate (17.9) - 95.5 170.7 Years ended 31 December 2007 2006 £m £m Tax on items credited/(charged) to equity:Deferred tax on actuarial losses/gains on defined benefit pension scheme 0.9 (2.6)Impact of reduction in tax rate on deferred tax on defined benefit pension scheme (0.4) -Deferred tax on fair value losses/gains on cash flow hedges 171.1 (140.5)Impact of reduction in tax rate on deferred tax on fair value losses/gains on cash flow hedges 1.0 - 172.6 (143.1) 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 2007 2006 £m £m Profit before tax 448.5 634.2Profit before tax multiplied by rate of corporation tax in the 134.6 190.3UK (30% for both years)Effects of:Adjustments in respect of prior periods (0.4) 1.2Expenses not deductible for tax purposes 1.5 0.5Tax effect of funding arrangements (22.9) (20.9)Other 0.6 (0.4)Change in UK tax rate (17.9) - Total taxation 95.5 170.7 In addition to the foregoing, under the current financing structure, DraxHoldings Limited is partially funded by a Eurobond payable to another groupcompany, with a tax deduction being claimed for all of the correspondinginterest charged in the Drax Holdings Limited income statement. Were HMRC tosuccessfully challenge the deductions claimed in respect of the Eurobond couponsfor open years to 31 December 2007, it is estimated that the additional taxliability would be up to £85 million, together with interest and penalties. Further details of the Group's financing structure, and related contingent taxliability described above are included on pages 78 and 79 of the listingparticulars issued on 28 October 2005 in respect of the introduction of DraxGroup plc to the Official List of the UK Listing Authority. 6. Dividends Years ended 31 December 2007 2006 £m £mAmounts recognised as distributions to equity holders in theyear (based on the number of shares in issue at the recorddate): Interim dividend for the year ended 31 December 2007 of 4.7 pence per share paid on 24 October 2007 (2006: 4.0 pence pershare paid on 25 October 2006) 16.3 16.3Final dividend for the year ended 31 December 2006 of 9.1 pence per share paid on 16 May 2007 33.6 -Special interim dividends for the year ended 31 December 2006 of 32.9 pence per share paid on 16 May 2007 (2006: 80.0 pence pershare paid on 25 October 2006) 121.4 325.7 171.3 342.0 Years ended 31 December 2007 2006 £m £mAmounts not recognised as distributions to equity holders in theyear:Proposed final dividend for the year ended 31 December 2007 of 9.9 pence per share (2006: 9.1 pence per share paid on 16 May2007) 33.6 33.6Declared special interim dividend for the year ended 31 December 2007 of 7.8 pence per share (2006: 32.9 pence per share paid on16 May 2007) 26.5 121.4 60.1 155.0 The Company undertook share consolidations in connection with the specialinterim dividends paid on 16 May 2007 and 25 October 2006. At the forthcoming Annual General Meeting the Board is recommending toshareholders that a resolution is passed to approve payment of a final dividendfor the year ended 31 December 2007 of 9.9 pence per share (equivalent toapproximately £33.6 million) payable on or before 7 May 2008. The Board has declared a further interim dividend (payable as a specialdividend) of 7.8 pence per share (equivalent to approximately £26.5 million),also payable on or before 7 May 2008. The final dividend of 9.9 pence per share and the special dividend of 7.8 penceper share have not been included as liabilities as at 31 December 2007. 7. Earnings per share During the year the Group has amended the calculation of earnings per share.Previously, the calculation of the weighted average number of ordinary sharesoutstanding assumed that share consolidations took place at the beginning of therelevant period. However, to better reflect the linkage between the specialdividends and the related share consolidations, the number of shares in issue isnow only amended from the date of the share consolidation. This change affectsdisclosure only and has no effect on profits, assets, liabilities or cash flows. Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. In calculating diluted earnings per share theweighted average number of ordinary shares outstanding during the year isadjusted to take account of outstanding share options in relation to the Group'sSavings-Related Share Option Plan ("SAYE") and contingently issuable sharesunder the Group's Executive Share Incentive Plan ("ESIP"). Reconciliations of the earnings and weighted average number of shares used inthe calculation are set out below. Years ended 31 December 2007 2006 £m £m Earnings attributable to equity holders of the Company for 353.0 463.5the purposes of basic and diluted earnings Years ended 31 December 2007 2006Number of shares:Weighted average number of ordinary shares for the purposes of basic earnings per share (millions) 354.9 400.0Effect of dilutive potential ordinary shares under share options 0.1 0.1 Weighted average number of ordinary shares for the purposes of diluted earnings per share (millions) 355.0 400.1 The effect of the amendments to the Group's calculation of earnings per sharecan be summarised as follows: Years ended 31 December 2007 2006Number of shares:Weighted average number of ordinary shares for the purposes of basic earnings per share as previously reported (millions) 349.6 368.9Effect of share consolidations from beginning of relevant period (millions) 5.3 31.1 Weighted average number of ordinary shares for the purposes of basic earnings per share under revised basis (millions) 354.9 400.0Earnings attributable to equity holders of the Company for the purposes of basic and diluted earnings (£ millions) 353.0 463.5Basic earnings per share as previously reported (pence per share) 101 126 Basic earnings per share under revised basis (pence per share) 99 116 The effect of this amendment in respect of diluted earnings per share is thesame as set out above. 8. Borrowings As at 31 December 2007 2006 £m £mCurrent:Term loans 9.9 19.8 As at 31 December 2007 2006 £m £mNon-current:Term loans 387.0 453.5Bridge loan - 2.9 387.0 456.4 Maturity of borrowings The following table details the remaining contractual maturity, includinginterest payments, for the Group's borrowings at the balance sheet dates: As at 31 December 2007 2006 £m £m In less than one year 33.0 48.4In more than one year but not more than two years 28.5 36.2In more than two years but not more than five years 393.8 478.9 Total contractual maturity 455.3 563.5 Less interest payments (58.4) (87.3) Carrying amount of borrowings 396.9 476.2 Interest payments are calculated based on forward interest rates estimated atthe balance sheet date based on publicly available information. The interest rates payable at the balance sheet dates were as follows: As at 31 December 2007 2006 % % Term loans 6.01 6.01Bridge loan - 6.28 Analysis of borrowings Borrowings at 31 December 2007 and 31 December 2006 consisted of bank loans heldby the Company's subsidiary Drax Finance Limited as follows: As at 31 December 2007 Borrowings before Deferred deferred finance Net finance costs costs borrowings £m £m £m Term loans 405.0 (8.1) 396.9 Total borrowings 405.0 (8.1) 396.9 Less current portion of debt (10.0) 0.1 (9.9) Non-current borrowings 395.0 (8.0) 387.0 As at 31 December 2006 Borrowings before Deferred deferred finance Net finance costs costs borrowings £m £m £m Term loans 485.0 (11.7) 473.3Bridge loan 2.9 - 2.9 Total borrowings 487.9 (11.7) 476.2 Less current portion of debt (20.0) 0.2 (19.8) Non-current borrowings 467.9 (11.5) 456.4 The term loans are subject to a fixed amortisation profile ending on 31 December2010 and debt service payments are made semi-annually on 30 June and 31December. Payment profiles for repayment of debt set out above are based on thefixed minimum repayment profile. Repayments above the fixed minimum repaymentprofile are permitted subject to the amount of cash available for debt service. Term loans repayments of £40.0 million were made on each of 29 June 2007 and 31December 2007. Previously, repayments of £57.5 million were made on each of 30June 2006 and 29 December 2006. All repayments have been made in line with thetarget repayment profile as a result of the levels of cash available for debtservice. The bridge loan was repaid in full following receipt of the final distributionunder the TXU Claim in April 2007. On 11 May 2006, the Group entered into a new credit facility agreement providinga further £100.0 million term loan on similar terms and with a similar repaymentprofile to the existing term borrowings. The facility was drawn down in full on3 July 2006 and partially used to make a payment of £22.5 million into theemployee pension scheme to reduce the actuarial deficit. The Group's debt is guaranteed and secured directly by each of the principalsubsidiary undertakings of the Company, as set out in note 3 to the Company'sseparate financial statements. Drax Group plc is not a guarantor of the Group'sdebt, but has granted a charge over the shares in its subsidiary, Drax FinanceLimited. Letter of credit facility and revolving credit facility In addition to its borrowings, the Group has access to a letter of creditfacility which provides credit support of up to £200.0 million to the Group'strading activities. The letter of credit facility, which has a final maturitydate of 15 December 2012, provides a mechanism whereby it may be extended for afurther 12 months at any time after 15 December 2007, but no later than one yearbefore the final maturity date. The Group guarantees the obligations of a numberof banks in respect of the letters of credit issued by those banks tocounterparties of the Group. As at 31 December 2007 the Group's contingentliability in respect of these guarantees amounted to £133.3 million (2006:£153.6 million). In addition, the Group has access to an undrawn £100.0 million revolving creditfacility, which may be used to issue letters of credit or for working capital,with a final maturity date of 15 December 2010. 9. Shareholders' funds and statement of changes in shareholders' equity Capital Share redemption Share Merger Hedge Retained capital reserve premium reserve reserve losses Total £m £m £m £m £m £m £m At 1 January 2006 40.7 - 420.7 710.8 (76.8) (875.2) 220.2Profit for the year - - - - - 463.5 463.5Equity dividends paid - - - - - (342.0) (342.0)Actuarial gains on defined benefit pension scheme - - - - - 8.6 8.6Deferred tax on actuarial gains ondefined benefit pensionscheme - - - - - (2.6) (2.6)Fair value gains on cash flow hedges - - - - 468.2 - 468.2Deferred tax on fair value gains on cash flowhedges - - - - (140.5) - (140.5)Movements in equity associated withshare-based payments - - - - - 1.7 1.7At 1 January 2007 40.7 - 420.7 710.8 250.9 (746.0) 677.1Profit for the year - - - - - 353.0 353.0Equity dividends paid - - - - - (171.3) (171.3)Purchase and redemption of own shares undershare buy-back programme (1.5) 1.5 - - - (83.5) (83.5)Actuarial losses on defined benefit pensionscheme - - - - - (3.3) (3.3)Deferred tax on actuarial losses ondefined benefit pensionscheme - - - - - 0.9 0.9Impact of reduction in tax rate on deferred taxon defined benefitpension scheme - - - - - (0.4) (0.4)Fair value losses on cash flow hedges - - - - (584.3) - (584.3)Deferred tax on fair value losses on cashflow hedges - - - - 171.1 - 171.1Impact of reduction in tax rate on deferred taxon fair value losses oncash flow hedges - - - - 1.0 - 1.0Movement in equity associated withshare-based payments - - - - - 3.1 3.1Own shares held by employee trust - - - - - (0.8) (0.8)Own shares purchased and vested with employees - - - - - (1.6) (1.6) At 31 December 2007 39.2 1.5 420.7 710.8 (161.3) (649.9) 361.0 10. Cash flow from operating activities Years ended 31 December 2007 2006 £m £m Profit for the year 353.0 463.5Adjustments for:Interest payable and similar charges 34.3 37.1Interest receivable (11.4) (13.4)Tax charge 95.5 170.7Depreciation 43.7 34.9Unrealised gains on derivative contracts (3.3) (90.8)Non-cash charge for share-based payments 3.1 1.7 Operating cash flows before movement in working capital 514.9 603.7Changes in working capital:Increase in inventories (31.4) (9.1)Decrease in receivables 43.8 19.7Decrease in payables (87.7) (4.4)Decrease in pensions (2.1) (23.6)Increase in provisions 0.2 0.2 Cash generated from operations 437.7 586.5 Glossary Ancillary services Services provided by National Grid used for balancing supply and demand or maintaining secure electricity supplies within acceptable limits. They are described in Connection Condition 8 of the Grid Code. Availability Average percentage of time the units were available for generation. Average achieved price Power revenues divided by volume of net sales (includes imbalance charges). Average capture price Revenue derived from bilateral contracts divided by volume of net merchant sales. Balancing Mechanism The period during which the System Operator can call upon additional generation/consumption or reduce generation/consumption, through market participants' bids and offers, in order to balance the system minute by minute. Baseload Running 24 hours per day, seven days per week remaining permanently synchronised to the system. Bilateral contracts Contract with counterparties and power exchange trades. Company Drax Group plc. Dark green spread The difference between the price available in the market for sales of electricity and the marginal cost of production (being the cost of coal and other fuels including C02 emissions allowances). EBITDA Profit before interest, tax, depreciation and amortisation, exceptional items and unrealised gains/ (losses) on derivative contracts. ESIP The Drax Group plc Restricted Share Plan, also known as the Drax Group plc Executive Share Incentive Plan. EU ETS The EU Emissions Trading Scheme is a mechanism policy introduced across the EU to reduce emissions of CO2; the scheme is capable of being extended to cover all greenhouse gas emissions. Forced Outage Any reduction in plant availability excluding planned outages. Forced Outage Rate The capacity which is not available due to forced outages or restrictions expressed as a percentage of the maximum theoretical capacity, less planned outage capacity. Frequency Response Service Services purchased by The National Grid Company used to maintain system frequency. Group Drax Group plc and its subsidiaries. IASs International Accounting Standards. IFRSs International Financial Reporting Standards. LECs Levy Exemption Certificates. Evidence of Climate Change Levy exempt electricity supplies generated from qualifying renewable sources. Load factor Net sent out generation as a percentage of maximum sales. Net Balancing Mechanism Net volumes attributable to accepted bids and offers in the Balancing Mechanism. Net merchant sales Net volumes attributable to bilateral contracts and power exchange trades. Net sales The aggregate of net merchant sales and net Balancing Mechanism. Occupational health and The OHSAS specification gives requirements for ansafety assessment series occupational health and safety (OH&S) safety assessment(OHSAS) series management system, to enable an organisation to control its OH&S risks and improve its performance. Planned Outage A period during which scheduled maintenance is executed according to the budget set at the outset of the year. Planned Outage Rate The capacity not available due to planned outages expressed as a percentage of the maximum theoretical capacity. Power exchange trades Power sales or purchases transacted on the APX UK power trading platform. Power revenues The aggregate of bilateral contracts and Balancing Mechanism income/expense. Refinancing and Listing The financial restructuring of the Group effective on 15 December 2005 resulting in the creation of a new holding company, Drax Group plc. Pursuant to the schemes of arrangement under which the Refinancing and 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. ROCs Renewables Obligation Certificates. Under the current regime, one ROC is issued to eligible generators for every MWh of electricity generated from renewable sources. SAYE Plan The Drax Group plc Approved Savings-Related Share Option Plan. SIP The Drax Group plc Approved Share Incentive Plan. Summer The calendar months April to September. Summer baseload market close Market price on the last day that the season was traded as a product. Technical Availability Total availability after planned and forced outages. 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 £336.0 million (excluding 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 The calendar months October to March. Winter baseload market close Market price on the last day that the season was traded as a product. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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