6th Sep 2007 07:01
Drax Group PLC06 September 2007 6 September 2007 DRAX GROUP plc (Symbol: DRX) INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007 Drax Group plc ("Drax" or the "Company"), the UK power generator, announces itsinterim results for the six months ended 30 June 2007. Highlights • EBITDA(1) up 21% to £288 million driven by improved margins delivered in the first half of 2007, realised through Drax's progressive hedging strategy • Return to shareholders of £100 million proposed, comprising: interim ordinary dividend of 4.7 pence per share (£17 million) and share buy back of £83 million starting shortly • Leading operating performance amongst UK coal generation plant maintained with plant availability of 87% • Emissions abatement remains a key focus: . Turbine upgrade installation commenced early - when complete will boost base load efficiency of the plant to 40% and save one million tonnes of CO2 each yea . The Government's Energy White Paper improves confidence in the long term viability of co-firing - Drax is targeting to produce 10% of its output from renewables by the end of 2009 resulting in an annual saving of two million tonnes of CO2 . Investment required to deliver compliance with the 2008 limits of LCPD largely complete Six months ended 30 June 2007 compared to six months ended 30 June 2006 Six months ended 30 June 2007 2006 £m £mTotal revenue 640 650Gross profit 382 320EBITDA (1) 288 239Operating profit (2) 283 329Profit before tax 273 317 Pence per share Pence per shareBasic and diluted earnings per share (3) 60 57Ordinary dividend (4) 4.7 4.0Special dividend (4) Note (5) 80.0 Notes: (1) EBITDA is profit before interest, tax, depreciation and amortisation, exceptional items and unrealised gains on derivative contracts. (2) Operating profit includes exceptional items and unrealised gains on derivative contracts totalling £13 million (2006: £108 million) (3) During the period the calculation of earnings per share was amended to reflect share consolidations associated with special dividends from the date of consolidation only. Comparatives have been restated accordingly (4) Based on the number of shares in issue at 30 June 2006 and 30 June 2007 respectively (5) Share buy back programme to be launched for £83 million Commenting on the performance, Dorothy Thompson, Chief Executive of Drax, said: "Drax has continued to deliver on its stated strategy over the last six months.Sticking to our strategy has enabled us to return nearly £600 million toshareholders since our listing in December 2005. "We are very pleased to announce that we have made an early start on ourturbines upgrade project and are installing this month our first high pressureturbine module. Fast tracking the project will bring early benefits in terms ofengineering experience, and modest efficiency gains and carbon dioxide emissionsreductions. "A key focus for the remainder of the year is to prepare for compliance with theLarge Combustion Plant Directive which comes into effect next year. We expectthis legislation to provide a challenge for the power generation industry as awhole as coal generators across the UK adjust to new operating constraints." ----------------------- Forward Looking Statements This announcement may contain certain statements, statistics and projectionsthat are or may be forward-looking. The accuracy and completeness of all suchstatements, including, without limitation, statements regarding the futurefinancial position, strategy, projected costs, plans and objectives for themanagement of future operations of Drax Group plc ("Drax") and its subsidiaries(the "Group") are not warranted or guaranteed. By their nature, forward-lookingstatements involve risk and uncertainty because they relate to events and dependon circumstances that may occur in the future. Although Drax believes that theexpectations reflected in such statements are reasonable, no assurance can begiven that such expectations will prove to be correct. There are a number offactors, many of which are beyond the control of the Group, which could causeactual results and developments to differ materially from those expressed orimplied by such forward-looking statements. These factors include, but are notlimited to, factors such as: future revenues being lower than expected;increasing competitive pressures in the industry; and/or general economicconditions or conditions affecting the relevant industry, both domestically andinternationally, being less favourable than expected. We do not intend topublicly update or revise these projections or other forward-looking statementsto reflect events or circumstances after the date hereof, and we do not assumeany responsibility for doing so. ----------------------- Management Presentation and Conference Call Management will host a presentation for analysts and investors at 9:00am (UKTime) today, Thursday 6 September 2007, at the City Presentation Centre, 4Chiswell Street, Finsbury Square, London, EC1Y 4UP. The meeting can also be accessed remotely via a conference call or alternativelyvia a live webcast, as detailed below. After the meeting, a video webcast andrecordings of the call will be made available and access details for theserecordings are also set out below. A copy of the presentation will be made available from 7:00am (UK time) onThursday 6 September for download at www.draxgroup.plc.uk >> investor centre Event Title: Drax Group plc: Half Year ResultsEvent Date: Thursday 6 September 2007Event Time: 9:00am (UK time) UK Call In Number: 020 7162 0125International Call In Number: +44 (0)20 7162 0125US Call In Number: +1 334 323 6203 Webcast details Live Event Link: http://events.webeventservices.com/drax/2007/09/06/ UK Instant Replay Start Date: 6 September 2007Delete Date: 6 October 2007Dial In Number: 020 7031 4064 Freephone number (UK only): 0800 358 1860 Passcode: 761615 US Instant Replay Start Date: 6 September 2007Delete Date: 6 October 2007Dial In Number: 1-954-334-0342 Freephone number (US only): +1 888 365 0240Passcode: 761615 Video Webcast Start Date: 6 September 2007Delete Date: 7 December 2007 Archive Link: http://events.webeventservices.com/drax/2007/09/06/ For further information please contact: On the day Thereafter Dorothy Thompson, Chief ExecutiveGordon Boyd, Finance Director +44 (0) 20 7353 4200 +44 (0)1757 618381 Andrew Jones, Investor Relations +44 (0) 20 7353 4200 +44 (0)1757 612938 Melanie Wedgbury, Media Contact +44 (0) 20 7353 4200 +44 (0)1757 612438 Tulchan CommunicationsDavid Trenchard and Peter Hewer +44 (0) 20 7353 4200 Website: www.draxgroup.plc.uk ----------------- Chairman's introduction Dear shareholder,During the first half of 2007 we have announced our strategy for the co-firingof energy crop biomass and made good progress on the turbines upgrade project.These projects look to preserve our competitive position whilst deliveringreductions in carbon dioxide ("CO2") emissions and efficiency improvements. Financial and operational performanceOur financial performance in the first half of the year has been deliveredagainst a background of reducing spot margins driven by commodity pricemovements. Nevertheless, EBITDA was £288 million, an improvement of £49 millionon the comparative period in 2006, and benefited from the margins secured forthe first half 2007 power sold in prior periods. Operationally, we have had the challenge of two major planned outages and inaddition an elective outage for preventative maintenance during the low marginsummer months. Throughout, our availability and safety performance continued torank highly amongst our peers, although there was some deterioration against ourhigh standards and last year's exceptional performance. DistributionsWe remain committed to our policy of distributing substantially all excess cashflows after first taking into account business needs, including our capitalexpenditure programme - notably in relation to the turbines upgrade and thebiomass project. This requires the Board to make careful judgements aboutprospective cash flows from volatile commodity markets whilst operating withinan uncertain future regulatory framework. In light of our first half 2007 results, shareholders in October 2007 willreceive an ordinary interim dividend of 4.7 pence per share equivalent toapproximately £17 million. In addition, we are introducing a share buy backprogramme which will purchase shares in the market up to a total value ofapproximately £83 million to bring total returns made to shareholders for thesix months ended 30 June 2007 to approximately £100 million. Previous specialdistributions have been made through the payment of a special dividend with ashare consolidation. However, in view of current market conditions, the size ofdistribution, views expressed by shareholders and after taking advice, the Boardconsiders the appropriate method of returning surplus cash to shareholders atpresent is through the introduction of a share buy back programme. The Boardintends to keep under review the most appropriate method for making any futurespecial distributions. RefinancingWe expect to embark on a refinancing of our current debt facilities later in2007 (market conditions permitting) to ensure balance sheet efficiency ismaintained, while preserving our investment grade rating. Shareholder valueThe focus of your Board remains on building shareholder value by: deliveringexcellence in operations and trading; maintaining an appropriate capitalstructure; investing in value enhancement; remaining alert to sectoropportunities; and returning excess cash to shareholders. Developing the Drax plantSince our initial announcement of the turbines upgrade project in 2006 we havemade good progress. I am particularly pleased to report the early delivery tosite of the first high pressure turbine module enabling that upgrade to takeplace this year. The 2006 Energy Review and the publication of the Energy White Paper in May thisyear were very positive for Drax. The former facilitated lifting the cap onco-firing of energy crops from 1 April, enabling the re-introduction of economicco-firing, and the latter proposed a banding approach to support futurerenewable generation, a policy that Drax strongly supports. These developmentsunderpin our investment to target 10% of our output from renewables at our Draxsite, which is being managed by a dedicated project team drawn both from acrossthe business and outside it. Our peopleFinally, I would like to welcome those who have joined Drax as part of our plansto develop the business and thank them and all the people at Drax for their hardwork and contribution. Gordon HorsfieldChairman Chief Executive's statement IntroductionDuring the first half of 2007, we have delivered a good performance in line withour business strategy, which is founded on the effective alignment of trading,production and investment strategies. This has resulted in an EBITDA of £288million for the period, which was £49 million higher than EBITDA in the firstsix months of 2006. The increase was due to realisations from forward salescontracts and improvements from business enhancements, offset to an extent bylower margins in the prompt markets and higher operational costs, as we movedforward with our investment and development programmes. We continue to follow our trading strategy by progressively hedging our output.We have maintained our forward sales portfolio and further diversified our fuelsuppliers and sources. Following on from our strong performance last year, wehave continued to draw benefit from our improved operating performance. Plantavailability for the traditionally high margin Winter quarter ending March 2007was 96.4% underpinned by a 3.6% forced outage rate. Plant availability for thefirst half of the year was 86.9%. During the second quarter we commenced ourplanned outage programme for the year and took elective outages to maintainplant integrity. This year, two of our six units are undergoing theirfour-yearly major planned outages. The first of these outages has been completedand the second is on schedule to complete in September. The execution of our investments to upgrade our turbines and grow our co-firingactivities has gained pace. In particular, we are pleased to report that we havebeen able to fast track the installation this year of a single new high pressureturbine module. The accelerated plan will bring benefits in terms of engineeringexperience as well as modest early efficiency gains and CO2 emissionsreductions ahead of the original project plan, which was scheduled to start in2008. On the regulatory side, we have seen two very positive moves emanating from lastyear's Energy Review: a fundamental rule change to the co-firing regulationsthat saw the removal of the caps and constraints surrounding energy cropco-firing; and the publication of the Government's Energy White Paper. Bothmeasures improve our confidence in the long-term viability of co-firingrenewable biomass materials at Drax Power Station. Commodity MarketsAs a power generation business operating in commodity markets, we are exposed tothe prices of power, coal and carbon. There are many factors that drive theprices of these commodities, including the weather. The Autumn of 2006 wasparticularly mild and central England experienced the warmest Winter sincerecords began in 1659. This weather continued into 2007 with significantlywarmer than average temperatures through to April. This led to reduced demandfor gas and electricity, and had a significant influence on UK spot gas prices,which in turn fed through to UK spot power prices, with both commoditiesfalling. Forward power and gas prices remain closely linked and strongly influenced byoil, which has supported fairly stable prices over the period. Coal pricesfirmed significantly during the first half of 2007. These have been driven bytight markets for both coal and freight, especially in the Pacific Basin causedby strong demand from China and India, combined with some production andlogistical issues in Australia and Indonesia. Lower spot gas prices and increased coal prices have meant that for certainperiods during the Summer, coal-fired plant have been the price setting plant inthe market as the marginal cost of coal-fired generation exceeded the marginalcost of gas-fired generation. This has been reflected in tighter margins andlower levels of generation in the Summer period. Prices for carbon in the EU Emissions Trading Scheme ("EU ETS") have beenvolatile. In Phase I (2005-2007), oversupply of CO2 emissions allowances causedthe price of the allowances to fall close to zero. For Phase II (2008-2012),where Drax has an allocation of 9.5 million tonnes, prices have risen steadilyover the period caused by the stronger stance taken by the European Commissionin ensuring lower allocations by the EU Member States. TradingWe have continued to deliver successfully against our trading strategy, as ourstrong market presence and credit rating have provided us with excellent accessto all the markets in which we trade. It is our strategy to hedge progressivelyour output, whilst targeting market or better dark green spreads and retaining abalanced market exposure. As part of this strategy, we generally hold thecapacity of around two of our six generating units to be sold six months or lessahead of delivery. We maintained the total size of our forward sales ofelectricity, mainly through sales into the liquid traded electricity market.This market has shown improved liquidity and our access to this is stronger thanever. Over the last two years we have been working hard to diversify and to optimiseour fuel sourcing. We have sought to add new fuel options and sources whilstimproving the quality of both the fuels and our contractual position. InFebruary, we were pleased to complete a three-year deal to purchase coal fromHargreaves (UK) Services Limited out of Maltby colliery following itsacquisition of the colliery from UK Coal. Our efforts to diversify our UK andinternational coal sources have delivered the widest diversity of fuels thatDrax has ever burned, which increases the security of our supplies and alsoprepares us for the challenges we expect when operating under the LargeCombustion Plant Directive ("LCPD") from 2008 onwards. We are constantly seeking new ways to add value to our trading capability andover the first half of the year introduced several new activities, includingelectricity options and seaborne freight chartering. Our robust risk managementapproach, managed by a dedicated risk management team, ensures that as we growthe scope of our activities we retain high quality and prudent processes. As a result of delivering plant flexibility and reliability, the services wesell to National Grid, known as ancillary services, delivered increased value inthe period. We have provided some of these services under new contractualarrangements for Drax, which should provide more certainty to the income stream. ProductionThe first half of the year has been not without challenge for the productionside of the business. Despite delivering good performances for both safety andavailability, there was some deterioration against our high standards and lastyear's exceptional performance. We moved forward with the implementation of our plant improvement programme,which will deliver compliance with the LCPD and improved plant efficiency, andwork to develop and improve our operational systems continued. We also electedto embark on a substantial inspection programme of our boiler tubes, whichincluded testing approximately 7,000 boiler tubes, providing us with a highdegree of confidence in maintaining plant reliability and integrity. OHSAS 18001 certification, an internationally recognised assessmentspecification for Occupational Health and Safety management systems, wasreceived in April. We are amongst the first coal-fired power stations in thecountry to hold the standard. The emphasis remains on improving risk managementprocedures and rolling out defensive behaviour programmes. The safety programmesimplemented in the last few years are becoming well entrenched and areelivering sound performance. InvestmentEarly replacement of the high pressure turbine of one of our units during thesecond planned outage this year will act as a useful learning curve for theinstallation process ahead of next year's upgrade of both the high pressure andlow pressure turbine modules of two of our units. In addition to coal and CO2savings, benefits from the acceleration of the upgrade programme include areduction in turbine maintenance times and costs going forward. Crucially, allturbine module replacements will be carried out during planned outages, ensuringno unnecessary lost generation time. During the period we have increased the range of biomass fuels we can and haveburned. We are particularly pleased to have now demonstrated that Drax can burn4% by heat for specific fuels by combining biomass with the coal and pulverisingit in the existing mills. To support our aim of significantly increasing our biomass burn we have nowestablished and resourced a dedicated biomass purchasing team, who are workinghard to secure increased volumes of energy crop biomass from both existingarrangements and suppliers, and also from new sources. Detailed design workcontinues on the biomass handling and direct injection projects. A dedicatedproject management team has been assembled over the first six months of the yearto finalise the design and deal with the construction phase of the project. Investment for compliance with the LCPD limits for oxides of nitrogen ("NOX")from 2008 has continued to be an area of environmental spend. Initial work onthree units has shown that compliance with the LCPD requirements is achievablethrough the retrofit of Boosted Over Fire Air ("BOFA") systems. This year, twounits are being retrofitted during the planned outage programme, leaving onlyone unit to be retrofitted next year. Importantly, election for the NationalEmission Reduction Plan route under the LCPD has allowed us some flexibilitywhen scheduling the retrofits, ensuring no additional outages. RegulatoryFrom 1 April, an amendment to the Renewables Obligation Order removed the capsand constraints surrounding energy crop co-firing. This important developmentremoved the regulatory hurdle to accessing value from Renewables ObligationCertificates ("ROCs"), when co-firing energy crops, to enable economic co-firingand significant savings in emissions of CO2. Fundamental reform of the Renewables Obligation ("RO") was a major policy putforward in the Energy White Paper published in May, which proposes to constructbands according to the state of development of the various renewablestechnologies. The proposed banding of the RO places energy crop co-firing andnon-energy crop co-firing into different bands, with differing rewards in termsof the fraction of a ROC earned. We are supportive of the banding approach as itputs in place a mechanism that is fair to all forms of renewables and enablesco-firing to contribute to CO2 emissions reduction targets in a meaningful way. Looking aheadWe have been reviewing the capital structure of the business and expect toembark on a refinancing of our current debt facilities later in 2007 (marketconditions permitting) to ensure balance sheet efficiency is maintained, whilepreserving our investment grade credit rating. We approach the Winter season with ample gas storage in the UK. Continental gasprices have been increasing, held up by strong oil markets, and the coal marketremains tight. Sustained bad weather in Indonesia has resulted in a reduction inAsian coal production, and the Asian market has tightened further amidst growingdemand from Japan on the back of decreasing confidence in their nucleargeneration plant. Against this backdrop of robust fuel prices, power prices havefollowed UK gas prices and fallen over the Summer for this coming Winter'selectricity. Even with falling UK gas prices and rising international coalprices, the UK forward markets for the coming Winter are indicating that gasplant will be the predominant price setting plant with margins for coal-firedgenerators remaining attractive, albeit significantly lower than for the sameperiod last year. A high priority for the balance of 2007 is to ensure that the business is fullyprepared for the new emission constraints under LCPD from 1 January 2008. Workwill continue on coal sourcing options and NOX reduction equipment performance. There is now an increasing prospect of regulatory controls on CO2 beyond 2012,when the existing EU ETS is planned to finish. The EU is planning to introduce aPhase III of the EU ETS, possibly in line with a revitalisation of the KyotoProtocol. In the UK, the Government has published its draft legislativeprogramme for the next session of Parliament. This includes a Climate ChangeBill and an Energy Bill, with CO2 emissions reduction at the heart of each. Thisaccords with our view that there will be a price for CO2 beyond 2012 whichunderpins our long-term strategy of achieving significant CO2 reduction throughjudicious investment. We will continue to press forward with our carbon abatement projects,principally the upgrade of our turbines and the development of the sourcing andcapability towards our target to produce 10% of our output from renewables bythe end of 2009. Dorothy ThompsonChief Executive Business and financial review Results of operations Six months Six months ended ended 30 June 2007 30 June 2006 £m £mTotal revenue 639.7 650.0Fuel costs(1)Fuel costs in respect of generation (221.6) (282.7)Costs of power purchases (36.2) (47.2) (257.8) (329.9)Gross profit 381.9 320.1Other operating expenses excluding depreciation,amortisation,unrealised gains on derivativecontracts and exceptional items(2) (94.3) (81.5)EBITDA(3) 287.6 238.6Depreciation and amortisation (17.4) (17.5)Other exceptional operating income 6.2 19.0Unrealised gains on derivative contracts 6.9 89.1Operating profit 283.3 329.2Interest payable and similar charges (17.4) (18.2)Interest receivable 7.2 5.7Profit before tax 273.1 316.7Tax charge- Before impact of reduction in taxrate on deferred tax (71.5) (85.0)- Impact of reduction in tax rate ondeferred tax 18.5 - (53.0) (85.0)Profit for the year attributable to equity shareholders from continuing operations 220.1 231.7 pence pence per share per shareEarnings per share from continuing operations(4)- Basic and diluted 60 57 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 business rates. (3) EBITDA is defined as profit before interest, tax, depreciation andamortisation, exceptional items and unrealised gains on derivative contracts. (4) During the period the Group has amended the calculation of earnings pershare to reflect share consolidations associated with special dividends from thedate of the consolidation only. Comparatives have been amended accordingly (seenote 7 to the condensed consolidated financial statements). The Group's principal performance indicators are highlighted at the beginning ofthis interim report. These illustrate strong operating results with EBITDA of£288 million for the six months ended 30 June 2007 compared to £239 million in2006. The business and financial review includes further explanation andcommentary in relation to our principal performance indicators and the resultsfor the period. Results of operationsTotal revenue for the six months ended 30 June 2007 was £640 million compared to£650 million in 2006. Power sales for the six months ended 30 June 2007 of £614million were flat compared to 2006. This reflected an improvement in our averageachieved price (see Price of electricity below), partially offset by a decreasein net power sold to 12.0TWh, compared to 12.4TWh in 2006. In addition to power sales, total revenue also includes income from the sale ofby-products (ash and gypsum), the provision of ancillary services, and the saleof ROCs, LECs and sulphur dioxide ("SO2") emissions allowances. In the sixmonths ended 30 June 2007 these revenues were £26 million compared to £36million in 2006, reflecting a significant reduction in ROC sales (following thereduction, in April 2006, from 25% to 10% in the amount of co-fired electricityqualifying for ROCs), partially offset by higher ancillary services income. Fuel costs in respect of generation during the six months ended 30 June 2007were £222 million, compared to £283 million in 2006. The decrease was primarilydue to the impact of lower prices for CO2 emissions allowances and lowergeneration, partially offset by an increase in the cost of coal and other fuels(see Price of coal and other fuels and CO2 emissions allowances below). 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 six months ended 30June 2007, the cost of purchased power decreased to £36 million compared to £47million in 2006, primarily due to lower power prices in the prompt (withinseason) markets. Gross profit for the six months ended 30 June 2007 was £382 million compared to£320 million in 2006. Other operating expenses excluding depreciation, amortisation, unrealised gainson derivative contracts and exceptional items were £94 million for the sixmonths ended 30 June 2007 compared to £82 million in 2006. The increase of £12million includes a one time payment of £3 million made in April (equating to£5,000 per eligible employee) in order to secure a two-year pay agreement withTrade Unions, following expiry of the previous two-year pay agreement. The payaward recognised the importance of retaining a skilled workforce at a time ofcompetition for those skills locally and in the workplace at large, andrecognised that in a number of areas Drax had fallen behind market rates. Wealso experienced an increase in business interruption insurance costs due tohigher margins, and we have significantly increased our expenditure on sitesecurity following the Camp for Climate Action in August 2006 and to meet theincreasing threat of terrorist activity. The increase in costs also reflectshigher grid connection and use of system charges (TNUoS). EBITDA (defined as profit before interest, tax, depreciation, amortisation,exceptional items and unrealised gains on derivative contracts) for the sixmonths ended 30 June 2007 was £288 million compared to £239 million in 2006. Exceptional operating income of £6 million for the six months ended 30 June 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 six months ended 30 June2006 amounted to £19 million. All amounts are net of VAT and costs, and proceedswere used to prepay debt secured against the claim, which has now been repaid infull. The Group recognises unrealised gains and losses on forward contracts which meetthe definition of derivatives under IAS 32 and IAS 39, 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 reflected in the income statements were£7 million for the six months ended 30 June 2007 compared to £89 million in2006. The unrealised gains primarily represent the unwinding of unrealisedlosses originally reflected in the income statement in 2005, prior to the Grouphaving the necessary documentation in place to permit hedge accounting under IAS39, as power was delivered in accordance with 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 six months ended30 June 2007 were £153 million compared to unrealised gains of £133 million in2006. Movements between the balance sheet position reported at 30 June 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 12 months, the average price relating to power which had beencontracted but had yet to be delivered at 31 December 2006 was significantlyhigher than market prices at that time, resulting in the recognition of a netunrealised gain of £344 million in the balance sheet. By comparison, at 30 June2007, although the average price relating to power which had been contracted buthad yet to be delivered remained higher than market prices at that time, thedifferential had narrowed resulting in the recognition of a much lower netunrealised gain of £199 million in the balance sheet. Operating profit for the six months ended 30 June 2007 was £283 million comparedto £329 million in 2006. Interest payable and similar charges in the six months ended 30 June 2007 were£17 million compared to £18 million in 2006, as a result of lower debt levels. The tax charge for the six months ended 30 June 2007 was £53 million, comparedto £85 million in 2006. The tax charge for 2007 includes a credit of £19 millionto 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 thesix months ended 30 June 2007 was £220 million compared to £232 million in 2006,and basic and diluted earnings per share was 60 pence compared to 57 pence in2006, as calculated in accordance with note 7 to the condensed consolidatedfinancial statements. Key factors affecting the business Price of electricityThe table below shows the average achieved price realised for the six monthsended 30 June 2006 and 30 June 2007, together with the market closing price onthe last day each season illustrated was traded as a product. Six months Six months ended ended 30 June 30 June 2007 2006Average achieved price (£/MWh) 48.1 45.7 2007 2006Summer baseload market close (£/MWh) 23.5 45.0 2006/2007 2005/2006Winter baseload market close (£/MWh) 51.7 49.2 Average achieved price for the six months ended 30 June 2007 was £48.1 per MWhcompared to £45.7 per MWh in 2006. Average capture price (being the priceattained prior to balancing mechanism activity) for the six months ended 30 June2007 was £46.4 per MWh compared to £44.5 per MWh in 2006. The forward baseloadpower prices for Winter 2007/2008 and Summer 2008 were approximately £36.7 perMWh and £35.9 per MWh respectively as at 31 August 2007. The increase in average achieved price reflected the benefit from forward salescontracts secured in the higher margin months of prior periods for power nowdelivered in 2007, partially offset by lower prices in the prompt markets. Price of coal and other fuelsWe burnt approximately 4.8 million tonnes of coal in the six months ended 30June 2007 compared to approximately 5.0 million tonnes in 2006. This coal waspurchased from a variety of domestic and international sources under eitherfixed or variable priced contracts with different maturities. Spot prices forinternationally traded coal delivered into North West Europe (as reflected bythe TFS API 2 index) rose from US$54 per tonne at the end of December 2005 toUS$68 per tonne at the end of December 2006, and then to US$79 per tonne at theend of June 2007. We also burn biomass, petroleum coke ("petcoke") and fuel oil, although coalcomprised around 97% of total fuel costs in 2007 (excluding CO2 emissionsallowances), which was an increase compared with 2006 when coal comprised around90% of total fuel costs. The increase in coal burn resulted from the reductionin the amount of co-fired electricity qualifying for ROCs from April 2006. Theaverage cost of fuel per MWh (excluding CO2 emissions allowances) for the sixmonths ended 30 June 2007 was £17.6 compared to £17.0 in 2006. CO2 emissions allowancesOur CO2 emissions allowances requirement for the six months ended 30 June 2007,in excess of those allocated under the UK NAP, was approximately 3.6 milliontonnes compared to approximately 4.0 million tonnes in 2006, with the reductionlargely due 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 period, closing at €0.13 per tonne on 30 June 2007. The average priceexpensed for CO2 emissions allowances during the six months ended 30 June 2007was £3.0 per tonne compared to £18.2 per tonne in 2006. Outages and plant utilisation levels Six months Six months ended ended 30 June 30 June 2007 2006Forced outage rate (%) 7.0 4.8Planned outage rate (%) 6.6 8.6Total outage rate(1) (%) 13.1 13.0Availability (%) 86.9 87.0Electrical output (net sales) (TWh) 12.0 12.4Load factor (%) 73.9 76.0 Note: (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 six months ended 30 June 2007 was 87% after takingaccount of both forced and planned outages, which is the same level ofperformance achieved for the corresponding period in 2006. The winter forced outage rate in the first quarter of 2007 was 3.6% (3.3% in2006). This compares favourably with a forced outage rate of 7.0% for the sixmonths ended 30 June 2007 (4.8% in 2006), of which approximately 1.3% was due toa decision to undertake a number of elective forced outages to inspect boilertubes following a tube failure at an older UK coal-fired power station. 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 forced outage rate of 4.5%. Our maintenance regime includes a major planned outage for each unit every fouryears. Consequently, there is an irregular pattern of planned outages andassociated expenditure, since in two of the four years; two units will undergo amajor outage. The planned outage rate achieved for the six months ended 30 June2007 was 6.6% compared to 8.6% in 2006, with a major planned outage on one unitsubstantially completed in both periods. A second major planned outage for 2007is currently in progress. Health and safetyThe lost time injury rate was 0.44% for the six months ended 30 June 2007compared to 0.15% in 2006. Although this represents a deterioration, the safetyprogrammes implemented in the last few years are becoming well entrenched andare delivering sound performance, and our safety record compares favourably tointernational benchmarks. Liquidity and capital resourcesNet debt was £271 million as at 30 June 2007 compared to £152 million at 30 June2006 and £321 million at 31 December 2006. Cash and cash equivalents were £165 million as at 30 June 2007 compared to £298million at 30 June 2006 and £155 million at 31 December 2006. The changes incash and cash equivalents are analysed in the following table. Analysis of cash flows Six months Six months ended ended 30 June 30 June 2007 2006Net cash generated from operating activities 234 335Net cash used in investing activities (24) (12)Net cash used in financing activities (200) (113)Net increase in cash and cash equivalents 10 210 Net cash generated from operating activities was £234 million in the six monthsended 30 June 2007 compared to £335 million in 2006. The decrease reflectedlower cash received under the TXU claim (£6 million cash received under theclaim in the six months ended 30 June 2007 compared to £55 million in 2006) andan increase of £49 million in income taxes paid. The impact of improved businessperformance, EBITDA having increased by £49 million, was offset by increasedworking capital utilisation in 2007, including a higher coal stock build and asignificantly lower liability with respect to CO2 emissions allowances. Net cash used in investing activities, which represented capital expenditurepayments in both periods, was £24 million for the six months ended 30 June 2007compared to £12 million in 2006 (see Capital expenditure below). Net cash used in financing activities was £200 million in the six months ended30 June 2007 compared to £113 million in 2006. The 2007 amounts included equitydividends paid of £155 million, the final bridge loan prepayment of £3 million,a term loan repayment of £40 million and purchases of own shares to meetcommitments under share-based incentive plans of £2 million. The 2006 amountsincluded a bridge loan prepayment of £55 million and a term loan repayment of£58 million. The increase in cash and cash equivalents was £10 million in the six monthsended 30 June 2007, compared to £210 million in 2006. Drax's policy is to investavailable cash in short-term bank, building society or other low risk deposits. Capital resources and refinancingDrax is committed to maintaining an appropriate capital structure. Since Listingin December 2005, senior secured debt has fallen from £500 million to £445million at 30 June 2007 (before deferred financing costs of £10 million),through a combination of scheduled debt repayments and the raising of additionalsecured debt. Senior secured debt is expected to reduce by a further £40 millionto £405 million (before deferred financing costs of £8 million) on 31 December2007, following the next scheduled debt repayment due on that date. In line withour commitment to shareholders, we expect to embark on a refinancing of ourcurrent debt facilities in the second half of 2007 (market conditionspermitting) to ensure balance sheet efficiency is maintained. Seasonality of borrowingOur business is seasonal with higher economic despatch in the Winter period andlower economic despatch in the Summer months. Accordingly, cash flow during theSummer months is materially reduced due to the combined effect of lower pricesand output, while maintenance expenditures are increased during this period dueto major planned outages. The Group's £100 million revolving credit facilityassists in managing the cash low points in the cycle where required. Therevolving credit facility was undrawn at 30 June 2007. Capital expenditureIn March 2007, we announced that we expected to incur total capital expenditureof approximately £260 million over the three years 2007 to 2009. Of this, around£150 million specifically related to the turbines upgrade project, condenser andfeed system plant improvements and investments in extending our biomasscapability. The remainder comprised smaller value enhancing investments andother expected capital expenditure in support of current operations. We plan tofund these investments from a combination of operational cash flows and debt. In relation to the turbines upgrade project, we expect to invest up to £100million over a five year programme, including approximately £68 million over thenext three years, to upgrade the high pressure and low pressure turbine moduleson all six generating units to improve efficiency. Using proven technology weexpect to achieve an overall baseload efficiency (that is, the ratio of energyout to energy in when operating at full capacity) approaching 40%. Thisrepresents a 5% improvement on current baseload efficiency of 38%. 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 will be undertaken during the planned outageprogramme, is currently expected to take place between the third quarter of2007, starting with the high pressure turbine on unit 3, and 2011. In terms of extending our biomass capability, the 2006 Energy Review and theexpected changes in the co-firing regime have allowed us to formalise our targetto produce 10% of our output from burning biomass by the end of 2009.Achievement of this target is expected to result in savings of over two milliontonnes of CO2 emissions allowances, the displacement of approximately onemillion tonnes of coal and the generation of in excess of two and a half millionROCs per annum. To achieve the target will require additional investment inpeople and infrastructure. In March 2007, we announced that we expected toinvest up to £47 million over the next three years to extend our directinjection capability from one generating unit to all six generating units, andto install the necessary processing and handling infrastructure to ensure we areable to handle up to 1.5 million tonnes of biomass material per annum. Sincemaking the announcement, we have appointed design engineers to develop detailedproject plans in support of the planning application and the letting ofconstruction contracts in due course. We expect to update the market on progresswhen we present our preliminary results in March 2008. We will continue to evaluate other opportunities which may result in additionalexpenditure. Further investment will be required beyond 2009 and prior to 2016to meet the requirements of the Large Combustion Plant Directive. Share-based incentive plansUnder 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 six months ended 30 June 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 six monthsended 30 June 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 of partnership shares (out of pre tax pay) in any one tax year.Matching shares are awarded to employees to match any partnership shares theybuy, in a ratio of one to one for the 2007/08 tax year, with the cost ofmatching shares borne by the Group. As at 30 June 2007, a total of 93,570matching shares had been purchased and were held in trust on behalf ofqualifying employees. The fair value of matching shares awarded up to 30 June2007 (determined at the award dates) of £0.7 million is being charged to theincome statement on a straight-line basis over a one year vesting period(matching shares are forfeited if an employee leaves Drax within one year of theaward). ESIP awards over 361,582 shares were granted to executive directors and othersenior staff in April and June 2007, with performance measured over the threeyears to 31 December 2009 and potential vesting in April 2010. The fair value ofthe 2007 ESIP awards (determined at the grant date) of £0.9 million, which takesinto account 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. Closing cash position guidanceWe issued a Trading Update on 29 June 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 the cashposition as at 30 June 2007 would be in the range £160 million to £165 million.The reported cash position as at 30 June 2007 was £165 million. Contracted position for 2007, 2008 and 2009Since issuing the Trading Update on 29 June 2007, we have continued to trade inline with expectations and to follow our stated trading strategy of makingforward power sales with corresponding CO2 emissions allowances and coalpurchases. Our aim is to deliver market level or better dark green spreadsacross all traded market periods and, as part of this strategy, we retain powerto be sold into the prompt (within season) power markets. As at 31 August 2007, the contracted power sales for 2007, 2008 and 2009 were asfollows: 2007 2008 2009Output (TWh) 22.8 16.0 10.3Comprising:- Fixed price power sales (TWh) at 21.5 at 10.7 at 5.0 at an average achieved price (per MWh) £45.4 £46.3 £39.2- Fixed margin power sales(TWh) 1.3 5.3 5.3CO2 emissions allowances hedged(including UK NAP allocation,market purchases and structuredcontracts) - (TWh equivalent) 23.9 16.9 17.3Solid fuel at fixedprice/hedged, includingstructured contracts (TWh equivalent) 24.3 15.9 11.2 Fixed margin power sales include approximately 1.3TWh in 2007 and 5.3TWh in 2008and 2009 under the five and a quarter year Baseload contract with Centrica whichcommences on 1 October 2007. Under this contract the Group will supply power onterms which include Centrica paying for coal based on international coal prices,and delivering matching CO2 emissions allowances amounting to approximately 4.7million tonnes per annum. The contract provides the Group with a series of fixeddark green spreads which were agreed in the first quarter of 2006. The contracted position for CO2 emissions allowances reflects the annualallocation made under the EU ETS and allowances due to be delivered under theterms of the Centrica contract. The contracted position for solid fuel includesthe coal volumes specified under the terms of the Centrica contract, whicheffectively remove the risk from Drax of price movements in respect of thatcoal. We expect to issue a further Trading Update on or around 18 December 2007. DistributionsDistribution policy The 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 provisionfor debt payments, debt service requirements (if any), capital expenditure andother expected business requirements, will be distributed to shareholders. Dividends paidOn 7 March 2007, the Board resolved to pay a final dividend for the year ended31 December 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, became effective on 30 April 2007. The final and special dividends were subsequently paid on 16 May 2007. Dividends proposedOn 5 September 2007, the Board resolved to pay an interim dividend for the sixmonths ended 30 June of 4.7 pence per share (equivalent to approximately £17million) on 24 October 2007. Shares will be marked ex-interim dividend on 3October 2007. Special distribution - share buy backOn 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. On completion of the buy back programme, returns toshareholders for the six months ended 30 June 2007 will amount to approximately£100 million, being the total of the interim dividend and share buy backprogramme. The buy back programme exercises the authority granted to the Company byshareholders at the Annual General Meeting held on 26 April 2007, whereby theCompany is authorised to buy back up to 35.2 million ordinary shares(representing approximately 10% of the issued ordinary share capital). Based onthe closing share price of 665 pence on 31 August, the intended programmerepresents approximately 3.5% of the issued ordinary share capital. The immediate intended programme will cover market purchases by the Company ofshares up to the value of approximately £83 million, which will subsequently becancelled. The exact amount and timing of purchases will be determined by theCompany and is dependent on market conditions and other factors. However, it is anticipated this will be achieved in this calendar year. The special distribution is based on the closing cash position on 30 June 2007after allowing for the working capital needs of the business during the Summermonths and for a deduction of approximately £17 million to fund the base interimdividend. Working capital needs are impacted by expected payments relating tothe planned outages on two of our generating units and the capital expenditureprogramme, both of which are weighted towards the second half of the financialyear. Previous special distributions have been made through the payment of a specialdividend combined with a share consolidation. However, in view of current marketconditions, the size of distribution, views expressed by shareholders and afterhaving taken advice, the Board considers the appropriate method of returningsurplus cash to shareholders at present is through the introduction of a sharebuy back programme. The Board intends to keep under review the most appropriate method for makingany future special distributions. Gordon BoydFinance Director Condensed consolidated income statements Six months Year ended 31 ended 30 June December Notes 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mContinuing operationsRevenue 639.7 650.0 1,387.0Fuel costs (257.8) (329.9) (641.3) 381.9 320.1 745.7 Other operatingexpenses excludingexceptional items (111.7) (99.0) (197.6)Other exceptionaloperating income 5 6.2 19.0 19.0Total other operatingexpenses (105.5) (80.0) (178.6)Unrealised gains onderivative contracts 6.9 89.1 90.8Operating profit 283.3 329.2 657.9Interest payable andsimilar charges (17.4) (18.2) (37.1)Interest receivable 7.2 5.7 13.4Profit before tax 273.1 316.7 634.2Tax charge 6 (53.0) (85.0) (170.7)Profit for the periodattributable to equity shareholders from continuingoperations 220.1 231.7 463.5 pence per share pence per share pence per shareEarnings per sharefrom continuing operations- Basic and diluted 7 60 57 116 Condensed consolidated statements of recognised income and expense Six months Year ended 31 ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mProfit for the period 220.1 231.7 463.5 Actuarial gains on definedbenefit pension scheme 9.2 9.8 8.6Deferred tax on actuarialgains on defined benefit pension scheme before impact of reduction in taxrate (2.8) (2.9) (2.6)Impact of reduction in tax rate on deferred tax on defined benefit pension scheme (0.4) - -Fair value (losses)/gainson cash flow hedges (152.6) 132.6 468.2Deferred tax recognised on fair value losses/gains on cash flow hedges before impact of reduction in tax rate 45.8 (39.8) (140.5)Impact of reduction in tax rate on deferred tax on fair value losses/gains on cash flow hedges 1.0 - -Net (losses)/gains notrecognised in income statement (99.8) 99.7 333.7Total recognised incomefor the period attributable to equity shareholders 120.3 331.4 797.2 Condensed consolidated balance sheets As at 30 June As at 31 December Notes 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mAssetsNon-current assetsProperty, plant and equipment 1,062.3 1,044.5 1,042.2Derivative financial 42.0 19.5 93.9instruments 1,104.3 1,064.0 1,136.1Current assetsInventories 97.6 75.6 76.9Trade and other receivables 65.4 110.0 171.4Derivative financial 181.6 61.7 257.2instrumentsCash and cash equivalents 164.6 298.2 154.8 509.2 545.5 660.3LiabilitiesCurrent liabilitiesFinancial liabilities:- Borrowings 10 14.8 25.3 19.8- Derivative financial 8.5 47.8 6.8instrumentsTrade and other payables 90.2 174.4 166.8Current tax liabilities 82.5 32.1 63.2 196.0 279.6 256.6Net current assets 313.2 265.9 403.7Non-current liabilitiesFinancial liabilities:- Borrowings 10 420.3 425.3 456.4- Derivative financial 16.6 26.4 -instrumentsDeferred tax liabilities 332.9 287.2 390.9Retirement benefit obligations 9 2.3 35.0 12.5Other non-current liabilities 1.0 1.0 0.7Provisions 2.3 2.1 2.2 775.4 777.0 862.7Net assets 642.1 552.9 677.1Shareholders' equityIssued equity 11 40.7 40.7 40.7Share premium 420.7 420.7 420.7Merger reserve 710.8 710.8 710.8Hedge reserve 145.1 16.0 250.9Retained losses (675.2) (635.3) (746.0)Total shareholders' equity 642.1 552.9 677.1 Condensed consolidated statements of changes in equity Share Share Merger Hedge Retained Total capital premium reserve reserve losses £m £m £m £m £m £mAt 1January 40.7 420.7 710.8 (76.8) (875.2) 220.22006Profit forthe - - - - 463.5 463.5periodEquitydividends - - - - (342.0) (342.0)paidActuarialgains ondefinedbenefitpension - - - - 8.6 8.6schemeDeferredtaxonactuarialgains ondefined - - - - (2.6) (2.6)benefitpensionschemeFair valuegains oncash - - - 468.2 - 468.2flow hedgesDeferredtaxrecognisedonfair value - - - (140.5) - (140.5)gains on cashflow hedgesNetmovementin equityassociatedwithshare-based - - - - 1.7 1.7paymentsAt 31December 40.7 420.7 710.8 250.9 (746.0) 677.12006At 1January 40.7 420.7 710.8 (76.8) (875.2) 220.22006Profit forthe - - - - 231.7 231.7periodActuarialgains ondefinedbenefitpension - - - - 9.8 9.8schemeDeferredtaxonactuarialgains ondefined - - - - (2.9) (2.9)benefitpensionschemeFair valuegains oncash - - - 132.6 - 132.6flow hedgesDeferredtaxrecognisedonfair value - - - (39.8) - (39.8)gains oncashflow hedgesNetmovementin equityassociatedwithshare-based - - - - 1.3 1.3paymentsAt 30 June 40.7 420.7 710.8 16.0 (635.3) 552.92006At 1January 40.7 420.7 710.8 250.9 (746.0) 677.12007Profit forthe - - - - 220.1 220.1periodEquitydividends - - - - (155.0) (155.0)paidActuarialgains ondefinedbenefitpension - - - - 9.2 9.2schemeDeferredtaxonactuarialgains ondefinedbenefitpensionscheme - - - - (2.8) (2.8)beforeimpactofreductionin tax rateImpact ofreductionintax rate ondeferredtaxon defined - - - - (0.4) (0.4)benefitpensionschemeFair valuelosses oncash - - - (152.6) - (152.6)flow hedgesDeferredtaxrecognisedonfair valuelosses oncashflow hedges - - - 45.8 - 45.8beforeimpactofreductionin tax rateImpact ofreductionintax rate ondeferredtaxon fair - - - 1.0 - 1.0valuelosses oncashflow hedgesNetmovementin equityassociatedwithshare-based - - - - 0.4 0.4paymentsTreasuryshares held - - - - (0.7) (0.7)At 30 June 40.7 420.7 710.8 145.1 (675.2) 642.12007 Condensed consolidated cash flow statements Six months Year ended 31 ended 30 June December Notes 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mCash generated fromoperations 12 290.9 338.3 586.5Income taxes(paid)/received (48.1) 1.1 (50.0)Decrease in restrictedcash - 11.3 11.2Interest paid (15.9) (20.2) (36.1)Interest received 7.0 4.7 13.5Net cash generated fromoperating activities 233.9 335.2 525.1Cash flows from investingactivitiesPurchase of property,plant and equipment (23.9) (12.2) (27.0)Net cash used ininvesting activities (23.9) (12.2) (27.0)Cash flows from financingactivitiesEquity dividends paid 8 (155.0) - (342.0)Repayment of borrowings 10 (42.9) (112.6) (189.1)Debt issued 10 - - 100.0Purchase of own shares (2.3) - -Net cash used infinancing activities (200.2) (112.6) (431.1)Net increase in cashand cash equivalents 9.8 210.4 67.0Cash and cashequivalents atbeginning of the period 154.8 87.8 87.8Cash and cashequivalents at end ofthe period 164.6 298.2 154.8 Notes to the condensed consolidated financial statements 1. General informationDrax Group plc (the ''Company'') is a company incorporated in England and Walesunder the Companies Act 1985. Drax Group plc and its subsidiaries (together the''Group'') operate in the electricity generation industry within the UK. Theaddress of Drax Group plc's registered office and principal establishment isDrax Power Station, Selby, North Yorkshire YO8 8PQ, United Kingdom. 2. Basis of preparationThe condensed consolidated financial statements have been prepared usingaccounting policies consistent with International Financial Reporting Standards("IFRSs") and in accordance with IAS 34 ''Interim Financial Reporting''. The information for the year ended 31 December 2006 does not constitutestatutory accounts as defined in Section 240 of the Companies Act 1985. A copyof the statutory accounts for that year has been delivered to the Registrar ofCompanies. The auditors' report on those accounts was not qualified and did notcontain statements under Section 237(2) or (3) of the Companies Act 1985. The condensed consolidated financial statements were approved by the Board on 5September 2007. 3. Significant accounting policiesThe accounting policies adopted are consistent with those followed in thepreparation of the Group's annual financial statements for the year ended 31December 2006. In the current financial year, the Group will adopt IFRS 7 "FinancialInstruments: Disclosures" for the first time. As IFRS 7 is a disclosurestandard, there is no impact of this change in accounting policy on this interimreport. Full details of the change will be disclosed in the Group's annualreport for the year ended 31 December 2007. 4. Segmental reportingTurnover comprises primarily sales of electricity generated by the Group to theelectricity wholesale market in England and Wales. As such, the Group has onlyone business segment and one geographical segment. 5. Other exceptional operating income Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mOther exceptional operating income:Distributions under the TXU claimreceived in:- July 2006 - 19.0 19.0- April 2007 6.2 - -Total other exceptionaloperating income 6.2 19.0 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 proceeds have been used toprepay debt secured against the claim, which has now been repaid in full. 6. TaxationThe income tax expense reflects the estimated effective rate on profit beforetaxation for the Group for the year ending 31 December 2007 and the movement inthe deferred tax balance in the period, so far as it relates to items recognisedin the income statement. In June 2007 the Finance Bill was presented to Parliament for approval. The billproposed a reduction in the rate of UK corporation tax from 30% to 28% witheffect from 1 April 2008. At 30 June 2007 the rate reduction was substantivelyenacted, and accordingly the tax charge for the six months ended 30 June 2007includes a credit of £18.5 million to reflect the impact on deferred tax. Thisrate reduction will also reduce the amount of tax payable on future profits. Although amendments to the industrial buildings allowance regime were alsoproposed in the 2007 budget announcement, these amendments were notsubstantively enacted at 30 June 2007 and accordingly have not been reflected inthe Group's results for the six months ended 30 June 2007. The directors haveestimated that, had these amendments been reflected in the Group's results forthe six months ended 30 June 2007, the effect would be to increase the deferredtax liability held in the balance sheet by approximately £11 million. Six months Year ended 31 ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mTax charge comprises:Current tax 67.3 25.8 108.2Deferred tax:- Before impact ofreduction in tax rate 4.2 59.2 62.5- Impact of reduction intax rate (18.5) - - 53.0 85.0 170.7 Under the current financing structure, Drax Holdings Limited ("Holdings"), awholly owned subsidiary undertaking of the Company, is partially funded by aEurobond payable to another group company, with a tax deduction being claimedfor all of the corresponding interest charged in the Holdings income statement.Were HM Revenue & Customs to successfully challenge the deductions claimed inrespect of the Eurobond coupons for open years to 31 December 2006, it isestimated that the additional tax liability would be up to £73 million, togetherwith interest and penalties. 7. Earnings per shareDuring the period 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 period. 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'sSAYE Plan and contingently issuable shares under the Group's ESIP. Reconciliations of the earnings and weighted average number of shares used inthe calculation are set out below. Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mEarnings:Earnings attributable toequity holders of theCompany for the purposesof basic and dilutedearnings 220.1 231.7 463.5 Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) millions millions millionsNumber of shares:Weighted average number ofordinary shares for thepurposes of basic earningsper share 364.8 407.0 400.0Effect of dilutivepotential ordinary sharesunder share options 0.2 - 0.1Weighted average number ofordinary shares for thepurposes of dilutedearnings per share 365.0 407.0 400.1 The effect of the amendments to the Group's calculation of earnings per sharecan be summarised as follows: Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited)Number of shares:Weighted average number ofordinary shares for thepurposes of basic earningsper share as previouslyreported (millions) 352.4 407.0 368.9Effect of shareconsolidations frombeginning of relevantperiod (millions) 12.4 - 31.1Weighted average number ofordinary shares for thepurposes of basic earningsper share under revisedbasis (millions) 364.8 407.0 400.0Earnings attributable toequity holders of theCompany for the purposesof basic and dilutedearnings (£ millions) 220.1 231.7 463.5Basic earnings per shareas previously reported(pence per share) 62 57 126Basic earnings per shareunder revised basis (penceper share) 60 57 116 The effect of this amendment in respect of diluted earnings per share is thesame as set out above. 8. Dividends Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mAmounts recognised as distributionsto equity holders in the period(based on the number of shares inissue at the record date):Final dividend for theyear ended 31 December2006 of 9.1 pence pershare paid on 16 May 2007 33.6 - -Special interim dividendfor the year ended 31December 2006 of 32.9pence per share paid on 16May 2007 121.4 - -Interim dividend for theyear ended 31 December2006 of 4 pence per sharepaid on 25 October 2006 - - 16.3Special interim dividendfor the year ended 31December 2006 of 80 penceper share paid on 25October 2006 - - 325.7 155.0 - 342.0 Year ended 31 Six mony months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mAmounts not recognised asdistributions to equity holders inthe period:Proposed interim dividendfor the six months ended30 June 2007 of 4.7 penceper share (2006: 4 penceper share paid on 25October 2006) 16.6 16.3 -Special interim dividendfor the six months ended30 June 2006 of 80 penceper share paid on 25October 2006 - 325.7 -Proposed final dividendfor the year ended 31December 2006 of 9.1 penceper share paid on 16 May2007 - - 33.6Proposed special interimdividend for the yearended 31 December 2006 of32.9 pence per share paidon 16 May 2007 - - 121.4 16.6 342.0 155.0 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 on 24 October 2007. The interimdividend of 4.7 pence per share has not been included as a liability as at 30June 2007. Also 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 as described in the Business and financial review. 9. PensionThe most recent actuarial valuation of the approved defined benefit schemeoperated on behalf of the Drax Power Group of the Electricity Supply PensionScheme was updated as at 30 June 2007 to reflect relevant changes inassumptions. The principal change from those assumptions adopted at 31 December2006 was a change in the discount rate from 5.1% to 5.8%, reflecting marketconditions at each date. 10. Financial liabilities - borrowings As at 30 June As at 31 December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mCurrent:Term loans 14.8 6.3 19.8Bridge loan - 19.0 - 14.8 25.3 19.8 As at 30 June As at 31 December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mNon-current:Term loans 420.3 422.4 453.5Bridge loan - 2.9 2.9 420.3 425.3 456.4 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 are based on the fixed minimumrepayment profile. Repayments above the fixed minimum repayment profile arepermitted, subject to the amount of cash available for debt service. £40 millionof the term loan was repaid on 29 June 2007. Previously, repayments of £57.5million were made on each of 30 June 2006 and 29 December 2006. All repaymentshave been made in line with the target repayment profile as a result of thelevels of cash available for debt service. 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 in to a further credit facility agreementproviding an additional £100 million borrowing facility on similar terms andwith a similar repayment profile to existing borrowings. The facility was drawndown in full on 3 July 2006 and is included within the term loans in the tableabove. 11. Called up share capital As at As at 30 June 31 December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mAuthorised:30 June 2007 - 865,238,823 ordinaryshares of £0.11 16/29 each 100.0 - -31 December 2006 - 905,796,893ordinary shares of £0.11 1/29 each - - 100.030 June 2006 - 999,500,020 ordinaryshares of £0.10 each - 100.0 -Issued and fully paid:30 June 2007 - 352,402,304 ordinaryshares of £0.11 16/29 each 40.7 - -31 December 2006 - 368,921,151ordinary shares of £0.11 1/29 each - - 40.730 June 2006 - 407,085,395 ordinaryshares of £0.10 each - 40.7 - 40.7 40.7 40.7 The movement in allotted and fully paid share capital of the Company during eachperiod was as follows: Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) Number Number NumberAt beginning of the period 368,921,151 406,927,661 406,927,661Issued under employeeshare schemes - 157,734 157,734Effect of shareconsolidation (16,518,847) - (38,164,244)At end of the period 352,402,304 407,085,395 368,921,151 The Company undertook a share consolidation in connection with the interimspecial dividend paid on 16 May 2007 (note 8). Following approval at the AnnualGeneral Meeting held on 26 April 2007, the share consolidation under whichshareholders received 64 new ordinary shares of 11 16/29 pence each for every 67existing ordinary shares of 11 1/29 pence each, became effective on 30 April2007. 12. Cash flow from operating activities Year ended 31 Six months ended 30 June December 2007 2006 2006 (Unaudited) (Unaudited) (Audited) £m £m £mContinuing operationsProfit for the period 220.1 231.7 463.5Adjustments for:Interest payable andsimilar charges 17.4 18.2 37.1Interest receivable (7.2) (5.7) (13.4)Tax charge 53.0 85.0 170.7Depreciation 17.4 17.5 34.9Unrealised gains onderivative contracts (6.9) (89.1) (90.8)Non-cash charge forshare-based payments 2.0 1.3 1.7Operating cash flowsbefore movement in workingcapital 295.8 258.9 603.7Changes in working capital:Increase in inventories (20.7) (6.2) (9.1)Decrease in receivables 106.0 83.9 19.7(Decrease)/increase inpayables (89.3) 1.5 (4.4)(Decrease)/increase inpensions (1.0) 0.1 (23.6)Increase in provisions 0.1 0.1 0.2Cash generated fromoperations 290.9 338.3 586.5 Independent Review Report to Drax Group plc IntroductionWe have been instructed by the Company to review the financial information forthe six months ended 30 June 2007, which comprises the condensed consolidatedincome statements, the condensed consolidated balance sheets, the condensedconsolidated statements of recognised income and expense, the condensedconsolidated statements of changes in equity, the condensed consolidated cashflow statements and related notes 1 to 12. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the Company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe Company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority and the requirements of IAS 34 whichrequire that the accounting policies and presentation applied to the interimfigures are consistent with those applied in preparing the preceding annualaccounts except where any changes, and the reasons for them, are disclosed. Review work performedWe conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. Deloitte & Touche LLPChartered AccountantsLondon Glossary Ancillary servicesServices provided by National Grid used for balancing supply and demand ormaintaining secure electricity supplies within acceptable limits. They aredescribed in connection Condition 8 of the Grid Code. AvailabilityAverage percentage of time the units were available for generation. Average achieved pricePower revenues divided by volume of net sales (includes imbalance charges). Average capture priceRevenue derived from bilateral contracts divided by volume of net merchantsales. Balancing mechanismThe period during which the System Operator can call upon additional generation/consumption or reduce generation/consumption, through market participants' bidsand offers, in order to balance the system minute by minute. BaseloadRunning 24 hours per day, seven days per week remaining permanently synchronisedto the system. Bilateral contractsContract with counterparties and power exchange trades. CompanyDrax Group plc. Dark green spreadThe difference between the price available in the market for sales ofelectricity and the marginal cost of production (being the cost of coal andother fuels including CO2 emissions allowances). EBITDAProfit before interest, tax, depreciation and amortisation, exceptional itemsand unrealised gains/(losses) on derivative contracts. ESIPThe Drax Group plc Restricted Share Plan, also known as the Drax Group plcExecutive Share Incentive Plan. EU ETSThe EU Emissions Trading Scheme is a policy introduced across Europe to reduceemissions of CO2, the scheme is capable of being extended to cover allgreenhouse gas emissions. Forced outageAny reduction in plant availability excluding planned outages. Forced outage rateThe capacity which is not available due to forced outages or restrictionsexpressed as a percentage of the maximum theoretical capacity, less plannedoutage capacity. GroupDrax Group plc and its subsidiaries. IASsInternational Accounting Standards. IFRSsInternational Financial Reporting Standards. LECSLevy Exemption Certificate. Evidence of Climate change levy exempt electricitysupplies generated from qualifying renewable sources. Load factorNet sent out generation as a percentage of maximum sales. Net balancing mechanismNet volumes attributable to accepted bids and offers in the balancing mechanism. Net merchant salesNet volumes attributable to bilateral contracts and power exchange trades. Net salesThe aggregate of net merchant sales and net balancing mechanism. Occupational health and safety assessment series (OHSAS).The OHSAS specification gives requirements for an occupational health and safety(OH&S) management system, to enable an organisation to control its OH&S risksand improve its performance. Planned outageA period during which scheduled maintenance is executed according to the budgetset at the outset of the year. Planned outage rateThe capacity not available due to planned outages expressed as a percentage ofthe maximum theoretical capacity. Power exchange tradesPower sales or purchases transacted on the APX UK power trading platform. Power revenuesThe aggregate of bilateral contracts and balancing mechanism income/expense. ROCsRenewables Obligation Certificates. One ROC is issued to eligible generators forevery MWh of electricity generated from renewable sources. SAYE planThe Drax Group plc Approved Savings Related Share Option Plan. SIPThe Drax Group plc Approved Share Incentive Plan. SummerThe calendar months April to September. Summer baseload market closeMarket price on the last day that the season was traded as a product. TXUTXU Europe Energy Trading Limited (in administration and subject to a companyvoluntary arrangement). TXU claimThe claim issued by the Group, ultimately agreed by the Administrators of TXU atapproximately £336 million (excluding VAT) in respect of unpaid power purchasedby TXU and liquidated damages under the TXU contract. TXU contractA 15 year power purchase agreement with TXU. UK NAPUK National Allocation Plan. WinterThe calendar months October to March. Winter baseload market closeMarket price on the last day that the season was traded as a product. --- ENDS --- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Drax