TIDMDRX
RNS Number : 1836F
Drax Group PLC
26 July 2016
26 July 2016
DRAX GROUP PLC (Symbol: DRX)
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 JUNE 2016
Achieving c.70% renewable energy generation, providing c.20% of
UK renewable electricity
Six months ended 30 June H1 2016 H1 2015
-------------------------------------- -------- --------
Key financial performance measures
EBITDA (GBP million)(1) 70 120
Underlying earnings (GBP million)(2) 17 41
Underlying earnings per share
(pence)(2) 4.2 10.2
Total dividends (pence per
share)(3) 2.1 5.1
Closing cash (GBP million)(4) 235 282
Statutory accounting measures
Profit before tax (GBP million) 184 53
Reported basic earnings per
share (pence) 37 10
-------------------------------------- -------- --------
Financial and Operational Highlights
-- EBITDA down GBP50 million on H1 2015
- Year on year reduction driven by loss of LECs(5) and
deterioration in commodity markets
- Impact mitigated by growth in system support markets
-- Statutory profit before tax includes unrealised gains related to foreign currency hedging
-- Healthy cash flows and balance sheet
Biomass Highlights
-- c.70% of generation from biomass in H1 2016 (H1 2015: 37%)
-- Investment on schedule and budget
-- US pellet operations performing in line with plan
Outlook
-- Underlying business performing in line with expectations expressed in April(6)
-- EU state aid approval of CfD contract expected in Autumn
-- Full year EBITDA remains subject to timing of CfD award - now
expected to be around the low end of the consensus range(7)
Dorothy Thompson, Chief Executive of Drax, said:
"Drax delivered a good operational performance over the last six
months, a period during which around 70% of our electricity
generation was renewable - enough to power Leeds, Manchester,
Sheffield and Liverpool combined - truly a renewable northern
powerhouse.
"Whilst we have seen signs of power and commodity prices
improving, our financial performance was impacted by the
challenging environment in which we operate.
"With our reliable and flexible generation we are well placed to
support the country's electricity system as we prepare for the
tightest winter in many years. With the right conditions, we can do
even more, upgrading further units to use compressed wood pellets
in place of coal. This is the fastest and most reliable way to
decarbonise the UK whilst minimising the cost to the consumer."
NOTES FOR ANALYSTS AND EDITORS
H1 2016 Group Financial Review
-- EBITDA for H1 2016 down 42% at GBP70 million
- Adverse impact of LEC(5) removal and deterioration in
commodity markets
- Mitigated by flexible operation, increasing Ancillary Services
income and cost reductions
-- Underlying earnings per share decreased 59% to 4.2 pence
- Lower net interest charge, reflecting revaluation of US dollar
denominated balances following depreciation of sterling; a non cash
item
-- Reported basic earnings per share of 37 pence includes
unrealised gains on derivative contracts of GBP163 million (and the
associated tax), principally related to foreign currency hedging
programme to support biomass procurement activities
-- Tax charge on underlying profits in line with UK corporation tax rate
-- Capital investment: biomass transformation in line with
original cost guidance of GBP650 - GBP700 million (3 unit
conversions, US supply chain investments and IED(8) compliance)
- H1 2016 capital investment of GBP38 million
- Full year capital investment guidance unchanged at GBP80 -
GBP100 million
-- Interim dividend of 2.1 pence per share, or GBP8 million (H1 2015: 5.1 pence per share,
or GBP21 million), in line with policy to distribute 50% of
underlying earnings
-- Net debt of GBP85 million (31 Dec 2015: GBP187 million),
including cash on hand of GBP235 million
H1 2016 Business Review
Generation
-- Generation: electricity output (net sales) of 10.9TWh (H1 2015: 14.0TWh)
- Significant increase in biomass generation to 7.5TWh (H1 2015:
5.2TWh)
-- Fuel: good progress with biomass volumes
- CfD necessary to underpin acceleration of long-term supply
chain development
-- Increase in Ancillary Services revenue to GBP20 million (H1 2015: GBP6 million)
-- Revised coal strategy
- Focus on short-term markets and reduced major planned outage
investment in 2017
Retail
-- Sales targets achieved, improving profitability
- Gross profit of GBP10 million (H1 2015: GBP8 million)
Biomass Supply
-- Port and pellet plants - good operations, in line with plan
Notes:
(1) EBITDA is defined as profit before interest, tax,
depreciation (including asset obsolescence charges and gains and
losses on asset disposals), amortisation and unrealised gains and
losses on derivative contracts.
(2) H1 2016 underlying earnings exclude unrealised gains on
derivative contracts of GBP163 million (H1 2015: unrealised losses
of GBP3 million) and the associated tax.
(3) Based on 50% of underlying earnings.
(4) Cash and cash equivalents plus short-term investments.
(5) LEC is Levy Exemption Certificate.
(6) Ancillary Services Contract RNS, 1 April 2016.
(7) Based on a range of market forecasts for EBITDA, published
since 1 April, of GBP146 million to GBP185 million. These forecasts
generally assume a CfD Investment Contract for Drax's third unit
conversion with a strike price of GBP100/MWh (2012 real terms) by
July 2016. The Investment Contract remains subject to approval by
the European Commission.
(8) IED is Industrial Emissions Directive.
Forward Looking Statements
This announcement may contain certain statements, statistics and
projections that are or may be forward-looking. The accuracy and
completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy,
projected costs, plans and objectives for the management of future
operations of Drax Group plc ("Drax") and its subsidiaries (the
"Group") are not warranted or guaranteed. By their nature,
forward-looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that may occur in
the future. Although Drax believes that the expectations reflected
in such statements are reasonable, no assurance can be given that
such expectations will prove to be correct. There are a number of
factors, many of which are beyond the control of the Group, which
could cause actual results and developments to differ materially
from those expressed or implied by such forward-looking statements.
These factors include, but are not limited to, factors such as:
future revenues being lower than expected; increasing competitive
pressures in the industry; and/or general economic conditions or
conditions affecting the relevant industry, both domestically and
internationally, being less favourable than expected. We do not
intend to publicly update or revise these projections or other
forward-looking statements to reflect events or circumstances after
the date hereof, and we do not assume any responsibility for doing
so.
This announcement contains inside information for the purpose of
Article 7 of Regulation (EU) No 596/2014.
Results presentation meeting and webcast arrangements
Management will host a presentation for analysts and investors
at 9:00am (UK time), Tuesday 26 July 2016, at The Lincoln Centre,
18 Lincoln's Inn Fields, London, WC2A 3ED.
Would anyone wishing to attend please confirm by either emailing
epayne@brunswickgroup.com or calling Emma Payne at Brunswick Group
on +44 (0) 20 7396 5323.
The meeting can also be accessed remotely via live webcast, as
detailed below. After the meeting, the webcast will be made
available and access details of this recording are also set out
below.
A copy of the presentation will be made available from 7:00am
(UK time) on Tuesday 26 July 2016 for download at:
www.drax.com>>investors>>results_and_reports>>IR
presentations>>2016 or use the link
http://www.drax.com/investors/results-and-reports/ir-presentations/
Event Title: Drax Group plc: Half Year Results
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Event Date: Tuesday 26 July 2016
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Event Time: 9:00am (UK time)
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Webcast Live http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/62965/Lobby/default.htm
Event Link
-------------- ------------------------------------------------------------------------------------------
Start Date: Tuesday 26 July 2016
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Delete Date: Monday 17 July 2017
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Archive Link: http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/62965/Lobby/default.htm
-------------- ------------------------------------------------------------------------------------------
For further information please contact Emma Payne at Brunswick
Group on +44 (0) 20 7396 5323.
Website: www.drax.com
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Chairman's introduction
Drax Group delivered a good operational performance in the first
half of 2016, though financially we continue to feel the effect of
weak commodity markets and the removal of the Climate Change Levy
exemption. It is for this reason Group EBITDA was down 42% to GBP70
million (H1 2015: GBP120 million). This delivered underlying
earnings per share of 4.2p which, in line with our dividend policy,
will result in a payment to shareholders of 2.1 pence per share (H1
2015: 5.1 pence).
The business we have today is operationally strong, with a
robust supply chain and backed by world-leading innovation and
technology. As well as delivering around 8% of the UK's total
electricity, during the six month period we accounted for around
20% of the UK's renewable electricity. We also play an increasingly
critical role in supporting the stability and efficiency of the
UK's electricity grid network.
Over the period, solid progress has been made across all parts
of the business. In the US our biomass manufacturing business
performed well, demonstrating our ability to supply good quality
compressed wood pellets. Our power station in Yorkshire remains
critical to the UK electricity system, a key reason why it was
successful in winning an Ancillary Services contract from National
Grid. Haven, our retail business, had another successful period of
sales. Of particular note is that for the period in question, of
the 10.9 TWh of energy we produced, circa 70% was generated using
compressed wood pellets. We are now, firmly, a predominantly
renewable energy generator, and one of the largest in the UK.
These hard won achievements demonstrate the ability of the Drax
Group to respond in agile ways to varying market and regulatory
conditions and uncertainty. We remain an essential part of the UK
energy mix and an emerging supplier of choice for compressed wood
pellets to the energy sector. Together these will create long-term
shareholder value, but we operate in a complex market that is
changing rapidly and which will continue to present both threats
and opportunities. It is for this reason that the Board will
continue to focus on the strategic direction of the business, on
optimising shareholder value and ensuring the Group is able to
quickly capitalise on attractive opportunities for growth.
We remain convinced that the use of compressed wood pellets
instead of coal has a critical role to play in the affordable
decarbonisation of the UK. We also understand fully that the
sourcing of this material has to be done with the greatest of care.
This is why we require all our suppliers to pass tough
independently conducted screening and sustainability audits. We
never cause deforestation or forest decline. We only take wood from
working forests that grow back and stay as forests. We never source
from areas that are officially protected or where our activities
would harm endangered species.
I would like to place on record my thanks to Melanie Gee who
left the Board in April. Melanie made a strong contribution and
departs with our best wishes for the future.
I would also like to recognise the hard work and dedication of
our people for helping us achieve what are, given the challenging
macro environment, a good set of results. We are an ambitious
business with world leading biomass technology and remain focussed
on driving growth and delivering shareholder value.
Philip Cox CBE
Chairman
25 July 2016
Chief Executive's statement
In the first six months of the year we achieved our long-term
ambition of becoming a predominantly renewable electricity
generator. We also grew our retail business to supply some 7.2 TWh
(H1 2015: 6.8 TWh) of electricity to UK businesses. Of the 10.9 TWh
we generated, 7.5 TWh came from the use of compressed wood pellets,
approximately 70% of the total. For the corresponding period in
2013 (the start of our transformation) we achieved only a tenth of
that, some 0.7 TWh. This has only been possible because of
significant investment in developing and installing leading edge
biomass technology at our power station in Yorkshire and throughout
our entire supply chain. As we have said previously, we stand
ready, with the right support, to further deploy our world leading
biomass technology to become 100% renewable.
Financially, the business continues to be impacted by weak
commodity markets and the removal of the Climate Change Levy
exemption, which has driven the reduction in earnings. Lower power
prices have been partially offset by a stronger than expected
operational performance and efficiency savings. Consequently
revenues have decreased by 2% to GBP1,487 million (H1 2015:
GBP1,511 million) and EBITDA by 42% to GBP70 million (H1 2015:
GBP120 million).
At our full year results I announced a reassessment of our coal
strategy and an efficiency enhancement programme focused on
deploying Lean Management principles in key areas of the business.
We are making good progress with both of these and are confident
that we will deliver significant cost savings. We are also
confident that we will achieve market expectations for full-year
operating expenditure of GBP230-240 million.
There are signs of recovery in the forward power markets (albeit
from very low levels) driven largely by a broader recovery in
commodity prices. This, together with the fact that supply for this
coming winter remains very tight, gives the Group some cause for
cautious optimism. However, this is offset somewhat by the current
macro political and economic uncertainty, especially as to the
level and direction of support the new UK Government will provide
to renewable generation technologies.
The vote by the UK electorate to leave the European Union
presents no immediate risk to Drax. However, we remain concerned
about the impact that a prolonged period of uncertainty may have on
the regulatory framework within which we operate. We have received
assurance from senior officials in both Whitehall and Brussels that
the state aid process currently in progress regarding the awarding
of a Contract for Difference (CfD) for our third coal to biomass
conversion is continuing as planned and will not be affected. We
restate our confidence that a positive decision will be reached in
the Autumn.
Our power station remains a key strategic asset for the UK. With
the continued and steady demise of large thermal generators and no
sign of any new similar capacity coming online in the near term,
our ability to generate the "quality" megawatts needed to ensure
grid stability, will help us improve returns for our
shareholders.
Operational update
Safety
There is no greater priority than the safety of our people, our
contractors and our communities. I am therefore pleased to be able
to report that our safety performance remains in the top quartile
for our peer group with a total recordable injury rate to date of
0.17, half the comparable figure for 2015 of 0.33. We will continue
to seek improvements across all areas of the business.
Sustainability
Our sustainability team, supported by a wide range of external
experts, has continued to develop and strengthen our rigorous
supplier compliance verification and auditing process. It is worth
noting that since the beginning of the year the sustainability
criteria we comply with to secure our Renewable Obligation
Certificates have been a legal requirement.
Following the introduction of the Industrial Emission Directive
(IED) on 1 January 2016, we are on track to deliver a 60% reduction
in our emissions of Nitrogen Oxides (NOx) compared to 2015. This is
being achieved through increased renewable generation, the
introduction of new technologies, such as Selective Non-Catalytic
Reduction, and using a greater percentage of low-nitrogen coal.
Supply (Drax Biomass)
Our compressed wood pellet manufacturing business has performed
well. The production gains we have been able to achieve have
improved per-unit operating costs, resulting in a more competitive
business that is better positioned to respond to changing market
conditions.
Over the period the business filled two key leadership
positions, Senior Vice President for Operations and Chief Financial
Officer, with seasoned professionals with extensive experience in
the wood pellet and energy sectors. These hires represent a
deliberate shift from the start-up and commissioning phase to a
growth-oriented business.
During the second half of 2016, Drax Biomass will continue to
increase its wood pellet production volumes. It will also explore
the potential for entering into new long-term supply contracts with
credit-worthy parties in Asia, Europe and other regions where the
use of compressed wood pellets is gaining government support as an
important component of a low-carbon, renewable energy future. In
addition to diversifying income this will also help underpin
further investment.
Generation (Drax Power)
Our power station provides both baseload generation and a more
responsive, flexible service, utilising both biomass and coal
units.
As a whole the station performed well. There was increased
prompt market and system balancing activity which played to our
strengths and demonstrated, yet again, our importance to the Grid
to ensure system stability and security.
The decision by National Grid to award the business a new 12
month Ancillary Services contract was a clear demonstration of the
value of Drax in helping to keep the UK electricity system robust.
With the reduction in thermal generation capacity and the absence
of new capacity coming online to replace it, the value of those
plants still able to provide despatchable and controllable system
support can only increase over the near-term.
Over the period we generated 7.5 TWh of power from compressed
wood pellets (H1 2015: 5.2 TWh) and 3.4 TWh from coal (H1 2015: 8.8
TWh). We expect a similar performance in H2.
As part of a revised coal strategy, in March of this year we
commenced a review of our long-term approach to maintenance of our
three coal units given that they may not be required to run over
future summer periods. We decided that we would reduce our
investment programme for the coal unit that is due for its four
year major maintenance outage in 2017. This means that we will
execute a restricted scope for the outage. It is worth noting that
this follows a standard double major outage for another of our coal
units and one of our biomass units in 2016. With lower investment
comes risk of lower reliability but we are confident that the unit
will continue to achieve an appropriate rate-of-return, as well as
be available to provide critical system support should the grid
require it. The future maintenance regime for our other coal unit,
due to have its major outage in 2018, remains under review.
The wood pellet market continues to be soft after three
successive warm winters in Europe. Spot prices are low and
liquidity remains limited. This has placed some pellet producers in
financial distress. Longer term we expect prices to stabilise as
new demand comes on line, specifically from Lynemouth and the MGT
plant in Teesside in the UK and new biomass generation projects in
the Netherlands, Belgium, Korea and Japan. Our strategy has always
been to secure our base requirements through long-term contracts
providing secure revenue for our suppliers and secure supplies to
meet our requirements. We also look to hedge the commodity and
foreign exchange exposures that arise in relation to those
contracts up to five years out. During the period our supply chain
continued to work efficiently and effectively, delivering wood
pellets for generation as required.
Retail (Haven Power and Billington Bioenergy)
Haven is a credit-efficient outlet for more than half of the
electricity the Group generates as well as providing an alternative
route to market for the ROCs and REGOs earned when the Group
generates renewable power. It is a robust business with significant
scale and our focus is to improve its contribution to Group EBITDA
whilst maintaining our high levels of customer service and
excellent renewal rate.
Renewals remained strong especially amongst large business, with
Santander and Manchester Airport Group both signing contract
extensions. A significant volume of these extensions is for
renewable power.
Billington performed in line with expectations although it,
along with the rest of the UK domestic wood pellet supply sector,
continues to suffer because of the changes to the Renewable Heat
Incentive.
Regulatory update
We have been advised that the recent decision by the UK to leave
the European Union should have no impact on state aid approval for
the CfD awarded to our third unit conversion. We remain fully
engaged with officials in both Whitehall and Brussels and are
confident that approval will be given in the Autumn.
We have previously expressed disappointment that biomass along
with other renewable technologies were excluded from the last round
of CfD auctions. We believe that for decarbonisation to be as
affordable as possible, all technologies should be allowed to
compete for support on an equal basis. We were therefore pleased
with the recent recommendation by the Competition and Markets
Authority that "...a technology neutral competitive auction should
be DECC's starting point when considering how to allocate CfDs."
However, like many in the renewable industry, we were disappointed
with DECC's response disagreeing with the CMA's conclusion.
It is now more than six months since the Secretary of State
announced a consultation on the closure of coal by 2025, and its
restricted use from 2023. We have been very clear on our desire to
move away from coal as quickly as is practicable but as yet there
has been no further information provided by the UK Government,
although we note recent comments from the former Minister for
Energy on the paramount importance of security of electricity
supply. We continue to work closely with government on regulatory
support for biomass technology. We also continue to make the case
that further deployment of biomass technology is the fastest, most
affordable and reliable way to move away from the fossil fuels of
the past to the renewable energy technology of the future.
Team changes
Over the last six months we have restructured our executive team
to allow us to better respond to the current challenges in the
energy sector as well as be ready to capitalise on any
opportunities should they materialise. At the beginning of the year
Pete Madden assumed executive responsibility for DBI, taking over
from Matthew Rivers who has become Group Corporate Affairs
Director, retaining his responsibility for Sustainability,
Regulation and Communications. Jonathan Kini joined the business in
January and is now CEO of Haven. Andy Koss, in addition to joining
the plc Board, remains CEO of our Generation business.
I am delighted with our re-modelled and leaner senior team. We
have a depth and breadth of experience which is already beginning
to positively challenge and question existing practices as well as
introduce new and more efficient approaches.
Outlook
We said at our full year results, that 2015 was a tough year and
2016 would be equally challenging. Whilst there has been some
recovery in forward power prices they are still well below what
might be considered historic norms. With electricity supply for
this coming winter expected to be very tight, there may well be
short-term price spikes if there is a cold winter in the UK and
continental Europe.
Our power station remains a key strategic asset with the ability
to generate electricity well into the 2030s. The grid still needs
large thermal plants to ensure its stability but the options
available are limited. Logically then, the services we can provide
will accrue value and we have seen that with the recent Ancillary
Services contract.
Our immediate priorities are to continue to improve our wood
pellet production, secure the CfD for our third unit conversion and
develop our retail proposition. We are alert to the need to
identify and develop attractive new opportunities for growth in
order to secure the long-term.
Britain needs affordable decarbonisation. With our world leading
biomass technology, Drax stands ready and able to convert further
units in order to help the country achieve its renewable energy
objectives in a pragmatic and affordable way. We look forward to
re-making our case to the new UK Government.
Dorothy Thompson CBE
Chief Executive Officer
25 July 2016
CFO's report
Introduction
Our financial performance was in line with our expectations and
in the context of difficult and variable market conditions during
the first half of 2016.
Power prices have shown signs of a limited recovery in recent
weeks, but the environment in which we do business remains
challenging. Despite this we have continued to deliver strong
operations, characterised by increasing renewable generation and
the successful shift to running our remaining coal units as a
flexible generation facility offering essential grid support
services.
Our EBITDA for the six months ending 30 June 2016 of GBP70
million is materially lower than for the same period last year (H1
2015: GBP120 million), reflecting the loss of LEC income (approx.
GBP30 million) and more challenging commodity markets, (GBP50
million) in Generation, partially offset by the benefit of higher
Ancillary Services revenues from National Grid (GBP14 million),
improved performance in Retail and Biomass Supply and lower
operating costs. While we are subject to the challenges of
government regulation and commodity prices, we are working hard to
mitigate those risks, as well as to take actions that
counterbalance them.
As mentioned above, the decision by the UK electorate to leave
the European Union presents no immediate risk to Drax. Our
long-standing policy to hedge our purchases of compressed wood
pellets has insulated us from the impact of the significant
depreciation of sterling, particularly against the US dollar. This
is reflected in the significant unrealised gains on our forward
currency portfolio.
Our balance sheet remains strong and we have delivered net cash
flows from operating activities of GBP151 million in the period. We
remain confident in the ability of the business to deliver real
value to shareholders in the longer term and continue to focus on
identifying opportunities to deliver efficiencies and improvements,
particularly in working capital and our operating cost base. This
will be underpinned by revenues which are increasingly contractual
in nature, providing greater certainty to our earnings.
Group Financial Performance
The financial performance of each of our business units is
presented in further detail in note 2 to the Condensed Consolidated
Financial Statements.
Trading Performance
Gross Margin
Our Generation business continues to contribute the majority of
our gross margin and has adapted well to the challenging
environment in which it now operates. Not only have we achieved our
vision for Drax Power Station to become a predominantly renewable
generator but our remaining coal units have successfully
transitioned to a flexible running regime in order to maximise
value in market conditions that do not favour coal-fired
generation. At the same time we continue to provide the essential
support services to the UK's electricity network that reliable
thermal plant is well-positioned to provide.
Total generation output for the six months ending 30 June 2016
was 10.9 TWh, a reduction from 14.0 TWh for the same period in
2015. This is reflective of lower coal-fired generation resulting
from both the modification of a third unit to run as a
"high-biomass" unit in the second half of 2015 and the more
flexible running regime of the remaining coal units in response to
difficult market conditions.
We are now a predominantly renewable generator with compressed
wood pellets accounting for 7.5 TWh, or circa 70%, of our total
output (H1 2015: 5.2 TWh, 37%). We continue to believe that further
deployment of biomass technology represents the fastest, easiest
and most affordable way for the UK to move away from fossil fuels
to a lower carbon energy future.
In addition to the baseload generation revenues from compressed
wood pellets, excellent progress has also been made with Ancillary
Services income, which contributed GBP20 million to our revenue for
the period, compared to GBP6 million for the same period last year.
This is largely due to a new 12-month Ancillary Services contract
signed in April 2016. This is a clear demonstration of the broader
value of Drax's reliable, flexible thermal generation to the UK,
enabling the deployment of more renewables.
However, despite these positive developments, our financial
results have not been immune to external factors. Commodity markets
remain challenging and our average captured power price is down
GBP3 / MWh compared to the first half of 2015. In addition, the
loss of LEC income from August 2015 (described fully in our 2015
Annual Report & Accounts) removed approximately GBP30 million
from our earnings for the first half when compared to the same
period last year.
As a result, Generation gross margin for the six months ended 30
June 2016 of GBP167 million is 27% lower than GBP228 million for
the same period in 2015.
Haven Power has now delivered its annual sales growth targets,
equivalent to GBP1.3 billion in revenues and more than half of our
generation output. Haven remains an important alternative and
credit-efficient route to market for our power and continues to
deliver a high-quality customer experience. Sales performance has
remained strong in the first six months of 2016, with total sales
of 7.2 TWh compared to 6.8 TWh for the same period last year,
whilst third-party costs (that is, those other than the wholesale
cost of electricity) have been in line with our expectations.
Retail gross margin of GBP10 million is slightly ahead of the
same period last year (H1 2015: GBP8 million). Haven remains a net
contributor of cash to the Group and plays a key role in
accelerating ROC cash flows (discussed further under Working
Capital, below). Looking forward, the focus for the business is to
continue improving profitability.
Billington Bioenergy, acquired in March 2015, operates on a
smaller scale than the rest of the Group's operations, with sales
in the period of GBP4 million, but continues to trade in line with
our expectations and delivered breakeven performance at EBITDA
level for the six months.
Performance at Drax Biomass, our compressed wood pellet supply
business in the US, has been encouraging. The business has
demonstrated the ability to produce at or close to maximum capacity
and total output for the first six months of the year is in line
with our expectations. 251 kt of pellets have been shipped to the
UK in the six months ending 30 June 2016 (H1 2015: 53 kt).
Fibre costs are the main driver of margin in this business and
they are currently higher than our long-term expectations as we
work through existing contracts; however per-capita costs of
production are falling as output improves. As a result, Drax
Biomass' gross margin for the six months ending 30 June 2016 is
GBP7 million (H1 2015: loss of GBP2 million).
We have increasing confidence in the robustness of our
facilities and expect a further ramp up in production over the next
12-18 months. Self-supply remains a critical part of our plans to
secure the biomass supply chain, and we are evaluating options for
further development of the business.
Overall, consolidated gross margin of GBP182 million for the
Group is GBP52 million lower than for the same period last year,
principally reflecting lost LEC income and the more challenging
commodity environment.
Operating & Administrative Costs
We have made good progress with our plans to reduce the
operating cost base of the business. As mentioned above, we are
undertaking a reassessment of our coal strategy and an efficiency
enhancement programme focused on Lean Management principles in key
areas of the business. We are making good progress with both of
these initiatives and are confident that we will achieve market
expectations for operating expenditure of GBP230-240 million for
the full year.
At the halfway stage of the year, we have made encouraging
progress with these projects, with the target savings either
realised or secured in our forecasts. Total operating costs of
GBP112 million in the six months ended 30 June 2016 are GBP2
million lower than for the same period last year (H1 2015: GBP114
million). These savings have been delivered without impacting the
operational capabilities of the business. As our Lean program and
the reassessment of our coal strategy continue, we expect to
continue reducing costs into the second half and beyond. Our
changes to the coal outage strategy for next year are a further
example of this.
EBITDA
As a result of the factors described above, consolidated EBITDA
for the six months ending 30 June 2016 was GBP70 million, compared
to GBP120 million for the same period last year.
Depreciation, Finance Costs & Taxation
Depreciation Charges
Depreciation charges (including losses on disposal of assets)
for the six months ended 30 June 2016 of GBP52 million are slightly
higher than GBP50 million for the same period in 2015. This is in
line with our expectations and reflects the continuing progress
made over the preceding 18 months in fully commissioning the assets
associated with our biomass transformation, in particular the
pellet plant and port assets in the US, which entered commercial
operations in July 2015.
During the period we undertook a review of the useful economic
lives of the Generation assets and in particular the coal units.
Whilst there are legitimate questions around the life of the coal
units following UK Government announcements and available margins,
we do not believe that a curtailment of the current lives is
appropriate given the forecast grid capacity constraints, the
flexibility of the plant and the Ancillary Services income
available. This is consistent with the recent announcement
regarding the new 12-month Ancillary Services contract with
National Grid.
Finance Costs
Finance costs reflect a net credit of GBP3 million for the
period (H1 2015: cost of GBP14 million). This includes net interest
costs of GBP10 million offset by GBP13 million of gains generated
principally from the revaluation of dollar-denominated investments
and balances following the depreciation of sterling during June.
These gains form part of our underlying results and, as such, are
included in the calculation of the interim dividend payment. A
breakdown of the components of the net credit is included in note 3
to the condensed consolidated financial statements.
As described under "Net Debt and Funding", below, our financing
platform has remained largely consistent year-on-year and
accordingly cash interest charges on our term loans and revolving
credit facility are in line with those incurred in 2015.
Taxation
The total tax charge for the six months ended 30 June 2016 was
GBP36 million (H1 2015: GBP14 million), an effective rate of 19%
(H1 2015: 27%).
The tax charge arising on underlying profit before tax, that is
excluding the impact of unrealised gains on derivative contracts as
described below, for the six months ended 30 June 2016 was GBP4
million (H1 2015: GBP15 million), an effective rate of 19% (H1
2015: 26%).
The tax charges were partially offset in the effective tax rate
by the positive impact of R&D tax credits received in respect
of prior year R&D activity tax claims which have now been
agreed with HMRC, worth approximately GBP3 million.
The tax charge excludes the potential future tax benefit arising
from start-up tax losses in the wood pellet supply business, which
have not been recognised in the period. We will recognise these
future benefits at the point a sufficient level of output is
reached and maintained that will result in taxable income against
which these losses can be offset. Taking these items together, the
effective tax rate on underlying earnings is slightly lower than
the standard rate of tax in the UK of 20%.
In the 2016 Budget the UK Government proposed a reduction in the
rate of corporation tax from 18% to 17% from 1 April 2020. The
effect of this reduction has not been recognised in the condensed
consolidated financial statements as it has not been substantively
enacted at the balance sheet date. Once legislated, currently
expected to be in the second half of 2016, this will result in tax
credits as we revalue our deferred tax liabilities.
As a result, it is likely that our underlying effective tax rate
for the full year will be well below the standard rate of tax in
the UK. In future years we would expect underlying tax rates to be
closer to the standard UK corporate tax rate.
Profit After Tax & Underlying Earnings
The reported earnings of our Group are materially affected by
volatility in the valuation of our derivative forward contracts for
both the commodities we purchase to generate electricity and the
financial contracts we use to secure sterling cash flows (such as
forward contracts for the purchase of foreign currencies).The types
of forward contracts we enter into and the accounting for these
contracts is unchanged from the previous period and are described
fully within our 2015 Annual Report and Accounts on pages 138 to
141.
Unrealised gains on derivative contracts, recognised in the
income statement, were GBP163 million in the six months ended 30
June 2016 (H1 2015: unrealised losses of GBP3 million), this
significant volatility reflecting the effect of the substantial
weakening of sterling following the UK's vote to leave the European
Union in June 2016 on our forward currency contract portfolio.
A further GBP214 million of unrealised gains on contracts
designated into accounting hedge relationships in accordance with
IFRS have been recognised within the hedge reserve in the
period.
Whilst not reflective of our underlying trading performance in
the current period, the unrealised gains figures do demonstrate the
value of our forward hedging programme and the protection it
provides our business from short-term market fluctuations as we
continue to purchase biomass fuel through contracts denominated in
US dollars.
Taking into account these unrealised gains and the deferred tax
thereon, consolidated profit after tax for the six months ended 30
June 2016 was GBP149 million an increase of GBP110 million compared
to the same period in 2015.
Underlying earnings is adjusted to exclude the impact of
unrealised gains and losses on derivative contracts and, where
relevant, certain one-off transactions that are not reflective of
the underlying trading performance of the Group (such as, for
example, non-cash asset obsolescence charges in 2015). A full
description of the non-statutory measures we report and a
reconciliation from reported earnings, is included within the
interim financial statements.
Underlying earnings for the six months ended 30 June 2016 were
GBP17 million, compared to GBP41 million for the same period last
year.
Capital Expenditure
Total capital expenditure of GBP38 million for the first half of
2016 is a reduction on the same period last year (H1 2015: GBP54
million) and reflects the expected reduction in capital spend as we
conclude our biomass transformation.
The biomass transformation will be fully delivered by the end of
2016, including the necessary investment required to ensure Drax
Power Station complies with the requirements of the Industrial
Emissions Directive (IED). We will deliver this in line with our
original cost guidance of GBP650 - GBP700 million, which includes
the three unit conversions and supporting infrastructure at the
power station, our US wood pellet manufacturing investments as well
as IED compliance work.
Once the transformation concludes our expenditure is expected to
reduce. Future investment in our existing plant will be managed
carefully to deliver quality compressed wood pellets, baseload
renewable power and flexible coal operations, whilst realising new
business opportunities. This is consistent with the decision to
reduce our outage programme during 2017.
Net Debt & Funding
Our primary funding platform remains unchanged and underpins a
balance sheet that remains robust. Our term loan package consists
of GBP325 million of loans, fully drawn down, with a maturity
profile that extends out to 2024.
This is supported by a GBP400 million revolving credit facility,
which we successfully renewed in December 2015 and now matures in
December 2019. At 30 June 2016 we had letters of credit totalling
GBP45 million drawn under this facility (H1 2015: GBP49
million).
In addition, our funding package includes a commodity trading
line, also successfully renewed in December 2015, which enables us
to transact prescribed volumes of commodity trades without having
to post collateral.
Further detail in relation to our funding arrangements can be
found on page 125 of our 2015 Annual Report & Accounts.
With cash balances at the end of the period of GBP235 million,
net debt stands at GBP85 million compared to GBP187 million at the
end of 2015.
Working Capital
We continue to focus on working capital and benefitted from
strong cash inflows during the six month period.
The commercial cycle for ROCs remains the biggest drain on our
short-term cash resources, with ROCs earned on a monthly basis
through the generation of renewable power but the cash not being
received until the ROC is sold to a third party, which can be up to
18 months later. An additional GBP126 million of ROCs were earned
and not sold in the first half of 2016; this was comparable with
GBP110 million for the same period last year, despite significantly
increased biomass generation in 2016 to date. The relatively modest
increase reflects our improved ability to monetise these assets,
both in the marketplace and by using available facilities.
In June 2016 we enhanced our working capital management
capabilities by implementing a new monetisation facility that
enables the Group to sell certain of its receivables and accelerate
delivery of the associated cash flows. We utilised this facility in
the period to help drive a net GBP198 million cash inflow from
working capital (other than ROCs).
This is a positive performance in challenging market conditions
and we will continue to seek ways to further optimise our working
capital position.
Cash Generated from Operations
Cash generated from operations in the six months ended 30 June
2016 was GBP153 million, compared to GBP199 million in the same
period last year, the reduction principally reflecting lower
EBITDA.
The Group remains significantly cash-generative and, with a
robust balance sheet, we are confident we are well-placed to
respond to changes in what has been, and remains, a very
challenging marketplace.
The overall net cash inflow for the first six months of 2016 of
GBP101 million (H1 2015: GBP82 million) reflects cash spend on
capital assets of GBP48 million and dividends paid of GBP2
million.
Other information
Going Concern
The Group's business activities, together with the factors
likely to affect future developments, financial position and
financial performance, including principal risks and uncertainties,
are set out within the Chief Executive's statement and this Chief
Financial Officer's report, with reference to our 2015 Annual
Report and Accounts where appropriate.
Our cash flows and borrowing facilities are described above. In
addition, section 7 to the consolidated financial statements
contained within the 2015 Annual Report and Accounts explains our
approach to capital risk management, exposure to financial risks
(including credit, counterparty and liquidity risk) and gives
details of financial instruments and hedging activities used to
mitigate these risks and exposures.
We presently have substantial headroom in our banking
facilities, a recent history of cash generation and strong covenant
compliance despite the challenging operating conditions faced by
the Group. We retain good visibility in near-term forecasts due to
our progressive hedging strategy. Our business plan is updated
quarterly and takes account of our capital investment plans and
reasonably possible changes in trading performance, including
sensitivity analysis on downside scenarios.
We are satisfied that we are able to operate the business within
the current level of our banking facilities, that we will remain
compliant with our covenants and that we will have sufficient cash
available to meet our obligations as they fall due for the
foreseeable future.
Consequently, the directors have a reasonable expectation that
the Group has adequate resources to continue in operational
existence for the foreseeable future and, as a result, continue to
prepare the financial statements on a going concern basis.
Seasonality of Trading
The primary activities of our Group are affected by seasonality.
Demand in the UK, for both electricity and heat, is typically
higher and thus drives higher prices and dispatch in the winter
period (October to March) when temperatures are colder. Conversely,
dispatch is typically lower in the summer months (April to
September), when prices are lower and plant availability is
affected by planned outages.
This trend is experienced by all of our UK-based businesses, as
they operate within the domestic electricity and heat markets, and
is most notable within the Generation business due to its scale and
the flexible operation of coal-fired plant when prices are low in
the summer. The US-based Biomass Supply business has a regular
production and despatch schedule, which insulates it from demand
fluctuations caused by seasonality.
Cash flow during the summer months can thus be materially
reduced due to the combined effects of lower demand, prices and
output, while maintenance expenditures are increased due to the
timing of major planned outages. The Group's GBP400 million working
capital and letter of credit facility assists in managing cash low
points in the cycle if required.
Distribution Policy
We continue to follow our policy of distributing 50% of
underlying earnings each year. Underlying earnings for the period
ending 30 June 2016 were GBP17 million (2015: GBP41 million)
providing the basis for the interim dividend proposal. We currently
have no plans to change our approach.
Dividends Paid
On 22 February 2016, the Board resolved, subject to approval by
shareholders at the Annual General Meeting on 20 April 2016, to pay
a final dividend in respect of the year ended 31 December 2015 of
0.6 pence per share (GBP2 million). The dividend was subsequently
paid on 13 May 2016.
Dividends Proposed
On 25 July 2016, the Board resolved to pay an interim dividend
for the six months ended 30 June 2016 of 2.1 pence per share (GBP8
million), representing 50% of the underlying earnings for the
period. The interim dividend will be paid on or before 7 October
2016 and shares will be marked ex-dividend on 22 September
2016.
Principal risks and uncertainties
We manage the commercial and operational risks faced by the
Group in accordance with policies approved by the Board. We set out
in our 2015 Annual Report and Accounts (pages 52-55) the principal
risks and uncertainties that could impact performance. These risks
remain unchanged and are as follows:
-- Regulatory and political risk
-- Biomass risks
-- Generating plant operating risk
-- Trading and commodity risk
-- Corporate risks
Regulatory and political risk remains the greatest challenge for
the Group. Following the UK's decision to leave the European Union
(EU) we recognise that this may increase the level of regulatory
and political risk as arrangements are made for the UK Parliament
to take full control of all policy-making which impacts the UK
energy industry. The Board is monitoring this situation closely,
and recognises the current uncertainty, but at this stage we do not
detect increasing risks for the Group. This position will remain
under review as events unfold in the coming months.
Our comprehensive hedging strategy, which includes sales of
power and ROCs, purchases of fuel, foreign currency and CO(2)
emissions allowances, provides some protection against short-term
volatility in commodity and currency markets, such as that seen in
the immediate aftermath of the EU decision. Progressive hedging of
power covers the period of the liquid market (typically up to two
years) and for foreign currency extends five years. As a result of
this action, there is no immediate increased risk to the Group
arising from the recent weakening of sterling.
In addition, our position is increasingly supported by
contractual-based revenues not reliant on commodity price
movements. We also keep the operating cost base of the Group under
constant review, making adjustments when appropriate, and take
opportunities to optimise value from our trading activities as they
arise.
We continue to promote the benefits of biomass and are engaged
with government and regulators in the UK and internationally to
ensure the Group's views and positions on current and forthcoming
legislation and regulations, and on energy and environmental policy
issues that may have implications for our business, are
represented.
Related parties
The Group set out in its 2015 Annual Report and Accounts (page
145) the related party transactions arising which were in relation
to remuneration of management personnel. There have been no new
related party transactions, other than the remuneration of key
management personnel, since 31 December 2015.
The contents of this report were approved by the Board on 25
July 2016.
Will Gardiner
Chief Financial Officer
25 July 2016
Directors' responsibility statement
We confirm that to the best of our knowledge:
(a) the condensed set of financial statements has been prepared
in accordance with IAS 34 "Interim Financial Reporting";
(b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year); and
(c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related party
transactions and changes therein).
By order of the Board
Dorothy Thompson Will Gardiner
Chief Executive Chief Financial Officer
25 July 2016 25 July 2016
Interim Condensed Consolidated Financial Statements
Introduction
The Interim Condensed Consolidated Financial Statements provide
detailed information about the financial performance (Condensed
consolidated income statement), financial position (Condensed
consolidated balance sheet), and cash flows (Condensed consolidated
cash flow statement) of Drax Group plc (the Company) together with
all of the entities controlled by the Company (collectively, the
Group).
The notes to the financial statements provide additional
information on the items in the Condensed consolidated income
statement, Condensed consolidated balance sheet and Condensed
consolidated cash flow statement. The notes include explanations of
the information presented. In general, the additional information
in the notes to the financial statements is required by IFRS or
other regulations to facilitate increased understanding of the
primary statements.
Basis of preparation
This section describes the accounting standards we have followed
in preparing these financial statements and the interpretation of
those accounting standards into accounting policies which are
relevant to our Group. We have not changed any of our accounting
policies in the period, nor have any new accounting standards had a
material effect on our financial statements.
The Interim Condensed Consolidated Financial Statements have
been prepared using accounting policies consistent with
International Financial Reporting Standards (IFRSs) as adopted by
the EU and in accordance with IAS 34 "Interim Financial Reporting".
The information provided in respect of year ended 31 December 2015
does not constitute statutory accounts as defined in Section 434 of
the Companies Act 2006. A copy of the statutory accounts for that
year has been delivered to the Registrar of Companies. The
auditor's report on those accounts was not qualified, did not draw
attention to any matters by way of emphasis and did not contain
statements under Section 498(2) or (3) of the Companies Act
2006.
The Interim Condensed Consolidated Financial Statements have
been prepared on the going concern basis and on the historical cost
basis, except for certain assets and liabilities that have been
measured at fair value (principally derivative financial
instruments - see note 7).
The Interim Condensed Consolidated Financial Statements were
approved by the Board on 25 July 2016.
Intra-group trading
Intra-group transactions are carried out on arm's-length,
commercial terms that where possible equate to market prices at the
time of the transaction.
The impact of all intra-group transactions, including any
unrealised profit arising (GBP1.9 million at 30 June 2016), is
eliminated on consolidation.
Adoption of new and revised accounting standards
Since the 2015 Annual Report and Accounts were published one new
standard (Annual improvements to IFRS 2011-2013 cycle) became
effective during the first 6 months of 2016. The adoption of this
standard has not had a material impact on the financial statements
of the Group.
The accounting policies adopted in the preparation of the
financial information presented here are consistent with those
followed in the preparation of the Group's consolidated financial
statements for the year ended 31 December 2015.
Judgements, estimates and uncertainties
The judgements, estimates and uncertainties relevant to the
preparation of the financial information presented are consistent
with those described in detail on pages 104-105 of the Group's
Annual Report and Accounts for 2015.
Section 2.3 (pages 114-115) of the 2015 Annual Report and
Accounts sets out our further consideration of the risk of
impairment as at 31 December 2015.
Whilst market conditions have improved in the first half of
2016, the key assumptions set out in that section remain relevant.
In the event of material adverse changes to the assumptions made,
significant impairment charges could arise in future periods.
Non-IFRS measures of financial performance
We present two non-IFRS measures on the face of our income
statement.
EBITDA is the primary measure we use to assess our financial
performance. EBITDA is defined as profit before interest, tax,
depreciation (including asset obsolescence charges and gains or
losses on asset disposals), amortisation and unrealised gains on
derivative contracts.
Underlying measures, including underlying profit before and
after tax and underlying earnings per share (EPS) exclude the
impact of unrealised gains on derivative contracts and asset
obsolescence charges. Underlying profit after tax and EPS exclude
the tax effect of these items.
Under our current distribution policy, dividends are calculated
based upon 50% of underlying profit after tax. A reconciliation of
profit for the year attributable to equity holders to underlying
profit after tax is provided in note 6.
Condensed consolidated income statement
Six months ended Year ended
30 June 31 December
------ ------------------------------ -------------
2016 2015 2015
(Unaudited) (Unaudited) (Audited)
Notes GBPm GBPm GBPm
------------------------------ ------ -------------- -------------- -------------
Revenue 1,486.5 1,511.2 3,065.0
Fuel costs in respect
of generation (516.4) (579.0) (1,309.9)
Cost of power purchases (457.1) (395.9) (851.3)
Grid charges (181.7) (184.1) (369.5)
Other retail costs (149.1) (118.0) (125.5)
------------------------------ ------ -------------- -------------- -------------
Total cost of sales (1,304.3) (1,277.0) (2,656.2)
------------------------------ ------ -------------- -------------- -------------
Gross profit 182.2 234.2 408.8
Other operating
and administrative
expenses (111.9) (114.3) (239.8)
------------------------------ ------ -------------- -------------- -------------
EBITDA(1) 70.3 119.9 169.0
Depreciation and
amortisation (49.3) (49.8) (100.4)
Asset obsolescence
charges - - (109.2)
Loss on disposal (2.7) - (7.1)
Unrealised gains/(losses)
on derivative contracts 163.4 (3.0) 123.7
------------------------------ ------ -------------- -------------- -------------
Operating profit 181.7 67.1 76.0
Net interest credit/(charge) 3 2.5 (14.1) (17.0)
Profit before tax 184.2 53.0 59.0
Tax charge 4 (35.5) (14.2) (2.7)
------------------------------ ------ -------------- -------------- -------------
Profit for the period
attributable to
equity holders 148.7 38.8 56.3
------------------------------ ------ -------------- -------------- -------------
Earnings per share pence pence pence
------------------------------ ------ -------------- -------------- -------------
- Basic 6 36.6 9.6 13.9
------------------------------ ------ -------------- -------------- -------------
- Diluted 6 36.3 9.5 13.8
------------------------------ ------ -------------- -------------- -------------
GBPm GBPm GBPm
------------------------------ ------ -------------- -------------- -------------
Underlying profit
for the period (2) 6 16.9 41.2 46.0
------------------------------ ------ -------------- -------------- -------------
pence pence pence
------------------------------ ------ -------------- -------------- -------------
Underlying earnings
per share (2) 6 4.2 10.2 11.3
------------------------------ ------ -------------- -------------- -------------
All results relate to continuing operations.
(1) EBITDA is defined as profit before interest, tax,
depreciation (including asset obsolescence charges and gains or
losses on asset disposals), amortisation and unrealised gains and
losses on derivative contracts.
(2) Underlying profit for the period is calculated as the profit
or loss attributable to equity holders excluding the after-tax
effect of unrealised gains or losses on derivative contracts and
asset obsolescence charges. A full reconciliation of the profit or
loss for the period to underlying profit is provided in note 6 to
the condensed consolidated financial statements.
Condensed consolidated statement of comprehensive income
Six months ended Year ended
30 June 31 December
------------------------------- --------------
2015
(Audited)
2016 2015
(Unaudited) (Unaudited)
GBPm GBPm GBPm
-------------------------------------- ------------- ---------------- --------------
Profit for the period 148.7 38.8 56.3
-------------------------------------- ------------- ---------------- --------------
Items that will not be
reclassified subsequently
to profit or loss:
Actuarial gains/(losses)
on defined benefit pension
scheme 5.4 (0.3) 1.2
Deferred tax on actuarial
gains/(losses) on defined
benefit pension scheme (1.0) 0.1 (0.2)
Items that may be subsequently
reclassified to profit
or loss:
Exchange differences on
translation of foreign
operations (8.0) 0.6 (2.9)
Fair value gains/(losses)
on cash flow hedges 214.3 (52.9) 23.4
Deferred tax on cash flow
hedges (39.4) 10.6 (4.7)
Impact of corporation tax
rate change on deferred
tax on cash flow hedges - - (0.2)
Other comprehensive income/(expense)
for the period 171.3 (41.9) 16.6
-------------------------------------- ------------- ---------------- --------------
Total comprehensive income/(expense)
for the period attributable
to equity holders 320.0 (3.1) 72.9
-------------------------------------- ------------- ---------------- --------------
Condensed consolidated balance sheet
As at
As at 30 June 31 December
------ ---------------------------- -------------
2015
(Audited)
2016 2015
(Unaudited) (Unaudited)
Notes GBPm GBPm GBPm
-------------------------------- ------ ------------- ------------- -------------
Assets
Non-current assets
Goodwill and other intangible
assets 14.5 14.5 26.3
Property, plant and
equipment 1,640.2 1,694.4 1,653.8
Derivative financial
instruments 7 481.2 94.8 278.4
-------------------------------- ------ ------------- ------------- -------------
2,135.9 1,803.7 1,958.5
-------------------------------- ------ ------------- ------------- -------------
Current assets
Inventories 222.7 185.4 224.0
ROC and LEC assets 396.2 294.5 270.1
Trade and other receivables 232.5 285.4 319.3
Derivative financial
instruments 7 330.2 156.5 330.8
Short-term investments - 20.0 -
Cash and cash equivalents 234.8 262.4 133.8
Current tax assets - - 0.6
-------------------------------- ------ ------------- ------------- -------------
1,416.4 1,204.2 1,278.6
-------------------------------- ------ ------------- ------------- -------------
Liabilities
Current liabilities
Trade and other payables 590.5 469.2 488.0
Current tax liabilities 7.0 4.2 -
Borrowings 0.9 0.6 0.3
Derivative financial
instruments 7 192.4 169.5 274.3
-------------------------------- ------ ------------- ------------- -------------
790.8 643.5 762.6
-------------------------------- ------ ------------- ------------- -------------
Net current assets 625.6 560.7 516.0
Non-current liabilities
Borrowings 318.9 321.7 320.1
Derivative financial
instruments 7 206.3 250.2 300.1
Provisions 30.9 30.1 30.5
Deferred tax liabilities 261.7 184.5 191.9
Retirement benefit obligations 20.6 32.6 29.5
-------------------------------- ------ ------------- ------------- -------------
838.4 819.1 872.1
-------------------------------- ------ ------------- ------------- -------------
Net assets 1,923.1 1,545.3 1,602.4
-------------------------------- ------ ------------- ------------- -------------
Shareholders' equity
Issued equity 47.0 46.9 46.9
Capital redemption reserve 1.5 1.5 1.5
Share premium 424.2 424.2 424.2
Merger reserve 710.8 710.8 710.8
Hedge reserve 9 209.8 (25.9) 34.9
Retained profits 529.8 387.8 384.1
-------------------------------- ------ ------------- ------------- -------------
Total shareholders'
equity 1,923.1 1,545.3 1,602.4
-------------------------------- ------ ------------- ------------- -------------
Condensed consolidated statement of changes in equity
Capital
Issued redemption Share Merger Hedge Retained
equity reserve premium reserve reserve profits Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 1 January
2015 46.8 1.5 422.8 710.8 16.4 374.3 1,572.6
----------------------- -------- ------------ --------- --------- --------- --------- --------
Profit for the
year - - - - - 56.3 56.3
Other comprehensive
income - - - - 18.5 (1.9) 16.6
----------------------- -------- ------------ --------- --------- --------- --------- --------
Total comprehensive
income for the
year - - - - 18.5 54.4 72.9
Equity dividends
paid - - - - - (49.9) (49.9)
Issue of share
capital 0.1 - 1.4 - - - 1.5
Movement in equity
associated with
share-based payments - - - - - 5.3 5.3
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 31 December
2015 46.9 1.5 424.2 710.8 34.9 384.1 1,602.4
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 1 January
2015 46.8 1.5 422.8 710.8 16.4 374.3 1,572.6
----------------------- -------- ------------ --------- --------- --------- --------- --------
Profit for the
period - - - - - 38.8 38.8
Other comprehensive
(expense)/income - - - - (42.3) 0.4 (41.9)
----------------------- -------- ------------ --------- --------- --------- --------- --------
Total comprehensive
(expense)/income
for the period - - - - (42.3) 39.2 (3.1)
Equity dividends
paid - - - - - (29.2) (29.2)
Issue of share
capital 0.1 - 1.4 - - - 1.5
Movement in equity
associated with
share-based payments - - - - - 3.5 3.5
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 30 June 2015 46.9 1.5 424.2 710.8 (25.9) 387.8 1,545.3
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 1 January
2016 46.9 1.5 424.2 710.8 34.9 384.1 1,602.4
----------------------- -------- ------------ --------- --------- --------- --------- --------
Profit for the
period - - - - - 148.7 148.7
Other comprehensive
income/(expense) - - - - 174.9 (3.6) 171.3
----------------------- -------- ------------ --------- --------- --------- --------- --------
Total comprehensive
income for the
period - - - - 174.9 145.1 320.0
Equity dividends
paid - - - - - (2.4) (2.4)
Issue of share
capital 0.1 - - - - - 0.1
Movement in equity
associated with
share-based payments - - - - - 3.0 3.0
----------------------- -------- ------------ --------- --------- --------- --------- --------
At 30 June 2016 47.0 1.5 424.2 710.8 209.8 529.8 1,923.1
----------------------- -------- ------------ --------- --------- --------- --------- --------
Condensed consolidated cash flow statement
Six months ended Year ended
30 June 31 December
------ ---------------------------- -------------
2015
(Audited)
2016 2015
(Unaudited) (Unaudited)
Notes GBPm GBPm GBPm
------------------------------- ------ ------------- ------------- -------------
Cash generated from
operations 10 152.7 198.9 167.3
Income taxes refunded/(paid) 1.6 (2.4) (3.8)
Other gains/(losses)
(1) 5.2 (19.6) (3.1)
Interest paid (8.6) (11.5) (11.9)
Interest received 0.2 0.7 1.5
------------------------------- ------ ------------- ------------- -------------
Net cash from operating
activities 151.1 166.1 150.0
------------------------------- ------ ------------- ------------- -------------
Cash flows from investing
activities
Purchases of property,
plant and equipment (47.8) (72.8) (179.1)
Acquisition of subsidiary - (4.0) (4.0)
Redemption of short-term
investments 11 - 20.1 40.1
------------------------------- ------ ------------- ------------- -------------
Net cash used in investing
activities (47.8) (56.7) (143.0)
------------------------------- ------ ------------- ------------- -------------
Cash flows from financing
activities
Equity dividends paid 5 (2.4) (29.2) (49.9)
Proceeds from issue
of share capital 0.1 1.5 1.5
Other financing costs
paid - (0.2) (5.7)
------------------------------- ------ ------------- ------------- -------------
Net cash used in financing
activities (2.3) (27.9) (54.1)
------------------------------- ------ ------------- ------------- -------------
Net increase/(decrease)
in cash and cash equivalents 11 101.0 81.5 (47.1)
Cash and cash equivalents
at beginning of the
period 133.8 180.9 180.9
------------------------------- ------ ------------- ------------- -------------
Cash and cash equivalents
at end of the period 234.8 262.4 133.8
------------------------------- ------ ------------- ------------- -------------
(1) Other gains/(losses) include the effect of changes in
foreign exchange rates and, in 2015, the net payment made in
settlement of the Group's obligations under CESP, as described on
page 39 of the 2014 Annual Report and Accounts.
Notes to the condensed consolidated financial statements
1. General information
These notes provide additional detail on the disclosures within
the condensed consolidated financial statements. Further
information, and a full set of explanations, can be found in our
2015 Annual Report and Accounts on pages 104 - 145. Throughout the
notes, we have included explanations of the information
presented.
Drax Group plc (the Company) is incorporated in England and
Wales under the Companies Act. The Company and its subsidiaries
(together, the Group) predominantly operate in the electricity
generation and supply industry within the UK. The address of the
Company's registered office and principal establishment is Drax
Power Station, Selby, North Yorkshire, YO8 8PH, United Kingdom.
2. Segmental reporting
The Group is organised into three business units with a
dedicated management team for each; the generation of electricity
at Drax Power Station (Generation), production of sustainable wood
pellets at our processing facilities in the US (Biomass Supply) and
the supply of power to business customers and wood pellets to the
domestic heat market (Retail). Each of these business units is
considered to be an operating segment for the purpose of segmental
reporting.
Information reported to the Board for the purposes of assessing
performance and making investment decisions is organised into these
three operating segments. The measure of profit or loss for each
reportable segment presented to the Board on a regular basis is
EBITDA, with sales between segments being carried out at
arm's-length.
Operating costs are allocated to segments to the extent they are
directly attributable to the activities of that segment.
Unallocated costs are included in central operating costs.
Segment revenues and results
The following is an analysis of the Group's results by reporting
segment in the six months ended 30 June 2016:
Six months ended 30 June 2016 (Unaudited)
-------------------------------------------------------------
Biomass Adjustments
Generation Retail Supply (1) Consolidated
GBPm GBPm GBPm GBPm GBPm
------------------- ----------- ------- -------- ------------ -------------
Revenue
External sales 843.8 642.7 - - 1,486.5
Inter--segment
sales 338.5 - 31.6 (370.1) -
------------------- ----------- ------- -------- ------------ -------------
Total revenue 1,182.3 642.7 31.6 (370.1) 1,486.5
------------------- ----------- ------- -------- ------------ -------------
Segment gross
profit 167.2 9.7 7.2 (1.9) 182.2
Segment EBITDA 85.8 (2.4) (2.8) - 80.6
------------------- ----------- ------- -------- ------------ -------------
Central operating
costs (10.3)
Consolidated
EBITDA 70.3
Depreciation
and amortisation (49.3)
Loss on disposal (2.7)
Unrealised gains
on derivative
contracts 163.4
------------------- ----------- ------- -------- ------------ -------------
Operating profit 181.7
Net finance
costs 2.5
------------------- ----------- ------- -------- ------------ -------------
Profit before
tax 184.2
------------------- ----------- ------- -------- ------------ -------------
(1) Adjustments represent the elimination of intra-group
transactions.
The following is an analysis of the Group's results by reporting
segment in the six months ended 30 June 2015:
Six months ended 30 June 2015
(Unaudited)
-----------------------------------------------------------
Biomass Adjustments
Generation Retail Supply (1) Consolidated
GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- ------- -------- ------------ -------------
Revenue
External sales 882.1 629.1 - - 1,511.2
Inter--segment
sales 364.1 - 6.1 (370.2) -
--------------------- ----------- ------- -------- ------------ -------------
Total revenue 1,246.2 629.1 6.1 (370.2) 1,511.2
----------- ------- -------- ------------ -------------
Segment gross
profit 228.4 7.9 (1.6) (0.5) 234.2
Segment EBITDA 148.6 (4.0) (9.0) - 135.6
--------------------- ----------- ------- -------- ------------ -------------
Central operating
costs (15.7)
Consolidated EBITDA 119.9
Depreciation and
amortisation (49.8)
Loss on disposal -
Unrealised gains
on derivative
contracts (3.0)
--------------------- ----------- ------- -------- ------------ -------------
Operating profit 67.1
Net finance costs (14.1)
--------------------- ----------- ------- -------- ------------ -------------
Profit before
tax 53.0
--------------------- ----------- ------- -------- ------------ -------------
(1) Adjustments represent the elimination of intra-group
transactions.
The following is an analysis of the Group's results by reporting
segment in the year ended 31 December 2015:
Year ended 31 December 2015
(Audited)
----------- -----------------------------------------------
Biomass Adjustments
Generation Retail Supply (1) Consolidated
GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- -------- -------- ------------ -------------
Revenue
External sales 1,775.0 1,290.0 - - 3,065.0
Inter--segment
sales 863.2 - 28.4 (891.6) -
--------------------- ----------- -------- -------- ------------ -------------
Total revenue 2,638.2 1,290.0 28.4 (891.6) 3,065.0
Segment gross
profit 390.1 19.3 1.0 (1.6) 408.8
Segment EBITDA 214.6 (6.3) (14.8) - 193.5
Central operating
costs (24.5)
Consolidated EBITDA 169.0
Depreciation and
amortisation (100.4)
Asset obsolescence
charges (109.2)
Loss on disposal (7.1)
Unrealised losses
on derivative
contracts 123.7
--------------------- ----------- -------- -------- ------------ -------------
Operating profit 76.0
Net finance costs (17.0)
--------------------- ----------- -------- -------- ------------ -------------
Profit before
tax 59.0
--------------------- ----------- -------- -------- ------------ -------------
(1) Adjustments represent the elimination of intra-group
transactions.
The accounting policies of the reportable segments are the same
as the Group's accounting policies which are described in the
Group's latest Annual Report and Accounts. The revenue and results
of all segments are subject to seasonality as detailed in the CFO's
Report.
Interest, tax, assets and working capital are monitored on a
Group basis with no separate disclosure by segment made in the
management accounts, and hence no separate asset disclosure is
provided in this report. However, spend on key capital projects is
monitored. Total spend on the biomass transformation project during
the first 6 months of 2016 was GBP12 million (H1 2015: GBP28
million), of which GBP3 million related to construction of assets
within our US business.
Major customers
Total revenue for the six months ended 30 June 2016 includes
amounts of GBP545.1 million and GBP267.8 million (H1 2015: GBP221.5
million and GBP173.8 million) derived from two customers (H1 2015:
two customers), each representing 10% or more of the Group's
revenue for the period.
3. Net interest credit/(charge)
Year ended
Six months ended 30 June 31 December
------------------------ -------------------------------------
2015 (Audited)
2016 (Unaudited) GBPm 2015 (Unaudited) GBPm GBPm
------------------------ --------------------- --------------
Interest payable and similar charges:
Interest payable on bank borrowings (9.1) (9.1) (18.0)
Unwinding of discount on provisions (0.4) (0.4) (0.7)
Amortisation of deferred finance costs (1.1) (1.5) (3.7)
Net finance cost in respect of defined benefit
scheme (0.5) (0.6) (1.1)
Other financing charges - (0.7) (0.8)
--------------------------------------------------- ------------------------ --------------------- --------------
Total interest payable and similar charges (11.1) (12.3) (24.3)
--------------------------------------------------- ------------------------ --------------------- --------------
Interest receivable and similar income:
Interest income on bank deposits 0.3 0.4 1.4
Other financing income 0.3 - -
--------------------------------------------------- ------------------------ --------------------- --------------
Total interest receivable and similar income 0.6 0.4 1.4
--------------------------------------------------- ------------------------ --------------------- --------------
Foreign exchange gains/(losses) 13.0 (2.2) 5.9
--------------------------------------------------- ------------------------ --------------------- --------------
Net interest credit/(charge) 2.5 (14.1) (17.0)
--------------------------------------------------- ------------------------ --------------------- --------------
The net interest credit for the six months ended 30 June 2016
includes foreign exchange gains of GBP13 million (H1 2015: loss of
GBP2 million) arising on the revaluation of investments and
balances denominated in foreign currencies at the balance sheet
date. These gains were driven by the significant depreciation of
sterling following the UK Brexit vote in June 2016.
4. Taxation
The tax charge includes both current and deferred tax. For
interim periods, the tax charge is based upon the expected tax rate
for the full year and applied to taxable profits for the interim
period.
Current tax, including UK corporation tax and foreign tax, is
the amount payable on taxable profits (profit before tax adjusted
for items upon which we are not required to pay tax, or in some
cases for items upon which we are required to pay additional tax in
respect of tax-disallowed expenditure) in the period. Deferred tax
is an accounting adjustment which reflects where more or less tax
is expected to arise in the future due to differences between the
accounting and tax rules.
In the 2016 Budget the UK Government proposed a reduction in the
rate of corporation tax from 18% to 17% from 1 April 2020. The
effect of this reduction has not been recognised in the condensed
consolidated financial statements as it has not been substantively
enacted at the balance sheet date. Once legislated, currently
expected to be in the second half of 2016, this will result in tax
credits as we revalue our deferred tax liabilities.
Six months ended Year ended
30 June 31 December
-------------------------------- -------------
2015
2015
2016 (Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
------------------------------------ ----------------- ------------- -------------
Tax charge comprises:
Current tax 6.1 4.9 1.8
Deferred tax before impact of
corporation tax change: 29.4 9.3 18.7
Deferred tax impact of corporation
tax change: - - (17.8)
Tax charge 35.5 14.2 2.7
------------------------------------ ----------------- ------------- -------------
The Group has not recognised deferred tax assets with an
estimated value of GBP28 million at 30 June 2016 (H1 2015: GBP13
million) in respect of UK and US losses that are carried forward to
offset against future taxable income. In both cases the business
units involved have a history of making losses and until
operational performance is established and maintained at a level
sufficient to deliver future taxable income the utilisation of the
benefit against this income is not considered to be probable.
5. Dividends
Six months ended Year ended
30 June 31 December
----------------------------- -------------
Pence
per
share 2016 2015
2015
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
------------------------------------- ------- -------------- ------------- -------------
Amounts recognised as distributions
to equity holders in the
period (based on the number
of shares in issue at the
record date):
Final dividend for the year
ended 31 December 2015 paid
13 May 2016 0.6 2.4 - -
Interim dividend for the
year ended 31 December 2015
paid 9 October 2015 5.1 - - 20.7
Final dividend for the year
ended 31 December 2014 paid
15 May 2015 7.2 - 29.2 29.2
------------------------------------- ------- -------------- ------------- -------------
2.4 29.2 49.9
------------------------------------- ------- -------------- ------------- -------------
On 25 July 2016, the Board resolved to pay an interim dividend
for the six months ended 30 June 2016 of 2.1 pence per share
(equivalent to approximately GBP8 million) on or before 7 October
2016. The interim dividend has not been included as a liability as
at 30 June 2016.
6. Earnings per share
Earnings per share (EPS) represents the amount of our earnings
(post-tax profits) attributable to each ordinary share or dilutive
potential ordinary share we have in issue. Basic EPS is calculated
by dividing our earnings by the weighted average number of ordinary
shares in issue during the period. Diluted EPS demonstrates the
impact upon the basic EPS if all outstanding share options, that
are expected to vest on their future maturity dates, were exercised
and treated as ordinary shares as at the balance sheet date.
In addition to EPS, we calculate underlying EPS. Our current
dividend policy is to pay a dividend equivalent to 50% of
underlying earnings. Underlying EPS is based upon underlying
earnings and strips out the post-tax effect of fair value movements
on derivative contracts and any one-off items from earnings (such
as the asset obsolescence charges recognised in 2015). Multiplying
underlying EPS by 50% will give the dividend per share for the
period.
Reconciliations of the earnings and weighted average number of
shares used in the calculation are set out below.
Six months ended Year ended
30 June 31 December
---------------------------- ---------------
2016 2015
(Unaudited) (Unaudited) 2015 (Audited)
GBPm GBPm GBPm
---------------------------------- ------------- ------------- ---------------
Earnings:
Earnings attributable to
equity holders of the Company
for the purposes of basic
and diluted earnings 148.7 38.8 56.3
Adjusted for:
Unrealised gains and losses
on derivative contracts (163.4) 3.0 (123.7)
Asset obsolescence charges - - 109.2
Tax impact of the above
adjustments 31.6 (0.6) 4.2
---------------------------------- ------------- ------------- ---------------
Underlying earnings attributable
to equity holders of the
Company 16.9 41.2 46.0
---------------------------------- ------------- ------------- ---------------
Six months ended Year ended
30 June 31 December
------------------------------------ ---------------
2016 (Unaudited) 2015 (Unaudited) 2015 (Audited)
--------------------------------------- ----------------- ----------------- ---------------
Number of shares:
Weighted average number of ordinary
shares for the purposes of basic
earnings per share (millions) 406.7 405.6 406.0
Effect of dilutive potential ordinary
shares under share plans 2.5 1.9 1.3
--------------------------------------- ----------------- ----------------- ---------------
Weighted average number of ordinary
shares for the purposes of diluted
earnings per share (millions) 409.2 407.5 407.3
--------------------------------------- ----------------- ----------------- ---------------
Earnings per share - basic (pence) 36.6 9.6 13.9
--------------------------------------- ----------------- ----------------- ---------------
Earnings per share - diluted (pence) 36.3 9.5 13.8
--------------------------------------- ----------------- ----------------- ---------------
Underlying earnings per share
- basic (pence) 4.2 10.2 11.3
--------------------------------------- ----------------- ----------------- ---------------
Underlying earnings per share
- diluted (pence) 4.1 10.1 11.3
--------------------------------------- ----------------- ----------------- ---------------
7. Derivative financial instruments
The accounting rules for derivative contracts are complex. Where
such contracts do not qualify for the own use exemption (described
on page 138 in our 2015 Annual Report and Accounts) we account for
them at fair value, which is in essence the difference between the
price we have secured in the contract and the price we could
achieve in the market at the balance sheet date. The tables and
commentary below provide additional information about how these
valuations are determined and the changes in underlying market
conditions that drive their movements.
The fair values of the Group's derivative financial instruments
which are marked to market and recorded in the balance sheet were
as follows:
As at 30 June As at
31 December
---------------------------- -------------
2016 2015 2015
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------- ------------- ------------- -------------
Assets
Commodity contracts 160.1 180.9 372.3
Financial contracts 651.3 70.4 236.9
--------------------- ------------- ------------- -------------
811.4 251.3 609.2
--------------------- ------------- ------------- -------------
Liabilities
Commodity contracts (138.5) (138.0) (373.6)
Financial contracts (260.2) (281.6) (200.8)
--------------------- ------------- ------------- -------------
(398.7) (419.6) (574.4)
--------------------- ------------- ------------- -------------
Contracts for the delivery of commodities are entered into to
secure market-level dark green and bark spreads on future power
sales.
Financial contracts are principally comprised of forward foreign
currency exchange contracts utilised to secure future sterling cash
flows on commodity purchases denominated in foreign currencies.
As described in our latest Annual Report and Accounts on page
139, the fair value of commodity contracts and financial contracts
is largely determined by comparison between forward market prices
and the contract price. These contracts have therefore been grouped
into Level 2 within the fair value hierarchy in their entirety.
The Group has no financial instruments with fair values derived
solely from unadjusted quoted prices (Level 1) or unobservable
inputs (Level 3). There have been no transfers of any assets or
liabilities between levels of the fair value hierarchy during the
current or preceding period.
Net unrealised gains on our derivative contract portfolio in the
first six months of 2016 were GBP377 million, with GBP163 million
recognised in the income statement and GBP214 million in the hedge
reserve.
The change in fair value of our derivative portfolio in the
period has been driven predominantly by changes in currency
exchange rates.
We have a large portfolio of forward currency purchase
contracts, which fixes the sterling cost of our future biomass fuel
purchases denominated in foreign currencies. Given the size of the
portfolio, its fair value is highly sensitive to changes in foreign
currency exchange rates. Sterling weakened substantially against
all of our principal foreign currencies (Euro, USD and CAD)
following the UK vote to leave the European Union in June,
resulting in the asset value of our currency contract portfolio
increasing significantly at the end of the first six months of
2016.
8. Other financial instruments
We hold a variety of other non-derivative financial instruments,
including cash and cash equivalents, borrowings, payables and
receivables arising from our operations.
Fair value
Cash and cash equivalents, short-term investments, trade and
other receivables, and trade and other payables generally have
short times to maturity. For this reason, their carrying values
approximate to their fair value. The Group's borrowings relate
principally to amounts drawn down against term loans, the carrying
amounts of which approximate their fair values by virtue of being
floating rate instruments.
9. Hedge reserve
Changes in the fair value of our derivative contracts for
purchases and sales of commodities and foreign currencies, to the
extent that they qualify as effective cash flow hedges under
accounting rules are recognised within the hedge reserve, a
component of shareholders' equity. The cumulative gains and losses
unwind and are released to the income statement as the related
contracts mature and we take delivery of the associated commodity
or currency.
The Group designates certain hedging instruments used to address
commodity price risk and foreign exchange risk as cash flow hedges.
At the inception of the hedge, the relationship between the hedging
instrument and hedged item is documented, along with its risk
management objectives. Furthermore, at the inception of the hedge
and on an ongoing basis, the Group documents whether the hedging
instruments used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items.
Changes in fair value of contracts designated into such hedging
relationships are recognised within the hedge reserve to the extent
they are effective, ineffectiveness is recognised in the income
statement.
Amounts held within the hedge reserve are then released as the
related contract matures and the hedged transaction impacts profit
or loss. For commodity contracts, this is when the underlying
commodity is delivered. For financial contracts this is when the
associated foreign currency transaction is recognised.
The expected release profile from equity of post-tax hedging
gains and losses is as follows:
As at 30 June 2016
(Unaudited)
-----------------------------------
Within
1 1-2
year years >2 years Total
GBPm GBPm GBPm GBPm
--------------------- ------- ------- --------- ------
Commodity contracts 5.5 (3.0) (0.2) 2.3
Financial contracts 13.1 30.0 164.4 207.5
--------------------- ------- ------- --------- ------
18.6 27.0 164.2 209.8
--------------------- ------- ------- --------- ------
As at 30 June 2015
(Unaudited)
------------------------------------
Within
1 1-2
year years >2 years Total
GBPm GBPm GBPm GBPm
--------------------- ------- ------- --------- -------
Commodity contracts 19.1 0.6 (1.6) 18.1
Financial contracts (8.1) 2.6 (38.5) (44.0)
--------------------- ------- ------- --------- -------
11.0 3.2 (40.1) (25.9)
--------------------- ------- ------- --------- -------
As at 31 December
2015 (Audited)
-----------------------------------
Within
1 1-2
year years >2 years Total
GBPm GBPm GBPm GBPm
--------------------- ------- ------- --------- ------
Commodity contracts 27.9 4.8 (0.8) 31.9
Financial contracts 7.8 (10.0) 5.2 3.0
--------------------- ------- ------- --------- ------
35.7 (5.2) 4.4 34.9
--------------------- ------- ------- --------- ------
10. Cash generated from operations
The table below reconciles our profit for the period to the
amount of physical cash we have generated from our operations (i.e.
sourcing, generating and selling electricity) by adjusting for any
non-cash accounting items.
Six months ended Year ended
30 June 31 December
--------------------------------- -------------
2015
(Audited)
2015
2016 (Unaudited) (Unaudited)
GBPm GBPm GBPm
----------------------------------------- ------------------ ------------- -------------
Profit for the period 148.7 38.8 56.3
Adjustments for:
Net interest (credit)/charge (2.5) 14.1 17.0
Tax charge (note 4) 35.5 14.2 2.7
Depreciation and amortisation 49.3 49.8 100.4
Asset obsolescence charges - - 109.2
Losses on disposal 2.7 - 7.1
Unrealised (gains)/losses on derivative
contracts (163.4) 3.0 (123.7)
Defined benefit pension scheme
charge 3.0 3.2 6.4
Non-cash charge for share-based
payments 3.0 3.5 5.3
----------------------------------------- ------------------ ------------- -------------
Operating cash flows before movement
in working capital 76.3 126.6 180.7
Changes in working capital:
Decrease in inventories 1.3 61.7 18.4
Decrease in receivables 86.8 78.0 49.3
Increase in payables 109.5 48.3 27.3
----------------------------------------- ------------------ ------------- -------------
Total decrease in working capital 197.6 188.0 95.0
Decrease/(increase) in carbon
assets 11.8 - (11.8)
Increase in ROC and LEC assets (126.1) (110.0) (85.6)
Defined benefit pension scheme
contributions (6.9) (5.7) (11.0)
----------------------------------------- ------------------ ------------- -------------
Cash generated from operations 152.7 198.9 167.3
----------------------------------------- ------------------ ------------- -------------
The decrease in receivables included within the net decrease in
working capital in the table above for the six months ended 30 June
2016 includes the benefit of GBP50 million of cash inflows arising
from the sale of trade receivables under the facility agreed in
June 2016, described in the CFO's Report.
11. Reconciliation of net debt
This note reconciles our net debt position in terms of changes
in our cash on hand, short-term investments and borrowings.
As at
As at 30 June 31 December
-------------------------------- -------------
2015
2015
2016 (Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------------------------- ----------------- ------------- -------------
Net debt at 1 January (186.6) (98.6) (98.6)
Increase/(decrease) in cash and
cash equivalents 101.0 81.5 (47.1)
Decrease in short-term investments - (20.1) (40.1)
Decrease/(Increase) in net borrowings 0.6 (2.7) (0.8)
--------------------------------------- ----------------- ------------- -------------
Net debt at period end (85.0) (39.9) (186.6)
--------------------------------------- ----------------- ------------- -------------
12. Contingent Liabilities
Contingent liabilities are potential future outflows of cash
that are dependent on a future event that is outside of our
control. The amount and timing of any payment is uncertain, cannot
be measured reliably, or is considered to be unlikely.
Guaranteed Minimum Pension (GMP)
The UK Government intends to implement legislation to equalise
the GMP, resulting in an increase in the value of GMP for males.
This would correspondingly increase the defined benefit pension
obligation of the Group. At present, the methodology for
implementing the equalisation is uncertain and thus the impact
cannot be reliably measured. As a result, no allowance has been
made for GMP equalisation in the calculation of the defined benefit
obligation within these condensed consolidated financial
statements.
Borrowings
In addition to the amount drawn down against the bank loans,
certain members of the Group guarantee the obligations of a number
of banks in respect of letters of credit issued by those banks to
counterparties of the Group. As at 30 June 2016 the Group's
contingent liability in respect of letters of credit issued under
the revolving credit facility amounted to GBP44.9 million (H1 2015:
GBP48.5 million).
Independent review report to Drax Group plc
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2016 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated statement of changes in equity, the
condensed consolidated cash flow statement and related notes 1 to
12. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed within the Basis of preparation section, the annual
financial statements of the group are prepared in accordance with
IFRSs as adopted by the European Union. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with International Accounting
Standard 34 "Interim Financial Reporting" as adopted by the
European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2016 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
25 July 2016
Glossary
Ancillary services
Services provided to 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.
Balancing mechanism
The sub-set of the market through 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.
Bark spread
The difference between the power price and the cost of biomass,
net of renewable support.
Contracts for difference (CfD)
A mechanism to support investment in low-carbon electricity
generation. The CfD works by stabilising revenues for generators at
a fixed price level known as the "strike price". Generators will
receive revenue from selling their electricity into the market as
usual. However, when the market reference price is below the strike
price they will also receive a top-up payment from suppliers for
the additional amount. Conversely if the reference price is above
the strike price, the generator must pay back the difference.
Dark green spread
The difference between the power price and the cost of coal and
carbon.
EBITDA
Profit before interest, tax, depreciation (including asset
obsolescence charges and gains or losses on asset disposals),
amortisation and unrealised gains on derivative contracts.
Grid charges
Includes transmission network use of system charges (TNUoS),
balancing services use of system charges (BSUoS) and distribution
use of system charges (DUoS).
H1 2015
The six-month period ended 30 June 2015.
H2 2015
The six-month period ended 31 December 2015.
H1 2016
The six-month period ended 30 June 2016.
IFRS
International Financial Reporting Standards.
Industrial Emission Directive (IED)
The Industrial Emission Directive (IED) is a European Union
directive which commits European Union member states to control and
reduce the impact of industrial emissions on the environment.
Lean Management
The philosophy of continually identifying and reducing or
eliminating waste and inefficiency.
LECs
Levy Exemption Certificates. Evidence of Climate Change Levy
exempt electricity supplies generated from qualifying renewable
sources.
Lost time injuries
Lost time injuries are defined as occurrences where the injured
party is absent from work for more than 24 hours.
Net debt
Comprises cash and cash equivalents, short-term investments less
overdrafts and borrowings net of deferred finance costs.
Planned outage
A period during which scheduled maintenance is executed
according to the plan set at the outset of the year.
Renewable support
Term used to refer to any financial incentive in respect of
renewable energy generation. At present this predominantly reflects
the value ascribed to ROCs and LECs, which is accounted for as a
deduction from fuel costs within costs of sales.
REGO
A Renewable Energy Guarantee of Origin (REGO) is certification
provided as proof of energy being generated from renewable
sources.
ROCs
A Renewables Obligation Certificate (ROC) is a certificate
issued to an accredited generator for electricity generated from
eligible renewable sources. The Renewables Obligation is currently
the main support scheme for renewable electricity projects in the
UK.
Summer
The calendar months April to September.
Total recordable injury rate (TRIR)
The frequency rate is calculated on the following basis: (lost
time injuries + worse than first aid injuries)/hours worked times
100,000.
Winter
The calendar months October to March.
Drax Group plc
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone: +44 (0)1757 618381
Fax: +44 (0)1757 612192
www.drax.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UVVBRNBABUAR
(END) Dow Jones Newswires
July 26, 2016 02:00 ET (06:00 GMT)
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