TIDMDRX
RNS Number : 4383L
Drax Group PLC
19 July 2017
19 July 2017
DRAX GROUP PLC (Symbol: DRX)
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 JUNE 2017
Drax: delivering growth strategy
Six months ended 30 June H1 2017 H1 2016
-------------------------------------- -------- --------
Key financial performance measures
EBITDA (GBP million)(1) 121 70
Underlying earnings (GBP million)(2) 9 17
Underlying earnings per share
(pence)(2) 2.2 4.2
Total dividends (pence per
share) 4.9 2.1
Net cash from operating activities
(GBP million) 197 151
Net debt (GBP million)(3) 372 85
Statutory accounting measures
(Loss) / profit before tax
(GBP million) (83) 184
Reported basic (loss) / earnings
per share (pence) (17) 37
-------------------------------------- -------- --------
Financial and Operational Highlights
-- EBITDA of GBP121 million, an increase of GBP51 million on H1 2016
- Strong operational performance
- Improved earnings from renewable generation
- Profitable and growing business to business (B2B) retail
operation - Opus Energy and Haven Power
-- Statutory loss before tax includes unrealised losses related
to foreign currency hedging of GBP65 million
-- Strong cash flows and balance sheet
- Refinancing complete and capital allocation policy
confirmed
-- Interim dividend of GBP20 million, representing 40% of the
expected full year - GBP50 million
Strategic Highlights and Outlook
-- Focus on higher quality earnings with targeted investment in long-term growth opportunities
-- Good progress with strategic initiatives
- Opus Energy and LaSalle Bioenergy acquisitions completed H1
2017, integration proceeding well
- Focus on research and innovation, including development of
options for future generation
-- Maintaining operational excellence across the Group
-- 2017 expectations unchanged, including c.2x net debt to EBITDA at year end
Dorothy Thompson, Chief Executive of Drax Group plc, said:
"We have made good progress with our strategy during the first
half of 2017, acquiring Opus Energy and a third compressed wood
pellet plant, in addition to refinancing and implementing a new
dividend policy.
"Central to our strategy is the delivery of targeted growth
through deploying our expertise across our markets and, in so
doing, diversifying, growing and improving the quality of earnings
whilst reducing exposure to commodity market volatility.
"Delivering reliable renewable electricity remains at the heart
of our business. We continue to produce at record levels, helping
to keep the UK's electricity system secure and supplying our
customers through our retail business. With the right conditions,
we can do even more. We are progressing our four new rapid response
gas power projects and our research and innovation work has
identified potentially attractive options to repurpose our
remaining coal assets.
"We continue to play a vital role in the UK's energy
infrastructure and our strategy is helping to change the way energy
is generated, supplied and used for a better future."
NOTES FOR ANALYSTS AND EDITORS
H1 2017 Group Financial Review
-- Underlying earnings per share decreased 48% to 2.2 pence
- Higher depreciation reflecting accelerated depreciation of
coal-specific assets and amortisation of intangible assets
associated with the acquisition of Opus Energy, in addition to an
increase in the net finance charge
-- Reported basic earnings per share - a loss of 17 pence, which
includes unrealised losses on derivative contracts of GBP65 million
(principally related to the foreign currency hedging programme) in
addition to one-off items - transaction costs relating to the
acquisition of Opus Energy (GBP6 million) and refinancing (GBP24
million)
-- Tax - small charge on underlying earnings, a function of a low underlying profit before tax
-- Acquisitions - Opus Energy (GBP367 million) and LaSalle Bioenergy ($35 million)
-- Capital investment of GBP79 million, including the acquisition of LaSalle Bioenergy
-- Full year capital investment includes:
- LaSalle Bioenergy acquisition and associated upgrades (c.GBP50
million)
- Other - reflecting core investment, pellet plant optimisation,
strategic spares, Haven Power information systems, research and
innovation and Opus Energy office consolidation (GBP120-GBP130
million)
- Continue to expect ongoing core capital investment of GBP50
million per year
-- Net debt of GBP372 million (31 Dec 2016: GBP93 million),
including cash on hand of GBP197 million
H1 2017 Business Review
Generation
-- Electricity output (net sales) 10.7TWh (H1 2016: 10.9TWh)
-- Renewable - biomass generation 7.3TWh (H1 2016: 7.5TWh)
-- Coal - adapted to market conditions with increased system support role
- Flexible operation in prompt and balancing markets
- Increase in Ancillary Services revenue to GBP21 million (H1
2016: GBP20 million)
- Fourth biomass unit trial - return to coal for winter 2017
Retail
-- Haven Power - EBITDA breakeven achieved
-- Opus Energy - significant addition to 2017 Group EBITDA
- Integration progressing well
- Delivering growth in SME(4) market
Biomass Supply
-- Improving operational performance whilst providing supply chain flexibility
-- LaSalle Bioenergy commissioning Q1 2018, increasing output through 2018
Notes:
(1) EBITDA is defined as earnings before interest, tax,
depreciation, amortisation and material one-off items that do not
reflect the underlying trading performance of the business.
(2) H1 2017 underlying earnings exclude unrealised losses on
derivative contracts of GBP65 million and material one-off items
that do not reflect the underlying performance of the business (H1
2016: unrealised gains of GBP163 million).
(3) Borrowing less cash and cash equivalents.
(4) SME is Small Medium Enterprise.
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), Wednesday 19 July 2017, at JP Morgan, 60
Victoria Embankment, London, EC4Y 0JP.
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 3556.
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 Wednesday 19 July 2017 for download at:
www.drax.com>>investors>>results_and_reports>>investor_relations_presentations
or use the link
http://www.drax.com/investors/results-and-reports/#investor-relations-presentations
Event Title: Drax Group plc: Half Year Results
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Event Date: Wednesday 19 July 2017
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Event Time: 9:00am (UK time)
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Webcast Live http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/91618/Lobby/default.htm
Event Link
-------------- ------------------------------------------------------------------------------------------
Start Date: Wednesday 19 July 2017
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Delete Date: Monday 16 July 2018
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Archive Link: http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16531/91618/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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Chief Executive's statement
Introduction
The Group has delivered strong operational performance, and
increased EBITDA from GBP70 million in H1 2016 to GBP121 million in
H1 2017. However, increases to depreciation and amortisation costs
and unrealised losses on derivative contracts, resulted in a loss
before tax for the period of GBP(83) million (2016: Profit of
GBP184 million).
Our new Group strategy, which we launched in December 2016, is
creating greater diversification for the business as we help to
change the way energy is generated, supplied and used for a better
future. In doing so we are shifting our earnings profile to deliver
higher quality more stable earnings, with opportunities for
long-term growth.
In Retail, with the acquisition of Opus Energy and good
performance at Haven Power, we significantly increased our customer
base and markedly improved profitability in the first half of the
year.
Our Generation business, Drax Power, is a predominantly
renewable electricity generator with 68% of our output being
produced from biomass in the form of sustainable compressed wood
pellets. As expected, our coal units ran less often but continued
to play an important role providing a range of system support
services to the UK electricity system with reliable, flexible and
responsive capacity.
In North America, our compressed wood pellet supply business,
Drax Biomass, increased its production of good quality,
sustainable, cost effective wood pellets for sale to Drax Power. In
April, in line with our strategy to increase self-supply, we
acquired a 450k tonne wood pellet plant in Louisiana. This
increases our production capacity by 50%.
At our Capital Markets Day in June we provided further detail of
our strategy and our ambitions for long-term growth across the
business, which we expressed with a 2025 EBITDA target of over
GBP425 million. We expect to deliver this across a range of
earnings streams, more than a third of which will come from the
growth of our Retail and Biomass Supply businesses, complemented by
increasingly stable and less commodity exposed generation
earnings.
We also announced the Group's new dividend policy which will see
us pay GBP50 million for the 2017 calendar year. This is a level
which is sustainable and expected to grow. It follows refinancing
we completed in May, which completes the Group's financial model
and supports our new strategy.
Strong corporate governance remains as important as ever and to
that end we are pleased to be able to complement our experienced
Board of directors with the appointment of a new non-executive
director. David Nussbaum will join the Board in August 2017 and we
look forward to benefitting from his considerable experience as we
deliver our sustainability agenda.
Safe and Sustainable Operations
Good safety and sustainability management is at the heart of our
operational philosophy.
Safety performance was particularly strong in the period. We
achieved our lowest ever total recordable injury rate across the
Group of 0.08. This is also good progress against the 0.17 recorded
in H1 2016.
Through the period we maintained our rigorous and robust
approach to sustainability, to ensure that all of the biomass we
use is sustainable, low carbon and fully compliant with the UK's
mandatory sustainability standards for biomass. The biomass we use
to generate electricity provides a 68% carbon emissions saving
against gas. This calculation factors in supply chain emissions
associated with manufacturing and transportation. Our biomass
life-cycle carbon emissions are 34g CO2/ MJ, less than half of the
UK Government's 79g CO2/ MJ limit(1) .
Retail
The acquisition of Opus Energy, alongside Haven Power, delivered
a step change in customer growth and profits in H1 2017, making the
Group the largest challenger business to business (B2B) energy
retailer in the UK. EBITDA for Retail increased from GBP(2) million
in H1 2016 to GBP11 million in H1 2017.
The B2B energy market in the UK has over five million
businesses. There are good opportunities for future growth as
market shares shift from traditional suppliers to challenger brands
like Opus Energy and Haven Power.
Opus Energy is focused on the Small and Medium-sized Enterprise
(SME) market, whilst Haven Power focuses on the Industrial and
Commercial (I&C) market and larger SMEs. Our two retail
businesses provide a highly complementary range of electricity
products and services. In addition, through Opus Energy we have now
added the sale of gas to our product range.
Led by their experienced management teams these businesses are
working well together. We have made good progress with the
integration of Opus Energy into the Group, as demonstrated by its
continued growth in sales at attractive margins. In addition, Haven
Power achieved breakeven profitability, ahead of plan, during H1
2017.
Generation
In biomass generation we have delivered world class operational
performance, with output of 7.3TWh in H1 2017 (2016: 7.5TWh). We
estimate(2) that we produced 17% of the UK's renewable electricity,
enough to power over four million homes. Three of our six
generating units are powered by compressed wood pellets and receive
support from Renewable Obligation Certificates (for two units) and
a Contract for Difference (CfD) (for one unit), which provides us
with high levels of revenue visibility through to 2027.
Our renewable electricity generation provides the UK with
reliable, flexible and cost effective electricity. Independent
research has shown that, on a whole system costs basis, it is the
most affordable large-scale renewable on the system(3) . In its
recent Future Energy Scenarios report, the electricity system
operator (National Grid plc(4) ) has identified a role for biomass,
well beyond 2027.
H1 2017 saw good operational performance in coal generation,
producing 32% of the power station's output, playing an important
role in the provision of system stability and earning a range of
merchant and contract based revenue streams. Capacity payments
worth circa GBP80 million are secured for 2017-2021, and revenue
from ancillary services was GBP21 million in H1 2017 (GBP20 million
in H1 2016).
In line with our strategy we continue to explore future options
for our Generation business. This includes continued engagement
with Government to make the case for further biomass upgrades of
coal units. During H1 2017 we have been running a trial on one of
our coal units to examine the feasibility of a low cost solution
for fuelling it with 100% compressed wood pellets using existing
co-firing infrastructure. The unit has performed well but there is
further work to do to ensure that it delivers high output reliably
and safely on a sustained basis, which we believe is achievable. In
view of this, we will continue our trial through the summer, but
have decided to return the unit to coal fuelling this winter to
ensure high availability through the colder months.
We are progressing well with our four rapid response gas
projects. Two of our project sites are ready to participate in the
UK capacity auctions and we intend to bid them into the February
2018 auction. If successful we will secure fifteen year contracts
for capacity delivery starting in winter 2021/2022. Meanwhile, the
process of securing the principal permits for the remaining two
project sites is progressing well and we aim to enter them into the
2019 capacity auction.
Our Research and Innovation team is currently developing a
proposal to look into the feasibility of converting one or more of
our coal units to gas. Early indications are that this could be an
attractive option for delivering critical flexible and reliable
generation capacity for the UK and we expect to continue to develop
this as an option over the coming years. Any such investment would
be eligible for a fifteen year capacity contract through the UK
Government's capacity auctions.
Biomass Supply
Operational performance improved in H1 2017 with increases in
production and supply. Production increased from 251k tonnes in H1
2016 to 366k tonnes in H1 2017.
In April we progressed our strategy to self-supply at least 30%
of wood pellets for Drax Power Station. We acquired a 450k tonne
compressed wood pellet plant out of receivership at a significant
discount to the new build cost of the asset. This plant, which we
have named LaSalle Bioenergy, is in the same South East US region
as our two existing pellet plants, allowing us to maximise the
benefits of our presence in this region. It requires further
investment to bring it up to the Group's technical standards for
safe and reliable operation. This is now underway and we expect the
plant to start ramping up operations in Q1 2018 and to reach full
capacity output in 2019.
Regulatory
We continue to operate in a changing political and regulatory
environment. The full impact of the UK's decision to leave the EU
is not yet known, but we continue to utilise medium-term foreign
exchange hedges to help protect the Group from volatility in
exchange rates leading to volatility in fuel costs. We do not
generate power or supply electricity and gas outside of the UK.
In terms of domestic energy policy, the UK Government's main
focus has been on what it sees as potentially unfair standard
variable tariffs (SVTs) for domestic consumers. The Government has
asked our regulator, Ofgem, to address this issue and to ensure
microbusinesses are treated fairly. Our retail focus remains on the
B2B market.
The Government's consultation on the cessation of coal
generation by 2025 closed in December 2016. The consultation asked
for views about the potential for co-firing with biomass to allow
coal stations to meet tighter emissions limits but we do not yet
have any indication of when the conclusions of this consultation
will be published. Similarly, the Government's call for evidence on
fuelled and geothermal technologies in the CfD scheme closed in
March this year. This asked for views on how the CfD scheme should
treat biomass conversions in the future but to date the Government
has not responded to the part of the consultation relating to
fuelled technologies which burn a fuel source derived from biomass.
We are also expecting the Government to announce plans for future
Carbon Price Support this autumn and are maintaining a dialogue
with the Treasury and other Government departments on this
issue.
Outlook
For the full year 2017, subject to continued operational
performance, we expect EBITDA to be in line with current market
consensus.
Beyond this our focus remains on the implementation and delivery
of our strategy, which is underpinned by safety, sustainability and
operational excellence as well as expertise in our markets. Central
to our strategy is the delivery of targeted growth through
deploying our expertise across our supply chain and, in so doing,
diversifying, growing and improving the quality of our earnings
with reduced exposure to commodity market volatility.
In our Retail business we expect to deliver continued growth at
Opus Energy at attractive margins and improving profitability at
Haven Power.
Our generation assets remain strategically important, delivering
cost effective large scale, low carbon renewable power, whilst also
playing a significant role in providing critical system support
services to the electricity grid. We will continue to actively
explore options to expand and upgrade our generation assets,
including new opportunities in gas which would provide additional
system support services and be underpinned by a stable fifteen
year, fixed price, capacity market contract. This would extend
earnings visibility to the late 2030's and deliver attractive
returns to shareholders.
The focus for our biomass pellet supply business remains on good
operational performance, reducing operating costs, cross-supply
chain optimisation and identifying attractive options to increase
self-supply to at least 30%.
Having made good progress on the delivery of our strategy we
will continue to build on it as we progress our targets for 2025,
whilst playing an important role in our markets and helping to
change the way energy is generated, supplied and used for a better
future.
Dorothy Thompson CBE
Chief Executive Officer
18 July 2017
Group Financial Review
Introduction
The Group's performance for the first six months of the year was
significantly improved relative to the first six months of 2016,
with EBITDA of GBP121 million (2016: GBP70 million). This
principally reflects contributions from recently acquired Opus
Energy and the operation of a biomass unit in Generation under a
CfD. This was delivered alongside a well-supported refinancing and
underpinned by strong operational performance across the Group.
Profit before tax was adversely impacted by higher depreciation
(GBP22 million), relating to the previously announced accelerated
depreciation of coal-specific assets, one off costs associated with
the Opus Energy acquisition (GBP6 million) and the refinancing
(GBP24 million), as well as amortisation of newly-acquired
intangible assets in Opus (GBP19 million). In addition, non-cash
unrealised losses on derivative contracts in the period of GBP65
million moved adversely by GBP228 million from 30 June 2016,
principally a result of foreign exchange rate movements. This
resulted in a loss before tax of GBP83 million for the period
(2016: profit GBP184 million). However, the underlying performance,
which excludes this volatility and related tax charges, resulted in
underlying earnings of GBP9 million, as shown in note 5.
The financial structure of the business has changed over the
past twelve months and the Group now benefits from increasingly
visible and growing earnings from a diversified base, with reducing
exposure to commodity prices. We expect the CfD will underpin our
earnings through the life of the contract (to March 2027),
supported by growing contributions from expanding Biomass Supply
operations and our Retail business.
On 10 February 2017 we completed the acquisition of Opus Energy
Group Limited for total consideration of GBP367 million. The
acquisition was funded from the Group's own resources and GBP200
million from an acquisition facility and resulted in GBP156 million
of goodwill and GBP224 million of intangible assets (see note
8).
As part of our interim review, we have reviewed the principal
commercial and operational risks faced by the Group. These risks
are set out in our 2016 Annual Report and Accounts (pages 55-61)
and remain unchanged.
The Group is supported by a robust balance sheet, strengthened
in the period by the refinancing and restructuring of the Group's
debt and a continued focus on working capital and cash
optimisation.
Financial Performance
Consolidated revenue for the period of GBP1,801 million was
GBP314 million greater than the same period in 2016, driven by
higher Generation sales and the acquisition of Opus Energy.
Electrical output from our Generation business of 10.7TWh was in
line with our plan, 68% from biomass-fired units and 32% from
coal-fired units.
Retail power revenues increased from GBP643 million at 30 June
2016 to GBP940 million at 30 June 2017, including contributions
from Opus Energy (from 10 February). Gross margins also improved
from GBP10 million to GBP61 million, with both businesses
contributing to this result.
Revenues and margins for our US-based compressed wood pellet
manufacturing business continued to rise, as we increased
production from 250,895 tonnes in the first half of 2016 to 366,496
tonnes this year. We are also making good progress on our projects
to increase capacity at our two existing facilities and in the work
to bring the recently acquired LaSalle Bioenergy in to service in
2018.
Consolidated gross margin to 30 June 2017 of GBP275 million was
driven by improvements across the business and compares to GBP182
million in the same period in 2016.
Other operating costs of GBP154 million are higher than GBP112
million in the first six months of 2016, reflecting the acquisition
of Opus Energy and costs associated with strategic development
activities.
As a result of these costs and gross margin performance,
consolidated EBITDA for 30 June 2017 was GBP121 million, compared
to GBP70 million in 2016.
Depreciation and amortisation charges increased from GBP49
million in the first six months of 2016 to GBP90 million this year.
This includes shortening the useful economic life and accelerating
depreciation on certain coal-specific assets within Generation to a
long stop date of 2025, in line with the Government's stated
ambition for the cessation of unabated coal generation. We also
recognised intangibles, entirely arising from the Opus acquisition,
of GBP224 million, which resulted in amortisation of GBP19 million
in the period.
Interest payable of GBP37 million include the costs incurred
during the Group's refinancing. A full breakdown of interest
payable is shown in note 3 and includes early repayment charges for
loans outstanding at the refinancing date.
A key component of the Group's risk management strategy is the
use of forward contracts to secure and de-risk the future cash
flows of the business. The accounting for these contracts is set
out in further detail in note 12 and during the period resulted in
an unrealised loss of GBP65 million, driven by the partial recovery
of sterling against the US Dollar.
Loss before tax, calculated in accordance with IFRS was GBP83
million, including transaction and integration costs incurred
through the acquisition of Opus Energy of GBP6 million, and the
Group refinancing costs of GBP24 million. This compared to a profit
of GBP184 million for the 6 months to June 2016. The movement
predominantly reflects volatility in the unrealised gains and
losses on derivative contracts.
After a tax credit for the period of GBP14 million (2016: charge
of GBP36 million), loss after tax was GBP68 million (2016: profit
of GBP149 million), delivering a basic loss per share of (16.8)
pence (2016: Earnings of 36.6 pence).
Underlying earnings is used to assess the performance of our
Group without P&L volatility. The reconciliation of IFRS
earnings to underlying earnings is shown in note 5 and results in
underlying profit after tax for the six months of GBP9 million
(2016: GBP17 million) or 2.2 pence per share (2016: 4.2 pence per
share).
Cash taxes paid during the period were GBP9 million (2016: GBP2
million cash taxes repaid).
Financial Position
Capital expenditure in the period was GBP79 million, increased
from GBP38 million in the first six months of 2016. This included
the purchase, at auction, of the pellet-production assets at
LaSalle Bioenergy ($35 million), details of which are shown in note
11, and investment in an office facility in Northampton (GBP10
million), which will be used to consolidate existing Opus Energy
operations in that area. Other investment reflected routine asset
replacement at Drax Power Station, including the purchase of
strategic spares, and the development of a new information
technology platform for Retail.
Cash generated from operations amounted to GBP235 million in the
period, an GBP82 million increase from the previous year. This was
supported by initiatives designed to improve cash flows and release
working capital from our balance sheet.
The cash position during the first half was significantly
impacted by a full Group refinancing, which was executed on 5 May
2017. The Group successfully raised GBP550 million of publicly
traded bonds, supported by a revised revolving credit facility of
GBP350 million.
During the period the newly-raised funds were used to repay the
GBP200 million Opus Energy acquisition facility and going forward
will provide support for our investment and strategic
programmes.
Net debt at 30 June was GBP372 million, compared to GBP85
million at the end of June 2016.
Distributions
On 15 June we announced a new dividend policy, consistent with
maintaining the Group's credit rating and investing in its
business.
In 2017 the Board expects to recommend a dividend of GBP50m with
regards to the 2017 financial year. The Board is confident that
this dividend is sustainable and expects it to grow from this level
as the implementation of the strategy generates an increasing
proportion of stable earnings and cash flows. In determining the
rate of growth in dividends the Board will take account of future
investment opportunities and the less predictable cash flows from
the Group's commodity based businesses. If there is a build-up of
capital in excess of the Group's investment needs the Board will
consider the most appropriate mechanism to return this to
shareholders.
At the Annual General Meeting on 13 April 2017, shareholders
approved payment of a final dividend for the year ended 31 December
2016 of 0.4 pence per share (GBP1.6 million). The final dividend
was subsequently paid on 12 May 2017.
On 18 July 2017, the Board resolved to pay an interim dividend
for the six months ended 30 June 2017 of 4.9 pence per share (GBP20
million), representing 40% of the expected full year dividend. The
interim dividend will be paid on 6 October 2017 and shares will be
marked ex-dividend on 21 September 2017.
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 discussed within the Chief Executive's statement (on pages 4 to
6), this Group Financial Review and our 2016 Annual Report and
Accounts.
Our cash flows and borrowing facilities are described above. In
addition, section 7 of the consolidated financial statements in the
2016 Annual Report and Accounts explains our approach to capital
risk management and 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.
Following the refinancing described above, we have substantial
headroom in our banking facilities, a recent history of cash
generation and strong covenant compliance. 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.
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 detail in our 2016 Annual Report and Accounts (pages 55-61) the
principal risks and uncertainties that could impact performance. We
have reviewed the principal risks and consider they are broadly
unchanged and will continue to be relevant over the second half of
the year.
We recognise that the UK's decision to leave the European Union
in 2016 and the recent UK election result have increased political
and regulatory uncertainty. The Group continues to monitor this
situation closely but at this stage we do not detect increasing
risks for our businesses. 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.
Seasonality of Trading
The primary activities of our Group are affected by seasonality.
Demand in the UK, for electricity, gas and heat, is typically
higher and thus drives higher prices and dispatch in the winter
period (October to March) when temperatures are colder. Conversely,
demand is typically lower in the summer months (April to
September), when prices are lower.
This trend is experienced by all of our UK-based businesses, as
they variously operate within the UK electricity, gas 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, driven by regular
demand from the Generation business for wood pellets, 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 amended GBP350 million
working capital and revolving credit facility assists in managing
cash low points in the cycle if required.
Related parties
The Group set out in its 2016 Annual Report and Accounts (page
166) 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 2016.
The contents of this report were approved by the Board on 18
July 2017.
Will Gardiner
Chief Financial Officer
18 July 2017
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 CBE Will Gardiner
Chief Executive Officer Chief Financial Officer
18 July 2017 18 July 2017
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. 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
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 2016
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, as explained on page 9,
and on the historical cost basis, except for certain assets and
liabilities that have been measured at fair value (principally
derivative financial instruments and acquired intangible
assets).
The Interim Condensed Consolidated Financial Statements were
approved by the Board on 18 July 2017.
Significant events and transactions
The financial position and performance of the Group was
particularly affected by the following events and transactions
during the six months to 30 June 2017:
-- On 10 February 2017, the Group acquired 100% of the issued
equity of Opus Energy Group Limited ("Opus Energy"). The
consolidated results for the period include the post-acquisition
trading results of Opus Energy. In addition, intangible assets of
GBP224 million have been recognised in the Group's consolidated
balance sheet. See note 8 for further details.
-- On 13 April 2017, the Group acquired the assets of a
compressed wood pellet manufacturing facility in Urania, Louisiana,
USA. The assets, which were acquired via an auction for a total
cost of $35 million, have been included in the Group's property,
plant and equipment at 30 June. Further details can be found in
note 11.
-- On 5 May 2017, the Group refinanced its debt facilities,
replacing the existing term loans (including a GBP200 million
facility drawn to part-fund the Opus Energy acquisition) and
revolving credit facility with a high yield bond (comprised of
GBP350 million fixed rate bonds and GBP200 million floating rate
bonds) and a new GBP350 million revolving credit facility. Full
details of new debt facilities are included in note 15. Interest
costs, including those expensed as a result of the refinancing, are
explained in note 3.
Adoption of new and revised accounting standards
Since the 2016 Annual Report and Accounts were published, the
Group has not made any changes in its accounting policies which
would result in retrospective adjustments to the published results.
Note 19 contains information relating to the potential impact of
three new IFRS standards which are in issue but not yet adopted by
the Group, and which will be applicable from 1 January 2018 (IFRS 9
and IFRS 15) and 1 January 2019 (IFRS 16).
The acquisition of Opus Energy has given rise to the recognition
of intangible assets which will be amortised over their useful
lives. The Group has not previously held any intangibles with a
defined useful life. The judgements and estimates relating to the
valuation and amortisation of these assets have been disclosed in
note 8.
Judgements and estimates
The judgements and estimates applied to the preparing of the
Interim Condensed Consolidated Financial Statements are consistent
with those described in detail on pages 117-118 of the Group's
Annual Report and Accounts for 2016, except for those noted
below.
As noted in section 3.1 (page 138) of the 2016 Annual Report,
the useful economic lives of certain coal-specific assets have been
reviewed. This followed the Government's announcement to consult on
the future closure of unabated coal-fired generation. In the light
of this announcement, it was concluded that coal generation will
cease during 2025, but that the three coal units will be retained
for conversion to alternative fuel sources after this date. An
initial assessment of the coal-specific assets affected by this
change suggested that depreciation charges would be increased by
GBP27 million per annum until 2025. Following a detailed review of
the assets that will be affected, the increase in depreciation
charges is expected to be GBP15 million per annum. Accordingly,
approximately half of this has been charged to the income statement
for the six months ended 30 June 2017. The detailed review has also
identified further Generation assets with a shortened useful life
and additional one-off charge of GBP4 million has been charged in
respect of these assets in the current period.
Following the acquisition of Opus Energy, the Retail businesses
have, where appropriate, aligned their judgements, estimates and
approach. Key judgements that have been reflected in the condensed
financial statements in respect of Opus Energy include:
-- the valuation of land and buildings - these have been valued
at their market value at the date of acquisition, resulting in a
GBP2 million uplift in non-current assets;
-- valuation of intangible assets - the key judgements in the
valuations of these assets are disclosed in note 8; and
-- the estimation of costs and revenues resulting from
electricity and gas supplies to customers - these are aligned to
the approaches taken on the existing Retail business, as disclosed
in the 2016 Annual Report and Accounts.
We have also reviewed the risk of impairment, as we did at 31
December 2016 (explained in Section 2.4 (page 130) of the 2016
Annual Report and Accounts). There have been no significant changes
to the judgements and estimates made at 31 December 2016 in this
respect.
Alternative performance measures (APMs)
We present two APMs (measures without formal definition within
IFRS) on the face of our income statement to assist investors in
evaluating the comparability of the Group's financial performance
and the performance against strategic objectives.
EBITDA is the primary measure we use to assess our financial
performance. The purpose of EBITDA is to provide a consistent,
comparable measure of the trading performance of the Group's
businesses year on year.
EBITDA is defined as earnings before interest, tax,
depreciation, amortisation and material one-off items that do not
reflect the underlying trading performance of the business.
The purpose of underlying earnings is to provide a consistent,
comparable measure of the overall financial performance of the
Group's businesses year on year, including costs of servicing the
existing debt and tax.
Underlying earnings is defined as profit after tax, as
calculated in accordance with IFRS, adjusted to exclude unrealised
gains and losses on derivative contracts and material one-off items
that do not reflect the underlying performance of the business.
EBITDA is reconciled to both gross profit and operating profit
on the face of the income statement. A reconciliation of underlying
earnings to profit after tax attributable to shareholders is
provided in note 5.
Condensed consolidated income statement
Six months ended Year ended
30 June 31 December
------ ------------------------------ -------------
2017 2016 2016
(Unaudited) (Unaudited) (Audited)
Notes GBPm GBPm GBPm
--------------------------------- ------ -------------- -------------- -------------
Revenue 1,800.5 1,486.5 2,949.8
Fuel costs in respect
of generation (561.5) (516.4) (1,154.2)
Cost of power purchases (489.2) (457.1) (907.8)
Grid charges (239.2) (181.7) (379.7)
Other retail costs (235.4) (149.1) (131.8)
--------------------------------- ------ -------------- -------------- -------------
Total cost of sales (1,525.3) (1,304.3) (2,573.5)
--------------------------------- ------ -------------- -------------- -------------
Gross profit 275.2 182.2 376.3
Other operating and
administrative expenses (154.4) (111.9) (236.3)
--------------------------------- ------ -------------- -------------- -------------
EBITDA(1) 120.8 70.3 140.0
Transaction and integration
costs (2) (6.3) - -
Depreciation and amortisation (89.6) (49.3) (109.5)
Loss on disposal - (2.7) (3.8)
Unrealised (losses)/gains
on derivative contracts (64.7) 163.4 176.8
--------------------------------- ------ -------------- -------------- -------------
Operating (loss)/profit (39.8) 181.7 203.5
Interest payable and
similar charges 3 (36.6) (11.1) (29.0)
Interest receivable
and similar income 3 - 0.6 0.6
Foreign exchange (losses)/gains 3 (6.3) 13.0 22.0
--------------------------------- ------ -------------- -------------- -------------
(Loss)/profit before
tax (82.7) 184.2 197.1
Tax credit/(charge) 4 14.3 (35.5) (3.2)
--------------------------------- ------ -------------- -------------- -------------
(Loss)/profit for
the period attributable
to equity holders (68.4) 148.7 193.9
--------------------------------- ------ -------------- -------------- -------------
(Loss)/earnings per
share pence pence pence
--------------------------------- ------ -------------- -------------- -------------
- Basic 7 (16.8) 36.6 47.7
--------------------------------- ------ -------------- -------------- -------------
- Diluted 7 (16.7) 36.3 47.4
--------------------------------- ------ -------------- -------------- -------------
GBPm GBPm GBPm
--------------------------------- ------ -------------- -------------- -------------
Underlying earnings
for the period (3) 5 8.9 16.9 20.5
--------------------------------- ------ -------------- -------------- -------------
pence pence Pence
--------------------------------- ------ -------------- -------------- -------------
Underlying earnings
per share (3) 7 2.2 4.2 5.0
--------------------------------- ------ -------------- -------------- -------------
All results relate to continuing operations.
(1) EBITDA is defined as: Earnings before interest, tax,
depreciation, amortisation and material one-off items that do not
reflect the underlying trading performance on the business.
(2) Transaction and integration costs reflect costs associated
with the acquisition and integration of Opus Energy Group Limited
into the Group.
(3) Underlying earnings is defined as: Profit after tax, as
calculated in accordance with IFRS, adjusted to exclude unrealised
gains and losses on derivative contracts and material one-off items
that do not reflect the underlying performance of the business (see
note 5).
Condensed consolidated statement of comprehensive income
Six months ended Year ended
30 June 31 December
------------------------------------ --------------
2016
(Audited)
2017 (Unaudited) 2016 (Unaudited)
GBPm GBPm GBPm
------------------------------------------ ----------------- ----------------- --------------
(Loss)/profit for the period (68.4) 148.7 193.9
------------------------------------------ ----------------- ----------------- --------------
Items that will not be reclassified
subsequently to profit or loss:
Actuarial gains/(losses) on
defined benefit pension scheme 11.3 5.4 (8.4)
Deferred tax on actuarial gains/(losses)
on defined benefit pension
scheme (2.2) (1.0) 1.6
Items that may be subsequently
reclassified to profit or loss:
Exchange differences on translation
of foreign operations 0.2 (8.0) (9.1)
Fair value (losses)/gains on
cash flow hedges (142.3) 214.3 330.1
Deferred tax on cash flow hedges 27.4 (39.4) (62.6)
Impact of corporation tax rate
change on deferred tax on cash
flow hedges - - 3.0
Other comprehensive (expense)/income
for the period (105.6) 171.3 254.6
------------------------------------------ ----------------- ----------------- --------------
Total comprehensive (expense)/income
for the period attributable
to equity holders (174.0) 320.0 448.5
------------------------------------------ ----------------- ----------------- --------------
Condensed consolidated balance sheet
As at
As at 30 June 31 December
------ ------------------------------------ -------------
2016
(Audited)
2017 (Unaudited) 2016 (Unaudited)
Notes GBPm GBPm GBPm
---------------------------------- ------ ----------------- ----------------- -------------
Assets
Non-current assets
Intangible assets 9 225.9 - 21.7
Goodwill 10 170.2 14.5 14.5
Property, plant and equipment 11 1,655.0 1,640.2 1,641.5
Deferred tax assets 39.0 - 33.5
Derivative financial instruments 12 301.3 481.2 486.3
---------------------------------- ------ ----------------- ----------------- -------------
2,391.4 2,135.9 2,197.5
---------------------------------- ------ ----------------- ----------------- -------------
Current assets
Inventories 207.8 222.7 287.5
ROC and LEC assets 365.8 396.2 257.6
Trade and other receivables 360.4 232.5 292.9
Derivative financial instruments 12 271.3 330.2 405.0
Cash and cash equivalents 197.0 234.8 228.4
1,402.3 1,416.4 1,471.4
---------------------------------- ------ ----------------- ----------------- -------------
Liabilities
Current liabilities
Trade and other payables 784.5 590.5 591.9
Current tax liabilities 35.4 7.0 6.1
Borrowings 15 0.8 0.9 35.9
Derivative financial instruments 12 165.9 192.4 251.0
---------------------------------- ------ ----------------- ----------------- -------------
986.6 790.8 884.9
---------------------------------- ------ ----------------- ----------------- -------------
Net current assets 415.7 625.6 586.5
Non-current liabilities
Borrowings 15 568.3 318.9 286.0
Derivative financial instruments 12 78.5 206.3 112.5
Provisions 34.9 30.9 35.0
Deferred tax liabilities 236.3 261.7 275.2
Retirement benefit obligations 15.5 20.6 30.1
---------------------------------- ------ ----------------- ----------------- -------------
933.5 838.4 738.8
---------------------------------- ------ ----------------- ----------------- -------------
Net assets 1,873.6 1,923.1 2,045.2
---------------------------------- ------ ----------------- ----------------- -------------
Shareholders' equity
Issued equity 47.0 47.0 47.0
Capital redemption reserve 1.5 1.5 1.5
Share premium 424.3 424.2 424.2
Merger reserve 710.8 710.8 710.8
Hedge reserve 14 190.5 209.8 305.4
Translation reserve (10.0) - (10.2)
Retained profits 509.5 529.8 566.5
---------------------------------- ------ ----------------- ----------------- -------------
Total shareholders' equity 1,873.6 1,923.1 2,045.2
---------------------------------- ------ ----------------- ----------------- -------------
Condensed consolidated statement of changes in equity
Capital
redemption Share Merger Hedge Translation Retained
Issued equity reserve premium reserve reserve reserve profits Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
At 1 January 2016 46.9 1.5 424.2 710.8 34.9 (1.1) 385.2 1,602.4
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
Profit for the
year - - - - - - 193.9 193.9
Other
comprehensive
income/(expense) - - - - 270.5 (9.1) (6.8) 254.6
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
Total
comprehensive
income for the
year - - - - 270.5 (9.1) 187.1 448.5
Equity dividends
paid - - - - - - (11.0) (11.0)
Issue of share
capital 0.1 - - - - - - 0.1
Movement in
equity
associated with
share-based
payments - - - - - - 5.2 5.2
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
At 31 December
2016 47.0 1.5 424.2 710.8 305.4 (10.2) 566.5 2,045.2
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
At 1 January 2016 46.9 1.5 424.2 710.8 34.9 (1.1) 385.2 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 (1.1) 530.9 1,923.1
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
At 1 January 2017 47.0 1.5 424.2 710.8 305.4 (10.2) 566.5 2,045.2
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
(Loss) for the
period - - - - - - (68.4) (68.4)
Other
comprehensive
income/(expense) - - - - (114.9) 0.2 9.1 (105.6)
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
Total
comprehensive
income for the
period - - - - (114.9) 0.2 (59.3) (174.0)
Equity dividends
paid - - - - - - (1.6) (1.6)
Issue of share
capital - - 0.1 - - - - 0.1
Movement in
equity
associated with
share-based
payments - - - - - - 3.9 3.9
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
At 30 June 2017 47.0 1.5 424.3 710.8 190.5 (10.0) 509.5 1,873.6
------------------ ---------------- ------------ --------- --------- --------- ------------ --------- --------
Condensed consolidated cash flow statement
Six months ended Year ended
30 June 31 December
------ ------------------------------------ -------------
2016
(Audited)
2017 (Unaudited) 2016 (Unaudited)
Notes GBPm GBPm GBPm
-------------------------------- ------ ----------------- ----------------- -------------
Cash generated from operations 16 235.2 152.7 213.1
Income taxes (paid)/refunded (9.0) 1.6 (1.7)
Other (losses)/gains/ (0.9) 5.2 0.7
Interest paid (29.1) (8.6) (21.7)
Interest received 0.3 0.2 0.4
-------------------------------- ------ ----------------- ----------------- -------------
Net cash from operating
activities 196.5 151.1 190.8
-------------------------------- ------ ----------------- ----------------- -------------
Cash flows from investing
activities
Purchases of property,
plant and equipment (83.2) (47.8) (93.2)
Acquisition of subsidiary (379.8) - -
Net cash used in investing
activities (463.0) (47.8) (93.2)
-------------------------------- ------ ----------------- ----------------- -------------
Cash flows from financing
activities
Equity dividends paid 6 (1.6) (2.4) (11.0)
Proceeds from issue of
share capital - 0.1 0.1
Repayment of borrowings (493.8) - -
New borrowings drawn
down 15 750.0 - -
Other financing costs
paid (17.4) - -
-------------------------------- ------ ----------------- ----------------- -------------
Net cash used in financing
activities 237.2 (2.3) (10.9)
-------------------------------- ------ ----------------- ----------------- -------------
Net (decrease)/increase
in cash and cash equivalents 17 (29.3) 101.0 86.7
Cash and cash equivalents
at beginning of the period 228.4 133.8 133.8
Effect of changes in
foreign exchange rates (2.1) - 7.9
-------------------------------- ------ ----------------- ----------------- -------------
Cash and cash equivalents
at end of the period 197.0 234.8 228.4
-------------------------------- ------ ----------------- ----------------- -------------
Notes to the condensed consolidated financial statements
1. General information
These notes provide additional information about the disclosures
within the condensed consolidated financial statements. Further
information can be found in our 2016 Annual Report and Accounts on
pages 117 - 166.
Drax Group plc (the Company) is incorporated in England and
Wales under the Companies Act. The Company and its subsidiaries
(together, the Group) operate in the electricity, gas and heat
markets 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 businesses, with a dedicated
management team for each, and a central head office providing
certain corporate functions. Our businesses are:
- Generation: the generation of electricity at Drax Power
Station;
- Biomass Supply: production of sustainable compressed wood
pellets at our processing facilities in the US; and
- Retail: the supply of electricity and gas to business
customers and wood pellets to the domestic heat market.
Each of these business units is 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 (as defined on page 12).
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.
During the period, the Group acquired 100% of the share capital
of Opus Energy Group Limited, a retail business supplying
electricity and gas to business customers. This new acquisition
forms part of the Retail segment, in line with the internal
reporting structure for its results. Note 8 details the additional
revenue and profit attributable to the Group from the new
acquisition.
The primary activities of the Group are affected by seasonality
as described on page 9 and is reflected in the results below.
Segment revenues and results
The following is an analysis of the Group's results by reporting
segment in the six months ended 30 June 2017:
Six months ended 30 June 2017 (Unaudited)
-------------------------------------------------------------
Biomass Adjustments
Generation Retail Supply (1) Consolidated
GBPm GBPm GBPm GBPm GBPm
-------------------------- ----------- ------- -------- ------------ -------------
Revenue
External sales 860.4 940.1 - - 1,800.5
Inter--segment
sales 337.9 - 54.3 (392.2) -
-------------------------- ----------- ------- -------- ------------ -------------
Total revenue 1,198.3 940.1 54.3 (392.2) 1,800.5
-------------------------- ----------- ------- -------- ------------ -------------
Segment gross profit 203.6 60.8 13.0 (2.2) 275.2
Segment EBITDA 136.7 11.4 (4.4) (2.2) 141.5
-------------------------- ----------- ------- -------- ------------ -------------
Central operating
costs (20.7)
Consolidated EBITDA 120.8
Depreciation and
amortisation (89.6)
Transaction and
integration costs (6.3)
Unrealised losses
on derivative contracts (64.7)
-------------------------- ----------- ------- -------- ------------ -------------
Operating loss (39.8)
Net finance costs (42.9)
-------------------------- ----------- ------- -------- ------------ -------------
Loss before tax (82.7)
-------------------------- ----------- ------- -------- ------------ -------------
(1) Adjustments represent the elimination of intra-group
transactions. 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 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. 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 following is an analysis of the Group's results by reporting
segment in the year ended 31 December 2016:
Year ended 31 December 2016 (Audited)
------------------------------------------------------------
Biomass Adjustments
Generation Retail Supply (1) Consolidated
GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- -------- -------- ------------ -------------
Revenue
External sales 1,622.7 1,326.4 0.7 - 2,949.8
Inter--segment
sales 868.2 - 72.9 (941.1) -
--------------------- ----------- -------- -------- ------------ -------------
Total revenue 2,490.9 1,326.4 73.6 (941.1) 2,949.8
Segment gross
profit 337.0 23.5 18.1 (2.3) 376.3
Segment EBITDA 173.8 (4.3) (6.3) (2.3) 160.9
Central operating
costs (20.9)
Consolidated EBITDA 140.0
Depreciation and
amortisation (109.5)
Loss on disposal (3.8)
Unrealised gains
on derivative
contracts 176.8
--------------------- ----------- -------- -------- ------------ -------------
Operating profit 203.5
Net finance costs (6.4)
--------------------- ----------- -------- -------- ------------ -------------
Profit before
tax 197.1
--------------------- ----------- -------- -------- ------------ -------------
(1) Adjustments represent the elimination of intra-group
transactions. 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.
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, investment on key capital
projects at segment level is monitored.
In the period, total capital investment was GBP79.0 million. The
significant movements relate to expenditure of GBP27 million for
the purchase of the assets of LaSalle Bioenergy within the US-based
Biomass Supply segment and GBP15 million relating to the Retail
segment, which is predominantly GBP10.4 million for a new office
facility for Opus Energy.
Major customers
Total revenue for the six months ended 30 June 2017 includes
amounts of GBP215 million and GBP204 million (H1 2016: GBP282.0
million and GBP222.7 million) derived from two customers (H1 2016:
two customers), each representing 10% or more of the Group's
revenue for the period.
3. Net interest (charge)/credit
Year ended
Six months ended 30 June 31 December
-------------------------------------------- ------------
2016
(Audited)
2017 (Unaudited) GBPm 2016 (Unaudited) GBPm GBPm
--------------------- --------------------- ------------
Interest payable and similar charges:
Interest payable on borrowings (9.5) (9.1) (19.4)
Unwinding of discount on provisions 0.4 (0.4) (4.5)
Net cost of refinancing (24.2) - -
Amortisation of deferred finance costs (1.7) (1.1) (2.1)
Net finance cost in respect of defined benefit pension
scheme (0.3) (0.5) (0.9)
Other financing charges (1.3) - (2.1)
---------------------------------------------------------- --------------------- --------------------- ------------
Total interest payable and similar charges (36.6) (11.1) (29.0)
---------------------------------------------------------- --------------------- ---------------------
Interest receivable and similar income:
Interest income on bank deposits - 0.3 0.6
Other financing income - 0.3 -
---------------------------------------------------------- --------------------- --------------------- ------------
Total interest receivable and similar income - 0.6 0.6
---------------------------------------------------------- --------------------- --------------------- ------------
Foreign exchange (losses)/gains (6.3) 13.0 22.0
---------------------------------------------------------- --------------------- --------------------- ------------
Net interest (charge)/credit (42.9) 2.5 (6.4)
---------------------------------------------------------- --------------------- --------------------- ------------
On 5 May 2017, the Group refinanced its external debt. The
resulting cost of GBP24.2 million (H1 2016: GBPNil) reflects the
costs incurred to extinguish the existing debt together with the
write off of the related deferred finance costs. Further
information about the new finance structure can be found in note
15.
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 which is applied to taxable profits/losses 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.
Six months ended Year ended
30 June 31 December
-------------------------------- -------------
2016
2016
2017 (Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
------------------------------------ ----------------- ------------- -------------
Tax (credit)/charge comprises:
Current tax 45.6 6.1 8.5
Deferred tax before impact of
corporation tax change (59.9) 29.4 4.5
Deferred tax impact of corporation
tax change - - (9.8)
Tax (credit)/charge (14.3) 35.5 3.2
------------------------------------ ----------------- ------------- -------------
5. Underlying earnings
Underlying earnings is defined as profit after tax, as
calculated in accordance with IFRS, adjusted to exclude unrealised
gains or losses on derivative contracts and material one-off items
that do not reflect the underlying performance of the business.
This note analyses the items which are included in our results
for the current and previous periods but are excluded from
underlying earnings:
- Unrealised gains and losses on derivative contracts:
calculated in accordance with IAS 39 and excluded due to the
inherent volatility
- Transaction and integration costs: costs associated with the
acquisition and integration of Opus Energy have been excluded as
material one-off costs incurred in the period
- Cost of refinancing: material costs incurred as a result of
the refinancing transactions and include break costs and the
acceleration of amortisation of deferred finance costs associated
with the previous facilities.
- Deferred tax on start-up losses and other temporary
differences: credit resulting from the recognition of a deferred
tax asset in the Biomass Supply business. This was excluded from
underlying earnings in 2016 as a material one-off item.
- Related tax charges and credits
Six months ended Year ended
30 June 31 December
------------------------------------ ---------------
2017 (Unaudited) 2016 (Unaudited) 2016 (Audited)
GBPm GBPm GBPm
------------------------------------- ----------------- ----------------- ---------------
Earnings:
Earnings attributable to equity
holders of the Company for the
purposes of basic and diluted
earnings (68.4) 148.7 193.9
Adjusted for:
Unrealised gains and losses
on derivative contracts 64.7 (163.4) (176.8)
Transaction and integration
costs 6.3 - -
Cost of refinancing 24.2 - -
Tax impact of the above adjustments (17.9) 31.6 33.9
Deferred tax on start-up losses
and other temporary differences - - (30.5)
------------------------------------- ----------------- ----------------- ---------------
Underlying earnings attributable
to equity holders of the Company 8.9 16.9 20.5
------------------------------------- ----------------- ----------------- ---------------
6. Dividends
Six months ended Year ended
30 June 31 December
------------------------------ -------------
Pence
per
share 2017 2016 2016
(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 2016 paid
12 May 2017 0.4 1.6 - -
Interim dividend for the
year ended 31 December 2016
paid 7 October 2016 2.1 - - 8.6
Final dividend for the year
ended 31 December 2015 paid
13 May 2016 0.6 - 2.4 2.4
------------------------------------- ------- -------------- -------------- -------------
1.6 2.4 11.0
------------------------------------- ------- -------------- -------------- -------------
On 18 July 2017, the Board resolved to pay an interim dividend
of 4.9 pence per share (GBP20 million), representing 40% of the
expected full year dividend in line with our new dividend policy.
The interim dividend will be paid on 6 October 2017 and shares will
be marked ex-dividend on 21 September 2017.
The Group has sufficient retained profits, which are accessible
by the Parent Company, for future distributions in accordance with
the Group's dividend policy.
7. 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. Underlying EPS
is based upon underlying earnings as defined in note 5.
Reconciliations of the weighted average number of shares used in
the calculation are set out below.
Six months ended Year ended
30 June 31 December
------------------------------------ ---------------
2017 (Unaudited) 2016 (Unaudited) 2016 (Audited)
--------------------------------------- ----------------- ----------------- ---------------
Number of shares:
Weighted average number of ordinary
shares for the purposes of basic
earnings per share (millions) 406.8 406.7 406.6
Effect of dilutive potential ordinary
shares under share plans 3.7 2.5 2.7
--------------------------------------- ----------------- ----------------- ---------------
Weighted average number of ordinary
shares for the purposes of diluted
earnings per share (millions) 410.5 409.2 409.3
--------------------------------------- ----------------- ----------------- ---------------
(Loss)/earnings per share - basic
(pence) (16.8) 36.6 47.7
--------------------------------------- ----------------- ----------------- ---------------
(Loss)/earnings per share - diluted
(pence) (16.7) 36.3 47.4
--------------------------------------- ----------------- ----------------- ---------------
Underlying earnings per share
- basic (pence) 2.2 4.2 5.0
--------------------------------------- ----------------- ----------------- ---------------
Underlying earnings per share
- diluted (pence) 2.2 4.1 5.0
--------------------------------------- ----------------- ----------------- ---------------
8. Acquisition of Opus Energy
The acquisition of Opus Energy Group Limited (Opus Energy) was
approved by shareholders on 8 February 2017 and subsequently
completed on 10 February 2017.
Opus Energy is a well-established energy retail business serving
business customers in the SME market. Opus Energy has contributed
positively to earnings and cash flow immediately following the
acquisition and the combination provides a robust platform for
future growth.
The purchase consideration was GBP340 million plus interest
calculated on the amount of Opus Energy's net assets from 31 March
2016 to the acquisition completion date. The total consideration
was GBP367 million and was funded by a combination of existing cash
reserves (GBP167 million) and partial drawing of a GBP375 million
acquisition facility (GBP200 million). This facility was repaid as
part of the refinancing described in note 15.
Acquisition related costs in the period amounted to GBP6.3
million and have been included in 'transaction and integration'
costs on the income statement.
The fair values of the identifiable assets acquired and the
liabilities assumed were provisionally determined as follows:
Total
Opening balance sheet as at 10 February 2017 GBPm
--------------------------------------------------------- -------
Intangible assets:
Customer related assets 211.0
Brand 11.3
Software 1.2
--------------------------------------------------------- -------
Total identifiable intangible assets 223.5
Financial assets 215.4
Property, plant and equipment 7.5
Financial liabilities (194.0)
Deferred tax liability (40.7)
--------------------------------------------------------- -------
Total identifiable net assets 211.7
Goodwill 155.7
--------------------------------------------------------- -------
Fair value of consideration payable 367.4
--------------------------------------------------------- -------
Income statement items for the period from 10 February
to 30 June 2017
Revenue 263.4
EBITDA 11.5
Profit before tax 10.7
--------------------------------------------------------- -------
These items exclude the effect of fair value adjustments
included in the consolidated accounts.
Following the acquisition, the Group has been able to identify
and measure the fair value of existing customer contracts and
relationships, the Opus Energy brand and software. The assets will
be amortised over their useful economic lives as follows:
-- Existing customer related assets 11 years (reducing balance)
-- Brand 10 years (straight line)
-- Software 3 years (straight line)
The fair value measurement of the existing customer contracts
requires judgement and assumptions, in particular regarding margins
on current customer contracts, future contract renewal rates and
future margins on renewed contracts. The goodwill of GBP156 million
initially recognised on acquisition is largely reflective of
potential new customer contracts and relationships, and growth
opportunities together with the assembled workforce. None of the
goodwill is deductible for tax purposes.
The financial assets acquired include GBP128 million of
receivables, the majority of which reflect the trade receivables
for energy supplied to customers. By virtue of their short tenor,
the fair value of these receivables is considered to be the
contractual amounts receivable less any provision for doubtful
debts. The provision for doubtful debts as at the acquisition date
was GBP16 million.
Pro forma information
The pro forma consolidated results of the Group, assuming the
acquisitions had been made at the beginning of the year, would show
revenue of GBP353 million (compared to reported revenue of GBP263
million), EBITDA of GBP14 million, compared to the reported EBITDA
of GBP12 million) and profit after taxation of GBP14 million
(compared to reported profit after taxation of GBP11 million). This
pro forma information includes the revenue and profits made by the
acquired business between the beginning of the financial year and
the date of acquisition, without accounting policy alignments
and/or the impact of fair value uplifts resulting from purchase
accounting considerations. This pro forma aggregated information is
not necessarily indicative of the results of the combined Group
that would have occurred had the acquisitions actually been made at
the beginning of the year presented, or indicative of the future
results of the combined Group.
9. Intangible assets
A summary of the movements in the net book value of intangible
assets for the 6-month period is as follows:
Intangibles
GBPm
Net book value at 1 January
2017 21.7
Additions 223.5
Utilised in period (0.8)
Amortisation (18.5)
------------------------------- ------------
Net book value at 30 June
2017 225.9
------------------------------- ------------
The additions to intangible assets recognised in the period
relate to the acquisition of Opus Energy as explained in note
8.
10. Goodwill
As explained in note 8, significant goodwill has been recognised
as a result of the acquisition of Opus Energy.
A summary of the movements in the net book value of goodwill for
the 6-month period is as follows:
Goodwill
GBPm
Net book value at 1 January
2017 14.5
Opus Energy acquisition 155.7
Net book value at 30 June
2017 170.2
------------------------------- ---------
11. Property, plant and equipment
On 13 April 2017, the Group acquired the wood pellet
manufacturing plant owned by Louisiana Pellets Inc, for a
consideration of $35 million (GBP27.4 million). The assets of the
plant were acquired at auction through a bankruptcy court and do
not constitute a business in their own right. At the point of
acquisition, the plant was not operational, there was no workforce
in place and no raw material contracts for it to operate as a
business. In accordance with the requirements of IFRS 3 - business
combinations, the acquisition has been accounted for as an asset
acquisition.
During the second half of the year, the plant will undergo a
re-fit and re-commissioning period and will then provide additional
wood pellet capacity in the region of 450k tonnes pa, playing an
important part in Drax's strategy to build a flexible supply chain
capable of self-supplying 30% of its generation requirement.
A summary of the movements in the net book value of property,
plant and equipment for the period is as follows:
GBPm
Net book value at 1 January
2017 1,641.5
Pellet plant acquired 27.4
Other additions 51.6
Depreciation (71.1)
Other movements 5.6
----------------------------- --------
Net book value at 30 June
2017 1,655.0
----------------------------- --------
12. Derivative financial instruments
We enter into forward contracts for the purchase and sale of
physical commodities (principally power, gas, coal, sustainable
biomass and CO2 emissions allowances) to secure market level bark
and dark green spreads on future electricity sales and also
financial contracts (principally currency exchange contracts,
financial coal and oil derivatives) to fix Sterling cash flows.
We hold these contracts for risk management purposes, to manage
key risks facing the business including commodity price risk and
foreign currency risk.
At the balance sheet date all contracts (subject to certain
exemptions described below) must be measured 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 that
point in time.
Changes in fair value are recognised either in the income
statement or, if the contract in question qualifies as an effective
hedge under IFRS, the hedge reserve.
Where possible, the Group has taken advantage of the "own use"
exemption which allows qualifying contracts to be excluded from
fair value mark-to-market accounting and therefore not recognised
in the financial statements until the contract is performed. This
applies to certain contracts for physical commodities entered into
and held for our own purchase, sale or usage requirements,
including forward contracts for the purchase of biomass, and coal
from domestic sources. It also applies to forward purchase
contracts of electricity and gas for use in the Retail
business.
Contracts which do not qualify for the own use exemption are
accounted for as derivatives in accordance with IAS 39 and are
recorded in the balance sheet at fair value, with changes in fair
value reflected through the hedge reserve (note 14) to the extent
that the contracts are designated as effective hedges in accordance
with IAS 39, or the income statement where the hedge accounting
requirements are not met. The Group enters into forward contracts
solely for the purpose of financial risk management and considers
all of its contracts to be economic hedges, regardless of whether
the specific criteria for hedge accounting are met.
Forward contracts for the sale of power, purchase of coal from
international sources, purchase of CO2 emissions allowances, gas
(collectively "Commodity contracts") and financial coal, financial
oil and foreign currency exchange contracts (collectively
"Financial contracts") are recorded in the balance sheet at fair
value as follows:
As at 30 June As at
31 December
---------------------------- -------------
2017 2016 2016
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------- ------------- ------------- -------------
Assets
Commodity contracts 52.0 160.1 102.8
Financial contracts 520.6 651.3 788.5
--------------------- ------------- ------------- -------------
572.6 811.4 891.3
--------------------- ------------- ------------- -------------
Liabilities
Commodity contracts (72.1) (138.5) (223.2)
Financial contracts (172.3) (260.2) (140.3)
--------------------- ------------- ------------- -------------
(244.4) (398.7) (363.5)
--------------------- ------------- ------------- -------------
Net unrealised losses on our derivative contract portfolio in
the first six months of 2017 were GBP200 million, with GBP65
million recognised in the income statement and GBP135 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.
Fair value measurement
- Commodity contracts fair value - The fair value of open
commodity contracts that do not qualify for the own use exemption
is calculated by reference to forward market prices at the balance
sheet date. As contracts are generally short-term, forward market
price curves are available for the duration of the contracts. The
quoted market price used for financial assets held by the Group is
the current bid price; the quoted price for financial liabilities
is the current ask price.
Financial contracts:
- Forward foreign currency exchange contracts fair value - The
fair value of forward foreign currency exchange contracts is
determined using forward currency exchange market rates at the
balance sheet date.
- Other financial contracts fair value - The fair value of other
financial contracts that do not qualify for the own use exemption,
is calculated by reference to forward market prices at the balance
sheet date. As contracts are generally short-term, forward market
price curves are available for the duration of the contracts.
The fair values of all derivative financial instruments are
discounted to reflect the credit risk inherent within the
instrument.
The fair values of commodity contracts and financial contracts
are largely determined by comparison between forward market prices
and the contract price; therefore, these contracts are categorised
as Level 2 of the fair value hierarchy.
13. 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 the publicly traded high-yield bond and amounts
drawn down against term loans. The financial liabilities have been
measured at amortised cost. The terms of the instruments have been
reviewed for embedded derivatives. The bond notes contain an early
repayment option that meets the definition of an embedded
derivative, but this has not been separated as it is deemed to be
closely related.
At 30 June 2017, the fair value of the fixed and floating bond
notes was GBP27 million in excess of the carrying value of GBP538
million (based on quoted market prices).
14. 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 in 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 delivery is taken of the associated commodity or
currency.
The expected release profile from equity of post-tax hedging
gains and losses is as follows:
As at 30 June 2017
(Unaudited)
----------------------------------
Within
1 1-2 2-5
year years years Total
GBPm GBPm GBPm GBPm
--------------------- ------- ------- ------- -------
Commodity contracts (18.1) (3.1) - (21.2)
Financial contracts 54.0 37.0 120.7 211.7
--------------------- ------- ------- ------- -------
35.9 33.9 120.7 190.5
--------------------- ------- ------- ------- -------
As at 30 June 2016
(Unaudited)
---------------------------------
Within
1 1-2 2-5
year years 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 31 December
2016 (Audited)
----------------------------------
Within
1 1-2 2-5
year years years Total
GBPm GBPm GBPm GBPm
--------------------- ------- ------- ------- -------
Commodity contracts (12.8) (0.6) 0.1 (13.3)
Financial contracts 42.8 69.0 206.9 318.7
--------------------- ------- ------- ------- -------
30.0 68.4 207.0 305.4
--------------------- ------- ------- ------- -------
15. Borrowings
On 5 May 2017, the Group undertook a refinancing exercise,
repaying its existing term debt. The new financing structure
includes GBP550 million high yield publicly traded bond listed on
the Luxembourg exchange. This bond included GBP350 million 4.25%
fixed rate notes and GBP200 million floating rate notes of 4.00%
above LIBOR.
The Group continues to benefit from a Revolving Credit Facility
(RCF), which has now been reduced to GBP350 million and
incorporates GBP35 million of fully drawn term debt. The facility
and the bond notes mature in April 2022.
Reconciliation of borrowings
Borrowings at 31 December 2016 consisted principally of amounts
drawn down against bank loans. The borrowings at 30 June 2017
reflect the new finance facilities, including the high yield
publicly traded bond.
Borrowings
prior
to deferred Deferred Net
finance finance borrowings
costs costs
GBPm GBPm GBPm
--------------------------------------- ------------ -------- ------------
Borrowings at 31 December 2016 329.0 (7.1) 321.9
Loans repaid (493.2) 7.1 (486.1)
New loans drawn 750.0 (17.4) 732.6
Loan indexation 0.1 0.0 0.1
Amortisation of deferred finance costs 0.0 0.6 0.6
--------------------------------------- ------------ -------- ------------
Borrowings at 30 June 2017 585.9 (16.8) 569.1
--------------------------------------- ------------ -------- ------------
Split between:
--------------------------------------- ------------ -------- ------------
Current borrowings 0.8
--------------------------------------- ------------ -------- ------------
Non-current borrowings 568.3
--------------------------------------- ------------ -------- ------------
16. Cash generated from operations
The table below reconciles our (loss)/profit for the period to
the amount of physical cash we have generated from our operations
(i.e. sourcing, generating and selling electricity and gas) by
adjusting for any non-cash accounting items.
Six months ended Year ended
30 June 31 December
---------------------------------- -------------
2016
(Audited)
2016
2017 (Unaudited) (Unaudited)
GBPm GBPm GBPm
----------------------------------------- ------------------ -------------- -------------
(Loss)/profit for the period (68.4) 148.7 193.9
Adjustments for:
Net interest charge/(credit) 42.9 (2.5) 6.4
Tax (credit)/charge (note 4) (14.3) 35.5 3.2
Depreciation and amortisation 89.6 49.3 109.5
Losses on disposal - 2.7 3.8
Unrealised losses/(gains) on derivative
contracts 64.7 (163.4) (176.8)
Defined benefit pension scheme
charge 3.7 3.0 6.0
Non-cash charge for share-based
payments 3.9 3.0 5.2
Close out of currency contracts (7.4) - 14.0
----------------------------------------- ------------------ -------------- -------------
Operating cash flows before movement
in working capital 114.7 76.3 165.2
Changes in working capital:
Decrease/(increase) in inventories 79.7 1.3 (63.5)
Decrease in receivables 120.5 86.8 28.6
Increase in payables 35.0 109.5 73.7
----------------------------------------- ------------------ -------------- -------------
Total decrease in working capital 235.2 197.6 38.8
Decrease/(increase) in carbon
assets 0.6 11.8 11.1
(Increase)/decrease in ROC and
LEC assets (108.2) (126.1) 12.5
Defined benefit pension scheme
contributions (7.1) (6.9) (14.5)
----------------------------------------- ------------------ -------------- -------------
Cash generated from operations 235.2 152.7 213.1
----------------------------------------- ------------------ -------------- -------------
17. 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
-------------------------------- -------------
2016
2016
2017 (Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------------------------- ----------------- ------------- -------------
Net debt at 1 January (93.5) (186.6) (186.6)
(Decrease)/increase in cash and
cash equivalents (29.3) 101.0 86.7
(Increase)/decrease in net borrowings (247.2) 0.6 (1.5)
Effect of changes in foreign exchange
rates (2.1) - 7.9
--------------------------------------- ----------------- ------------- -------------
Net debt at period end (372.1) (85.0) (93.5)
--------------------------------------- ----------------- ------------- -------------
18. 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 has begun implementing 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 2017 the Group's
contingent liability in respect of letters of credit issued under
the revolving credit facility amounted to GBP46.1 million (H1 2016:
GBP44.9 million).
19. Impact of standards issued but not yet applied by the
entity
IFRS 9 - financial instruments
The Group expects to adopt IFRS 9 in line with the 1 January
2018 effective date.
The group does not expect the new requirements to have a
significant impact on the classification or measurement of its
financial assets. Further analysis is being performed to assess the
likely quantum, if any, of change that may occur in the valuation
of the Group's trade receivable balances as a result of new
impairment requirements in respect of financial assets.
There will be no impact on the Group's accounting for financial
liabilities.
New hedge accounting rules will align the accounting for hedging
instruments more closely with the Group's risk management
practices. It is anticipated that more of the Group's commodity
contracts will qualify for hedge accounting under the new standard
than under the existing standard. This may result in a greater
proportion of unrealised gains and losses being recognised in the
hedge reserve and an associated reduction in income statement
volatility.
IFRS 9 also introduces expanded disclosure requirements and
changes in presentation. These are expected to change the nature
and increase the extent of the group's disclosures about its
financial instruments, particularly in 2018 when the new standard
is adopted.
IFRS 15 - revenue from customer contracts
The Group's impact assessment for the adoption of IFRS 15 is
ongoing. The Group expects to adopt IFRS 15 in line with the
effective date of 1 January 2018.
Whilst further work is required to determine the impact on
reported revenue, the Group will review and update its revenue
recognition policies in light of the updated requirements.
Based on the initial findings of this process, a material change
to the quantum and timing of profitability is considered unlikely.
The key focus area is in the Retail businesses due to the types of
customer contracts.
The new standard also introduces expanded disclosure
requirements. These are expected to change the nature and extent of
the group's disclosures about its revenue recognition, particularly
in 2018 when the new standard is adopted.
IFRS 16 - leases
The standard will affect primarily the accounting for the
Group's operating leases. As at the reporting date, the group has
non-cancellable operating lease commitments of GBP29 million.
However, the Group has not yet determined to what extent these
commitments will result in the recognition of an asset and a
liability for future payments and how this will affect the Group's
profit and classification of cash flows.
Some of the commitments may be covered by the exception for
short-term and low-value leases.
The Group currently expects to adopt IFRS 16 in the period it
becomes mandatory, which is 1 January 2019 subject to EU
endorsement.
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 2017 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, condensed consolidated balance sheet, the
condensed consolidated statement of changes in equity, the
condensed consolidated cash flow statement and related notes 1 to
19. 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 on page 11, 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 2017 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
Statutory Auditor
London, United Kingdom
18 July 2017
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.
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
EBITDA is defined as earnings before interest, tax,
depreciation, amortisation and material one-off items that do not
reflect the underlying trading performance of the business.
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 2016
The six-month period ended 30 June 2016.
H2 2016
The six-month period ended 31 December 2016.
H1 2017
The six-month period ended 30 June 2017.
IFRS
International Financial Reporting Standards.
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.
Power
The provision of electricity and/or gas
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 CfD, 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
(1) Calculated using Ofgem's Solid and Gaseous Biomass Carbon
Calculator
(2) Estimates based on own data and BEIS Energy Trends:
renewables section 6 available to 31 March 2017
(3)
http://www.nera.com/publications/archive/2016/NERA_Imperial_Feb_2016_Renewable_Subsidies_and_Whole_System_Costs_FINAL_160215.html
(4) National Grid's 'Future Energy Scenarios' July 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR RPMPTMBJBBLR
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July 19, 2017 02:00 ET (06:00 GMT)
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