Gordon Boyd
Finance Director
Total revenue for the year ended 31 December 2007 was £1,247 million compared to £1,387 million in 2006. Power sales were £1,204 million for the year ended 31 December 2007 compared to £1,327 million in 2006.
Gross profit reflects a reduction in our average achieved electricity price and net power sold together with lower other income, which were offset to some extent by lower carbon costs.
EBITDA reflects lower gross margin and increased operating expenses. Operating expenses reflect higher outage costs, as a result of a double outage year, increased insurance costs, significant expenditure on site security, higher transmission system charges and a payment to employees to secure a two-year pay agreement in recognition of the value of retaining a skilled workforce.
The Group’s principal performance indicators are highlighted on the
inside front cover of this document. EBITDA was £506 million for
the year ended 31 December 2007 compared to £583 million in 2006.
The business and financial review includes further explanation and
commentary in relation to our principal performance indicators and
the results for the year.
Total revenue for the year ended 31 December 2007 was £1,247 million compared to £1,387 million in 2006. Power sales were £1,204 million for the year ended 31 December 2007 compared to £1,327 million in 2006, reflecting a fall in our average achieved electricity price (see Price of electricity) and a reduction in net power sold to 24.9TWh, compared to 25.2TWh in 2006.
In addition to power sales, total revenue also includes income from the provision of ancillary services, the sale of by-products (ash and gypsum), and the sale of ROCs, LECs and sulphur dioxide (“SO2”) emissions allowances. In the year ended 31 December 2007, these revenues were £43 million compared to £60 million in 2006, reflecting the timing of ROC sales, partially offset by higher ancillary services income. Although we burnt more biomass in 2007 compared to 2006, a proportion of the associated ROC sales will not be made until 2008, which has resulted in a reduction in ROC revenues in 2007 when compared to 2006.
Fuel costs in respect of generation during the year ended 31 December 2007 were £471 million, compared to £548 million in 2006. The decrease was primarily due to the impact of lower prices for CO2 emissions allowances and lower generation, partially offset by an increase in the cost of coal and other fuels (see Price of coal and other fuels and CO2 emissions allowances).
We purchase power in the market when the cost of power in the market is below our marginal costs of production in respect of power previously contracted for generation and delivery by us, and to cover any shortfall in generation. The costs of power purchased are treated as fuel costs. For the year ended 31 December 2007, the cost of purchased power decreased to £76 million compared to £94 million in 2006, primarily due to lower market prices for electricity.
Gross profit for the year ended 31 December 2007 was therefore £701 million compared to £746 million in 2006.
Other operating expenses excluding depreciation, amortisation, unrealised gains on derivative contracts and exceptional items were £196 million for the year ended 31 December 2007 compared to £163 million in 2006. The increase of £33 million includes significantly higher maintenance costs, with two units undergoing a major planned outage in 2007 compared to just one unit in 2006. We also experienced an increase in business interruption insurance costs due to higher margins in 2006 and the first six months of 2007, and we have significantly increased our expenditure on site security following the Camp for Climate Action in August 2006. We also incurred higher grid connection and use of system charges (“TNUoS”).
Increased operating expenses also includes a one-time payment of £3 million made in April 2007 (equating to £5,000 per eligible employee) in order to secure a two-year pay agreement with trades unions, following expiry of the previous two-year pay agreement. The pay award recognised the importance of retaining a skilled workforce at a time of competition for those skills locally and in the workplace at large, and recognised that in a number of areas Drax had fallen behind market rates. In addition, our average monthly headcount increased to 658 in 2007 compared to 619 in 2006, primarily as a result of planned investments in the business.
EBITDA (defined as profit before interest, tax, depreciation, amortisation, exceptional items and unrealised gains on derivative contracts) for the year ended 31 December 2007 was accordingly £506 million compared to £583 million in 2006.
Depreciation and amortisation for the year ended 31 December 2007 was £44 million compared to £35 million in 2006. The increase primarily reflected accelerated depreciation of plant and equipment we expect to replace under our capital expenditure investment programme.
Exceptional operating income of £6 million for the year ended 31 December 2007 related to our final distribution under the TXU Claim received in April 2007, bringing the total received to date to £336 million, representing full recovery of the claim. Income recognised under the claim in the year ended 31 December 2006 amounted to £19 million. All amounts are net of VAT and costs, with proceeds used to prepay debt secured against the claim, which has now been repaid in full.
The Group recognises unrealised gains and losses on forward contracts which meet the definition of derivatives under IAS 32, IAS 39 and IFRS 7, the International Accounting Standards in respect of derivatives and financial instruments. The unrealised gains and losses principally relate to the mark-to-market of our forward contracts for power yet to be delivered.
Unrealised gains on derivative contracts recorded in the income statements were £3 million for the year ended 31 December 2007 compared to £91 million in 2006. The unrealised gains primarily represent the unwinding of unrealised losses originally reflected in the income statement in 2005, prior to the Group implementing hedge accounting under IAS 39, as power was delivered in accordance with underlying derivative contracts.
Mark-to-market movements on a large proportion of our commodity contracts, considered to be effective hedges under IAS 39, have been recognised through the hedge reserve, a component of shareholders’ equity in the balance sheet. The unrealised losses recognised through the hedge reserve in the year ended 31 December 2007 were £584 million compared to unrealised gains of £468 million in 2006.
Movements between the balance sheet position reported at 31 December 2007 and 31 December 2006 are mainly the result of unwinding mark-to-market movements relating to power delivered during 2007, and recording mark-to-market movements on power yet to be delivered. As a consequence of the decline in power prices over the last six months of 2006, the average price relating to power which had been contracted but had yet to be delivered at 31 December 2006 was significantly higher than market prices at that time, resulting in the recognition of a net unrealised gain of £344 million in the balance sheet. By comparison, following increases in power prices over the last quarter of 2007, the average price relating to power which had been contracted but had yet to be delivered at 31 December 2007 was lower than market prices at that time, resulting in the recognition of a net unrealised loss of £237 million in the balance sheet.
Operating profit for the year ended 31 December 2007 was £471 million compared to £658 million in 2006.
Interest payable and similar charges for the year ended 31 December 2007 were £34 million compared to £37 million in 2006, as a result of lower debt levels partially offset by the impact of higher interest rates.
The tax charge for the year ended 31 December 2007 was £96 million, compared to £171 million in 2006. The tax charge for 2007 includes a one-off credit of £18 million to reflect the impact on deferred tax of a reduction in the rate of UK corporation tax from 30% to 28% with effect from 1 April 2008.
Reflecting the above factors, profit attributable to equity shareholders for the year ended 31 December 2007 was £353 million compared to £464 million in 2006, and basic and diluted earnings per share was 99 pence compared to 116 pence in 2006, as calculated in accordance with note 9 to the consolidated financial statements.
Results of operations
Total revenue for the year ended 31 December 2007 was £1,247 million compared to £1,387 million in 2006. Power sales were £1,204 million for the year ended 31 December 2007 compared to £1,327 million in 2006, reflecting a fall in our average achieved electricity price (see Price of electricity) and a reduction in net power sold to 24.9TWh, compared to 25.2TWh in 2006.
In addition to power sales, total revenue also includes income from the provision of ancillary services, the sale of by-products (ash and gypsum), and the sale of ROCs, LECs and sulphur dioxide (“SO2”) emissions allowances. In the year ended 31 December 2007, these revenues were £43 million compared to £60 million in 2006, reflecting the timing of ROC sales, partially offset by higher ancillary services income. Although we burnt more biomass in 2007 compared to 2006, a proportion of the associated ROC sales will not be made until 2008, which has resulted in a reduction in ROC revenues in 2007 when compared to 2006.
Fuel costs in respect of generation during the year ended 31 December 2007 were £471 million, compared to £548 million in 2006. The decrease was primarily due to the impact of lower prices for CO2 emissions allowances and lower generation, partially offset by an increase in the cost of coal and other fuels (see Price of coal and other fuels and CO2 emissions allowances).
We purchase power in the market when the cost of power in the market is below our marginal costs of production in respect of power previously contracted for generation and delivery by us, and to cover any shortfall in generation. The costs of power purchased are treated as fuel costs. For the year ended 31 December 2007, the cost of purchased power decreased to £76 million compared to £94 million in 2006, primarily due to lower market prices for electricity.
Gross profit for the year ended 31 December 2007 was therefore £701 million compared to £746 million in 2006.
Other operating expenses excluding depreciation, amortisation, unrealised gains on derivative contracts and exceptional items were £196 million for the year ended 31 December 2007 compared to £163 million in 2006. The increase of £33 million includes significantly higher maintenance costs, with two units undergoing a major planned outage in 2007 compared to just one unit in 2006. We also experienced an increase in business interruption insurance costs due to higher margins in 2006 and the first six months of 2007, and we have significantly increased our expenditure on site security following the Camp for Climate Action in August 2006. We also incurred higher grid connection and use of system charges (“TNUoS”).
Increased operating expenses also includes a one-time payment of £3 million made in April 2007 (equating to £5,000 per eligible employee) in order to secure a two-year pay agreement with trades unions, following expiry of the previous two-year pay agreement. The pay award recognised the importance of retaining a skilled workforce at a time of competition for those skills locally and in the workplace at large, and recognised that in a number of areas Drax had fallen behind market rates. In addition, our average monthly headcount increased to 658 in 2007 compared to 619 in 2006, primarily as a result of planned investments in the business.
EBITDA (defined as profit before interest, tax, depreciation, amortisation, exceptional items and unrealised gains on derivative contracts) for the year ended 31 December 2007 was accordingly £506 million compared to £583 million in 2006.
Depreciation and amortisation for the year ended 31 December 2007 was £44 million compared to £35 million in 2006. The increase primarily reflected accelerated depreciation of plant and equipment we expect to replace under our capital expenditure investment programme.
Exceptional operating income of £6 million for the year ended 31 December 2007 related to our final distribution under the TXU Claim received in April 2007, bringing the total received to date to £336 million, representing full recovery of the claim. Income recognised under the claim in the year ended 31 December 2006 amounted to £19 million. All amounts are net of VAT and costs, with proceeds used to prepay debt secured against the claim, which has now been repaid in full.
The Group recognises unrealised gains and losses on forward contracts which meet the definition of derivatives under IAS 32, IAS 39 and IFRS 7, the International Accounting Standards in respect of derivatives and financial instruments. The unrealised gains and losses principally relate to the mark-to-market of our forward contracts for power yet to be delivered.
Unrealised gains on derivative contracts recorded in the income statements were £3 million for the year ended 31 December 2007 compared to £91 million in 2006. The unrealised gains primarily represent the unwinding of unrealised losses originally reflected in the income statement in 2005, prior to the Group implementing hedge accounting under IAS 39, as power was delivered in accordance with underlying derivative contracts.
Mark-to-market movements on a large proportion of our commodity contracts, considered to be effective hedges under IAS 39, have been recognised through the hedge reserve, a component of shareholders’ equity in the balance sheet. The unrealised losses recognised through the hedge reserve in the year ended 31 December 2007 were £584 million compared to unrealised gains of £468 million in 2006.
Movements between the balance sheet position reported at 31 December 2007 and 31 December 2006 are mainly the result of unwinding mark-to-market movements relating to power delivered during 2007, and recording mark-to-market movements on power yet to be delivered. As a consequence of the decline in power prices over the last six months of 2006, the average price relating to power which had been contracted but had yet to be delivered at 31 December 2006 was significantly higher than market prices at that time, resulting in the recognition of a net unrealised gain of £344 million in the balance sheet. By comparison, following increases in power prices over the last quarter of 2007, the average price relating to power which had been contracted but had yet to be delivered at 31 December 2007 was lower than market prices at that time, resulting in the recognition of a net unrealised loss of £237 million in the balance sheet.
Operating profit for the year ended 31 December 2007 was £471 million compared to £658 million in 2006.
Interest payable and similar charges for the year ended 31 December 2007 were £34 million compared to £37 million in 2006, as a result of lower debt levels partially offset by the impact of higher interest rates.
The tax charge for the year ended 31 December 2007 was £96 million, compared to £171 million in 2006. The tax charge for 2007 includes a one-off credit of £18 million to reflect the impact on deferred tax of a reduction in the rate of UK corporation tax from 30% to 28% with effect from 1 April 2008.
Reflecting the above factors, profit attributable to equity shareholders for the year ended 31 December 2007 was £353 million compared to £464 million in 2006, and basic and diluted earnings per share was 99 pence compared to 116 pence in 2006, as calculated in accordance with note 9 to the consolidated financial statements.
Results of operations
| Continuing operations | Year ended 31 December 2007 £m |
Year ended 31 December 2006 £m |
|---|---|---|
| Total revenue | 1,247.4 | 1,387.0 |
| Fuel costs (1) | ||
| Fuel costs in respect of generation | (470.6) | (547.5) |
| Costs of power purchases | (75.5) | (93.8) |
| (546.1) | (641.3) | |
| Gross profit | 701.3 | 745.7 |
| Other operating expenses excluding depreciation, amortisation, unrealised gains on derivative contracts and exceptional items(2) |
(195.7) | (162.7) |
| EBITDA (3) | 505.6 | 583.0 |
| Depreciation and amortisation | (43.7) | (34.9) |
| Other operating income – exceptional credit | 6.2 | 19.0 |
| Unrealised gains on derivative contracts | 3.3 | 90.8 |
| Operating profit | 471.4 | 657.9 |
| Interest payable and similar charges | (34.3) | (37.1) |
| Interest receivable | 11.4 | 13.4 |
| Profit before tax | 448.5 | 634.2 |
| Tax charge | ||
| – Before impact of reduction in tax rate on deferred tax |
(113.4) | (170.7) |
| – Impact of reduction in tax rate on deferred tax | 17.9 | – |
| (95.5) | (170.7) | |
| Profit for the year attributable to equity shareholders | 353.0 | 463.5 |
| Earnings per share (4) | Pence per share | Pence per share |
| – Basic and diluted | 99 | 116 |
Notes:
- Fuel costs comprise the fuel costs incurred in the generation process, predominantly coal and CO2 emissions allowances, together with oil and biomass. Fuel costs also include the cost of power purchased to meet power sales commitments.
- Other operating expenses excluding depreciation, amortisation, unrealised gains on derivative contracts and exceptional items principally include salaries, maintenance costs, grid connection and use of system charges (“TNUoS”), balancing services use of system charges (“BSUoS”) and business rates.
- EBITDA is defined as profit before interest, tax, depreciation and amortisation, exceptional items and unrealised gains on derivative contracts.
- During the year the Group has amended the calculation of earnings per share to reflect share consolidations associated with special dividends from the date of the consolidation only. Comparatives have been amended accordingly (see note 9 to the consolidated financial statements).