Net debt was £235 million as at 31 December 2008 compared to £337 million at 31 December 2007. Cash and cash equivalents were £130 million as at 31 December 2008 compared to £60 million at 31 December 2007. An analysis of cash flows for both years is set out in the following table.

Analysis of cash flows

Net cash generated from operating activities was £310 million in the year ended 31 December 2008 compared to £313 million in 2007. The small decrease was a result of a reduction of £51 million in EBITDA, largely offset by lower working capital utilisation in 2008.

Net cash used in investing activities, which represented payments in respect of capital expenditure in both periods, was £91 million for the year ended 31 December 2008 compared to £68 million in 2007 (see Capital expenditure).

Net cash used in financing activities was £148 million in the year ended 31 December 2008 compared to £340 million in 2007. The 2008 amount includes equity dividends paid of £110 million, term loan repayments of £35 million, and purchases of our own shares to meet commitments under share-based incentive plans of £3 million. The 2007 amounts included equity dividends paid of £171 million and payments under a share buy-back programme of £84 million, together representing returns to shareholders totalling £255 million. Also included in 2007 were term loan repayments of £80 million, the final bridge loan repayment of £3 million, and purchases of our own shares to meet commitments under share-based incentive plans of £2 million.

The increase in cash and cash equivalents was therefore £71 million in the year ended 31 December 2008, compared to a decrease of £95 million in 2007. Drax’s policy is to invest available cash in short-term bank, building society or other low risk deposits.

Capital resources and refinancing

Following scheduled repayments of £35 million during the year, senior secured debt was £370 million at 31 December 2008 (before deferred finance costs). Scheduled debt repayments are £65 million in each of 2009 and 2010, under an amortisation profile ending with a final repayment of £240 million on 31 December 2010.

Conditions in the debt markets have continued to be turbulent. We continue to monitor the situation, and will seek to achieve an optimal balance between refinancing risk and the cost of refinancing before maturity of the existing facilities.

We acknowledge recent guidance on going concern for companies preparing financial statements, in the light of recent volatility in financial markets which has created a general level of uncertainty. However, we have significant headroom on our existing facilities, and a reasonable expectation that these will be renewed when required. We also have a recent history of cash generation, strong covenant compliance, and good visibility in medium-term forecasts, due to our progressive hedging strategy.

We notified investors of a change in distribution policy when we announced our biomass growth strategy in October 2008 (see Distribution policy). At the same time, we also notified investors that any net refinancing proceeds will be used to fund our equity investment in the 900MW dedicated biomass-fired generation business we intend to develop with Siemens Project Ventures (see Biomass growth strategy).

Seasonality of borrowing

Our business is seasonal with higher electricity prices and despatch in the Winter period and lower despatch in the Summer months, when prices are lower and plant availability is affected by planned outages.

Accordingly, cash flow during the Summer months is materially reduced due to the combined effect of lower prices and output, while maintenance expenditures are increased during this period due to major planned outages. The Group’s £100 million revolving credit facility assists in managing the cash low points in the cycle where required. The revolving credit facility was undrawn at 31 December 2008 and has a final maturity date of 15 December 2010.

Capital expenditure

In March 2008, we announced that we expected to incur total capital expenditure of approximately £250 million over the three years 2008 to 2010. Of this, around £150 million specifically related to the turbine upgrade project and investments in extending our biomass capability. The remainder comprised smaller value enhancing investments and other expected capital expenditure in support of current operations. Following fixed asset additions of £102 million in the year ended 31 December 2008 (£83 million in 2007), we remain on track to achieve this target. In addition, we expect to incur expenditure of around £20 million in 2009 in relation to our plans to develop the dedicated biomass-fired generation business (see Biomass growth strategy).

In relation to the turbine upgrade project, we expect to invest up to £100 million over the five-year period from 2007 to 2011, including approximately £60 million over the three years 2008 to 2010, to upgrade the high pressure and low pressure turbine modules on all six generating units to improve efficiency. Using proven technology we expect to achieve an overall baseload efficiency (that is, the ratio of energy out to energy in when operating at full capacity) approaching 40%. This will represent a 5% improvement on current baseload efficiency of around 38%. When complete, the project is expected to deliver annual savings of one million tonnes of CO2 emissions allowances and approximately half a million tonnes of coal.

During the two major planned outages of 2008 we successfully completed the upgrade of the high and low pressure turbines on two of our six generating units. Together these units are now delivering the 5% efficiency improvement target. Translated into carbon savings this means that, from the third quarter of 2008, two of our generating units have been operating at an overall efficiency that will save one-third of a million tonnes of CO2 emissions allowances each year.

With regard to extending our biomass capability, we expect to invest around £80 million to develop a 400MW direct injection co-firing biomass facility. We will extend our direct-injection capability from one generating unit to all six generating units, and install the necessary processing and handling infrastructure to enable us to handle an additional one and a half million tonnes of biomass material per annum. Delivery of the 400MW facility is expected to result in savings of over two million tonnes of CO2 emissions allowances, the displacement of approximately one million tonnes of coal and the generation of in excess of one and a quarter million ROCs per annum.

We have made good progress in advancing the project. Early in 2008, planning permission was received to construct biomass handling, processing and co-firing facilities on the Drax Power Station site. During the year, contracts were awarded to Alstom Power Limited for the construction and installation of the main processing works associated with the co-firing facility, and to Doosan Babcock Energy Limited for the supply and installation of direct injection biomass co-firing systems to all six generating units.

We anticipate commissioning phase one of the project towards the end of 2009, with achievement of the full 400MW capacity around the middle of 2010.

We have also developed our biomass procurement strategy, and identified attractive biomass supplies which greatly exceed the requirements of the new 400MW direct-injection co-firing facility. Confidence in our fuel supplies will allow us to operate the new co-firing facilities alongside our existing, through the mill delivery, co-firing capacity of 100MW. This will provide us with a total co-firing capacity of 500MW when the new 400MW direct-injection project is fully commissioned.

As part of our development of biomass supply sources, we are also in the process of constructing a pilot project for the production of pellets from locally sourced straw.

A pellet plant is being constructed in Goole, approximately three miles from the Drax site. The plant will take straw from the local area and produce around 100,000 tonnes of straw pellets annually, to be brought to Drax for combustion in the co-firing facility. If successful, similar pellet plants could be developed in other, local cereal growing regions.

We firmly believe in procuring biomass from sustainable sources and to this end we have established a sustainable sourcing policy framework.

We will also continue to evaluate other investment opportunities which may result in additional capital expenditure. Further investment will be required beyond 2009 and prior to 2016 to meet the requirements of the LCPD.

Biomass growth strategy

Under a Joint Development Agreement with Siemens Project Ventures, we intend to build, own and operate three 300MW dedicated biomass-fired power plants in the UK.

We expect each plant to be funded with a debt/equity mix, and we are targeting 60% non-recourse project finance debt. Under the terms of the Joint Development Agreement, the intended ownership will be split 60% Drax and 40% Siemens Project Ventures.

Drax will manage and operate the biomass businesses, and will also be responsible for all biomass procurement and trading. It is proposed that the plants will use Siemens’ turbine technology.

Current estimates of the total capital cost of this business are around £2 billion, including investments in ancillary biomass logistics and processing facilities. Construction of the first plant is targeted to commence in late 2010, following execution of the construction and financing contracts and agreed capital commitment, with the first plant expected to be operational in 2014.

We are now in the advanced feasibility stage of developing and planning but we will only commit to investment once it can be plainly demonstrated that we will secure attractive returns. Whilst no commitments to construction contracts or financing have been made to date, we expect to finalise these arrangements by the second half of 2010. We expect to incur expenditure of around £20 million in 2009 in developing this business.

Since we made the announcement in October 2008, we have made good progress. We now have five site options under review. We expect to accept a grid connection date shortly for the Drax site (October 2012) and have already accepted a connection date for the Immingham site (October 2014).

We have also moved forward on the engineering design, with our strategic partner, Siemens Project Ventures.

We believe that the long-term investment case for this business remains strong, particularly in the light of the UK’s need for reliable renewable generation capacity by 2020.