| Continuing operations | Year ended 31 December 2008 £m |
Year ended 31 December 2007 £m |
|---|---|---|
| Total revenue | 1,752.8 | 1,247.4 |
| Fuel costs(1) | ||
| Fuel costs in respect of generation | (858.4) | (470.6) |
| Cost of power purchases | (211.8) | (75.5) |
| (1,070.2) | (546.1) | |
| Gross profit | 682.6 | 701.3 |
| Other operating expenses excluding depreciation, amortisation, | ||
| exceptional items and unrealised gains on derivative contracts(2) | (228.4) | (195.7) |
| EBITDA(3) | 454.2 | 505.6 |
| Depreciation, amortisation and loss on disposal of fixed assets | (46.4) | (43.7) |
| Exceptional operating income – final TXU Claim proceeds | – | 6.2 |
| Unrealised gains on derivative contracts | 56.3 | 3.3 |
| Operating profit | 464.1 | 471.4 |
| Interest payable and similar charges | (28.8) | (34.3) |
| Interest receivable | 7.2 | 11.4 |
| Profit before tax | 442.5 | 448.5 |
| Tax charge | ||
| – Before changes in tax legislation | (100.8) | (113.4) |
| – Impact of industrial building allowances withdrawal on deferred tax | (8.8) | – |
| – Impact of reduction in tax rate on deferred tax | – | 17.9 |
| (109.6) | (95.5) | |
| Profit for the year attributable to equity shareholders | 332.9 | 353.0 |
| Earnings per share | Pence per share | Pence per share |
| – Basic and diluted | 98 | 99 |
Notes:
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 SO2 emissions allowances. In the year ended 31 December 2008, these revenues were £61 million compared to £43 million in 2007. Significantly higher ROC sales in 2008 were driven by our growing biomass burn. Lower ancillary services revenues were a result of stronger competition in the market to provide frequency response services to National Grid plc (“National Grid”).
Fuel costs in respect of generation during the year ended 31 December 2008 were £858 million, compared to £471 million in 2007. The increase was primarily due to higher generation, an increase in the price of coal and other fuels, and the impact of higher prices for and increased purchases of CO2 emissions allowances (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 cost of production in respect of power previously contracted for generation and delivery by us, and to cover any shortfall in generation.
The cost of power purchased is included within fuel costs. For the year ended 31 December 2008, the cost of purchased power increased to £212 million compared to £76 million in 2007, primarily due to higher market prices for electricity.
As a result of these factors, gross profit for the year ended 31 December 2008 was £683 million compared to £701 million in 2007.
Other operating expenses were £228 million for the year ended 31 December 2008 compared to £196 million in 2007. In 2008, we experienced an increase of £11 million in use of system charges, following National Grid price uplifts in response to market conditions. Higher operating expenses in 2008 also reflect the impact of increased generation on maintenance costs.
Operating expenses include the impact of growth in our average headcount to 712 compared to 658 in 2007. This reflects planned investments in our business, including operational support for the implementation of our large capital projects, the growth of our biomass procurement activities and investments to support the development of the biomass growth strategy.
EBITDA for the year ended 31 December 2008 was therefore £454 million compared to £506 million in 2007.
Depreciation and amortisation for the year ended 31 December 2008 was £46 million compared to £44 million in 2007, reflecting significant asset additions over the last two years, as well as accelerated depreciation on plant and equipment we expect to replace under our capital expenditure investment programme.
The Group recognises unrealised gains and losses on forward contracts which meet the definition of derivatives under IASs. Where possible, we take the own use exemption for derivative contracts entered into and held for our own purchase, sale or usage requirements, including forward domestic coal contracts. As such, the unrealised gains and losses recognised in the balance sheet principally relate to the mark to market of our forward contracts for power yet to be delivered. The following table describes the movements in unrealised gains and losses and where they are recorded in our financial statements.
- 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, exceptional items and unrealised gains on derivative contracts principally include salaries, maintenance costs, transmission network 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.
Results of operations
Total revenue for the year ended 31 December 2008 was £1,753 million compared to £1,247 million in 2007. Power sales were £1,692 million in 2008 compared to £1,204 million in 2007, reflecting a 29% improvement in our average achieved electricity price to £58.3/MWh (see Price of electricity) and an increase in net power sold to 25.4TWh, compared to 24.9TWh in 2007 (see Outages and plant utilisation levels).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 SO2 emissions allowances. In the year ended 31 December 2008, these revenues were £61 million compared to £43 million in 2007. Significantly higher ROC sales in 2008 were driven by our growing biomass burn. Lower ancillary services revenues were a result of stronger competition in the market to provide frequency response services to National Grid plc (“National Grid”).
Fuel costs in respect of generation during the year ended 31 December 2008 were £858 million, compared to £471 million in 2007. The increase was primarily due to higher generation, an increase in the price of coal and other fuels, and the impact of higher prices for and increased purchases of CO2 emissions allowances (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 cost of production in respect of power previously contracted for generation and delivery by us, and to cover any shortfall in generation.
The cost of power purchased is included within fuel costs. For the year ended 31 December 2008, the cost of purchased power increased to £212 million compared to £76 million in 2007, primarily due to higher market prices for electricity.
As a result of these factors, gross profit for the year ended 31 December 2008 was £683 million compared to £701 million in 2007.
Other operating expenses were £228 million for the year ended 31 December 2008 compared to £196 million in 2007. In 2008, we experienced an increase of £11 million in use of system charges, following National Grid price uplifts in response to market conditions. Higher operating expenses in 2008 also reflect the impact of increased generation on maintenance costs.
Operating expenses include the impact of growth in our average headcount to 712 compared to 658 in 2007. This reflects planned investments in our business, including operational support for the implementation of our large capital projects, the growth of our biomass procurement activities and investments to support the development of the biomass growth strategy.
EBITDA for the year ended 31 December 2008 was therefore £454 million compared to £506 million in 2007.
Depreciation and amortisation for the year ended 31 December 2008 was £46 million compared to £44 million in 2007, reflecting significant asset additions over the last two years, as well as accelerated depreciation on plant and equipment we expect to replace under our capital expenditure investment programme.
The Group recognises unrealised gains and losses on forward contracts which meet the definition of derivatives under IASs. Where possible, we take the own use exemption for derivative contracts entered into and held for our own purchase, sale or usage requirements, including forward domestic coal contracts. As such, the unrealised gains and losses recognised in the balance sheet principally relate to the mark to market of our forward contracts for power yet to be delivered. The following table describes the movements in unrealised gains and losses and where they are recorded in our financial statements.
| Year ended 31 December 2008 £m |
Year ended 31 December 2007 £m |
|
|---|---|---|
| Net unrealised (losses)/gains in balance sheet at 1 January | (236.7) | 344.3 |
| Unrealised gains recognised in the income statement | 56.3 | 3.3 |
| Fair value gains/(losses) recognised in the hedge reserve (a component of equity) | 164.7 | (584.3) |
| Net unrealised losses in balance sheet at 31 December | (15.7) | (236.7) |
As a consequence of increases in power prices throughout 2007, the
average price relating to power which had been contracted but had
yet to be delivered at 31 December 2007 was much lower than market
prices at that time, resulting in the recognition of a net
unrealised loss of £237 million in the balance sheet (included in
captions described as derivative financial instruments). As a
result of falling power prices over the last quarter of 2008, the
difference narrowed considerably, resulting in a reduction in the
net unrealised loss to £16 million at 31 December 2008. These
trends in forward power prices, which determine the movements in
our net unrealised gains/losses position, are illustrated in a
chart within the key factors affecting the
business section.
The unrealised gains recognised in the income statement of £56 million for the year ended 31 December 2008 and £3 million in 2007 represent mark to market movements on a small proportion of our derivative contracts which do not qualify for hedge accounting.
Mark to market movements on most of our derivative contracts, considered to be effective hedges, have been recognised through the hedge reserve, a component of shareholders’ equity in the balance sheet. Movements in unrealised gains and losses recognised in the hedge reserve are mainly the result of unwinding mark to market positions relating to power delivered during a reporting period, and the recording of mark to market positions on power yet to be delivered at the end of that period. The net unrealised gain recognised through the hedge reserve in the year ended 31 December 2008 was £165 million, compared to a net unrealised loss of £584 million in 2007, both reflecting the forward power price trends described above.
In considering mark to market movements, it is important to recognise that EBITDA is driven by our strategy to deliver market level or better dark green spreads, not by the absolute price of electricity at any given date.
After allowing for the unrealised gains on derivative contracts, operating profit for the year ended 31 December 2008 was £464 million compared to £471 million in 2007.
Net finance costs for the year ended 31 December 2008 were £22 million compared to £23 million in 2007, as a result of lower interest rates and debt levels.
The tax charge for the year ended 31 December 2008 was £110 million, compared to £96 million in 2007. Tax for 2008 includes a one-time charge of £9 million to reflect the estimated impact on deferred tax of the withdrawal of industrial buildings allowances introduced by the Finance Act 2008. The tax charge for 2007 included a one-time 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.
As a result of the above factors, profit attributable to equity shareholders for the year ended 31 December 2008 was £333 million compared to £353 million in 2007, and basic and diluted earnings per share were 98 pence compared to 99 pence in 2007.
The unrealised gains recognised in the income statement of £56 million for the year ended 31 December 2008 and £3 million in 2007 represent mark to market movements on a small proportion of our derivative contracts which do not qualify for hedge accounting.
Mark to market movements on most of our derivative contracts, considered to be effective hedges, have been recognised through the hedge reserve, a component of shareholders’ equity in the balance sheet. Movements in unrealised gains and losses recognised in the hedge reserve are mainly the result of unwinding mark to market positions relating to power delivered during a reporting period, and the recording of mark to market positions on power yet to be delivered at the end of that period. The net unrealised gain recognised through the hedge reserve in the year ended 31 December 2008 was £165 million, compared to a net unrealised loss of £584 million in 2007, both reflecting the forward power price trends described above.
In considering mark to market movements, it is important to recognise that EBITDA is driven by our strategy to deliver market level or better dark green spreads, not by the absolute price of electricity at any given date.
After allowing for the unrealised gains on derivative contracts, operating profit for the year ended 31 December 2008 was £464 million compared to £471 million in 2007.
Net finance costs for the year ended 31 December 2008 were £22 million compared to £23 million in 2007, as a result of lower interest rates and debt levels.
The tax charge for the year ended 31 December 2008 was £110 million, compared to £96 million in 2007. Tax for 2008 includes a one-time charge of £9 million to reflect the estimated impact on deferred tax of the withdrawal of industrial buildings allowances introduced by the Finance Act 2008. The tax charge for 2007 included a one-time 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.
As a result of the above factors, profit attributable to equity shareholders for the year ended 31 December 2008 was £333 million compared to £353 million in 2007, and basic and diluted earnings per share were 98 pence compared to 99 pence in 2007.
Trading in the commodity markets
The commodity markets in which we operate were highly volatile in 2008. We have a dedicated and experienced team in place to deliver our trading strategy of targeting market or better dark green spreads, while retaining balanced market exposure.
