FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
October 1, 2004
BRITISH ENERGY PLC
(Registrant's name)
3 Redwood Crescent
Peel Park
East Kilbride G74 5PR
Scotland
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F..X.. Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ..... No ..X..
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b):
Exhibit Index
The following document (bearing the exhibit number listed below) is furnished
herewith and is made a part of this Report pursuant to the General Instructions
for Form 6-K:
Exhibit Description
No. 1 RNS Announcement, re: 1st Quarter Results dated 1 October 2004
30 September 2004
Part 1 of 3
British Energy plc
UNAUDITED RESULTS FOR THE FIRST QUARTER ENDED 30 JUNE 2004 (Q1 05)
UK GAAP
Key Points - Q1 05
No comparative data is available because the Company only commenced publishing
quarterly reporting in the third quarter ended 31 December 2003. In reviewing
these results, it is important to note that, in general, output and prices tend
to be higher in the third and fourth quarters of the financial year.
A summary of the results for the period is set out below:
Quarter ended
30 June 2004
Profit & Loss Summary GBPm
UK operating loss before exceptional items (20)
Net exceptional operating charges (16)
UK operating loss after exceptional items (36)
Group loss after tax and exceptional items (115)
The UK operating loss of GBP36m is reported after net exceptional operating
charges of GBP16m.
Quarter ended
30 June 2004
EBITDA Summary GBPm
UK operating loss before exceptional items (20)
Add: Depreciation 18
EBITDA - continuing activities (2)
Add: P&L adjustment of revised BNFL back end contracts (1)
Adjusted EBITDA - continuing activities (3)
Notes:
1. EBITDA - is defined by the Company as earnings before
interest, taxes, depreciation, amortisation and related exceptional items. The
Company has included information concerning EBITDA because it believes that it
is used by certain investors as one measure of the Company's financial
performance. EBITDA is not a measure of financial performance under United
Kingdom Generally Accepted Accounting Principles and is not necessarily
comparable to similarly titled measures used by other companies. EBITDA should
not be construed as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with United Kingdom Generally
Accepted Accounting Principles) as a measure of liquidity.
2. EBITDA - continuing activities for Q1 05 does not include
the adjustment from the revised BNFL back end contracts of GBP1m charge (benefit
of GBP58m in FY 04). Following the asset impairment review at 31 March 2003
(updated at 31 March 2004) all expenditure of a capital nature has been expensed
through the P&L account. Capital expenditure will continue to be fully expensed
in the P&L account until it is possible to demonstrate that it enhances the
value of the Company's assets after taking account of the impairment review.
Based on UK GAAP, Capex, as referred to above, cannot be added back to EBITDA.
The estimated amount of capital expenditure in Q1 05 was GBP15m.
3. Adjusted EBITDA includes the adjustment of GBP1m charge
(benefit of GBP58m in FY 04) from the revised BNFL back end contracts. Further
details can be found under the heading "Fuel" in Management's Discussion and
Analysis.
EBITDA from continuing activities was negative GBP2m. Adjusted EBITDA, after
including an adjustment of GBP1m from the revised BNFL back end contracts, was
negative GBP3m.
Net cash outflow from operating activities in the period was GBP61m, which
contributed to a decrease in Total Cash (including liquid resources) of GBP72m.
Details of cash and net debt are summarised in the table below, including an
update as at 31 August 04.
Cash Balances 31 August 04 30 June 04 31 March 04
GBPm GBPm GBPm
Cash not used for collateral
Cash used for collateral 252 180 276
300 321 297
Total Cash Note 1 552 501 573
Total Debt: pre restructuring 883 883 883
Less: total cash (552) (501) (573)
Net Debt 331 382 310
Note:
1. Total Cash is the sum of cash at bank and term deposits/bank balances.
Following the implementation of the Proposed Restructuring, GBP700m of New Bonds
will replace the existing bonds, the RBS letter of credit and certain PPA's.
Quarter Ended
Output and Unit Costs
30 June 04 30 June 03
Output (TWh)
- Nuclear 15.0 17.0
- Coal 1.4 1.1
Total Output 16.4 18.1
Realised price (GBP/MWh) 18.0
Total operating unit cost (GBP/MWh) - as reported 19.6
Margin(GBP/MWh) (1.6)
Impact of adjustments on unit costs:-
Total operating unit costs (GBP/MWh) 19.6
Revised BNFL back end contracts (GBP/MWh) 0.1
Depreciation (GBP/MWh) (1.1)
Adjusted operating unit cost (GBP/MWh) 18.6
Adjusted Margin (GBP/MWh) (0.6)
(Figures rounded)
Total UK output for the quarter was 16.4TWh, of which nuclear output was 15.0TWh
and Eggborough output was 1.4TWh. This compares with nuclear output of 17.0TWh
and Eggborough output of 1.1TWh for Q1 04.
The realised price was GBP18.0/MWh which compares favourably to GBP16.9/MWh for
the year ended 31 March 2004 (an increase of 7%), and to GBP15.8/MWh in the
first half of the previous year. The total operating unit cost was GBP19.6/MWh
which includes depreciation of GBP18m, and Capex expensed to P&L of GBP15m
(GBP47m in H1 04 and GBP70m in FY 04) but does not include the incremental
charges of the revised BNFL back end contracts of GBP1m (a benefit of GBP31m in
H1 04 and GBP58m in FY 04). This was significantly higher when compared to the
total operating unit cost of GBP16.4/MWh for the first half of the previous year
due to lower output and increased costs. The margin was negative GBP1.6/MWh,
which compares with the negative margin GBP0.6/ MWh reported for the first half
of financial year 2004. The adjusted margin was negative GBP0.6/MWh compared to
the adjusted margin of positive GBP0.9/MWh for the first half of financial year
2004 after adjusting for depreciation and the revised BNFL back end contracts.
Recent Events and Outlook
- The Company recently announced its revised target of annual nuclear
output in its statement dated 30 July 2004 to around 61.5 TWh. The expected
annual nuclear output for the year-ending 31 March 2005 will be given in the
prospectus which is expected to be published pursuant to the Proposed
Restructuring.
- As of mid September 2004 the Company had in place contracts for volume
equivalent to virtually all of planned output for FY 05, of which a large
majority were at fixed prices. The average price for these contracts for FY 05
is GBP20.8/MWh. The market price for forward baseload contracts has continued to
rise during the period. Annual contracts for delivery from October 2004 onwards
have risen from around GBP23.5/MWh at the end of March 2004 to over GBP30/MWh by
mid September 2004, an increase of some 28%.
- Progress has been made towards the completion of the Proposed
Restructuring, but it still remains subject to a number of significant
uncertainties and important conditions. The European Commission announced its
approval of the Government's State aid application as noted in the Company's
announcement on the 22 September 2004. The approval was subject to certain
compensatory measures the details of which were announced by the Department of
Trade and Industry on 22 September 2004.
- The Company has recently secured a three year GBP60m full-recourse
receivables (debt purchase) facility expiring on 24 August 2007. On completion
of the Proposed Restructuring the receivables facility will be guaranteed by the
other principal companies within the Group (excluding Eggborough Power Limited).
This is an important step as, upon HMG receiving State aid approval from the
European Commission no further drawings can be made under the credit facility
provided by HMG.
- On 23 September 2004 the Company announced that it had received
indicative non-investment grade ratings for the GBP550m of New Bonds that are to
be issued to certain of our creditors and to the Nuclear Liabilities Fund
Limited upon completion of the Proposed Restructuring pursuant to the terms that
were announced on 1 October 2003.
- On 24 September 2004 the United Kingdom Office for National Statistics
(ONS) announced that with effect from 9 September 2002, the Company would be
classified as in the public sector. This classification was stated by the ONS to
reflect the degree of control that can be exercised by the Government over the
Group, first through the Government credit facility and then as a result of the
terms of the Proposed Restructuring.
- There are currently and on Admission will continue to be, certain
restrictions on and factors affecting our ability to pay dividends. As a result
of these restrictions and after making a prudent allowance for collateral
requirements the directors consider that the earliest period for which a
dividend may be declared is FY 07.
Requisitioned EGM
- On 3 September 2004 British Energy received a formal request from two
shareholders holding together in excess of 10% of the issued share capital,
Polygon Investment Partners and Brandes Investment Partners, to convene an
extraordinary general meeting of British Energy (EGM) to consider three special
resolutions and two ordinary resolutions which, if approved, could prevent the
Proposed Restructuring being implemented. The Company has taken certain measures
to protect the completion of the terms of the Creditor Restructuring Agreement
announced on 1 October 2003. These measures are detailed in the delisting
circular to shareholders dated 23 September 2004, and in the requisitioned EGM
circular to shareholders dated 24 September 2004. On 30 September 2004 Polygon
announced that it would withdraw its support for the EGM and consequently has
confirmed that it will vote against the resolutions and not further oppose the
Proposed Restructuring.
Board Changes
- Since the year-end, we have announced the appointment of Stephen
Billingham as Finance Director. Mr Billingham joined the Company at the end of
August as Finance Director Designate. As part of ongoing hand over arrangements
Mr Billingham was appointed to the Board on 16 September 2004 and Martin Gatto,
formerly our Interim Finance Director, stepped down on the same day. Mr
Billingham joined British Energy from WS Atkins plc, the engineering consultancy
and support service group, where he was Group Finance Director during its
successful financial recovery.
- Martin Gatto continues to serve with the Company in the role of Chief
Financial Officer.
- Roy Anderson was appointed to the Board as Chief Nuclear Officer on 16
September 2004. Prior to joining the Company, on 5 July 2004, he was president
of PSE&G in the United States where he was responsible for all nuclear
production.
- David Pryde was appointed as an independent non-executive director on 1
September 2004. Mr Pryde has extensive trading and risk management experience.
He has held senior management positions in trading businesses within JP Morgan
and Co Inc and has sat on the Boards of the Commodity Exchange, the Chicago
Mercantile Exchange and the Futures Industry Association.
- In addition David Gilchrist resigned from the Board of the Company on 5
August 2004. Mr Gilchrist has been with the Company since 1991 and was appointed
MD of the nuclear generation business in 2002. The Company thanks him for his
past contribution and wishes him well for the future.
For further information please contact:
John Searles, Investor Relations : 01355 262202
Andrew Dowler, Media: 020 7831 3113
A copy of this release and a copy of a presentation in Pdf file format can be
found on the Company's web site at www.british-energy.com.
30 September 2004
Part 2 of 3
British Energy plc
UNAUDITED RESULTS FOR THE FIRST QUARTER ENDED 30 JUNE 2004 (Q1 05)
UK GAAP
Management's Discussion and Analysis - Financial Condition and Results Of
Operations
Overview
This report contains British Energy's publication of results prepared under UK
GAAP for the first quarter ended 30 June 2004. Since this is the first time
British Energy has published results for its first quarter, this report does not
contain any comparative quarterly information.
In the following discussion the 'three-month period' or the 'quarter' refers to
the three months ended 30 June 2004 unless otherwise stated. In this discussion
references to 'British Energy' or the 'Company' are to British Energy plc.
References to the 'Group' are to the Company and its subsidiaries.
British Energy is continuing to work hard on its proposed restructuring, the
terms of which were announced on 1 October 2003 (the Proposed Restructuring).
As at 30 June 2004 and 31 August 2004 there were no drawings under the
Government Facility.
British Energy has a total of eight nuclear power stations and one coal-fired
power station in the United Kingdom.
Electricity demand in the UK is seasonal, in that demand and prices have been
generally lower in summer than in winter. As a result, British Energy (and
other generators) schedule a significant proportion of planned outages for the
summer months. This seasonality in both prices and output can have a direct
effect on operating performance and cash flows.
Total output for the quarter was 16.4 TWh of which nuclear output was 15.0 TWh.
This fell short of the Company's expectations, and was adversely affected by
unplanned outages lasting for fourteen days or more at Sizewell B, Torness and
Heysham 2, contributing to lost output of approximately 1.7 TWh.
On 30 July 2004 the Company announced that following the evaluation of
structural inspections carried out during the statutory outage at the Hartlepool
power station and discussions with the Nuclear Installations Inspectorate, the
Company decided that further work to demonstrate the integrity of certain
boilers was necessary. This work entails intrusive visual inspections of a
number of boiler closures at Heysham 1 and at Hartlepool. The Company reviewed
its annual nuclear output target previously announced at 64.5 TWh and believed
that in the light of these new issues it was prudent to revise the nuclear
output target for the 2004/05 financial year to around 61.5 TWh. The expected
annual nuclear output for the year ending 31 March 2005 will be given in the
prospectus which is to be published pursuant to the Proposed Restructuring.
The realised price was GBP18.0/MWh for the three-month period. The market price
for forward annual baseload contracts has risen by over 20% during the quarter,
resulting in an increased requirement for collateral for trading counterparties.
As of mid September 2004, fixed price sales contracts were in place covering a
high proportion of planned output in 2004/05 at an average price of GBP20.8/MWh.
As at 30 June 2004 and 31 August 2004 the Company had cash balances amounting to
GBP501m and GBP552m respectively, of which GBP321m and GBP300m were deposited as
collateral in support of trading and operating activities. At 31 March 2004 the
Company had cash balances amounting to GBP573m of which GBP297m had been
deposited in support of collateral requirements.
In accordance with the dividend policy set out within the annual accounts to 31
March 2004 and as updated below, no dividend has been declared for the quarter.
The Proposed Restructuring remains subject to a large number of significant
uncertainties and important conditions. On 22 September 2004 the Company
announced the receipt by the Secretary of State of notification from the
European Commission that as far as the Proposed Restructuring involves the grant
of State aid by the UK Government, such aid is compatible with the Common
Market. The European Commission's decision is subject to the following
conditions:
- the Company's nuclear and generation business will be ring-fenced from
its fossil fuel, supply and trading businesses to ensure the aid to the nuclear
business is not used to cross subsidise any of the Company's businesses. This
measure will last indefinitely;
- there will be no nuclear or fossil-fuelled capacity expansion (above
our current capacity) by the Company in the European Economic Area for six
years, and no hydro-electric capacity expansion in the UK for the same period;
and
- a restriction on the Company selling to its industrial and commercial
customers at prices below the prevailing wholesale market prices for six years
unless there are exceptional market circumstances as determined by an
independent expert.
Furthermore, the Secretary of State is entitled not to proceed with the Proposed
Restructuring if, in her opinion, the Group will not be viable in all reasonably
foreseeable conditions without access to additional financing beyond that which
is committed and will continue to be available when required. In any event, the
Proposed Restructuring requires to be completed by the earlier of 120 days after
the satisfaction of the initial conditions and 31 January 2005.
If for any reason British Energy is unable to implement the Proposed
Restructuring it may be unable to meet its financial obligations as they fall
due in which case it may have to take appropriate insolvency proceedings. If
British Energy were to commence insolvency proceedings, distributions, if any,
to unsecured creditors may represent only a small fraction of their unsecured
liabilities and it is highly unlikely that there would be any return to
shareholders. Even if the Proposed Restructuring is completed, the return, if
any, for shareholders will represent a very significant dilution of their
existing interests.
Key Points on Results
- The Group recorded an operating loss of GBP36m in the three-month
period, including exceptional operating costs of GBP16m (further detail is
provided in note 4 to the financial statements).
- Losses before tax of GBP115m were recorded in the three-month period.
- Total output for the quarter was 16.4 TWh. Nuclear output was down by
12% to 15.0 TWh in the three-month period, compared with 17.0 TWh of nuclear
output in the equivalent period last year.
- Realised price (which is calculated by dividing turnover, net of
energy supply costs and miscellaneous income, by total output during the period)
was GBP18.0/MWh for the three-month period. This compared to GBP16.9/MWh for the
year ended 31 March 2004; an increase of 7%.
- Total operating unit costs, excluding revalorisation (which is
calculated by dividing the total operating costs, net of exceptional items and
energy supply costs, by total output), were GBP19.6/MWh for the three-month
period. This compared to GBP16.5/MWh for the year ended 31 March 2004, an
increase of 19% mainly due to the lower volumes and the largely fixed cost base,
together with the inclusion of a GBP13m pension charge for the quarter.
- Operating cash outflow was GBP61m for the three-month period. Net
debt increased in the quarter by GBP72m to GBP382m, primarily as a result of
working capital outflow and the loss for the quarter.
- A contingent asset of GBP338m has been accumulated but not recognised
in the financial statements as at the period end arising from the revised BNFL
contracts. The consequence of this is that the results for the quarter do not
reflect the profit and loss account charge that would arise under the revised
BNFL back-end contracts, although any cash flow benefits have already been
reflected as cash payments assume the revised BNFL back-end contracts are in
place. The profit and loss account charge under the revised BNFL contracts would
be GBP1m higher in the quarter compared with GBP58m lower in the previous
financial year due to increased electricity market prices. The net benefit under
the revised BNFL back-end contracts to the date of restructuring will be
recognised in the balance sheet of the restructured Group upon implementation of
the Proposed Restructuring together with other restructuring related
adjustments.
Explanatory Notes
Certain statements in this document are 'forward-looking' statements as defined
in Section 21E of the US Securities Exchange Act of 1934. Such forward-looking
statements include, among others:
- statements concerning the Proposed Restructuring and its effect on the
Group's business and financial condition or results of operations;
- the anticipated development of the UK electricity industry, the future
development of regulation of the UK electricity industry, the effect of these
developments on our business, financial condition or results of operation; and
- other matters that are not historical facts concerning the Group's
business operations, financial condition and results of operations.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors which are in some cases beyond the Group's control and may
cause its actual results or performance to differ materially from those
expressed or implied by such forward-looking statements. Due to the
uncertainties and risks associated with these forward-looking statements, which
apply only as at the date hereof, the Company is claiming the benefit of the '
safe harbour' provision contained in Section 21E of the US Securities Exchange
Act of 1934.
EBITDA is defined by the Company as earnings before interest, tax, depreciation,
amortisation and related exceptional items. The Company has included
information concerning EBITDA because it believes that it is used by certain
investors as one measure of the Company's financial performance. EBITDA is not
a measure of financial performance under United Kingdom Generally Accepted
Accounting Principles (UK GAAP) and is not necessarily comparable to similarly
titled measures used by other companies. EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities (as
determined in accordance with UK GAAP) as a measure of liquidity.
The following discussion and analysis should be read in conjunction with the
unaudited financial statements for the three months ended 30 June 2004 and the
notes thereto which are included in this report. The full financial statements
for the year ended 31 March 2004 and the notes thereto are not included in this
report but are available on the British Energy website (www.british-energy.com).
British Energy has also prepared, for the first time, a quarterly report on a
Form 6-K under accounting principles generally accepted in the United States (US
GAAP) for the three months ended 30 June 2004 which is also available on the
British Energy website.
KEY EVENTS
Restructuring Developments
On 22 September 2004 the Company announced the receipt by the Secretary of State
of notification from the European Commission that as far as the Proposed
Restructuring involves the grant of State aid by the UK Government, such aid is
compatible with the Common Market.
Bruce Power Disposal
The disposal of the interest in Bruce Power was completed on 14 February 2003.
On 12 February 2004 the Company received a notice of warranty claims from the
consortium which purchased the Group's 82.4% interest in Bruce Power alleging
breach of certain warranties and representations relating to tax and to the
condition of certain plant at the Bruce power station. Under the agreement with
the consortium C$20m is retained in trust to meet any representation and
warranty claims, and this may be retained pending agreement or determination of
the claims.
In addition to the consideration received at the time of the disposal of its
interest in Bruce Power, British Energy was entitled to receive up to C$100m,
contingent on the restart of two of the Bruce A Units. On 25 May 2004 the
Company received C$10m in respect of the restart of Unit 3 in addition to the
sum of C$20m already received in respect of the restart of Unit 4. Discussions
are ongoing with the Ontario Provincial Government regarding the release of
further sums, if any. The total amount that will be released will be
significantly less than C$100m.
Board Affairs
During the quarter the Company announced the appointment of Stephen Billingham
as Finance Director Designate. Stephen Billingham joined the Company in August
2004. As part of the ongoing hand over arrangements Stephen Billingham was
appointed to the board of the Company (the Board) on 16 September 2004 and
Martin Gatto, formerly the Interim Finance Director, resigned from the Board on
the same day and assumed the role of Chief Financial Officer. Stephen
Billingham joined British Energy from WS Atkins plc, the engineering consultancy
and support services group, where he was Group Finance Director. Prior to his
role at WS Atkins plc, he led the finance team that concluded the Metronet
London Underground Public Private Partnership.
On 5 August 2004, the Company announced the resignation of David Gilchrist from
the Board.
On 27 August 2004, the Company announced the appointment of David Pryde as an
independent Non-Executive Director with effect from 1 September 2004. David
Pryde has extensive trading and risk management experience having held various
senior management positions in trading businesses within JP Morgan and Co Inc
and has sat on the Boards of the Commodity Exchange, the Chicago Mercantile
Exchange and the Futures Industry Association.
On 16 September 2004 the Company announced the appointment of Roy Anderson to
the Board as Chief Nuclear Officer. Roy Anderson, who joined the Company on 5
July 2004, was previously President of PSEG Nuclear, having also previously been
Chief Nuclear Officer of Nuclear Management Company and of Florida Power
Corporation.
Performance Improvements
The Performance Improvement Programme (PIP) commenced during the year ended 31
March 2004. Following an initial mobilisation phase which ended in July 2004
and which included an asset condition survey, and the development of a plan of
action, the next phase of PIP implementation, which will focus on staff
organisation, prioritisation of work activities and human performance
initiatives is targeted to complete, subject to availability of sufficient
working capital headroom, around 1 April 2005. The final phase, which focuses on
investing in the materiel condition of our plant, is targeted to complete,
subject again to sufficient working capital headroom being available, by 31
March 2007. Certain aspects of remedial capital investment will, however, likely
run beyond that into the financial year ending 31 March 2008.
The Company expects that investment in plant projects, major repairs and
strategic spares across the whole new British Energy Group including incremental
costs associated with the PIP of approximately GBP20m will be in the range of
GBP150m to GBP180m.
British Energy's Trading Development Programme to improve and extend trading
capability and asset utilisation remains on track.
Pension Scheme Valuation
A triennial valuations of the Group's pension schemes is being carried out by
the schemes' actuaries as at 31 March 2004, however, the result of the valuation
will not be concluded until October 2004. The combined funding deficiencies (on
the actuarial bases used for the valuations) in the two pension schemes is
expected to be GBP385m, within the range of GBP330m to GBP440m previously
disclosed. The impact of this deficit will be reflected in our financial results
for the year ending 31 March 2005, and a charge of GBP13m was recognised in the
quarter.
Prior Period Adjustment
In preparing the financial statements for the quarter, the Group has adopted
UITF Abstract 17 (revised 2003) (Employee Share Schemes) and UITF Abstract 38
(Accounting for ESOP Trusts) which relate to the measurement of the Employee
Share Scheme charge and the presentation and disclosure of own shares held. The
adoption of these new UITF Abstracts represents a change in accounting policy
and the comparative figures have been restated accordingly.
The Group has restated opening reserves to comply with the above UITF Abstracts
so that the profit and loss account reserve has been decreased by GBP2m and
other fixed asset investments have decreased by the same amount as at 1 April
2004. The impact of the adoption of UITF Abstract 38 on the profit and loss
account for the three months ended 30 June 2004 and the year ended 31 March 2004
was not material. The effect of UITF Abstract 17 on the results for the periods
ended 31 March 2004 and 30 June 2004 was not material.
Other Factors Affecting Results of Operations
The results of operations are principally affected by changes in plant output,
electricity prices and operating costs. Each of these factors is discussed
below.
Plant Output
Nuclear output was 15.0 TWh (a 72% load factor) for the three-month period. The
UK nuclear output for the equivalent period in 2003 was 17.0 TWh (an 82% load
factor). The reduction on prior year is primarily due to the number of
unplanned outages occurring in the quarter. Sizewell B, Torness and Heysham 2
all had unplanned outages that lasted for fourteen days or more in the quarter.
A rotor earth fault at Sizewell B in April caused one unit to be shut down to
carry out repairs with the loss of output of 0.8 TWh, the unit did not return to
service until mid June. A reactor at Torness was shut down for most of May for
the extension to a planned outage for boiler modifications with the overall loss
of output of 0.5 TWh and one unit at Heysham 2 was out of service between May
and June as blocked boiler tubes were cleared with a loss of output of 0.4 TWh.
There were also a number of other smaller unplanned outages lasting less than
fourteen days.
Output from the coal-fired power station at Eggborough was 1.4 TWh during the
three-month period. For the equivalent period in the previous year, the output
was 1.1 TWh. As Eggborough is operated primarily as a flexible mid-merit power
station, its output level is influenced by market prices, the Company's
contracted trading position and the extent to which it is operated as cover for
unplanned outages at our nuclear power stations.
Commissioning work on the Flue Gas Desulphurisation (FGD) equipment that is
being fitted to Units 3 and 4 at Eggborough continued through the three-month
period. The Company has advised the Environment Agency (the EA) of its
intention to opt out Units 1 and 2 from the requirements to set Emission Limit
Values (ELVs) under the Large Combustion Plant Directive (the LCPD), which will
mean that these units must close within 20,000 operational hours from 1 January
2008 and in any case no later than 31 December 2015. The decision to apply for
an opt out for units 1 and 2 from the ELV limits was on the basis of the
Government's view that opted out plant can opt back in before 30 June 2005,
while a decision not to have opted out by 30 June 2004 is irrevocable. It was
therefore decided to "conditionally" opt out Eggborough's two non-FGD units
under the LCPD. The EA confirmed that the opt out had been granted on 30 June
2004.
Electricity Prices
The market price for forward baseload contracts has continued to rise during the
three-month period. Annual contracts for delivery from October 2004 onwards have
risen from around GBP23.5/MWh at the end of March 2004 to over GBP30/MWh mid
September 2004, an increase of some 28%. As of mid September 2004, fixed price
sales contracts were in place covering a large majority of planned output in
2004/05 at an average price for the full year of GBP20.8/MWh.
During the quarter and the prior year the overriding concern of British Energy
was to reduce the Group's exposure to potential falls in the market price of
electricity. Therefore the Company sought to sell forward virtually all of our
planned generation. As a result the Company has not fully benefited from the
more recent rises in market prices. The Group has continued with its trading
strategy to reduce exposure to volatility in medium term market prices,
utilising a variety of routes to market whilst seeking to reduce the amount of
trading collateral required.
British Energy's realised price was GBP18.0/MWh for the three-month period. This
compares to an average price of GBP16.9/MWh for the year ended 31 March 2004.
The higher realised price is a result of the increase in market prices over the
previous year, partly offset by seasonal factors and earlier fixed price
contracts.
Operating Costs
Operating costs after exceptional items were GBP408m for the three-month period.
These are discussed more fully later in this report in the 'Results of
Operations' section.
Exceptional Items
The financial results of both the three-month period and the year ended 31 March
2004 were affected by a number of exceptional items. The table below summarises
the impact of exceptional items (before tax).
3 months Year ended
ended 31 March
30 June 2004
2004 GBPm
GBPm
Restructuring costs 5 43
Severance costs 8 -
Siemens' settlement - (18)
Fixed asset write-up - (295)
Depreciation - corporate headquarters 3 -
UK decommissioning fund write-up - (13)
Exceptional items included within operating costs 16 (283)
Revalorisation charges/(credits) 2 (68)
Interest rate swaps provision credit - (5)
Exceptional items included within financing costs 2 (73)
18 (356)
Exceptional gain on sale of joint venture and businesses (4) (47)
Total net exceptional charges/(credits) 14 (403)
Exceptional items are discussed more fully in notes 4, 5 and 8 to the financial
statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED 30 JUNE 2004
Group Performance
The operating result after exceptional operating items was an operating loss of
GBP36m for the three-month period.
The loss on ordinary activities before taxation was GBP115m for the three-month
period.
The discussion below focuses on the results of continuing activities for the
three-month period.
Turnover
Turnover was GBP372m for the three-month period and is analysed as follows:
3 months Year ended
ended 31 March
30 June 2004
2004 GBPm
GBPm
Direct supply sales net of energy supply costs 143 522
Energy supply costs recovered from customers 70 260
213 782
Wholesale generation sales 153 703
Miscellaneous income 6 31
372 1,516
Direct Supply Sales
The direct sales business has continued to make good progress during the
three-month period in its core market of industrial and commercial customers.
Wholesale Generation Sales
The level of wholesale generation sales for the quarter reflects partly the
changing mix of sales being contracted by the Company and also the output in the
quarter. The GBP153m of wholesale generation sales for the quarter represents
42% of turnover excluding miscellaneous income compared to 47% in the previous
year.
Operating Costs
Total operating costs before exceptional items were GBP392m for the three-month
period, and are further analysed as follows:
3 months Year ended
ended 31 March
30 June 2004
2004 GBPm
GBPm
Continuing activities
- Fuel 104 413
- Materials and services 127 512
- Staff costs 73 224
- Depreciation charges 18 50
322 1,199
Energy supply costs 70 260
Total operating costs 392 1,459
Fuel
Total fuel costs amounted to GBP104m for the three-month period. Nuclear fuel
costs were GBP81m and coal costs were GBP23m.
The costs of nuclear fuel in the quarter were marginally higher when compared
with the prior year on a pro rata basis. The prior year contained a number of
small one off credits totalling approximately GBP4m that were not replicated in
the quarter. These were offset by reductions of GBP2m in comparable costs mainly
as a result of lower output in the quarter proportionally compared to the prior
year.
On 31 March 2003 and 16 May 2003, the Company announced that it had exchanged
contracts covering front-end and back-end fuel services required to give effect
to the non-binding heads of terms entered into with BNFL. The amendments to
existing front-end contracts contained in the March 2003 deeds of amendment to
the existing AGR fuel supply agreements became effective on 1 April 2003 but
(except in relation to the new arrangements for the supply of uranics to BEG)
may be terminated if the Proposed Restructuring is not completed. The revised
back-end contracts are conditional on completion of the Proposed Restructuring
but payments are being made as if the revised back-end contracts had become
effective on 1 April 2003.
The financial statements for the three-month period have been prepared upon the
basis of the historic BNFL contracts in respect of back-end fuel costs, pending
satisfaction of the conditions set out in the revised contracts. This is the
only element of the Proposed Restructuring that will have a retrospective
accounting impact.
The consequence of this is that the results for the quarter do not reflect the
profit and loss account charge that would arise under the revised BNFL back-end
contracts, which amounted to an increase in the charge of GBP1m in the quarter.
The effect of the revised contracts will be recognised on the completion of the
Proposed Restructuring, together with other restructuring adjustments. The cost
for the quarter under the revised contracts has been calculated using an average
electricity price for the quarter, as defined in the revised BNFL back-end
contracts, of GBP23.9/MWh.
As noted above and as part of the standstill arrangements, the Group has made
payments during the year to BNFL as if the revised BNFL back-end contracts were
in place. The difference in the cash payments that include the profit and loss
account savings under the revised contracts, means that included within current
liabilities are amounts due to BNFL which will never be paid by the Group,
provided the Proposed Restructuring is completed. These amounts totaled GBP338m
at 30 June 2004, an increase of GBP32m from GBP306m at 31 March 2004 reflecting
payments that would have been made under the historic BNFL contracts and accrued
standstill interest offset by fuel costs under the revised back-end BNFL
contracts.
This matter is discussed further in note 16 to the financial statements.
GBPm GBPm
Opening balance at 1 April 2004 306
Amounts payable to BNFL under the historic back-end contracts for the period 64
Less: amounts paid/payable for the period under the revised BNFL back-end contracts, analysed
as follows:
Amounts settled (26)
Amounts included in accruals at quarter end (13)
Cash flow benefit arising within the quarter 25
Finance charges accrued on amounts stoodstill 7
32
Closing balance at 30 June 2004 338
The net benefit under the revised BNFL back-end contracts to the date of the
Proposed Restructuring will be recognised in the balance sheet of the
restructured Group upon implementation of the Proposed Restructuring together
with other restructuring related adjustments. The ultimate benefit recognised
will depend on a number of factors including the date of the Proposed
Restructuring, the market price of electricity between 1 April 2004 and the date
of the Proposed Restructuring as defined in the contract and the amount of fuel
used.
Materials and Services
Materials and services costs comprise the operating expenses of our power
stations and support functions excluding fuel costs, staff costs and
depreciation. The costs during the three-month period were GBP127m excluding
exceptional restructuring costs.
Included in materials and services is capital investment expenditure of GBP15m
for the three-month period that was expensed as operating costs. This arises
because it was not possible to demonstrate that this expenditure enhanced the
value of the Group after taking account of the fixed asset impairment review
carried out in the year ended 31 March 2004.
Exceptional charges amounting to GBP5m were incurred for the quarter in relation
to advisory and other costs associated with the Company's Proposed
Restructuring.
Staff Costs
Staff costs, excluding exceptional restructuring costs, were GBP73m for the
three-month period. This includes pension costs of GBP13m expensed under SSAP
24.
In addition an exceptional charge of GBP8m has been recorded for severance costs
in relation to the Group's restructuring.
Depreciation
Depreciation charges were GBP18m in the three-month period. The charges for
depreciation are significantly affected by the GBP3,738m write down of fixed
assets at 31 March 2003 and have increased compared to the prior year due to the
partial write back of GBP295m at 31 March 2004 (see notes 4 and 8 of the
financial statements). An exceptional depreciation charge of GBP3m was recorded
to align the carrying value of the Company's corporate headquarters at Peel
Park, East Kilbride, Scotland to its market value.
Energy Supply Costs
Energy supply costs mainly comprise the costs incurred for the use of the
distribution and transmission systems and are fully recovered through turnover.
Energy supply costs also include costs of GBP8m related to meeting the cost of
compliance with the Renewables Obligation which are also recovered through
turnover. The Group is required to comply with the Renewables Obligation as
part of the regulations governing climate change. Total energy supply costs
were GBP70m for the three-month period.
Operating (Loss)/Profit
As shown below, Group operating loss after exceptional items was GBP36m:
3 months Year ended
ended 30 31 March
June 2004 2004
GBPm GBPm
Operating (loss)/profit before exceptional items (20) 57
Exceptional items (16) 283
Group operating (loss)/profit (36) 340
Financing Charges
Total financing charges were GBP83m made up of revalorisation and net interest,
which are analysed below:
3 months Year ended
ended 30 31 March
June 2004 2004
GBPm GBPm
Revalorisation of nuclear liabilities 77 215
Revalorisation of decommissioning fund (10) (28)
Share of revalorisation of joint venture - (2)
Total revalorisation 67 185
Net interest expense 14 64
Financing charges before exceptional items 81 249
Exceptional interest credit - (5)
Exceptional revalorisation charge/(credit) 2 (68)
Total financing charges 83 176
Revalorisation arises because nuclear liabilities are stated in the balance
sheet at current price levels, discounted at 3% per year real from the eventual
payment dates. The revalorisation charge is the adjustment that results from
restating these liabilities to take into account the effect of inflation in the
year and to remove the effect of pro rata discount. Similarly, a revalorisation
credit arises in respect of the decommissioning fund that is calculated by
applying an actuarial assessment of the long-term investment growth rate to fund
contributions in order to determine the asset value to be recorded in the
balance sheet. The growth rate used in the calculations is based on 3.5% per
annum real.
The net revalorisation charge excluding exceptional items was GBP67m in the
three-month period. The weighted average UK inflation rate was higher in the
three-month period compared with the prior year. The remaining increase in the
quarter when proportionally compared with the prior year was due to a charge
based on a higher opening nuclear liabilities balance.
The net interest expense charge of GBP14m for the quarter comprises interest
payable of GBP19m offset by interest receivable of GBP5m.
In the quarter there was an exceptional charge of GBP2m in respect of
revaluation of the decommissioning fund receivables. These are discussed more
fully in note 5 to the financial statements.
Taxation
There was no taxation charge on ordinary activities in the three-month period
ended 30 June 2004. The taxation charges reflect the anticipated effective tax
rates relating to the underlying business performance on a pre-restructured
basis for the year ending 31 March 2005.
No deferred tax asset has been recognised at 30 June 2004.
Loss on Ordinary Activities
As a result of the factors discussed above, there was a loss on ordinary
activities after taxation for the three-month period of GBP115m.
Deficit per Share
There was a deficit per share of 19.1p for the three-month period.
Investment Expenditure
During the three-month period, investment expenditure on plant projects, major
repairs and strategic spares across the whole Group, including incremental costs
associated with PIP, totalled GBP32m of which GBP15m may have been capitalised,
with the main projects in the period including replacement of cast iron
pipework, fuel route improvements and the implementation of the work management
programme. None of this has been capitalised as fixed assets since it has not
been possible to demonstrate that the investment expenditure enhanced the value
of the Company's fixed assets after taking account of our previous impairment
review. Based on its current expectations of future electricity prices and
output, and therefore financial resources, the Company believes that investment
in plant projects, major repairs and strategic spares across the whole Group
which includes incremental PIP expenditure of approximately GBP20m will be in
the range of GBP150m to GBP180m for the year ending 31 March 2005, compared with
GBP128m for the year ended 31 March 2004.
Research and Development
We support scientific and engineering research activities primarily directed
toward securing further improvements in the reliability, performance and safety
of our generating business. For the three-month period our expenditure on
research and development was GBP4m which is included within material and
services costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operating Activities
A reconciliation of profit after tax and exceptional items to earnings before
interest, tax, depreciation, amortisation and related exceptional items (EBITDA)
is shown in the following table. EBITDA is a measure commonly reported and
widely used by analysts, certain investors and other interested parties, as well
as a measure used internally by the Group. The EBITDA calculations are shown
for the total results and also exclude the disposals during the period and
exceptional items for the continuing business. The EBITDA calculation for the
continuing activities is further reconciled to the operating cash flow from
continuing activities and then to the decrease in total cash.
3 months Year ended
ended 30 31 March
June 2004 2004
GBPm GBPm
(Loss)/profit after tax and exceptional items (115) 234
Interest (including exceptional items) 14 59
Revalorisation (including exceptional items) 69 117
Tax (including exceptional items) - (2)
Depreciation (including exceptional items) 21 50
Exceptional depreciation credits due to impairment review - (295)
EBITDA (11) 163
Gain on sale of businesses (4) (47)
AmerGen profit - (21)
Net exceptional charges other than depreciation 13 12
EBITDA - continuing activities (2) 107
Nuclear liabilities charged to operating costs 35 130
Nuclear liabilities discharged (37) (59)
Regular contributions to decommissioning fund (5) (19)
Other provisions discharged - (3)
Exceptional operating cash costs (5) (25)
Working capital movements (47) 25
Operating cash flow from continuing activities (61) 156
Taxation paid - (12)
Disposal of investments 4 171
Net interest paid (15) (75)
(Decrease)/increase in total cash (72) 240
Represented by:
(Decrease)/increase in cash in the period (88) 175
Increase in liquid resources 16 65
(Increase)/decrease in net debt in the period (72) 240
The operating cash outflow from continuing activities for the quarter was
GBP61m. Included in the quarter cash flows are capital investment amounts
totalling GBP15m that are expensed as part of materials and services costs.
When adjusted for the receipts from the sale of investments and the net interest
paid, there was a decrease in total cash of GBP72m.
The movement on working capital of GBP47m can be attributed to a decrease in
creditors reflecting deferred fuel payments at 31 March 2004 and reduced
quarterly trading and a decrease in the pension prepayment and further reduction
in trade debtors due to the reduced levels of quarterly trading.
Management of Liquid Resources
The net cash outflow due to movements in financial investments and increases in
term deposits was GBP72m in the three-month period. The balances on the term
deposit accounts holding the collateral amounts increased from GBP297m at 31
March 2004 to GBP321m at 30 June 2004.
Capital Resources
At 30 June 2004, total debt of GBP883m comprised:
- A project finance loan of GBP475m secured by, amongst other things,
the shares in, and assets of Eggborough Power Limited (EPL), a subsidiary
company that operates the Eggborough power station. Amounts owed by EPL are not
guaranteed by British Energy but British Energy guarantees the payment of
amounts by British Energy Power and Energy Trading Limited (BEPET) to EPL under
the Capacity and Tolling Agreement (CTA). The contractual amounts payable by
BEPET under the CTA are calculated so as to cover, amongst other things, EPL's
borrowing requirements and operating costs. British Energy also provides a
subordinated loan facility to EPL. The final instalment of project finance loan
principal will be repaid in 2011. The project finance loan currently bears
interest at LIBOR plus 1.3%. It is proposed that these arrangements will be
restructured as part of the Proposed Restructuring of the Group. For further
details of the Proposed Restructuring see note 1 to the financial statements.
- An aggregate principal amount of GBP408m sterling denominated bonds
due between 2003 and 2016. The bonds bear interest at a rate of between 5.9% and
6.2%. An aggregate principal amount of GBP110m matured in March 2003 but payment
has been stoodstill as part of the arrangements of the Proposed Restructuring of
the Group.
There were no drawings under the Government Facility at any point during the
quarter or at 30 June 2004. The conditions applying to the Government Facility
are more fully discussed in note 1 to the financial statements.
Net debt increased in the quarter by GBP72m to GBP382m, primarily as a result of
working capital outflow and the loss for the quarter.
Future Liquidity
The Group had cash and liquid resources, including amounts posted as collateral,
of GBP501m at 30 June 2004 of which GBP321m was deposited as collateral in
support of trading and operating activities.
The Group's main source of liquidity is its operating businesses. Cash
generation by the operating businesses is dependent upon the reliability of the
Group's power stations in producing electricity, the realised selling price for
electricity, operational risk and capital investment expenditure (expensed in
the profit and loss account since 1 April 2003), maintenance requirements as
well as collateral requirements relating to trading activities.
The Group lost its investment grade rating in September 2002. The Group intends
to seek a new credit rating prior to the issuance of New Bonds as part of the
Proposed Restructuring. The loss of investment grade rating has meant that the
Group now has to provide significant levels of collateral to counterparties in
order to cover their trading exposures, to maintain trading arrangements,
thereby substantially reducing the levels of cash resources available to the
Group. Given the financial circumstances of the Group, certain contracts may be
capable of being terminated. Such termination may result in termination payments
becoming payable as well as having an adverse effect on cash flows. On 23
September 2004 the Company announced that it had received indicative
non-investment grade ratings for the GBP550m of New Bonds that are to be issued
to certain of the Company's creditors and to the Nuclear Liabilities Fund
Limited upon completion of the Proposed Restructuring pursuant to the terms
announced on 1 October 2003.
The Government Facility will mature on the earliest of (1) 31 January 2005, (2)
the date on which the Proposed Restructuring becomes effective and (3) any date
notified by the Secretary of State to British Energy on which repayment of
amounts outstanding under the Government Facility are required as a result of a
Commission decision or an obligation under EU law. Following the receipt by the
Secretary of State of notification from the Commission that as far as the
Proposed Restructuring involves the grant of State aid by the Government, such
aid is compatible with the Common Market, no further drawings can be made under
the Government Facility. Since no incremental collateral can be posted under
the Government Facility, incremental collateral requirements are being provided
by a charge over cash deposits in certain of our accounts. The final maturity
date has now been amended from 30 September 2004 to 31 January 2005.
The Company's strategy for securing part of its income through fixed price
contracts means that in a volatile and rising electricity market the collateral
requirements are also volatile. The extent to which the Company is able to
trade forward is therefore limited by the amount of collateral available.
The Board remains of the opinion that the working capital available to the Group
is not sufficient for the present requirements of the Group pending the Proposed
Restructuring. The Company continues to take steps with a view to improving this
situation. The Board continues to explore initiatives to reduce the demand for
trading collateral and to achieve sufficient liquid resources to implement the
Proposed Restructuring. On 25 August 2004 British Energy Generation Limited
(BEG) entered into a three year trade receivables financing facility
(Receivables Facility) with a financial institution under which, on utilisation,
BEG will sell to the financial institution on a full recourse basis receivables
arising from its direct supply business. The amount of funding available to BEG
under the Receivables Facility is limited to GBP60m and is dependent on the
amount of eligible receivables available at utilisation, which, in turn, is
subject, inter alia, to seasonal changes in the demand and price for electricity
and to limits on customer concentrations within the receivables portfolio. On
completion of the Proposed Restructuring the Receivables Facility will be
guaranteed by the other principal companies within the Group (excluding EPL).
The Receivables Facility is subject to customary representations, warranties and
covenants appropriate to the financial situation of BEG and the prospective
guarantors. Events of default include, inter alia, non-payment, cross-default,
occurrence of insolvency related events, revocation of the electricity supply
license and the exercise by the Secretary of State of her right not to proceed
with the Proposed Restructuring if, in her opinion, the Group will not be viable
without access to additional financing. As at 29 September 2004, the Receivables
Facility had not been utilised.
The Proposed Restructuring remains subject to a large number of important
conditions, including:
- the Secretary of State's entitlement not to proceed with the Proposed
Restructuring if, in her opinion, we will not be viable in all reasonably
foreseeable conditions without access to additional financing beyond that which
is committed and will continue to be available when required;
- the restructured British Energy Group having sufficient working
capital for its present requirements from the listing of the New Shares and New
Bonds;
- there being no material adverse change on our (or on EPL's) current or
future business or operations, financial or trading position, profits or
prospects or which is likely to have a material adverse effect on the value of
the New Bonds, the New Shares, the CTA Bonds or the new Eggborough arrangements;
- the Creditors' Scheme becoming effective;
- continuation of the standstill arrangements; and
- agreement on presently unsettled documents with creditors, Scottish
court approval and listing of the New Shares and New Bonds referred to above and
the delisting of the Company's ordinary shares and A shares.
Some uncertainties that may affect the Group's cash flow position, performance
or outlook are described in this Management's Discussion and Analysis.
If the conditions to the Proposed Restructuring are not fulfilled, or if the
Company's cash generating initiatives are not achieved in each case, within the
time scales envisaged or required, or if there is a material deterioration in
the Group's cash flow position, performance or outlook, or if the Government
Facility ceases to be available or if the restructuring and standstill
arrangements which the Group has entered into with certain of its creditors are
terminated, British Energy may be unable to meet its financial obligations as
they fall due and consequently the Company may have to take appropriate
insolvency proceedings, in which case the distributions to unsecured creditors
may represent only a small fraction of their unsecured liabilities and there is
unlikely to be any return to shareholders. Further details on the Proposed
Restructuring are contained in note 1 to the financial statements.
Post Balance Sheet Events
Output Forecast
On 30 July 2004 the Company announced that following the evaluation of
structural inspections carried out during the statutory outage at the Hartlepool
power station and discussions with the Nuclear Installations Inspectorate, the
Company decided that further work to demonstrate the integrity of certain
boilers was necessary. This work entails intrusive visual inspections of a
number of boiler closures at Heysham 1 (one reactor is shut down and the other
was shut down for its statutory outage in early September) and at Hartlepool
(one reactor is currently shut down and there is no impact on the operation of
the other reactor).
At the same time, the Company also announced its revised target of annual
nuclear output of around 61.5 TWh for the 2004/05 financial year. The Directors
are satisfied that, in the Company's current circumstances, the impact of the
downward revision in output target on the carrying value of its nuclear assets
is not material. The expected annual nuclear output for the year ending 31
March 2005 will be given in the prospectus which is to be published pursuant to
the Proposed Restructuring
Exelon
As a result of ongoing discussions with Exelon, outlined in note 17 - Contingent
liabilities to the financial statements, the Company is reviewing with Exelon a
working capital adjustment resulting from a change to the estimated tax
recoverable for prior periods made after the consummation of the sale and this,
if agreed, may result in a reduction in the purchase price payable by Exelon,
with the reduction currently estimated to be in the range of up to US$6.3m.
Polygon
On 3 September 2004 two groups of shareholders, together holding 10.22% of our
ordinary shares, requisitioned an extraordinary general meeting (the
Requisitioned EGM). Those groups of shareholders were Polygon Investment
Partners LLP (Polygon), Brandes Investment Partners, LLC (Brandes) and their
respective associates. The Company is, as a result, obliged under the Companies
Act to call the Requisitioned EGM. One of the resolutions proposed by Polygon
and Brandes would have the effect, if passed, of requiring the Company to seek
shareholder approval prior to applying for the cancellation of its listings in
London and New York. If the Company was required, under the terms of the
Creditor Restructuring Agreement, to take steps to cancel the London listings of
its shares, but could not do so as a result of a failure to achieve such
shareholder approval, the Company believes, having taken legal advice, that it
would be likely to be in breach of the Creditor Restructuring Agreement.
The Company announced on 23 September 2004 that the Requisitioned EGM will be
held on 22 October 2004 and that as a result of this attempt to frustrate the
Proposed Restructuring agreed by the Company in October 2003, it would be
applying to the UKLA to cancel the listings of its ordinary and A Shares. As a
consequence, and as announced on 23 September 2004, the NYSE suspended trading
on the Company's ADRs prior to the opening of trading on 28 September 2004. At
that time, the NYSE also instituted delisting proceedings.
On 24 September 2004 the Company announced (i) the unanimous recommendation of
the Board to shareholders to vote against the resolutions proposed by Polygon
and Brandes at the Requisitioned EGM, (ii) that it intended to seek an extension
to the Creditor Restructuring Agreement long stop date of 31 January 2005 for
the Proposed Restructuring and (iii) that, in accordance with the Creditor
Restructuring Agreement, it would execute a business transfer agreement whereby
the Company's assets would, conditional on the Proposed Restructuring becoming
effective, be transferred to a new intermediate holding company of the
restructured British Energy group.
On 30 September 2004 Polygon announced that it would withdraw its support for
the Requisitioned EGM. Polygon stated that, having considered the Company's
recent circulars, they now believe there is no commercial logic for it
supporting the resolutions to be considered at the Requisitioned EGM and
consequently have confirmed that they will vote against the resolutions and not
further oppose the Proposed Restructuring. The Requisitioned EGM will take place
on 22 October 2004 as described in the notice mailed to our shareholders. Our
Board continues to reiterate its unanimous recommendation to all shareholders to
vote against the resolutions proposed for the Requisitioned EGM.
Corporate Headquarters
On 15 September 2004 the Company announced the proposed sale of its corporate
headquarters located at Peel Park, East Kilbride, Scotland to Kenmore Capital
East Kilbride Limited in consideration of a cash payment of GBP6.625m and a
potential additional cash payment of up to GBP0.25m if certain letting
arrangements come to fruition. An exceptional depreciation charge of GBP3m was
recorded in the quarter to align the carrying value of the Company's corporate
headquarters to its market value. The Company has also entered into a ten year
lease for part of the building. It is expected that the sale will be completed
in January 2005. In August 2004 the Company signed a lease for our new
corporate headquarters in Alba Campus, Livingston, Scotland
State Aid
On 22 September 2004 the Company announced the receipt by the Secretary of State
of notification from the European Commission that as far as the Proposed
Restructuring involves the grant of State aid by the UK Government, such aid is
compatible with the Common Market. The European Commission's decision is
subject to the following conditions:
- the Company's nuclear and generation business will be ring-fenced from
its fossil fuel, supply and trading businesses to ensure the aid to the nuclear
business is not used to cross subsidise any of the Company's businesses. This
measure will last indefinitely;
- there will be no nuclear or fossil-fuelled capacity expansion (above
our current capacity) by the Company in the European Economic Area for six
years, and no hydro-electric capacity expansion in the UK for the same period;
and
- a restriction on the Company selling to its industrial and commercial
customers at prices below the prevailing wholesale market prices for six years
unless there are exceptional market circumstances as determined by an
independent expert.
The European Commission has set down an additional requirement that a threshold
of GBP1.629billion be set for the aid, above which the European Commission can
request enhanced reporting to satisfy themselves that the State aid is being
kept to a minimum and is only being used to authorised purposes.
Credit Rating
On 23 September 2004 the Company announced that it had received indicative
non-investment grade ratings for the GBP550m of New Bonds that are to be issued
to certain of the Company's creditors and to the Nuclear Liabilities Fund
Limited upon completion of the Proposed Restructuring pursuant to the terms
announced on 1 October 2003.
Classification of British Energy in the Public Sector
On 24 September 2004 the United Kingdom Office for National Statistics (ONS)
announced that, with effect from 9 September 2002, the date on which the Credit
Facility was granted, the Company would be classified as in the public sector.
This classification was stated by the ONS to reflect the degree of control that
can be exercised by the Government over the Group, first through the Credit
Facility, and then as a result of the terms of the Proposed Restructuring.
Prior to this announcement the ONS classified British Energy as part of the
private sector.
The ONS's decision was made for UK National Accounts purposes and was dependent
upon a judgement about the degree of control exercised by Government. The ONS
has acknowledged that, following completion of the Proposed Restructuring, no
one factor constitutes the degree of control necessary for a classification in
the public sector. The decision is based on the view that, taken together, a
number of factors represent a high degree of UK Government control. The
background to and terms of the Proposed Restructuring are detailed in note 1 to
the financial statements.
The ONS has noted that as the Proposed Restructuring process has not been
finalised, some of the details of its decision may change, and as a result this
classification (as it applies to the Company post-restructuring) is provisional.
The Company is currently assessing the implications of this decision for its
business. In particular, the Company is giving thought to those relationships
that will exist post-restructuring that may require to be disclosed under FRS 8
- Related Party Disclosures in its financial statements for the year ending 31
March 2005. The Company has not, as yet, finalised its conclusions on this.
Contingent Liabilities
On 12 February 2004, British Energy and certain of its subsidiaries received a
notice of warranty claims from the consortium which purchased the Group's 82.4%
interest in Bruce Power alleging breach of certain warranties and
representations relating to tax and to the condition of certain plant at the
Bruce power station.
The principal tax claim relates to the treatment of expenditure at the Bruce
Power plant during the period of the Company's part ownership and is currently
being considered by the Canadian tax authorities. The treatment proposed by
British Energy could result in a rebate of a material amount of tax to the Group
that has never been recognised in the financial statements. The consortium
claims that allowance of the expenditure for that period would cause it to lose
future deductions. British Energy has rejected the tax claim. The Company is
confident that the amount of the tax claim should not, in any event, materially
exceed the amount of the rebate, and that the tax claim should have no material
cash flow impact on the Group.
The claim relating to the condition of the plant is based upon alleged erosion
of certain parts of the steam generators, including the support plates, through
which boiler tubes pass, which it is alleged resulted in an extended outage of
one unit at the plant to carry out repair works and loss of revenues and costs
of approximately C$64.5m. The consortium also claims that the alleged erosion
may reduce the operating life of the unit and/or result in further repairs
involving further losses. British Energy has rejected the claim and expects to
defend it if it is pursued further. In accordance with FRS12 - Provisions,
Contingent Liabilities and Contingent Assets, no provision has been made in the
financial statements at 30 June 2004 for either claim.
Under the agreement with the consortium C$20m is retained in trust to meet any
representation and warranty claims, and this may be retained pending agreement
or determination of the claims.
As a result of an accounting adjustment made by Exelon in AmerGen's management
accounts and closing accounts as at 21 December 2003, British Energy may be
required to make a payment to Exelon of up to US$13.7m. British Energy served a
dispute notice on Exelon on 4 June 2004 to preserve its rights and the parties
are endeavouring to resolve the matter amicably. The agreement with Exelon for
the sale of AmerGen requires that, prior to instituting any litigation or other
dispute resolution procedure, the companies will in good faith seek to resolve
any dispute.
The Company has received notification from Polygon that if the Company were to
seek a delisting of its shares from the Official List of the UKLA ahead of the
shareholder vote on the Members' Scheme which forms part of the Proposed
Restructuring, Polygon would consider taking legal action against the Company
and its directors. On 23 September 2004 the Company applied to the UKLA to
cancel the listings of its ordinary and A shares.
Further contingent liabilities of the Group are described in note 17 to the
financial statements for the quarter ended 30 June 2004.
Dividend Policy
The Board intends to distribute to shareholders as much of the Company's
available cash flow as prudently possible, but not prior to the completion of
the Proposed Restructuring, and not until the operational requirements of the
business permit. In addition, under the terms of the Proposed Restructuring,
there are certain restrictions on or factors affecting the Board's ability to
pay dividends, including:
- we are required to fund a cash reserve out of our net cash flow in
order to support British Energy Group plc's collateral and liquidity
requirements following the Proposed Restructuring. The initial target amount for
the cash reserve is GBP490 million plus the amount by which cash employed as
collateral exceeds GBP200 million (the Target Amount). Prior to paying any
dividend, our cash must equal or exceed the Target Amount and certain amounts
specified in the Contribution Agreement;
- the terms of the Contribution Agreement also require that once the
cash reserve is funded to the Target Amount, we must make the NLF Cash Sweep
Payment. Initially this is 65% of the increase in cash, cash equivalents and
other liquid assets during the year after adjusting for certain matters (the
Payment Percentage). The Payment Percentage may be adjusted for certain
corporate actions but may never exceed 65%. The requirement to make the NLF Cash
Sweep Payment will greatly reduce the amount of cash that would otherwise be
available for distribution to shareholders. In addition, we may not pay any
dividends without making an additional payment to the NLF if the result of
paying such dividend would be that the aggregate amount of dividends paid to
shareholders following the Proposed Restructuring would exceed the aggregate of
our annual adjusted net cash flow in such period less the aggregate NLF Cash
Sweep Payment payable in such period;
- the terms of the New Bonds contain certain covenants, including a
restriction that allows us to pay a dividend only if no event of default has
occurred; and
- we must have distributable reserves.
As a result of these restrictions and after making a prudent allowance for
collateral requirements the directors consider that the earliest period for
which a dividend may be declared is the financial year 2006/07.
Subject to these restrictions, the Board intends to distribute to shareholders
as much of the Company's available cash flow as prudently possible. Any such
decision to make such a distribution will be made in the circumstances of the
time. In relation to any financial year in respect of which the Company might
otherwise be permitted to pay a dividend, the directors might, for example,
consider during the course of that year (or subsequent to it) whether it would
be prudent to redeem or repurchase New Bonds and CTA Bonds (together with
accelerated payments of fixed decommissioning payment to the NLF), make
additional contributions to the Group's pension schemes, allocate cash to the
Forecast Expenditure Reserve in accordance with the Contribution Agreement (for
instance, to meet certain qualifying expenditure on PIP which is due in the
following financial period, to acquire or finance a specific fixed asset or
undertaking (expected to be with cash and not from borrowings)) or retain cash
reserves in excess of the Target Amount.
Movements in the operational cash flow (prior to debt service and the
adjustments referred to above) from one financial year to another are likely to
be volatile, for example because of movements in the wholesale price of
electricity and variability in our output.
Taking account of the constraints set out above, consideration of prudence and
the likely volatility of operational cash flows, the Board believes that any
dividends paid by the Company may vary in size and frequency.
Quantitative and Qualitative Disclosures About Market Risk
The following discussion relates to the financial instruments, derivative
instruments and derivative commodity instruments held by British Energy at 30
June 2004, which are potentially sensitive to changes in interest rates, foreign
exchange rates, commodity prices and equity markets. The Group uses derivative
instruments to hedge the primary market exposures associated with the underlying
assets, liabilities and committed transactions.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Overview
The main financial risks faced are trading risks in England and Wales in respect
of both price and volume output on the sale of electricity while in Scotland the
risk is all price related during the term of the Nuclear Energy Agreement (NEA).
There is also an exposure to risks associated with fluctuations in the equity
markets through the UK Nuclear Generation Decommissioning Fund Limited (UK
Decommissioning Fund) and the Group's pension schemes. Policies have been
instituted for managing each of these risks, which have been approved by the
Board. Each of these risks is discussed in more detail below with the exception
of liquidity and funding risk that is more fully discussed in the 'Future
Liquidity' section above.
The Power and Energy Trading Division manages electricity trading risks. The
Power and Energy Trading Division operates within policies and procedures that
are approved by the Board and monitored by a sub-committee of the Executive
Committee.
Non-trading risks (i.e. cash resources, debt finance and financial risks) are
managed by the central treasury function (the Treasury Department). The
Treasury Department operates within policies and procedures approved by the
Board. The Treasury Department uses appropriate and available instruments,
within specified limits, to manage financial risk but is not permitted to take
speculative, open positions. Both the Treasury Department and the Power and
Energy Trading Division are subject to regular scrutiny from the Internal Audit
Department.
Interest Rate Risk Management
The market value of debt varies with fluctuations in prevailing interest rates
in the United Kingdom.
Eggborough related derivative agreements (nominal amount of GBP367m as at 30
June 2004 (31 March 2004: GBP377m)) have been amended as part of the Proposed
Restructuring process. The effect of has been to fix future interest payments
under the swaps from October 2004 onwards.
In addition, the Group had mixed rate derivatives with a mark to market value of
GBP29m at 30 June 2004 that were originally established as an interest rate
hedge. These derivatives were no longer deemed effective because of the Proposed
Restructuring and a provision was established for the projected out of the money
element.
At 30 June 2004 the total of investments in liquid funds and cash at bank
amounted to GBP501m, and had maturity dates due within one year. Cash not
immediately required for business purposes is invested in fixed-rate term
deposits and money market funds. At 30 June 2004 the term deposits and money
market funds not used to fund collateral were due to mature or were available
within one month and earned interest at an average rate of 4.5%. Term deposits,
money market funds and bank balances at 30 June 2004 include GBP321m of cash
that has been deposited in collateral bank accounts and earned interest at an
average rate of 3.5%. Availability of this cash is, therefore, restricted over
the periods of the collateralised positions.
As the deposit terms are short-term, the carrying value of our investment in
liquid funds and cash at bank at 30 June 2004 approximates to the fair market
value.
Foreign Exchange Risk Management
There are potential future foreign currency receivables in respect of amounts
outstanding from the sale of Bruce Power and AmerGen. When these cash flows
become more certain in the future the Group will evaluate currency hedging
opportunities, balancing the cost and availability of entering into such
transactions against the underlying currency risk.
At 30 June 2004 there were no foreign exchange contracts in place.
Electricity Trading Risk Management
British Energy's trading activities relate principally to supporting the power
generation business and direct supply business. The trading operations,
therefore, act principally as wholesale marketers rather than as pure financial
traders. The principal objective of the Company's trading activities is to
increase the return on assets while hedging the market risk associated with
plant output and market price.
Under NETA in England and Wales, any mismatch between actual metered generation
(or demand) and the notified contract position is settled through the balancing
mechanism at generally unfavorable prices. The Company generally sell all
planned nuclear output forward and to minimize our exposure to unfavorable
prices pursuant to the balancing mechanism. The risks in the wholesale market
are managed through a contracting strategy that builds a portfolio of forward
contracts of different lengths.
Eggborough power station provides a flexible generation capability that fulfils
three purposes designed to enhance profitability. Firstly, it provides a means
for compensating for unplanned lost output from our nuclear units at short
notice; secondly it provides the capability to profile the output to meet the
requirements of both wholesale and direct supply business customers; and
thirdly, it provides a flexible capability.
British Energy's policy is to manage credit exposure to trading and financial
counterparties within clearly defined limits. A sub-committee of the Executive
Committee strictly monitors electricity trading activities and places controls
through delegated authorities and procedures, which include specific criteria
for the management of counterparty credit exposures.
Output from the two stations in Scotland will continue to be sold under the
terms of the Nuclear Energy Agreement to Scottish Power and Scottish and
Southern Energy until April 1, 2006, or the introduction of BETTA (currently
scheduled for April 1, 2005), whichever is earlier.
Equity Risk Management
The UK Decommissioning Fund was established to provide for the eventual
decommissioning of the Group's UK nuclear power stations. Cash contributions
are made on a quarterly basis to a payment profile set out in a contract between
the Group and the UK Decommissioning Fund and are invested by the Trustees of
the UK Decommissioning Fund in UK marketable fixed income debt, equity
securities and property in accordance with its investment policy. British Energy
is ultimately responsible for contributions to the UK Decommissioning Fund.
Therefore, the level of future contributions, which are reviewed every five
years in conjunction with the review of ultimate decommissioning costs, depend
partly on the estimated long-term investment performance of the equity and debt
instruments in which the contributions are invested and returns on investments
in property. Income from dividends and other returns on the underlying
investments are retained by the UK Decommissioning Fund and then invested in
debt and equity securities.
The balance held by the UK Decommissioning Fund was recorded in the balance
sheet at GBP453m at 30 June 2004, which approximates to its market value. The UK
Decommissioning Fund comprised property and debt and equity securities with
market values of GBP47m and GBP406m respectively at 30 June 2004.
If the Proposed Restructuring is completed, the Group's liabilities in respect
of the decommissioning of its stations will be governed by the terms of certain
of the restructuring agreements with Government relating to the establishment
and operation of the NLF. As a consequence, the Group's level of obligation for
decommissioning liabilities will be predetermined, and will not be subject to
fluctuations in the values of assets held by the UK Decommissioning Fund.
The Group disclosed a deficit of GBP352m on its Group pension schemes, under the
transitional rules permitted under FRS17 - Retirement Benefits basis, in its
financial statements at 31 March 2004. The Company's actuaries restated this to
a deficit of GBP325m after the finalisation of the financial statements at 31
March 2004. At 30 June 2004, the deficit was GBP272m and the Group pension
schemes' assets were valued at GBP1,827m (31 March 2004: GBP1,822m restated) of
which GBP1,582m (31 March 2004: GBP1,571m restated) was held in equities and
bonds. The level of employer contributions to the Group pension schemes will be
re-assessed following the triennial actuarial valuation that will be carried out
with an effective date of 31 March 2004 and is expected to be completed in
October 2004. The combined funding deficiencies (on the actuarial bases used for
the valuations) in the two pension schemes is expected to be GBP385m, within the
range of GBP330m to GBP440m previously disclosed. The level of re-assessed
contributions will depend partly on the estimated long-term investment
performance of the equity and debt instruments in which contributions are
invested.
Controls and Procedures
The management of British Energy, including the Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of the Group's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and concluded that, as of the end of the period covered by this
report, the disclosure controls and procedures are effective in ensuring that
all material information required to be filed in this report has been made known
to them in a timely fashion. The required information was effectively recorded,
processed, summarised and reported within the time period necessary to prepare
this report. British Energy's disclosure controls and procedures are effective
in ensuring that information required to be disclosed in British Energy's
reports under the Exchange Act are accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. There have
been no significant changes in British Energy's internal controls over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, British Energy's
internal controls over financial reporting. We are continuing to evaluate our
controls and procedures with respect to the accounting for derivative financial
instruments and are making certain procedural amendments going forward.
30 September 2004
Part 3 of 3
British Energy plc
UNAUDITED RESULTS FOR THE FIRST QUARTER ENDED 30 JUNE 2004 (Q1 05)
UK GAAP
Group Profit and Loss Account
For the three months ended 30 June 2004 (unaudited)
Notes 3 months ended Year ended
30 June 2004 31 March 2004
restated
GBPm GBPm
Turnover:
Group and share of discontinued joint venture turnover 372 1,660
Less: share of turnover in discontinued joint venture 3 - (144)
Group turnover - continuing activities 3 372 1,516
Operating costs before exceptional items 4 (392) (1,459)
Exceptional operating items 4 (16) 283
Operating costs after exceptional items 4 (408) (1,176)
Group operating (loss)/profit - continuing activities (36) 340
Share of operating profit of discontinued joint venture - 21
Operating (loss)/profit: Group and share of discontinued joint venture (36) 361
Exceptional gain on sale of joint venture and businesses 8 4 47
Financing (charges)/credits:
Revalorisation charges 5 (67) (185)
Net interest 5 (14) (64)
Exceptional revalorisation (charges)/credits 5 (2) 68
Exceptional financing credits 5 - 5
(Loss)/profit on ordinary activities before taxation 3 (115) 232
Taxation on profit on ordinary activities 6 - 2
(Loss)/profit for the year attributable to shareholders (115) 234
(Deficit)/earnings per share (p):
Basic 7 (19.1) 38.9
Group Balance Sheet
As at 30 June 2004 (unaudited)
30 June 2004 31 March 2004
restated
Notes GBPm GBPm
Fixed assets
Tangible assets and investments 8 914 935
Current assets
Decommissioning fund 453 440
Stocks 351 350
Debtors 340 374
Investments - liquid funds 15 327 311
Cash at bank 174 262
1,645 1,737
Creditors: amounts falling due within one year
- borrowings 9 (220) (197)
- other 9 (1,198) (1,250)
9 (1,418) (1,447)
Net current assets 227 290
Total assets less current liabilities 1,141 1,225
Creditors: amounts falling due after more than one year
- borrowings 9 (663) (686)
- other 9 (1,907) (1,893)
Provisions for liabilities and charges 9 (1,852) (1,812)
Net liabilities (3,281) (3,166)
Capital and reserves
Called up equity share capital 277 277
Share premium 76 76
Capital redemption reserve 350 350
Profit and loss account (4,077) (3,962)
Equity shareholders' funds 12 (3,374) (3,259)
Non-equity shareholders' interests 93 93
(3,281) (3,166)
Group Cash Flow Statement
For the three months ended 30 June 2004 (unaudited)
3 months Year ended
ended 30 31 March
June 2004 2004
restated
Notes GBPm GBPm
Net cash (outflow)/inflow from operating activities 13 (61) 156
Returns on investments and servicing of finance (15) (75)
Taxation paid - (12)
Disposals 8 4 171
Management of liquid resources 14 (16) (65)
(Decrease)/increase in cash 14 (88) 175
Group Statement of Total Recognised Gains and Losses
For the three months ended 30 June 2004 (unaudited)
3 months Year ended
ended 30 31 March
June 2004 2004
restated
Notes GBPm GBPm
(Loss)/profit for the period (115) 234
Translation differences on foreign currency net investments - (15)
Total recognised (losses)/gains relating to the period (115) 219
Prior year adjustment (as explained in note 1) (2) -
Total gains and losses recognised since last annual report (117) 219
Notes to the financial statements
1. Basis of Preparation
(i) Introduction
These interim financial statements have been prepared on the basis of accounting
policies consistent with those set out in the Group financial statements for the
year ended 31 March 2004 except where detailed in (ii) below and note 2. This
is the first set of quarterly results for the first three months of the year to
be published by British Energy and therefore no comparative information is
provided for the comparative period in the prior year. In accordance with the
requirements of the Listing Rules for Interim Financial Information, comparative
information will be included in the quarterly results ending 31 December 2004 as
appropriate. In this discussion British Energy plc is referred to as 'British
Energy' or 'the Company' and 'the Group' refers to the Company and its
subsidiaries.
Fixed annual charges are apportioned to the quarterly period on the basis of
time elapsed. Other expenses are accrued in accordance with the same principles
used in the preparation of the annual accounts.
On 22 December 2003, the Group disposed of its 50% interest in AmerGen Energy
Company LLC (AmerGen), therefore, its results up to the point of disposal have
been classified as discontinued joint venture operations during the prior year.
All other activities of the Group have been shown as continuing activities.
The financial statements for the three months ended 30 June 2004 are unaudited
but have been formally reviewed by the auditors and their report to the Company
is set out below. The figures for the year ended 31 March 2004 have been
extracted from the full financial statements for that year, which have been
delivered to the Registrar of Companies. The information included in note 24 to
the full financial statements relating to FRS17 disclosures for the Group's
pension schemes have been revised by the Company's actuaries. The reported net
pension deficit of GBP352m has been revised to GBP325m and the note has been
reproduced at note 10 to these financial statements. The report of the auditors
on these accounts was unqualified and did not contain a statement under either
section 237(2) or section 237(3) of the Companies Act 1985. The auditors'
report included within the Report and Accounts of the Group for the year ended
31 March 2004 includes a reference to a fundamental uncertainty in respect of
the going concern basis of the Group. These interim financial statements were
approved by the Board of Directors on 30 September 2004.
(ii) Prior Period Adjustment
In preparing the financial statements for the quarter, the Group has adopted
UITF Abstract 17 (revised 2003) (Employee Share Schemes) and UITF Abstract 38
(Accounting for ESOP Trusts) which relate to the measurement of the Employee
Share Scheme charge and the presentation and disclosure of own shares held. The
adoption of these new UITF Abstracts represents a change in accounting policy
and the comparative figures have been restated accordingly.
The Group has restated opening reserves to comply with the above UITF Abstracts
so that the profit and loss account reserve has been decreased by GBP2m and
other fixed asset investments have decreased by the same amount as at 1 April
2004. The impact of the adoption of UITF 38 on the profit and loss account for
the 3 months ended 30 June 2004 and the year ended 31 March 2004 is not
material. The effect of UITF 17 on the results for the periods ended 31 March
2004 and 30 June 2004 was not material.
(iii) Background to Proposed Restructuring
Having reviewed the longer-term prospects of the business, on 5 September 2002
the Directors of British Energy announced that they had no alternative but to
seek financial support from the UK Government. On 9 September 2002 the UK
Government granted the Company a credit facility of up to GBP410m (the
Government Facility) to provide working capital for the Group's immediate
requirements and to allow British Energy to stabilise its trading position in
the UK and North America. On 26 September 2002 British Energy announced that the
UK Government had agreed to extend a revised Government Facility for up to
GBP650m until 29 November 2002 to give the Company sufficient opportunity to
develop a restructuring plan. On 28 November 2002 British Energy announced that
the Government Facility had been further extended until 9 March 2003. The
Government Facility is cross-guaranteed by the principal Group subsidiaries
(excluding Eggborough Power (Holdings) Limited and Eggborough Power Limited
(EPL)) and is secured by, among other things, fixed and floating charges and/or
share pledges granted by those subsidiaries. The Government Facility also
contains a requirement to provide further security as required by the Secretary
of State for Trade and Industry (the Secretary of State) provided that the
creation of such security would not cause a material default under any contract
to which any member of the Group is a party or a breach of law.
On 14 February 2003 British Energy and certain of its subsidiaries announced
that they had entered into binding standstill agreements, namely:
(a) the Standstill Agreement between British Energy and its subsidiaries and
the bank syndicate that provided financing for the Eggborough coal-fired
power station (the Eggborough Banks), The Royal Bank of Scotland plc (RBS)
as provider of a letter of credit to the Eggborough Banks, our significant
trade creditors, Teesside Power Limited (TPL), TotalFinaElf Gas and Power
Limited (now Total Gas & Power Limited) (Total) and Enron Capital & Trade
Europe Finance LLC (Enron) (TPL, Total and Enron (which have subsequently
transferred their respective interests to Deutsche Bank) being
collectively referred to as the Significant Creditors) and British Nuclear
Fuels plc (BNFL); and
(b) the Bondholder Restructuring Agreement between British Energy, British
Energy Generation Limited (BEG), British Energy Generation (UK) Limited
(BEGUK) and certain holders of British Energy bonds due in 2003, 2006
and 2016 (the holders of those bonds being referred to collectively as the
Bondholders).
1. Basis of Preparation (continued)
On 7 March 2003 British Energy announced that the UK Government had agreed to
extend the Government Facility in the reduced amount of GBP200m, such that it
would mature on the earliest of (1) 30 September 2004, (2) the date on which the
proposed restructuring, outlined in (iii) below, (the Proposed Restructuring)
becomes effective, and (3) any date notified by the Secretary of State to
British Energy on which repayment of amounts outstanding under the Government
Facility are required as a result of a European Commission (Commission) decision
or an obligation under EU law (the Final Maturity Date). In the meantime the
Secretary of State may require repayment of the Government Facility if she
concludes that the Proposed Restructuring cannot be completed in the manner or
time scales envisaged. Following the receipt by the Secretary of State of
notification from the Commission that as far as the Proposed Restructuring
involves the grant of State aid by the Government, such aid is compatible with
the Common Market, no further drawings can be made under the Government
Facility. Since no incremental collateral can be posted under the Government
Facility, incremental collateral requirements are being provided by a charge
over cash deposits in certain of our accounts. The final maturity date has now
been amended from 30 September 2004 to 31 January 2005.
On 1 October 2003, the Company announced that it had agreed the terms of the
Proposed Restructuring of the Group with certain of the Group's creditors and
the Secretary of State and by 31 October 2003 had obtained the further approvals
and agreements required.
The Company also agreed the proposed disposal of its 50% interest in AmerGen to
Exelon Generation Company LLC (Exelon) in October 2003 for US$277m, subject to
various adjustments and conditions including a break fee of US$8.295m payable to
FPL Group Inc. The disposal was completed on 22 December 2003.
The Government Facility was temporarily increased to GBP275m on 27 November
2003. The additional GBP75m ceased to be available on the Group's receipt of the
proceeds from the sale of AmerGen on 23 December 2003.
On 19 December 2003 Bondholders approved amendments to the trust deed
constituting the bonds to facilitate the implementation of the Proposed
Restructuring and to amend the standstill arrangements under the trust deed on
terms consistent with the Creditor Restructuring Agreement (as defined in (iii)
below). Following formal amendment of the trust deed, a new standstill
agreement has been entered into with creditors in place of the Standstill
Agreement dated 14 February 2003 in accordance with the terms of the Creditor
Restructuring Agreement.
The Group has retained a trading relationship with a high proportion of its
existing contracted counterparties during the period since its announcement of 5
September 2002, although in most cases it has been required to provide
alternative credit support to a parent company guarantee. Given the financial
circumstances of the Group, certain contracts may be capable of being
terminated. Such termination may result in termination payments being payable
as well as having an adverse effect on the Group's cash flows.
The Board is exploring initiatives to achieve sufficient liquid resources to
implement the Proposed Restructuring, including investigating the availability
of third party financing. On 25 August 2004 BEG entered into a three year trade
receivables financing facility (Receivables Facility) with a financial
institution under which, on utilisation, BEG will sell to the financial
institution on a full recourse basis receivables arising from its direct supply
business. The amount of funding available to BEG under the Receivables Facility
is limited to GBP60m and is dependent on the amount of eligible receivables
available at utilisation, which, in turn, is subject, inter alia, to seasonal
changes in the demand and price for electricity and to limits on customer
concentrations within the receivables portfolio. On completion of the Proposed
Restructuring the Receivables Facility will be guaranteed by the other principal
companies within the Group (excluding EPL). The Receivables Facility is subject
to customary representations, warranties and covenants appropriate to the
financial situation of BEG and the prospective guarantors. Events of default
include, inter alia, non-payment, cross-default, occurrence of insolvency
related events, revocation of the electricity supply license and the exercise by
the Secretary of State of her right not to proceed with the Proposed
Restructuring if, in her opinion, the Group will not be viable without access to
additional financing. As at 29 September 2004, the Receivables Facility had not
been utilised.
The alternative credit support currently in place has been provided by the Group
under banking arrangements involving the UK Government established in connection
with the Government Facility. The Group is seeking to replace these with
arrangements which do not involve the UK Government before the Final Maturity
Date of the Government Facility and over the longer term to reduce the demand
for trading collateral.
(iv) Terms of the Proposed Restructuring
The terms of the Proposed Restructuring are set out in:
(a) the Creditor Restructuring Agreement dated as of 30 September 2003
and entered into by the Company, certain other Group companies, the Significant
Creditors, RBS, the members of the ad hoc committee of British Energy's
Bondholders and BNFL (as amended by a side letter entered into on 31 October
2003) (the Creditor Restructuring Agreement); and
(b) the Government Restructuring Agreement dated 1 October 2003 and
entered into between the Company, BEGUK, BEG, British Energy Power and Energy
Trading Limited (BEPET), British Energy Investment Limited, District Energy
Limited, British Energy International Holdings Limited, British Energy US
Holdings Inc., British Energy L.P., Peel Park Funding Limited, the Secretary of
State, the Nuclear Generation Decommissioning Fund Limited (to be renamed the
Nuclear Liabilities Fund Limited (NLF)) and the trustees of the Nuclear Trust
(the Government Restructuring Agreement).
The Creditor Restructuring Agreement required certain further creditor approvals
and sign ups. By 31 October 2003 all these requirements had been satisfied as
follows:
(a) bondholders representing in aggregate with RBS 88.8% of the
combined amount owing to the Bondholders and RBS had signed up to the Creditor
Restructuring Agreement;
(b) the terms of the Proposed Restructuring had been approved by the
credit committee of RBS; and
(c) all of the lenders and swap providers comprising the Eggborough
Banks had signed up to the Creditor Restructuring Agreement with full credit
committee approvals.
1. Basis of Preparation (continued)
The principal features of the Proposed Restructuring include:
- compromising the existing claims of Bondholders, RBS, Significant
Creditors and the Eggborough Banks in exchange for New Bonds and New
Ordinary Shares and settling new arrangements for Eggborough (the claims of the
Bondholders and RBS will be compromised pursuant to a scheme of arrangement to
be proposed to these creditors by the Company (the Creditors' Scheme). In the
case of the Significant Creditors and the Eggborough Banks, claims will be
compromised pursuant to the terms of the Creditor Restructuring Agreement
itself);
- the amendment and extension of our contracts with BNFL for front-end
and back-end related fuel services for the Group's AGR stations
announced on 31 March 2003 and 16 May 2003 and the implementation of a new
trading strategy;
- establishing the NLF which will fund certain uncontracted nuclear
liabilities and decommissioning costs in return for initial and ongoing
contributions from British Energy; and
- the Government funding certain contracted liabilities relating
to historic spent fuel and certain uncontracted nuclear liabilities and
decommissioning costs to the extent of any shortfall in the NLF.
Creditor Restructuring Agreement
Conditions
Completion of the Proposed Restructuring is subject to a large number of
conditions in the Creditor Restructuring Agreement including, amongst other
things:
- the receipt by the Secretary of State of notification of a
satisfactory decision by the Commission that insofar as the proposals involve
the grant of State aid by the UK Government, such aid is compatible with the
common market. The Secretary of State received this notification on 22
September 2004;
- there being no material adverse change (see below);
- the Government Restructuring Agreement becoming unconditional;
- agreement of presently unsettled documents with creditors;
- the approval of the Court of Session, Scotland; and
- the listing of the New Shares and Bonds.
For the purposes of the Creditor Restructuring Agreement, a material adverse
change is defined as a material adverse change in the current or future business
or operations, the financial or trading position, profits or prospects of the
Group as a whole or of EPL or a change in the current or future business or
operations, the financial or trading position, profits or prospects of the Group
as a whole which is likely to have a material adverse effect on the value of the
New Bonds, the New Ordinary Shares (to be issued as part of the Proposed
Restructuring), the CTA global bond to be held by EPL to fund the GBP150m of new
bond-equivalent payments under the new Eggborough arrangements (as represented
by the CTA Global Bond) or the new Eggborough arrangements.
Creditor allocations
Under the terms of the Creditor Restructuring Agreement the creditors have
agreed (subject to certain conditions) to extinguish their existing unsecured
claims against the Group in exchange for GBP275m of New Bonds and at least 97.5%
of the issued ordinary shares of the new parent company of the Group (British
Energy Group plc).
The Eggborough Banks as creditors with security over, amongst other things, the
shares in, and assets of, EPL have agreed to replace their existing secured
claims with a right to receive GBP150 million under an Amended Credit Agreement
on substantially the same payment terms as the New Bonds. In addition, the
Eggborough Banks will be granted: (i) options under which they may acquire the
shares in, or assets of, EPL on 31 March 2010 in consideration for, amongst
other things, GBP104 million (subject to certain adjustments depending on the
condition of the Eggborough power station) and the cancellation of the
outstanding payments under an Amended Credit Agreement at such time; and (ii)
options under which they may acquire the shares in, or assets of, EPL on and at
any time after the occurrence of an event of default under an Amended Credit
Agreement that is continuing in consideration for, amongst other things, a fee
(this fee varies depending on the type of event of default) and the cancellation
of the outstanding payments under an Amended Credit Agreement at such time. The
Eggborough Banks will be entitled to assign and/or transfer all (but not part
only) of their rights under the options to a third party, subject to a
pre-emption right in favour of British Energy Group plc under which a member of
British Energy Group plc may purchase such rights at 105%. of the price offered
to the relevant third party. The Eggborough Banks' security will secure, amongst
other things, the Eggborough Banks' rights under an Amended Credit Agreement and
the options.
1. Basis of Preparation (continued)
Standstill arrangements
The Creditor Restructuring Agreement and ancillary agreements restrict the
Significant Creditors, the Eggborough Banks, RBS, each Bondholder who signs up
to the Creditor Restructuring Agreement (the Consenting Bondholders) and BNFL
(together the Consenting Creditors) from taking any steps to initiate insolvency
proceedings or demand or accelerate any amounts due and payable by British
Energy during the period of the standstill (the Standstill Period) until the
earliest of:
(a) 12 noon on the earlier of 31 January 2005 and the date falling 120
days after the satisfaction of the initial conditions to the Proposed
Restructuring (the Restructuring Longstop Date);
(b) termination of the Creditor Restructuring Agreement or the
standstill arrangements in accordance with their terms; or
(c) the completion of the Proposed Restructuring.
Any of the Consenting Creditors may terminate the standstill arrangements
following the occurrence of a termination event. The termination events
include, inter alia, certain insolvency events affecting the Company, BEG,
BEGUK, BEPET or EPL; acceleration of the Government Facility; and any of the
Company, BEG, BEGUK, BEPET or EPL failing to discharge certain continuing
obligations. If the standstill arrangements terminate, the Creditor
Restructuring Agreement will also terminate and vice versa.
The standstill arrangements were extended to include all Bondholders on 24 March
2003 as set out in a supplemental trust deed dated 31 March 2003.
Under the standstill arrangements, RBS, the Eggborough Banks, Significant
Creditors and Bondholders are to be paid interest but not principal in respect
of any claims against the Group. Interest will continue to be paid to
Bondholders and the Eggborough Banks in accordance with existing arrangements.
The terms of the bonds were amended in March 2003 for interest to be paid on a
six monthly rather than an annual basis. In respect of the Significant
Creditors and RBS, interest was paid first on 25 March 2003 and is subsequently
payable on the last business day of every six month period thereafter based on
the agreed claim amounts (except in the case of RBS where interest payments will
be based on the present value of its claim amount as at 14 February 2003).
Commission will also continue to be paid to RBS under the facility agreement for
the letter of credit to the Eggborough Banks.
The Creditor Restructuring Agreement also contains certain covenants by British
Energy for the benefit of the Consenting Creditors that have signed it, as well
as for the benefit of the remaining Bondholders pursuant to a supplemental trust
deed dated 31 March 2003, including certain limitations on acquisitions and
disposals, a prohibition on the payment of dividends and on the issuing of
equity as well as a negative pledge.
Mechanics for implementation and shareholder allocation
The Proposed Restructuring will involve establishing British Energy Group plc as
the new parent company of the Group and a directly wholly owned subsidiary of
British Energy Group plc, as an intermediate holding company (British Energy
Holdings plc).
The Company proposes to cancel its existing ordinary shares of 44 28/43 pence
each and A shares of 60 pence each under a scheme of arrangement with its
shareholders (the Members' Scheme), and issue to shareholders: (i) New Ordinary
Shares in British Energy Group plc equal to 2.5% of the issued share capital of
British Energy Group plc immediately following implementation of the Proposed
Restructuring, and (ii) warrants to subscribe for a maximum of 5% of the thereby
diluted ordinary issued share capital of British Energy Group plc (excluding,
amongst others, the impact of conversion of the NLF Cash Sweep Payment (see
section entitled Government Restructuring Agreement below)) immediately
following implementation of the Proposed Restructuring. The subscription price
under the warrants is GBP28.95m in aggregate, equivalent to an equity market
capitalisation of the Group of GBP550m following implementation of the Proposed
Restructuring. This will result in a very significant dilution of the holdings
of the existing shareholders.
If the Members' Scheme is not approved by the requisite majority of shareholders
or for any other reason the Members' Scheme is not implemented, the Company will
dispose of all its business and assets to British Energy Holdings plc (the
Disposal). If the Disposal is approved by the shareholders in general meeting,
shareholders will receive only warrants to subscribe for a maximum of 5% of the
ordinary issued share capital of British Energy Group plc immediately following
implementation of the Proposed Restructuring. If the Disposal is not approved
by the shareholders in general meeting, shareholders will not receive any shares
or warrants and the Company will be delisted.
On 3 September 2004 two groups of shareholders, together holding 10.22% of our
ordinary shares, requisitioned an extraordinary general meeting (the
Requisitioned EGM). Those groups of shareholders were Polygon, Brandes and their
respective associates. The Company is, as a result, obliged under the Companies
Act to call the Requisitioned EGM. One of the resolutions proposed by Polygon
and Brandes would have the effect, if passed, of requiring the Company to seek
shareholder approval prior to applying for the cancellation of its listings in
London and New York. If the Company was required, under the terms of the
Creditor Restructuring Agreement, to take steps to cancel the London listings of
its shares, but could not do so as a result of a failure to achieve such
shareholder approval, the Company believes, having taken legal advice, that it
would be likely to be in breach of the Creditor Restructuring Agreement.
The Company announced on 23 September that the Requisitioned EGM will be held on
22 October 2004.and that as a result of this attempt to frustrate the Proposed
Restructuring agreed by the Company in October 2003, it would be applying to the
UKLA to cancel the listings of its ordinary and A Shares. As a consequence, and
as announced on 23 September 2004, the NYSE suspended trading on the Company's
ADRs prior to the opening of trading on 28 September 2004. At that time, the
NYSE also instituted delisting proceedings.
1.Basis of Preparation (continued)
On 24 September 2004 the Company announced (i) the unanimous recommendation of
the Board to shareholders to vote against the resolutions proposed by Polygon
and Brandes at the Requisitioned EGM, (ii) that it intended to seek an extension
to the Creditor Restructuring Agreement long stop date of 31 January 2005 for
the Proposed Restructuring and (iii) that, in accordance with the Creditor
Restructuring Agreement, it would execute a business transfer agreement whereby
the Company's assets would, conditional on the Proposed Restructuring becoming
effective, be transferred to a new intermediate holding company of the
restructured British Energy group.
On 30 September 2004 Polygon announced that it would withdraw its support for
the Requisitioned EGM. Polygon stated that, having considered the Company's
recent circulars, they now believe there is no commercial logic for it
supporting the resolutions to be considered at the Requisitioned EGM and
consequently have confirmed that they will vote against the resolutions and not
further oppose the Proposed Restructuring. The Requisitioned EGM will take place
on 22 October 2004 as described in the notice mailed to our shareholders. Our
Board continues to reiterate its unanimous recommendation to all shareholders to
vote against the resolutions proposed for the Requisitioned EGM.
Government Restructuring Agreement
The Government Restructuring Agreement provides for the circumstances in which
the Secretary of State will support the Proposed Restructuring, including
entering into the agreements with the Group and, in certain cases, the NLF,
which effect the proposals regarding the manner in which the decommissioning and
other uncontracted liabilities of the Group are to be funded and the agreements
relating to the funding of certain of the contracted nuclear liabilities of the
Group (the Nuclear Liabilities Agreements). It also effects some further
amendments to the Government Facility. As noted above the Government Facility
will terminate (unless previously extended) on the Final Maturity Date.
Conditions
Under the Government Restructuring Agreement, the obligations of the Secretary
of State to support the Proposed Restructuring (including as the holder of a
number of special shares) and of the parties to the Nuclear Liabilities
Agreements to enter into them are conditional on, among other things:
- the Creditor Restructuring Agreement becoming unconditional in
all respects by the Restructuring Longstop Date;
- the Secretary of State not having determined and notified
British Energy in writing that, in her opinion, the Group (including British
Energy Group plc and British Energy Holdings plc) will not be viable in all
reasonably foreseeable conditions without access to additional financing (other
than financing which the Secretary of State is satisfied has been committed and
will continue to be available when required);
- there being no continuing event of default under the Government Facility;
- receipt by the Secretary of State of copies of letters giving
the confirmations relating to working capital referred to in the terms of Rule
2.18 of the United Kingdom Listing Authority (UKLA) Listing Rules without
qualification (whether or not British Energy Group plc is to be listed on the
Official List of the UKLA);
- the representations and warranties given by the members of the
Group being true, accurate and not misleading when given and if repeated at the
effective date of the Proposed Restructuring; and
- there being no breach of any undertaking given by any member of
the Group pursuant to the Government Restructuring Agreement which, in the
opinion of the Secretary of State, is or is likely to be material in the context
of the Proposed Restructuring.
If any of the conditions are not fulfilled or waived by the Secretary of State
by the time specified in the requisite conditions or if no such date is
specified, by the Restructuring Longstop Date, the Government Restructuring
Agreement will terminate. In addition if a material adverse change (as defined
in the Creditor Restructuring Agreement and referred to above) occurs at any
time before the Court order sanctioning the Creditors' Scheme is filed with the
Registrar of Companies in Scotland, the Secretary of State may give written
notice to British Energy to terminate the Government Restructuring Agreement.
Nuclear Liabilities Agreements
Under the Nuclear Liabilities Agreements to be entered into pursuant to the
Government Restructuring Agreement between the Company and the Secretary of
State, among others, dated 10 October 2003, the NLF will fund certain of the
Group's qualifying uncontracted nuclear liabilities and costs of decommissioning
the Group's nuclear power stations, and the Secretary of State will fund certain
of the Group's contracted liabilities relating to historic spent fuel and
qualifying nuclear liabilities, and qualifying decommissioning costs to the
extent there is any shortfall in the NLF. In consideration for the assumption of
these liabilities, British Energy Holdings plc will issue GBP275m in New Bonds
to the NLF. In addition, members of the Group will make the following payments
to the NLF: (i) fixed decommissioning contributions of GBP20m per annum (indexed
to RPI and tapering as stations are currently scheduled to close); (ii)
GBP150,000 (indexed to RPI) for every tonne of uranium loaded into Sizewell B,
our Pressurised Water Reactor nuclear power station, after completion of the
Proposed Restructuring; and (iii) an annual contribution equal to a percentage
of the Group's adjusted free cash flow (initially 65%, subject to adjustment,
but not to exceed 65%) (the NLF Cash Sweep Payment).
The entitlement of the NLF to the NLF Cash Sweep Payment is convertible into an
equity shareholding in British Energy Group plc equal to the same percentage of
the thereby enlarged issued share capital. Although the NLF will receive
convertible ordinary shares equal to the then prevailing NLF Cash Sweep Payment
percentage (again subject to a maximum of 65%) the terms of the convertible
ordinary shares into which such entitlement will convert will limit the general
voting rights attaching to such shares equal to the amount which can be held
without triggering a mandatory offer under the Takeover Code, being currently
29.9% of the voting rights in the Company (and, for this purpose, taking into
account the voting rights attributable to any other ordinary shares held or
acquired by any person acting in concert with the NLF). The convertible
ordinary shares will be converted into ordinary shares with no such restrictions
on voting rights automatically on their transfer by the NLF to a third party but
may not otherwise be converted at the election of the NLF.
1. Basis of Preparation (continued)
In addition, under the Nuclear Liabilities Agreements, British Energy is
required to establish and maintain cash reserves to provide collateral for
trading and operations, cover lost revenue and costs resulting from plant
outages and to meet other working capital requirements (the Cash Reserve). The
initial target amount for the Cash Reserve is GBP490m plus the amount by which
cash employed as collateral exceeds GBP200m.
The above is a summary only and investors and others are strongly advised to
read the entire announcement which was issued by the Company on 1 October 2003,
which contains additional important information not included in this summary.
(v) Principles Underlying Going Concern Assumption
The financial statements have been prepared on a going concern basis in
accordance with FRS18 - Accounting Policies, because British Energy has not been
liquidated nor is it ceasing to trade. The validity of this assumption depends
on the fulfilment of the conditions of the Proposed Restructuring and
achievement of the Group's cash generation initiatives, in each case within the
timescales envisaged or required and the continuation of the restructuring and
standstill arrangements with certain creditors and financial assistance from the
Secretary of State pursuant to the Government Facility and there being no
material deterioration in the Group's cash flow position, performance or
outlook. This assumption is, therefore, subject to a large number of
significant uncertainties and important conditions.
If for any reason British Energy is unable to meet its financial obligations as
they fall due the Company may have to take appropriate insolvency proceedings
and cease to be a going concern, in which case adjustments may have to be made
to reduce the monetary values of assets to the recoverable amounts, to provide
for further liabilities that might arise and to reclassify the fixed assets and
long term liabilities as current assets and liabilities.
2. New Accounting Policies
Own Shares Held
The Group has adopted the new UITF Abstract 17 (revised 2003) (Employee Share
Schemes) and UITF Abstract 38 (Accounting for ESOP Trusts) which relate to the
measurement of the Employee Share Scheme charge and the presentation of own
shares held. As a result where the Group purchases shares in its equity share
capital through the Group's Employee Share Trust or Qualifying Employee Share
Trust the net consideration paid is deducted from the profit and loss account
reserve in arriving at total equity shareholders' funds. Where such shares are
subsequently sold or reissued any consideration received is included in equity
shareholders' funds.
3. Turnover and (loss)/profit on ordinary activities before taxation
(a) Output and Turnover
3 months Year ended
ended 31 March
30 June 2004
2004
TWh TWh
Output
- United Kingdom 16.4 72.6
GBPm GBPm
Continuing activities
United Kingdom
- Wholesale generation sales 153 703
- Direct supply sales 213 782
- Turnover from continuing activities excluding miscellaneous income 366 1,485
- Miscellaneous income 6 31
Turnover from continuing activities 372 1,516
Share of turnover in discontinued joint venture - 144
The turnover and profit before tax of the Group's joint venture, AmerGen, relate
entirely to activities in the United States of America. On 22 December 2003 the
Group disposed of its interest in AmerGen.
(b) (Loss)/Profit on Ordinary Activities Before Taxation
A geographical analysis of (loss)/profit on ordinary activities before taxation
is as follows:
3 months Year ended
ended 31 March
30 June 2004 2004
GBPm GBPm
United Kingdom (115) 187
United States - share of discontinued joint venture - 45
(115) 232
4. Operating costs
3 months Year ended
ended 31 March
30 June 2004
2004 GBPm
GBPm
Continuing activities
- Fuel 104 413
- Materials and services 127 512
- Staff costs 73 224
- Depreciation charges 18 50
322 1,199
Energy supply costs 70 260
Total operating costs 392 1,459
Exceptional operating items
- Materials and services 5 25
- Staff costs 8 -
- Depreciation charges/(credits) 3 (295)
- Amounts credited to non-operational assets - (13)
16 (283)
Operating costs after exceptional items 408 1,176
3 months Year ended
ended 31 March
30 June 2004
2004 GBPm
GBPm
Analysis of exceptional operating items
Restructuring costs 5 43
Severance costs 8 -
Settlement of claim - (18)
Fixed asset write-up - (295)
Depreciation - corporate headquarters 3 -
UK decommissioning fund write-up - (13)
16 (283)
There were exceptional materials and services costs of GBP5m within the
three-month period in respect of costs incurred on advisory fees and other costs
associated with restructuring the Group's activities. An exceptional charge of
GBP8m has been recorded for severance costs in relation to the Group's
restructuring. An exceptional depreciation charge of GBP3m was recorded to align
the carrying value of the corporate headquarters at Peel Park, East Kilbride,
Scotland to its market value.
Exceptional operating credits amounting to GBP283m were reported for the year
ended 31 March 2004. These amounts are further explained as follows:
- charges incurred on advisory fees and other costs associated with the
Proposed Restructuring of the Group's activities of GBP43m in the year ended 31
March 2004;
- settlement of long standing disputes with Siemens Power Generation
Limited (Siemens) relating to work done since 1996 by the former Parsons
business. Under the terms of the settlement Siemens paid the Company
approximately GBP18m;
- exceptional depreciation credit of GBP295m in the year ended 31 March
2004 in respect of the reversal of previous impairment losses in the carrying
value of fixed assets following a review of economic values and net realisable
values of fixed assets; and
- the investments held within the UK decommissioning fund were
written-up to reflect an increase in market value, resulting in a reversal of
the previous write-down of GBP13m.
5. Financing charges/(credits)
3 months Year ended
ended 31 March
30 June 2004
2004
GBPm GBPm
Revalorisation of nuclear liabilities
- changes in price levels 46 97
- discharge of one year's discount 31 118
77 215
Revalorisation credit of UK decommissioning fund (10) (28)
Share of revalorisation of discontinued joint venture - (2)
Revalorisation charges before exceptional items 67 185
Interest payable less receivable 14 64
Total financing charges prior to exceptional charges/(credits) 81 249
Exceptional revalorisation charges/(credits) 2 (68)
83 181
Exceptional interest and other financing credits - (5)
83 176
At 30 June 2004 the market value of the UK decommissioning fund had increased to
GBP453m (31 March 2004: GBP440m). The revalorisation credit of GBP10m relating
to the UK decommissioning fund and the regular contributions of GBP5m have
increased the book value to GBP455m at 30 June 2004. An exceptional charge of
GBP2m in the three months ended 30 June 2004 is required to reduce the book
value to a market value of GBP453m at 30 June 2004. The market value remains
below the amount that would have been calculated by revalorising on an actuarial
basis the total amounts that have been invested in the fund.
At 31 March 2004 the market value of the UK decommissioning fund was GBP440m,
thereby necessitating an exceptional credit of GBP59m in the twelve months ended
31 March 2004 to reverse previously written-down amounts. As a result of the UK
decommissioning fund receivable being restated at market value, a GBP13m
exceptional credit was recorded in operating costs to reverse a prior write-down
of non-operational assets, and exceptional credits of GBP46m were recorded in
finance charges for the twelve months ended 31 March 2004 to reverse the prior
write-down of previous revalorisation. The market value was below the amount
that would have been calculated by revalorising on an actuarial basis the total
amounts that have been invested in the fund.
The market value of the AmerGen decommissioning fund had also increased over the
period to 22 December 2003, and the British Energy share of the exceptional
credit was GBP22m in the year to the date of sale and recorded within the Group
result for the year ended 31 March 2004.
The total of the UK decommissioning fund and AmerGen decommissioning fund
exceptional revalorisation credits included within financing charges for the
year ended 31 March 2004 amounted to GBP68m.
At 31 March 2004 the value of the interest rate swaps were marked to market and
the resultant valuation was lower than the book value, resulting in an
exceptional credit of GBP5m for the year ended 31 March 2004. There was no
exceptional credit for the quarter ended 30 June 2004.
6. Taxation
3 months Year ended
ended 31 March
30 June 2004
2004
GBPm GBPm
Tax on results excluding exceptional items - (2)
There is no UK current tax charge for the three months ended 30 June 2004 (31
March 2004: GBPnil). The tax credit of GBP2m for the year ended 31 March 2004
represents the release of an over provision of foreign tax in earlier years.
The taxation charges reflect the anticipated effective tax rates relating to the
underlying business performance on a pre-restructured basis for the year ending
31 March 2005.
7. (Deficit)/earnings per share
The (deficit)/earnings per share for each period has been calculated by dividing
the (loss)/profit on ordinary activities after taxation by the weighted average
of ordinary shares in issue during the period, based on the following
information:
3 months Year ended
ended 31 March
30 June 2004
2004
(Loss)/profit for the period (GBPm) (115) 234
Basic weighted average share capital (number of shares, million) 602 602
8. Tangible fixed assets
(i) Investment in Own Shares
Following the adoption of UITF Abstract 38 (Accounting for ESOP Trusts) the
investment in own shares is no longer shown as a fixed asset investment but is
deducted from the profit and loss account reserve. This adjustment has also
been made for the 31 March 2004 balances.
(ii) Carrying Value of Fixed Assets
The Directors reviewed the economic values and net realisable values of the
Group's fixed assets at 31 March 2004 and compared them to their book value. As
a result of this review the carrying value of fixed assets was increased by
GBP295m.
The carrying value of the nuclear stations was calculated by discounting the
expected future cash flows from continued use of the assets, having made
appropriate assumptions regarding future operating performance. The valuation
of Eggborough Station was based on an assessment of net realisable value.
The electricity price assumptions were a very significant component of the asset
value calculation. The Directors considered the market's views on future prices
of wholesale electricity and also the forecasts specifically commissioned for
the Company. In determining the price assumptions the Directors took a cautious
view on there being a significant recovery in prices. As market prices are
outside the Directors' control actual prices may differ from those forecast.
The Directors will review the economic assumptions underlying the calculation of
fixed asset carrying values at 31 March 2005 in line with the requirements of
FRS11 - Impairment of Fixed Assets and Goodwill, and make revisions as
appropriate.
(iii) Sale of Investments
Total cash receipts in the period in relation to the discontinued activities of
Bruce Power amounted to GBP4m. The cash receipt of GBP4m received on 25 May 2004
was in partial consideration of the re-start of the Bruce A units.
9. Creditors and provisions
Other
creditors
Nuclear and
liabilities Debt provisions Total
GBPm GBPm GBPm GBPm
Creditors:
Amounts falling due within one year 579 220 619 1,418
Amounts falling due after more than one year 1,907 663 - 2,570
Provisions for liabilities and charges 1,812 - 40 1,852
As at 30 June 2004 4,298 883 659 5,840
As at 31 March 2004 4,223 883 732 5,838
Nuclear liabilities including accruals for AGR fuel services relating to spent
AGR fuel are based on the terms of contracts with BNFL (dated 30 March 1995 and
3 June 1997), most of which include fixed prices subject to indexation, or the
Group's estimates where no contracts exist. Provisions for services relating to
the disposal of nuclear waste and the storage and disposal of PWR spent fuel are
based on cost estimates derived from the latest technical assessments. The
costs of decommissioning the power stations have been estimated on the basis of
technical assessments of the processes and methods likely to be used for
decommissioning under the current regulatory regime. The estimates are designed
to reflect the costs of making the sites of the power stations available for
alternative use in accordance with the Group's decommissioning strategy.
Other creditors of GBP619m include GBP316m (31 March 2004: GBP316m) in respect
of claims relating to onerous trading contracts. These contracts are pre-NETA
electricity trading contracts with Enron, TPL and Total. The Enron and Total
contracts were terminated during the year ended March 2003, which gave rise to
claims for certain amounts which have become payable. Interest is payable and
being paid on standstill balances at a rate of 6%, other than for the bonds and
the amounts due to the Eggborough banks which continue under their original
terms. These accounts reflect the claim amounts which have been agreed in
principle with Enron, TPL and Total for the purposes of the Proposed
Restructuring. Enron, TPL and Total have subsequently transferred their claims
to Deutsche Bank.
The analysis of the maturity of borrowings has been prepared based on the dates
when the borrowings mature under the existing contractual arrangements.
However, the standstill arrangements which have been put in place have the
effect of deferring the payments of certain amounts due until the Bonds and
Eggborough project finance loan are replaced or amended (as the case may be) as
part of the Proposed Restructuring or earlier termination of the standstill.
The maturity profile of borrowings will change upon completion of the Proposed
Restructuring.
Included in the provisions total of GBP40m (31 March 2004: GBP36m) is an
interest rate swaps provision in respect of swap contracts which were put in
place to hedge interest rate risk. The Directors have reviewed the necessity for
these swaps in the context of the Proposed Restructuring and have concluded that
the swaps are no longer effective as hedges. The balance on the provision of
GBP33m at 31 March 2004 has reduced to GBP29m through utilisations of GBP2m and
revaluation to market value of GBP2m.
10. Post retirement benefit obligations
This note is included for the three months ended 30 June 2004 to restate the
FRS17 disclosures by the Company's actuaries. This note will not normally be
produced as part of the quarterly published information.
British Energy operates two separate pension arrangements in the UK within the
Electricity Supply Pension Scheme (ESPS), the British Energy Generation Group
(BEGG) for the majority of employees and the British Energy Combined Group
(BECG) for the employees at Eggborough Power Station. The ESPS is a defined
benefit scheme, which is externally funded and subject to triennial actuarial
valuation. Each pension group that participates in the ESPS is financially
independent from the other groups.
The most recent triennial valuations of the BEGG and BECG schemes were carried
out at 31 March 2001 by the independent ESPS actuary. Formal triennial
valuations of the BEGG and the BECG pension schemes at 31 March 2004 are
currently being undertaken and are expected to be completed in October 2004. The
combined deficits are expected to be GBP385m, which falls within the range of
GBP330m to GBP440m disclosed previously.
The valuations for accounting purposes have been carried out by a separate
independent actuary using the projected unit method. The principal assumptions
adopted for both these valuations were that, over the long-term, the investment
rate of return would be 6% per annum for benefits already accrued, and 6% for
the return achieved on future contributions. The rate of salary increase would
be 4.25% per annum and the rate of pension increase would be 2.75% per annum.
Assets were taken at market value. At the date of the 31 March 2004 valuation,
the combined market value of assets of both schemes was GBP1,822m. This
represents 91% of the benefits that had accrued to members after allowing for
expected future increases in earnings. The SSAP 24 charge of GBP13m for the
quarter reflects this revised information.
British Energy contributed 17.1% to the BEGG pension scheme and 15.3% to the
BECG pension scheme for the period from 1 April 2003 to 31 March 2004.
Contributing members contribute 5% and 6% to the respective plans. Any
deficiency disclosed in the BEGG or BECG pension schemes following an actuarial
valuation has to be made good by British Energy.
The Group's UK pension costs for the period to 30 June 2004 were GBP13m (31
March 2004: GBPnil). At 30 June 2004 there was a SSAP 24 prepayment of GBP95m
(31 March 2004: GBP101m) in the UK.
FRS17 Disclosures
The Group has not implemented FRS17 in the accounts for the three months ended
30 June 2004. At 31 March 2004, the asset values used in the financial
statements were based on actuarial reports. These have subsequently been found
to be inaccurate and therefore the figures below have been restated as indicated
to reflect these correct values. The market value of the plans was previously
reported as GBP1,795m resulting in a net pension liability of GBP352m which are
now GBP1,822m and GBP325m respectively. The disclosures required under the
transitional arrangements for UK plans within FRS17 as advised by the Company's
actuaries are, however, set out below:
a) Major assumptions for FRS17 disclosures at:
30 June 31 March 31 March
2004 2004 2003
% pa % pa % pa
Price inflation 2.80 2.75 2.25
Rate of general increase in salaries 4.30 4.25 3.75
Rate of increase of pensions in payment 2.80 2.75 2.25
Discount rate 5.75 5.50 5.50
b) The assets and liabilities of the scheme on an FRS17 basis and the expected
rates of return at period end are:
Value at
Value at 31 March Value at
Rate of 30 June Rate of 2004 Rate of 31 March
return 2004 return Restated return 2003
% GBPm % GBPm % GBPm
Equities 8.25 1,109 8.25 1,102 8.5 878
Bonds 5.1 473 4.75 469 4.5 438
Property 6.4 218 6.4 223 6.5 183
Others 4.0 27 3.75 28 3.75 26
Total market value of plan assets 1,827 1,822 1,525
Present value of plan liabilities (2,099) (2,147) (1,877)
Pension liability (272) (325) (352)
No deferred tax asset is recognisable on the pension deficit at 30 June 2004 and
31 March 2004, based on application of the deferred tax accounting policy.
c) Analysis of the amount that would be charged to operating profit on an FRS17
basis:
3 months Year
ended ended
30 June 31 March
2004 2004
(Gain)/loss (Gain)/loss
GBPm GBPm
Operating profit
Current service cost 9 35
Past service cost - 1
Total charge to operating profits 9 36
Finance income
Expected return on assets in the pension scheme (32) (106)
Interest on pension scheme liabilities 30 102
Net credit to finance income (2) (4)
Total profit and loss account charge before tax 7 32
d) Movement in plan deficit during the period on an FRS17 basis:
31 March
30 June 2004
2004 Restated
GBPm GBPm
Deficit in plan at beginning of the period (325) (352)
Contributions paid 7 34
Current service cost (9) (35)
Past service cost - (1)
Other finance income 2 4
Actuarial gain (note 10 (e)) 53 25
Deficit in the plan at the end of the period (272) (325)
e) History of experience gains and losses which would have been recognised on an
FRS17 basis:
30 June 2004 31 March 2004 31 March 2003
As % of
As % of (Gain)/ plan
plan loss assets or As % of plan
(Gain)/ assets Restated liabilities (Gain)/loss Assets or
loss or GBPm Restated GBPm liabilities
GBPm liabilities
Consolidated statement of total recognised
gains and losses
Actual return less expected return on post
employment plan assets 16 1 (228) (13) 410 27
Experience gains and losses arising on plan
liabilities 1 - 34 2 (3) -
Changes in assumptions (financial and
demographic) (70) 3 169 8 - -
Actuarial gain recognisable in consolidated
statement of total
recognised gains and losses before tax (53) (25) 407
As % of plan liabilities at end of period 3 1 22
f) Group reconciliation of net liabilities and reserves under FRS17:
30 June 2004 31 March 2004
Profit Profit and
and loss loss account
Net account Net reserve
liabilities
liabilities reserve Restated Restated
GBPm GBPm GBPm GBPm
As reported (3,281) (4,077) (3,166) (3,962)
SSAP 24 prepayment (95) (95) (101) (101)
Net liabilities excluding defined benefit asset (3,376) (4,172) (3,267) (4,063)
FRS17 pension asset 1,827 1,827 1,822 1,822
FRS17 defined benefit liability (2,099) (2,099) (2,147) (2,147)
Including FRS17 pension liability (3,648) (4,444) (3,592) (4,388)
No deferred tax asset is recognisable on the pension deficit or pension
prepayment.
11. Share capital/ESOPs
British Energy Employee Share Trust (BEEST) and Qualifying Employee Share Trust
(QUEST) hold shares in British Energy for the purpose of satisfying options
exercisable under the Company's employee share option and sharesave schemes. At
30 June 2004, BEEST held 21,734,839 ordinary shares (31 March 2004: 21,734,839)
and QUEST held 5,292,103 ordinary shares (31 March 2004: 5,292,103) and
19,165,471 'A' shares (31 March 2004: 19,165,471) in British Energy plc.
12. Reconciliation of movement in equity shareholders' funds
3 months Year
ended ended
30 June 31 March
2004 2004
GBPm GBPm
As at 1 April 2004 and at 1 April 2003 (3,259) (3,476)
(Loss)/profit for the period (115) 234
Translation differences on foreign currency net investment - (15)
Prior year adjustment (as explained in note 1) - (2)
As at 30 June 2004 and at 31 March 2004 (3,374) (3,259)
13. Reconciliation of operating cash flow
3 months Year
ended ended
30 June 31 March
2004 2004
GBPm GBPm
Group operating (loss)/profit - continuing activities (36) 340
Depreciation charges/(credit) (includes fixed asset write-up and lease amortisation) 21 (245)
Nuclear liabilities charged to operating costs 35 130
Nuclear liabilities discharged (37) (59)
Increase/(decrease) in other provisions 8 (3)
Regular contributions to decommissioning fund (5) (19)
Operating exceptional decommissioning fund movement - (13)
(Increase)/decrease in working capital (47) 25
Net cash (outflow)/inflow from operating activities (61) 156
14. Reconciliation of net cash flow to movement in net debt
GBPm
Decrease in cash in the period (88)
Increase in liquid resources 16
Increase in net debt in the period (72)
Net debt at 1 April 2004 (310)
Net debt at 30 June 2004 (382)
15. Collateral
Investments in liquid funds at 30 June 2004 include GBP321m (31 March 2004:
GBP297m) of cash that has been deposited in collateral bank accounts to support
trading and operating activities. Availability of this cash is, therefore,
restricted over the periods of the collateralised positions.
16. Contingent assets
On 16 May 2003 the Company announced that it had exchanged the last of the suite
of contracts covering front-end and back-end fuel services required to give
effect to the non-binding heads of terms entered into with BNFL on 28 November
2002. The front-end contracts became effective on 1 April 2003 but may be
terminated if the Proposed Restructuring is not completed. The back-end
contracts are conditional on completion of the Proposed Restructuring but
payments are being made as if the revised back-end contracts had become
effective on 1 April 2003. The financial statements for the period to 30 June
2004 have been drawn up on the basis of the historic BNFL contracts in respect
of back-end fuel contracts, pending satisfaction of the conditions set out in
the revised contracts, thereby creating a contingent asset of GBP338m (31 March
2004: GBP306m) which will be recognised upon completion of the Proposed
Restructuring as one of a number of expected adjustments at that time. An
analysis of amounts included in current liabilities due to BNFL but not expected
to be paid by the Group provided the
Proposed Restructuring is completed is shown as follows:
GBPm GBPm
Opening balance at 1 April 2004 306
Amounts payable to BNFL under the historic back-end contracts for the period 64
Less: amounts paid/payable for the period under the revised BNFL back-end contracts, analysed
as follows:
Amounts settled (26)
Amounts included in accruals at quarter end (13)
Cash flow benefit arising within the quarter 25
Finance charges accrued on amounts stoodstill 7
Closing balance at 30 June 2004 338
GBPm
Amounts payable under historic BNFL back-end contracts
Opening balance at 1 April 2004 317
Amounts falling due in quarter 64
Amounts settled (26)
Standstill interest accrued 7
Closing asset balance at 30 June 2004 362
Less: amounts payable under revised BNFL back-end contracts
Opening balance at 1 April 2004 11
Amounts falling due in quarter 39
Amounts settled (26)
Closing liability balance at 30 June 2004 24
Contingent asset at 30 June 2004 338
On 14 February 2003 the Company announced that it had completed the disposal of
its 82.4% interest in Bruce Power in Canada to a consortium of three parties.
In addition to the consideration payable by the consortium under the master
purchase agreement, up to a further C$100m was payable to British Energy
contingent upon the restart of two of the Bruce A units under a trust agreement
(the Trust Agreement) entered into on the same date. Had the first unit
restarted by 15 June 2003, C$50m would have been released to British Energy and
an additional C$50m would have been released to British Energy had the second
unit restarted by 1 August 2003. An amount of C$5m was deducted from the C$50m
payable in respect of each unit for its failure to restart by the scheduled
restart date or by the first day of each successive calendar month following the
scheduled restart date. The Group received C$20m on 22 March 2004 and C$10m on
25 May 2004 in partial consideration under the Trust Agreement. British Energy
is seeking the payment of additional consideration under the Trust Agreement on
the basis that Bruce A Unit 4 restarted earlier than these dates but has not
recognised any additional amounts on its balance sheet at 30 June 2004 because
of uncertainties regarding their realisation. The Company is in discussion with
the Ontario Provincial Government which has indicated that it considers that the
units may have restarted, for the purposes of the Trust Agreement, at later
dates. The amounts recoverable in respect of the restarts will be substantially
lower than the maximum C$100m but the amounts and timing of the payments have
still to be confirmed.
17. Contingent liabilities
These accounts are drawn up on a going concern basis, the basis of which is
explained more fully in note 1 to these financial statements. This note
describes the contingent liabilities that are applicable to the Group and the
Company.
The Group has been provided with the Government Facility by the Secretary of
State. As at 30 June 2004, the Group had no drawings under the Government
Facility. Also at 30 June 2004, the Group had cash and liquid investments of
GBP501m of which GBP321m had been deposited as collateral to support trading and
other operations.
The following security has been granted for obligations under the Government
Facility made available by the Secretary of State:
- an all monies debenture creating fixed security (by way of assignment and/or
fixed charge) over certain intra-group receivables and special accounts and
a floating charge between the Secretary of State and certain Group companies;
- fixed charges in relation to the UK nuclear power stations; and
- pledge and mortgage of shares in certain Group subsidiaries in favour of the
Secretary of State.
Amounts owing by EPL to the Eggborough Banks are not guaranteed by the Company.
However, the Company guarantees the payment of amounts by BEPET to EPL under the
CTA, calculated to cover, amongst other things, EPL's borrowing and operating
costs. In addition, the Company also provides a subordinated loan facility to
EPL.
On 1 October 2003, the Company announced that it had entered into the Creditor
Restructuring Agreement with certain significant creditors (including the
Eggborough Banks) and BNFL relating to the standstill, recognition and
compromise of their claims. However, while the Directors believe that the
amounts of the agreed claims agreed for the purposes of the Proposed
Restructuring currently reflect the amounts legally claimable, in the event of
the Proposed Restructuring not being completed different amounts may be
calculated as being claimable.
On 25 September 2002 the Nuclear Generation Decommissioning Fund Limited (the
NDF) served a default notice relating to the solvency of the Company, BEG and
BEGUK. Unless the default is cured to the satisfaction of the NDF, or waived,
the NDF has the right to require accelerated payment of all of the contributions
due to the NDF prior to the next quinquennial review in Autumn 2005. Annual
payments are in the region of GBP18m. The NDF has agreed not to take enforcement
action without further notice while the Group progresses satisfactorily towards
achieving the Proposed Restructuring. If the conditions to the Proposed
Restructuring are satisfied, the NDF and others will enter into a Deed of
Termination whereby the NDF agrees that it shall take no action to enforce its
rights pursuant to the default notice.
On 12 February 2004 British Energy received a notice of warranty claims from the
consortium which purchased the Group's 82.4% interest in Bruce Power alleging
breach of certain warranties and representations relating to tax and to the
condition of certain plant at the Bruce Power Station.
The principal tax claim relates to the treatment of expenditure at the Bruce
Power Station during the period of the Company's part ownership and is currently
being considered by the Canadian tax authorities. The treatment proposed by
British Energy could result in a rebate of a material amount of tax to the Group
that has never been recognised in the financial statements. The consortium
claims that allowance of the expenditure for that period would cause it to lose
future deductions. British Energy has rejected the tax claim. The Company is
confident that the amount of the tax claim should not, in any event, materially
exceed the amount of the rebate, and that the tax claim should have no material
cash flow impact on the Group.
The claim relating to the condition of the plant is based upon alleged erosion
of certain parts of the steam generators, including the support plates, through
which boiler tubes pass, which it is alleged resulted in an extended outage of
one unit at the plant to carry out repair works and loss of revenues and costs
of approximately C$64.5m. The consortium also claims that the alleged erosion
may reduce the operating life of the unit and/or result in further repairs
involving further losses. British Energy has rejected the claim and expects to
defend it if it is pursued further.
Under the agreement with the consortium C$20m is retained in trust to meet any
representation and warranty claims, and this may be retained pending agreement
or determination of the claims.
The Group has given certain indemnities and guarantees in respect of the
disposal of its investment in AmerGen. As a result of an accounting adjustment
made by Exelon to AmerGen's management accounts and closing accounts as at 21
December 2003, British Energy may be required to make a payment to Exelon of up
to US$13.7m. British Energy served a dispute notice on Exelon on 4 June 2004 to
preserve its rights and the parties are endeavouring to resolve the matter
amicably. The agreement with Exelon for the sale of AmerGen requires that,
prior to instituting any litigation or other dispute resolution procedure, the
companies will in good faith seek to resolve any dispute.
18. Non-adjusting post balance sheet events
Output Forecast
On 30 July 2004 the Company announced that following the evaluation of
structural inspections carried out during the statutory outage at the Hartlepool
power station and discussions with the Nuclear Installations Inspectorate, the
Company decided that further work to demonstrate the integrity of certain
boilers was necessary. This work entails visual inspections of a number of
boilers at Heysham 1 (one reactor is shut down and the other was shut down for
its statutory outage in early September) and at Hartlepool (one reactor is
currently shut down and there is no impact on the operation of the other
reactor).
At the same time, the Company also announced its revised target of annual
nuclear output of around 61.5 TWh for the 2004/05 financial year. The Directors
are satisfied that, in the Company's current circumstances, the impact of the
downward revision in output target on the carrying value of its nuclear assets
is not material. The expected annual nuclear output for the year ending 31
March 2005 will be given in the prospectus which is to be published pursuant to
the Proposed Restructuring.
Exelon
As a result of ongoing discussions with Exelon outlined in note 17, the Company
is reviewing with Exelon a working capital adjustment resulting from a change to
the estimated tax recoverable for prior periods made after the consummation of
the sale and this, if agreed, may result in a reduction in the purchase price
payable by Exelon, with the reduction currently estimated to be in the range of
up to US$6.3m.
Polygon
On 3 September 2004 two groups of shareholders, together holding 10.22% of our
ordinary shares, requisitioned an extraordinary general meeting (the
Requisitioned EGM). Those groups of shareholders were Polygon, Brandes and their
respective associates. The Company is, as a result, obliged under the Companies
Act to call the Requisitioned EGM. One of the resolutions proposed by Polygon
and Brandes would have the effect, if passed, of requiring the Company to seek
shareholder approval prior to applying for the cancellation of its listings in
London and New York. If the Company was required, under the terms of the
Creditor Restructuring Agreement, to take steps to cancel the London listings of
its shares, but could not do so as a result of a failure to achieve such
shareholder approval, the Company believes, having taken legal advice, that it
would be likely to be in breach of the Creditor Restructuring Agreement.
The Company announced on 23 September 2004 that the Requisitioned EGM will be
held on 22 October 2004 and that as a result of this attempt to frustrate the
Proposed Restructuring agreed by the Company in October 2003, it would be
applying to the UKLA to cancel the listings of our ordinary and A Shares. As a
consequence, and as announced on 23 September 2004, the NYSE suspended trading
on the Company's ADR's prior to the opening of trading on 28 September 2004. At
that time, the NYSE also instituted delisting proceedings.
On 24 September 2004 the Company announced (i) the unanimous recommendation of
the Board to shareholders to vote against the resolutions proposed by Polygon
and Brandes at the Requisitioned EGM, (ii) that it intended to seek an extension
to the Creditor Restructuring Agreement long stop date of 31 January 2005 for
the Proposed Restructuring and (iii) that, in accordance with the Creditor
Restructuring Agreement, it would execute a business transfer agreement whereby
the Company's assets would, conditional on the Proposed Restructuring becoming
effective, be transferred to a new intermediate holding company of the
restructured British Energy group.
On 30 September 2004 Polygon announced that it would withdraw its support for
the Requisitioned EGM. Polygon stated that, having considered the Company's
recent circulars, they now believe there is no commercial logic for it
supporting the resolutions to be considered at the Requisitioned EGM and
consequently have confirmed that they will vote against the resolutions and not
further oppose the Proposed Restructuring. The Requisitioned EGM will take
place on 22 October 2004 as described in the notice mailed to our shareholders.
Our Board continues to reiterate its unanimous recommendation to all
shareholders to vote against the resolutions proposed for the Requisitioned EGM.
Corporate Headquarters
On 15 September 2004 the Company announced the proposed sale of its corporate
headquarters located at Peel Park, East Kilbride, Scotland to Kenmore Capital
East Kilbride Limited in consideration of a cash payment of GBP6.625m and a
potential additional cash payment of up to GBP0.25m if certain letting
arrangements come to fruition. An exceptional depreciation charge of GBP3m was
recorded in the quarter to align the carrying value of the Company's corporate
headquarters to its market value. The Company has also entered into a ten year
lease for part of the building. It is expected that the sale will be completed
in January 2005. In August 2004 the Company signed a lease for our new
corporate headquarters in Alba Campus, Livingston, Scotland.
State Aid
On 22 September 2004 the Company announced the receipt by the Secretary of State
of notification from the European Commission that as far as the Proposed
Restructuring involves the grant of State aid by the UK Government, such aid is
compatible with the Common Market. The European Commission's decision is
subject to the following conditions:
- the Company's nuclear and generation business will be ring-fenced from
its fossil fuel, supply and trading businesses to ensure the aid to the nuclear
business is not used to cross subsidise any of the Company's businesses. This
measure will last indefinitely;
- there will be no nuclear or fossil-fuelled capacity expansion (above our
current capacity) by the Company in the European Economic Area for six
years, and no hydro-electric capacity expansion in the UK for the same
period; and
- a restriction on the Company selling to its industrial and commercial
customers at prices below the prevailing wholesale market prices for six
years unless there are exceptional market circumstances as determined by an
independent expert.
The European Commission has set down an additional requirement that a threshold
of GBP1.629billion be set for the aid, above which the European Commission can
request enhanced reporting to satisfy themselves that the state aid is being
kept to a minimum and is only being used to authorised purposes.
Credit Rating
On 23 September 2004 the Company announced that it had received indicative
non-investment grade ratings for the GBP550m of New Bonds that are to be issued
to certain of the Company's creditors and to the Nuclear Liabilities Fund
Limited upon completion of the Proposed Restructuring pursuant to the terms
announced on 1 October 2003.
Classification of British Energy in the Public Sector
On 24 September 2004 the United Kingdom Office for National Statistics (ONS)
announced that, with effect from 9 September 2002, the Company would be
classified as in the public sector. This classification was stated by the ONS
to reflect the control that can be exercised by the Government over the Group,
first through the Credit Facility, and then as a result of the Proposed
Restructuring. Prior to this announcement the ONS classified British Energy as
part of the private sector.
The ONS's decision was made for UK National Accounts purposes and was dependent
upon a judgement about the degree of control exercised by Government. The ONS
has acknowledged that, following completion of the Proposed Restructuring, no
one factor constitutes the degree of control necessary for a classification in
the public sector. The decision is based on the view that, taken together, a
number of factors represent a high degree of Government control.
The ONS has noted that as the Proposed Restructuring process has not been
finalised, some of the details of its decision may change, and as a result this
classification (as it applies to the Company post-restructuring) is provisional.
The Company is currently assessing the implications of this decision for its
business. In particular, the Company is giving thought to those relationships
that will exist post-restructuring that may require to be disclosed under FRS 8
in its financial statements for the year ending 31 March 2005. The Company has
not, as yet, finalised its conclusions on this.
INDEPENDENT REVIEW REPORT TO BRITISH ENERGY PLC
Introduction
We have been instructed by the Company to review the financial information,
contained in the quarterly report, which comprises the profit and loss account,
balance sheet, cash flow statement, statement of total recognised gains and
losses and related notes. We have read the other information contained in the
quarterly report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
Directors' Responsibilities
The quarterly report, including the financial information contained therein, is
the responsibility of, and has been approved by the Directors. The Listing
Rules of the Financial Services Authority require that the accounting policies
and presentation applied to the quarterly figures should be consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review Work Performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and, therefore,
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information. This report, including
the conclusion, has been prepared for and only for the Company for the purpose
of the Listing Rules of the Financial Services Authority and for no other
purpose. We do not, in producing this report, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or in
to whose hands it may come save where expressly agreed by our prior consent in
writing.
Fundamental Uncertainty - Going Concern
In arriving at our review conclusion, we have considered the adequacy of the
disclosures made in Note 1 concerning the preparation of the quarterly financial
information on the going concern basis. The validity of this assumption depends
on the fulfilment of the conditions of the Proposed Restructuring and
achievement of the Group's cash generation initiatives, in each case within the
time-scales envisaged or required and the continuation of the restructuring and
standstill arrangements with certain creditors and financial assistance from the
Secretary of State pursuant to the Government Facility and there being no
material deterioration in the Group's cash flow position, performance or
outlook. In view of the significance of the uncertainty concerning these
matters we consider that they should be drawn to your attention but our
conclusion is not qualified in this respect.
Review Conclusion
On the basis of our review, we are not aware of any material modifications that
should be made to the financial information as presented for the three months
ended 30 June 2004.
PricewaterhouseCoopers LLP
Chartered Accountants
Edinburgh
30 September 2004
Notes:
(a) The maintenance and integrity of the British Energy plc website is the
responsibility of the Directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to the
quarterly report since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and
dissemination of financial information may differ from legislation in other
jurisdictions.
CERTIFICATION
I, Mike Alexander, Chief Executive Officer of British Energy plc
(the 'registrant'), certify that:
1. I have reviewed this quarterly report for the three-month period ended
30 June 2004 (the 'report') of the registrant;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the 'Evaluation Date'); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarise and report data and have identified for the registrant's auditors
any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 30 September 2004 Name: Mike Alexander
: Title Chief Executive Officer
CERTIFICATION
I, Martin Gatto, Chief Financial Officer of British Energy plc
(the 'registrant'), certify that:
1. I have reviewed this quarterly report for the three-month period
ended 30 June 2004 (the 'report') of the registrant;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the 'Evaluation Date'); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarise and report data and have identified for the registrant's auditors
any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: 30 September 2004 Name: Martin Gatto
Title: Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mike Alexander, Chief Executive Officer, certify, pursuant to 18 U.S.C.
section 1350, that:
(1) The quarterly report for the period ended 30 June 2004 (the 'report') of
British Energy plc (the 'registrant') fully complies with the requirements
of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934; and
(2) The information contained in the report fairly presents, in all material
respects, the financial condition and results of the registrant.
Date 30 September 2004 Mike Alexander
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Martin Gatto, Chief Financial Officer, certify, pursuant to 18 U.S.C. section
1350, that:
(1) The quarterly report for the period ended 30 June 2004 (the '
report') of British Energy plc (the 'registrant') fully complies with the
requirements of section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of the registrant.
Date 30 September 2004 Martin Gatto
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: October 1, 2004 BRITISH ENERGY PLC
By:____John Searles____
Name: John Searles
Title: Director - Investor Relations