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
June 17, 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: Final Results dated 17 June, 2004
British Energy plc
17 June 2004
RESULTS FOR THE FINANCIAL YEAR ENDED 31 MARCH 2004 (FY2004)
AND THE FOURTH QUARTER ENDED 31 MARCH 2004 (Q4)
Key Points - FY2004
- Progress has been made towards the completion of the restructuring, but it
still remains subject to a large number of significant uncertainties and
important conditions. In October 2003, British Energy exchanged contractual
agreements with the Government, BNFL and certain creditors regarding the terms
of the Proposed Restructuring. The Secretary of State for Trade and Industry now
expects to receive notification of a decision from the European Commission on
the Government's State aid application during the autumn.
- UK operating profit was GBP57m before exceptional items compared to GBP7m in
the prior year. The improvement reflected the fact that, while average realised
prices were GBP1.4/MWh lower at GBP16.9/MWh, total unit operating costs were
reduced by GBP2.1/MWh to GBP16.5/MWh primarily as a result of higher output. The
increase in profit did not include the potential P&L account savings of GBP58m
from the revised BNFL back end contracts, which will not be recognised
pre-restructuring. Restructuring costs of GBP43m were incurred during the year,
compared to GBP35m last year.
- After net exceptional operating credits of GBP283m, total UK operating profit
for continuing activities after exceptional items was GBP340m. This compared
with a UK operating loss for continuing activities, after exceptional operating
items, of GBP3,899m last year. The Group profit after tax and after total net
exceptional credits of GBP403m was GBP234m. The UK loss before tax and before
exceptional items for continuing activities was GBP194m.
- A summary of the results and the comparatives is set out in the table below:
FY 2004 FY 2003
(Year end 31 March - GBPm)
UK operating profit before exceptional items - continuing 57 7
activities
Net exceptional operating credits/(charges) 283 (3,906)
UK operating profit/(loss) after exceptional items - 340 (3,899)
continuing activities
Group profit/(loss) after tax and exceptional items 234 (3,924)
UK (loss) before tax and before exceptional items - (194) (274)
continuing activities (1)
Notes :
1. The continuing activities described above exclude the results of Bruce Power
and Huron Wind which were disposed of on 14 February 2003 and the share of
profits from AmerGen which was disposed of on 22 December 2003. For FY2004, this
loss includes the revalorisation charge of GBP187m. Post-restructuring charges
to the P&L account will reflect payments to the new Nuclear Liabilities Fund.
- The Company conducted an asset impairment review at 31 March 2003 writing down
fixed assets by GBP3,738m. The carrying value of fixed assets has been reviewed
again as at 31 March 2004, and, as a result, there was a non - cash accounting
upward adjustment of GBP295m for the partial reversal of the write-down of fixed
assets in the prior year, principally due to an expectation of higher
electricity prices.
- Following the asset impairment review at 31 March 2003, no additions have been
recorded to fixed assets in 2004. As a consequence the Company expensed an
estimated GBP70m to the FY2004 P&L account that may have been capitalised in the
absence of the impairment review. Expenditure previously treated as 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 fixed assets
after taking into account the impairment review.
- Cash payments are being made to BNFL as if the revised back end contracts,
which are contingent on the restructuring being implemented successfully, had
become effective on 1 April 2003. The benefit of the revised BNFL back end
contracts, GBP179m in FY2004, is reflected in the cash flow statements.
- EBITDA from continuing activities was GBP107m. After including potential P&L
account savings of GBP58m from the revised BNFL back end fuel contracts,
adjusted EBITDA would have been GBP165m in FY2004. Group operating cash flow
from continuing activities was GBP156m, which includes the cash flow benefit of
the revised BNFL contracts.
FY 2004 FY 2003
(Year end 31 March - GBPm)
EBITDA(1) - continuing activities 107(2) (3) 280
Adjusted EBITDA - continuing activities after including P 165(4) 280
&L savings from revised BNFL back end fuel contracts
Capital expenditure (expensed to P&L) 70(2) -
Group operating cash flow 156 336
Increase in total cash and liquid funds(5) 240 204
Notes:
1. EBITDA is defined by the Company as operating income before interest expense,
income taxes, depreciation and amortisation. 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 FY2004 does not include the potential P&L
account savings from the revised BNFL back end contracts of GBP58m. 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 in the table is shown for presentation purposes only.
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 after
taking account of the impairment review. Based on UK GAAP, capital expenditure
as referred to above cannot be added back to EBITDA. An amount estimated at
GBP70m may have been capitalised in the absence of the impairment review.
3. During FY 2004 there was a major unplanned outage at Heysham 1 with a
resultant loss of output of some 3.2TWh, equivalent to some GBP71m of lost
profit contribution.
4. Adjusted EBITDA includes the potential P&L account savings of GBP58m from the
revised BNFL back end contracts.
5. Total cash and liquid funds is the sum of cash at bank and term deposits /
bank balances.
- Total output for the year was 72.6TWh. Nuclear output was 65.0TWh, up from
63.8TWh last year, but below the Company's target of 67.0TWh. Eggborough output
was up 1.9TWh to 7.6TWh. The realised price for the year was GBP16.9/MWh, with a
total operating cost of GBP16.5/MWh resulting in a positive margin of GBP0.4/
MWh, an improvement over the negative margin of GBP0.3/MWh in the prior year.
- Total unit operating cost represents the average cost of generation of British
Energy's entire output (both coal and nuclear), and includes depreciation and
capital expenditure (expensed to the P&L account and estimated at GBP70m) but
does not include the P&L account benefits of the revised BNFL back end contracts
of GBP58m.
- A summary of output, realised prices and total operating unit costs is set out
below:-
(Year end 31 March) FY 2004 FY 2003
Output (TWh)
- Nuclear 65.0 63.8
- Coal 7.6 5.7
72.6 69.5
Realised price (GBP/MWh) 16.9 18.3
Total operating unit costs (GBP/MWh) 16.5 18.6
Margin(GBP/MWh) 0.4 (0.3)
After adjusting Total operating unit costs for the revised BNFL back end
contract P&L account savings and depreciation, the adjusted unit operating cost
in FY2004 was GBP15.0/MWh resulting in an adjusted margin of GBP1.9/MWh, as set
out below:
(Year end 31 March 2004 GBP/MWH)
FY 2004
Total operating unit costs 16.5
Revised BNFL back end contracts (0.8)
Depreciation (0.7)
Adjusted operating unit cost 15.0
Adjusted margin 1.9
- Our investment in AmerGen was sold for US$277m allowing the Government
facility to be fully repaid. The year end cash and liquid funds balance was
GBP573m of which GBP297m was deposited in support of collateral requirements.
Cash increased by GBP240m in FY2004, with net debt of GBP310m as of 31 March
2004.
Details of cash and net debt are summarised in the table below, including an
update as of 31 May 2004:
Update
(GBPm) As at 31 Mar 04 as at 31 May 04
Cash and term deposits not used for collateral 276 203
Cash and term deposits used for collateral 297 304
Total Cash 573 507
Total Debt: Pre restructuring 883 883
Less: total cash (573) (507)
Net Debt 310 376
- Following the implementation of the Proposed Restructuring, GBP700m of debt
will replace the existing debt, the RBS letter of credit, and certain PPA's
included in the restructuring. On this basis, proforma net debt would have been
GBP127m at 31 March 2004 had restructuring become effective on that date.
- The Company is taking forward plans to improve the operational performance and
reliability of its nuclear plants. A major part of the drive is the Performance
Improvement Programme which is central to the operational plans designed to
enhance the prospects of the Group. The cost implications of these plans are
discussed below.
Key Points - Fourth Quarter
- No comparative data is available because the Company only commenced publishing
quarterly reporting for the 3rd Quarter ended 31 December 2003. In reviewing
these results, it is important to note that, in general, output and realised
prices tend to be higher in the third and fourth quarters of the year.
- A summary of the results for the quarter ended 31 March 2004 is set out below:
(Quarter ended 31 March 2004)
GBPm
UK operating profit before exceptional items - continuing activities 51
Net exceptional operating credits 310
UK operating profit after exceptional items - continuing activities 361
Group profit after tax and exceptional items 316
The UK operating profit of GBP361m was achieved after net exceptional operating
credits of GBP310m, which included a non-cash accounting upward adjustment of
GBP295m for the partial reversal of the write-down of fixed assets in the prior
year.
(Quarter ended 31 March 2004)
GBPm
UK operating profit before exceptional items 51
Add: Depreciation 14
EBITDA - Continuing activities (1) 65
Add: P&L savings of revised BNFL back end contracts 21
Adjusted EBITDA - continuing activities (1) 86
Note :
1. See notes on EBITDA above
- EBITDA from continuing activities was GBP65m. Adjusted EBITDA, after including
P&L account savings of GBP21m from the revised BNFL back end contracts, was
GBP86m.
- Cash inflow from operating activities in the period was GBP155m, which led to
an increase in total cash and term deposits of GBP144m.
- Total UK output for the quarter was 19.8TWh, of which nuclear output was
17.0TWh and Eggborough output was 2.8TWh.
- The realised price was GBP18.2/MWh and the total operating cost was
GBP16.1/MWh - this represents a positive margin of GBP2.1/MWh, significantly
better than the margin in the first 9 months, largely due to seasonal factors
and the effect high output has on unit cost.
Outlook
- The target nuclear output for FY2005 is 64.5TWh to take account of the
replacement of cast iron pipework which is an important component of improving
future reliability.
- FY2005 target nuclear output has been substantially contracted in order to
hedge against price uncertainty. A large majority of these contracts are at
fixed prices. As of the beginning of June, the average price of the fixed
contracts for 2004/05 was GBP19.5/MWh.
- Market prices have continued to increase over the last six months. Prices for
annual baseload power for FY2005 were trading at around GBP22/MWh at the end of
March 2004. Since then the implied prices for annual baseload power have risen
such that for the rest of the current year they have recently traded around
GBP25/MWh.
- As part of the Company's plans to improve the condition and future reliability
of the nuclear fleet, we are increasing year-on-year investment in major plant
projects, repairs and strategic spares by some 34% to around GBP175m.
- In October 2003, the Company announced its projected three year average
nuclear cost per MWh. As a result of the planned increase in investment in
nuclear plant and other costs, the Company has revised upwards the projected
three year average nuclear cash cost by approximately GBP1.30 per MWh, on an
equivalent basis, excluding the effects of inflation.
- It is the intention of the Company to pay dividends when the requirements of
the business permit, subject to the distributable reserves position and
restrictions under the restructuring arrangements. No dividend is expected in
respect of the two financial years ending March 2005 and March 2006, as the
Board believes that investing in the business is a prerequisite for a successful
turnaround.
Board / Management Changes
- Whilst the robustness of the Company's balance sheet depends on completing a
successful financial restructuring, the long term success of the Company depends
on achieving a comprehensive turnaround of the business, in particular its
nuclear fleet. It is for this reason that the Board was determined to make a
number of key appointments in critical areas.
- During the year, four new non-executive Directors were appointed - William
Coley (USA), Dr Pascal Colombani (France), Sir Robert Walmsley (UK) and John
Delucca (USA), have strengthened the Board. In addition, as previously
announced, Martin Gatto was appointed as Interim Finance Director.
- In addition, since the year end, we have announced the appointments of Roy
Anderson as our new Chief Nuclear Officer who joins the company on 5 July. Roy
is currently President of PSEG and brings valuable experience from previous
nuclear turnarounds in the USA. Neil O'Hara joined on 4 May as our new Trading
Director. Neil was previously at RWE, Centrica and AEP and has a key role in
implementing and developing our trading strategy.
Adrian Montague, Chairman, said:
"In the past twelve months we have made considerable progress in agreeing the
shape of the proposed restructuring and the new British Energy with the
Government and our creditors. In October, we reached agreements with our major
creditors on the restructuring plan. The way forward is subject to a large
number of conditions including approval by the European Commission, Court
sanction and settling certain documents with creditors. We must also establish
our viability to the satisfaction of the Secretary of State for Trade and
Industry. It is intended that the Proposed Restructuring be implemented in the
current financial year but there is a great deal to do in order to achieve this,
and the size of the task should not be underestimated."
Safe Harbour
This document contains certain "forward-looking" statements as defined in
Section 21E of the US Securities Exchange Act of 1934, including statements with
respect to British Energy's business plans, the performance of its stations,
electricity prices and other matters that are not historical facts concerning
the business operations, financial condition and results of operations of
British Energy. These forward-looking statements typically contain words such
as "intends", "expects", "anticipates", "estimates", "aim", "believe", "assume",
"should" and words of similar import, which are predictions of or indicate
future events or future trends. These forward-looking statements involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of British Energy and may cause actual results or performance
to differ materially from those expressed or implied from such forward-looking
statements. British Energy has identified some important factors that may cause
such differences in British Energy's Form 20-F annual report for the year ended
31 March 2003 filed with the US Securities and Exchange Commission.
A copy of this release in Pdf file format can be found on the Company's web site
at www.british-energy.com.
Conference Call
Management will host a conference call for analysts and investors at 4.00pm
(UK time) today 17th June 2004.
The conference call can be accessed by dialling;
UK dial in: 0845 113 0049
International dial in: +44 1452 542 303
US dial in: 1866 38 99778
Replay facility - 14 days, UK Dial in: 0845 245 5205
International dial in: +44 1452 550 000
Pin: 1433421#
For further information please contact:
Paul Heward, British Energy: 01355 262201
Andrew Dowler, Financial Dynamics: 020 7831 3113
A copy of the investor presentation in connection with the above conference call
will be published on the Company's website later this morning.
Chairman's Statement
In the past 12 months we have made considerable progress towards restructuring,
with significant milestones being achieved.
In last year's Annual Report, I reported to you on the traumatic events of 2002.
Over the past twelve months we have made considerable progress in agreeing the
shape of the proposed restructuring and the new British Energy with the
Government and our creditors (the Proposed Restructuring). In October, we
reached agreement with our major creditors on the restructuring plan. The way
forward is subject to a large number of significant uncertainties and important
conditions including approval by the European Commission (the Commission), Court
sanction and settling certain documents with creditors. We must also establish
our viability to the satisfaction of the Secretary of State for Trade and
Industry. It is intended that the Proposed Restructuring be implemented in the
current financial year but there is a great deal to do in order to achieve this,
and the size of the task should not be underestimated.
Total output for the year was 72.6 TWh. Nuclear output was 65.0 TWh, up from
last year but less than the target we set for ourselves. The improved generation
output helped lead to an operating profit of GBP57m which together with
exceptional operating credits of GBP283m, resulted in a total Group operating
profit for continuing activities of GBP340m compared to a GBP3,899m loss last
year. It is the intention of the Company to pay dividends when the requirements
of the business permit, subject to the distributable reserves position and
restrictions under the restructuring arrangements. No dividend is expected in
respect of the two financial years ending March 2005 and March 2006, as the
Board believes that investing in the business is a prerequisite for a successful
turnaround.
Restructuring
Since I reported to you last on the principles of our Proposed Restructuring we
have reached formal agreement with our major creditors and the Government on the
Proposed Restructuring plan and in October we exchanged a Creditor Restructuring
Agreement and a Government Restructuring Agreement documenting these proposals.
The key features of these agreements are:
Certain creditors have agreed to extinguish their unsecured claims against the
Group in exchange for GBP275m of new bonds, and at least 97.5 per cent of the
issued ordinary shares of the restructured Group.
The Nuclear Liabilities Fund (NLF) will assume financial responsibility for
discharging certain of the Group's uncontracted nuclear liabilities and costs of
decommissioning the Group's nuclear power stations, and the Government will
assume financial responsibility for certain of the Group's contracted nuclear
liabilities and any shortfall in the NLF.
In consideration for this assumption of financial responsibility, the Group will
issue GBP275m in new bonds to the NLF and will also make further payments to the
NLF.
These payments to the NLF will include a proportion, initially (and not to
exceed) 65%, of the Group's adjusted cash flow, which the NLF will be entitled
to convert into a proportional equity shareholding in the Group.
The Eggborough Bank Syndicate have agreed to replace their existing secured
claims with a right to payments having a payment profile equivalent to GBP150m
of new bonds. In addition, they will have an option to acquire the Eggborough
station in 2010 upon payment of a GBP104m break fee and the extinguishing of
outstanding bond equivalent payments.
British Energy's existing shareholders will, if the Members' Scheme is
implemented, receive new ordinary shares equal to 2.5% of the share capital of
the Group immediately following implementation of the Proposed Restructuring as
well as warrants to subscribe GBP28.95m for shares representing a further 5.0%
of the Group's thereby diluted issued share capital immediately following
implementation of the proposed restructuring.
The standstill arrangements agreed on 14 February 2003 have been extended and
will continue while the Proposed Restructuring is being implemented (subject to
certain termination events not occurring).
The restructuring plan has yet to be agreed by the Commission. Due to the need
for the Company and the DTI to complete final assessments in relation to the
financing of the Group, it will not be possible for the Secretary of State to
present all the necessary information to the Commission to enable the Commission
to take a decision before its summer break. The DTI now expects the Commission
to take a decision this autumn. Thereafter we are required under our agreements
with creditors and the Government to complete the restructuring by 31 January
2005 at the latest.
A condition of the restructuring principles we agreed in November 2002 was the
disposal of our North American businesses. In February 2003, we sold our
interest in Bruce Power. In December 2003, following a competitive sale process,
British Energy sold its 50% interest in AmerGen to its joint venture partner,
Exelon. The proceeds of US$277m from the sale of our interest in AmerGen were
applied in repaying all sums owing under the Government Facility. The remaining
proceeds were used to fund ongoing collateral requirements. At the year end, the
Company had a cash and liquid funds balance of GBP573m of which GBP297m was
deposited in support of collateral requirements.
If the restructuring is implemented, the return, if any, to existing
shareholders will represent a very significant dilution of their existing
interests. However, the Board continues to believe that the Proposed
Restructuring is in the best interests of the Company, and is working hard to
ensure that all the necessary conditions are met. It must be recognised that the
restructuring remains subject to a large number of significant uncertainties and
important conditions and, that if, for any reason, the restructuring cannot
proceed, the Board may have to seek the protection of insolvency proceedings. In
this case the distribution to unsecured creditors may represent only a small
fraction of their unsecured liabilities and it is highly unlikely that there
will be any return to shareholders.
The Creditor Restructuring Agreement requires that, absent shareholder approval,
the agreed restructuring will be completed by delisting the Company's shares
from the Official List thus avoiding the requirement for shareholder approval
under the existing Listing Rules. The UKLA has published a consultation paper
proposing that a rule change should be made which would require shareholder
consent for delisting. Even if the Proposed Restructuring is not approved by
shareholders the Company does not believe that the timescale for this proposed
rule change will prevent implementation of the agreed restructuring.
The Proposed Restructuring is only part of the story; the sale of our interest
in AmerGen saw British Energy return to being solely a UK business, and much
work has been undertaken to restructure our generation and trading businesses,
including the planned relocation of our headquarters in Scotland and sale of the
current premises at Peel Park. In his review, Mike Alexander outlines the
significant steps taken over the year to put in place the foundations for
improved performance and reliability from our stations and to change the culture
in British Energy.
Industry Development
Over the past year, some commentators have voiced concerns over the availability
of sufficient generation capacity to meet demand. This brought the need for
investment in UK power generation into sharper focus. Much of the current debate
has centred on whether future dependency on gas should be balanced by renewables
or the replacement of existing nuclear generation. We regard a balanced
portfolio of energy sources and addressing long-term decisions on the need for
new power stations as fundamental to the future security of energy supply for
the United Kingdom. Increases in wholesale prices for electricity during the
year have started to improve the climate for investment in generation assets.
The forthcoming Emissions Trading Scheme and other environmental legislation
will aim to restrict the emission of greenhouse gases by generators. There is,
however, some way to go before the UK has a stable market creating sufficient
confidence for longer term investments. At the same time, progress needs to be
made on the Government's initiative through the Committee on Radioactive Waste
Management to develop a UK approach to nuclear waste disposal - this is
essential to the future of nuclear power.
Safety
Safety as always remains our first priority and we recognise its importance to
the continuing public confidence in our operations. Public confidence in our
operations is in turn dependent upon our safety record. Our performance in the
course of the year shows scope for further improvement, and we are working with
the World Association of Nuclear Operators (WANO) to apply best practice from
elsewhere in the world, especially the USA. We are appreciative of the support
we have received from WANO and the international nuclear community in the last
year. Our operational structure has already been revised to learn from this. As
well as the reliability of our operations, our Performance Improvement Programme
is intended to enhance both our safety performance and culture.
Board Changes
We have also strengthened the Board. The Non-Executive appointments in 2003 of
William Coley, Pascal Colombani and Sir Robert Walmsley have greatly enhanced
the Board's nuclear expertise while John Delucca, who joined us in February this
year, brings us experience of finance and restructuring which is immensely
valuable.
Having helped to secure creditor approval to the restructuring plan in October,
Keith Lough stepped down as Finance Director and Martin Gatto was appointed as
Interim Finance Director. Following the disposal of all our North American
interests, Duncan Hawthorne stepped down from the Board in March. I would like
to extend my thanks to both Keith and Duncan for their contributions to British
Energy.
As well as bringing relevant expertise to the direction of our business, our new
Board appointments considerably enhance the level of independent scrutiny of
management's activities and will assist British Energy to meet the more
stringent requirements expected under corporate governance developments. In the
course of the year we have increased the comprehensiveness and frequency of our
financial reporting.
I am also pleased to announce the appointment from 4 May 2004 of Neil O'Hara as
Trading Director, and from 5 July 2004 of Roy Anderson as Chief Nuclear Officer.
Finally, the Board is very grateful to all our staff for their dedication during
a difficult time. I would like to record my personal thanks for their continued
professionalism and commitment to generating safe, reliable electricity for the
UK.
Adrian Montague, CBE
Chairman
Review of Operating Performance and Financial Review
The challenge for British Energy is to improve efficiency and reliability in our
stations.
Overview
Total output for the year was 72.6 TWh. Of this, nuclear output for the year was
65.0 TWh, an improvement on the 63.8 TWh produced last year, but short of our
target of 67.0 TWh. Nuclear output was adversely affected by unplanned outages,
particularly to both reactors at Heysham 1, described further below. Unplanned
outages forced the Group into the market to buy back replacement power at a time
of higher prices, costing an additional GBP24m. The output from Eggborough, the
Group's coal-fired power station was increased by 1.9 TWh to 7.6 TWh.
The key results were the UK operating profit of GBP57m before exceptional
operating credits of GBP283m giving a total Group operating profit for
continuing activities of GBP340m compared to a GBP3,899m loss last year, and the
Group profit before tax of GBP232m, which included exceptional credits of
GBP403m. The Group profit before tax included a contribution of GBP21m from
AmerGen prior to its disposal on 22 December 2003. After incurring a UK
operating loss of GBP9m before exceptional costs of GBP24m in the first half of
the year, the Group made a UK operating profit of GBP66m in the second half
before operating exceptional credits of GBP307m. This resulted mainly from a
higher realised price, largely reflecting seasonal factors, even though second
half output was affected adversely by a series of unplanned outages. The
realised price for the year was GBP16.9/MWh, down from GBP18.3/MWh in the prior
year. However, at the same time our total operating costs were GBP16.5/MWh, down
from GBP18.6/MWh in the prior year, mainly as a result of higher output.
The financial statements for the period have been drawn up on the basis of the
historic BNFL contracts in respect of back end fuel costs, pending satisfaction
of the restructuring conditions set out in the revised contracts. The
consequence of this is that the result for the year does not reflect the profit
and loss account savings that will arise under the revised BNFL back end fuel
contracts, which amounted to GBP58m in the year excluding the impact of
revalorisation. The saving will be recognised on the completion of the
restructuring, together with other restructuring adjustments.
During the year the Group's interest in AmerGen was sold for US$277m, subject to
adjustment, allowing the Government Facility to be fully repaid. Part of the
adjustment mechanism relates to the value of nuclear fuel. As a result of an
accounting adjustment made by Exelon to the value of nuclear fuel contained in
AmerGen's balance sheet dated 21 December 2003, British Energy may be required
to make a payment to Exelon of up to US$13.7m which is the subject of a formal
dispute procedure. Further details can be found under Discontinued Activities.
There was a year end cash and liquid funds balance of GBP573m of which GBP297m
had been deposited in support of collateral requirements. Net debt reduced by
GBP240m to GBP310m.
Following the disposal of its interest in Bruce Power in February 2003, the
Company received C$20m on 28 April 2003 which had been retained in an escrow
account at completion of the disposal of the Group's interest in Bruce Power in
respect of a possible price adjustment relating to pensions. This followed
confirmation that no such adjustment was required. We also received payment of
C$20m as a result of the restart of one unit at Bruce A (Unit 4 returned to
service during the third quarter of the year). Subsequently Unit 3 returned to
service in the fourth quarter. A further payment of C$10m was received on 25 May
2004. In February 2004, we received a notice of warranty claims from the
consortium which purchased our interest in the Bruce Power Station relating to
the alleged condition of certain plant at the power station and to the treatment
of expenditure at the Bruce plant during the period of the Group's ownership
which is currently being considered by the Canadian tax authorities. The Company
expects to defend the claim if it is pursued further.
In February 2004 we announced the settlement of a long-standing dispute with
Siemens Power Generation Limited (Siemens) whereby Siemens agreed to pay the
Company GBP18.3m, which was received in March. Further details are contained in
note 4 to the financial statements.
The challenge for British Energy is to complete the Proposed Restructuring and
focus on improving efficiency and reliability in our stations in order that we
may compete in the very competitive UK electricity market. Clearly there is much
to be done to ensure that British Energy achieves world class standards of
reliability. The Company has already embarked on a number of programmes which
are intended to tackle the causes of under-performance and reduce losses from
unplanned outages to competitive levels, improve our trading performance and
reduce our overheads. In doing so, we are seeking to harness the skills and
experience of leading operators in various fields. A major part of the drive is
the Performance Improvement Programme which is central to the operational plans
designed to enhance the prospects of the Group.
A key appointment as part of our operational plans is that of Roy Anderson as
Chief Nuclear Officer, responsible for the operation of our eight nuclear power
stations. He joins us from PSEG Nuclear in the US where he was President. Mr
Anderson was also previously Chief Nuclear Officer of Nuclear Management Company
and prior to that of Florida Power Corporation. Mr Anderson has significant
experience of nuclear turnarounds and his experience will be valuable as the
Company progresses the Performance Improvement Programme and restructuring.
David Gilchrist, currently Managing Director, British Energy Generation, will
take on the new Group wide position of Technical Director, which will strengthen
the technical and operational involvement in key regulatory and commercial
support areas across British Energy.
The Group has continued to seek to reduce its exposure to volatility in market
prices through a trading strategy which utilises diverse sales channels whilst
minimising the amount of trading collateral required. Our direct sales business
has continued to show strong growth, increasing volumes supplied during the year
by almost 30%, to 29.1 TWh.
During the course of the year, the Company also continued to streamline overhead
costs in various areas, for example the decision to sell its existing
headquarters at Peel Park, East Kilbride and relocate to Livingston near
Edinburgh. The company also announced in July 2003 that the nuclear power
station support functions, currently split between Peel Park and Barnwood in
Gloucester would be brought together to create a centre of excellence. As a
result, around 150 operational jobs will be relocated to Barnwood, whilst the
electrical and civil engineering support groups and some business support
functions will remain in Scotland.
Business Review
British Energy has a total of eight nuclear power stations. Seven are Advanced
Gas-cooled Reactor (AGR) power stations; Dungeness B; Hartlepool; Heysham 1;
Heysham 2; Hunterston B; Hinkley Point B and Torness. The eighth station,
Sizewell B, is the UK's sole Pressurised Water Reactor (PWR). The results for
Eggborough, our coal-fired power station in Yorkshire, are discussed in the
Power and Energy Trading section below.
Performance Improvement Programme
During the year, British Energy started its drive to focus on four fundamentals
- human performance, equipment reliability, management of work and operational
focus. In order to address these and as part of its efforts to reduce the level
of unplanned generation losses to competitive levels, the Company announced the
launch of its Performance Improvement Programme. The human performance element
is a drive to implement and reinforce a standard set of error reduction tools
used widely in the nuclear industry. The focus on equipment reliability aims to
identify and rectify the root causes of equipment problems and therefore improve
our performance. Management of work is concentrated on getting the best out of
our investment in our work management tools and processes and finally,
operational focus is about getting the whole British Energy organisation aligned
to support our power stations in delivering a safe and reliable output.
To support the implementation of these programmes the Company has engaged a
consortium of experienced consultants in conjunction with significant support
from WANO. Through WANO, the Company's Performance Improvement Programme and
power station management teams have been supplemented with additional
experienced nuclear professionals.
British Energy's focus over the coming twelve months is to continue to improve
infrastructure, including significantly improving training arrangements and
focusing on the human performance aspect of our business. Already changes have
been made to the power station organisation. In addition, a number of
operationally experienced people have been appointed to senior positions in the
Group's central support functions. A review of the condition of our generation
assets is underway, and once the Company has the correct structures and
operational processes in place, further emphasis will be put on improving the
Materiel Condition of plant.
I am grateful to our staff, creditors, customers and shareholders for their
support and understanding during the implementation of the restructuring and the
other changes being undertaken by the Company to improve its performance. I
recognise that this has been a very testing period for all concerned with the
Company. However, I am convinced that full implementation of the restructuring
and Performance Improvement Programme will allow the Company to play a key role
in the UK's electricity generating mix.
Update on Unit Costs and Collateral
Over the past few months, the Company has been evaluating its business plan for
the three years ending 31 March 2007. As a result British Energy's expected cost
base post restructuring and anticipated collateral levels have been revised.
In relation to the current financial year ending 31 March 2005, British Energy
expects that the investment in major plant projects, repairs and strategic
spares across the whole Group, including incremental costs associated with the
Performance Improvement Programme of approximately GBP25m, will be around
GBP175m. Whether or not any of this expenditure will be capitalised or expensed
depends on the future carrying value of fixed assets as a result of impairment
and fair value reviews and whether the expenditure will enhance the value of the
assets. The Performance Improvement Programme costs above include an increase in
revenue expenditure relating to staff and support costs which will be expensed
in any event.
The detailed budgets for each of the latter two years of the business plan will
not be finalised until shortly prior to the commencement of the relevant
financial year. The incremental expenditure of the Performance Improvement
Programme will depend on the financial resources and prospects of the Group at
the relevant time. Based on its current expectations of future electricity
prices and output, and therefore financial resources, the Company believes that
annual investment in major plant projects, repairs and strategic spares across
the whole Group which includes incremental Performance Improvement Programme
annual expenditure of GBP85m to GBP120m will be in the range GBP220m to GBP255m
in the two years ending 31 March 2006 and 2007. This compares with the range of
capital expenditure of GBP85m to GBP90m stated in the 1 October 2003
announcement which did not include any Performance Improvement Programme
expenditure, nor the costs of repairs and strategic spares.
The Company anticipates that there may be a need to increase the level of its
future annual contributions to the pension fund depending on the performance of
financial markets, from a previously estimated GBP35m to approximately GBP65m
per annum for the three years commencing 1 April 2005.
The Company has therefore revised its projected nuclear unit cash operating
costs for the three financial years ending 31 March 2007. These costs include
maintenance, expenditures on plant and equipment and corporate overheads but
exclude the impact of the NLF cash sweep. It excludes movements in working
capital and all costs relating to Eggborough. An illustration of the projected
nuclear unit operating costs is shown below. This assumes an average nuclear
output level for the three years commencing 1 April 2004 of 66.2TWh.
Assuming an average nuclear output level for the three years commencing 1 April
2004 of 67.0 TWh, the average nuclear unit cash costs are expected to be as
follows:
As announced in October 2003 Updated in June 2004
Base reference price Average nuclear cost Average nuclear cost Average reference Average nuclear
(1) (2) per MWh per MWh (3) per MWh increased by price per MWh cost per MWh (4)
inflation (5) increased by (5)
inflation (4)(5)
(GBP) (GBP) (GBP) (GBP) (GBP)
14.0 13.8 14.1 15.1 15.5
15.0 13.9 14.2 16.2 15.6
16.0 14.5 14.9 17.3 16.2
17.0 15.0 15.4 18.4 16.7
18.0 15.5 15.9 19.4 17.2
19.0 15.9 16.3 20.5 17.6
20.0 16.2 16.6 21.6 17.9
21.0 16.4 16.8 22.7 18.1
22.0 16.4 16.8 23.8 18.1
Note 1 : Reference price is the wholesale price of electricity upon which the
price of nuclear fuel from BNFL is based.
Note 2 : Stated in 2002/03 money values
Note 3 : Average over the period 2003/04 to 2005/06.
Note 4 : Average over the period 2004/05 to 2006/07.
Note 5 : Inflation assumed at 2.5% pa.
The average nuclear costs per MWh as updated in June 2004 represents an increase
of approximately GBP1.3/MWh, after eliminating the impact of inflation, in the
Company's nuclear cash cost per MWh compared with the range stated in the 1
October 2003 announcement. This is attributable almost entirely to increased
investment in the plant and the costs of the Performance Improvement Programme.
It should be noted that, as British Energy's costs are primarily fixed, at
different output levels these units costs would be different. In addition, under
the terms of the revised arrangements with BNFL the reference price is based on
2002/03 prices and indexed to the RPI and therefore need to be escalated to take
account of actual inflation. There is no change in nuclear cash cost above a
baseload electricity price of GBP21.0/MWh (2002/03 prices).
In the announcement of 1 October 2003, British Energy provided its view of the
level of collateral that it expects would be required to support its trading
activities. The Company has updated its view of the expected range of future
collateral reflecting the higher level and volatility of electricity prices,
taking account also of increased sales through routes to market that generally
have lower collateral requirements.
The Company now expects that the collateral required to support the trading
activities will be in a range of GBP270m to GBP320m based on the current sales
mix and no further undue volatility in the forward curve for electricity prices.
Collateral amounts in this range would result in an increase in the target
amount for cash reserves under the contribution agreement with the Government
(see note 1 to the financial statements).
Nuclear Generation
Nuclear output for the year was 65.0 TWh (a load factor of 77%). This compared
to a target of 67.0 TWh and the 63.8 TWh (a load factor of 76%) achieved in the
prior year. The shortfall in the year compared to the target arose as a result
of the significant impact of unplanned outages, in particular at Heysham 1. The
outages of both reactors at Heysham 1 were due to a cast iron pipework failure
in the seawater cooling system within the turbine hall. Following repairs, both
units returned to service before the financial year end. The resultant loss of
output was some 3.2 TWh, equivalent to some GBP71m of lost profit contribution
inclusive of imbalance costs and associated fuel savings.
Following the unplanned outages at Heysham 1, the Company reviewed the
implications for further cast iron pipework replacement at its other stations,
and on 19 March 2004 announced that its indicative target for nuclear output for
2004/05 was 64.5 TWh. This indicative target takes into account an estimated
loss of 2.5 TWh resulting from the Company's estimates of the work required to
carry out cast iron pipework replacement at other stations in 2004/05. Some of
this work may be moved to 2005/06 as the Company seeks to utilise planned
outages to maximum effect.
Last year we carried out 5.5 statutory outages (with the half representing an
overlap between two financial years), representing a total loss of output of
4.9TWh. A further loss of potential output of 3.0TWh was attributable to
refuelling. In addition to the loss of 3.2TWh output resulting from the
unplanned outage at Heysham 1, there were further losses of potential generation
from unplanned outages of 7.5TWh. Of these, 4.8TWh was due to outages of 14
days or less.
Improvements in the performance of Dungeness B have continued. The station
marked 21 years of supply to the National Grid by generating output of 6.7 TWh,
a record for Dungeness B. The station also gained Nuclear Installations
Inspectorate approval to adopt three year intervals, rather than two year,
between statutory outages, bringing it in line with the rest of the British
Energy AGR fleet.
The year's best performing station (by load factor) was Heysham 2 with a total
output of 9.81 TWh (a load factor of 89%), exceeding the prior year by some 0.5
TWh. This was achieved despite having to replace part of a low pressure turbine
at the start of the year.
Safety
The Company seeks to operate to world-class safety standards. However, during
the year the Company's performance against certain key safety indicators
deteriorated. These are discussed below. This is being addressed as part of the
human performance aspect of the Performance Improvement Program. One of the
reasons for the review of the Company's organisational structure, and the key
appointments being made as part of the Performance Improvement Program is to
implement the required changes to improve safety. The new organisational
structure is designed to promote clarity of accountability for every aspect of
the Company's safety performance. British Energy works closely with WANO,
benefiting from the sharing of best practice and the secondment of personnel.
Nuclear Safety
The International Nuclear Event Scale (INES) is the standard scale measuring the
significance of nuclear safety events. In 2003/04 one event occurred, the
degradation of a feed pump system with no release of radioactivity either on or
off site, which was registered at level two on the seven point INES scale - at
Dungeness B on 11 July 2003. Level two is used to describe an incident with
significant failure in safety provisions but with sufficient defence in depth
remaining to cope with additional failures. There is no off-site impact
associated with such an event. All other events were at or below level one
(minor operating anomalies with no impact on staff or the general public). In
2003/04, the number of reportable minor events was 77, representing a
disappointing increase on the 65 reportable minor events recorded in the prior
year.
Radiological Safety
The collective radiation dose to workers at our UK stations was 0.09 manSv/
reactor in 2003/04. This was a decrease from the collective dose of 0.12 manSv/
reactor in the prior year. This represents approximately one-tenth of the
worldwide median of the operators contributing to WANO and places British Energy
in the top 10% of performers in this respect.
Industrial Safety
The Company encourages an open culture which promotes the reporting of all
accidents, including those where no actual injury resulted. Over the last twelve
months our accident frequency rate was 0.53 lost-time accidents per 200,000
man-hours of operation, an increase from 0.46 in the prior year.
Looking at the performance of our conventional plant, it was with deep regret
that British Energy reported an accident at Eggborough power station last July,
where one of our contractors lost his life. A full panel of inquiry was held to
examine the circumstances and determine the cause of the accident. Its
conclusion is pending.
Power and Energy Trading
Market Overview
At the end of March 2003, the forward price for baseload power for 2003/04
delivery was GBP17.0/MWh. Both spot and forward prices increased during the
year, driven primarily by increases in fossil-fuel prices and tightening of
capacity margins. International coal prices rose sharply during the year to
unprecedented levels, and UK gas prices, which are partly linked to oil prices,
also increased. The Group was protected against the rise in coal prices due to
fixed price contracts that ended during the year. At the end of March 2004, the
forward price for baseload power for 2004/05 delivery was GBP22.2/MWh, an
increase of 30% compared with prices prevailing in March 2003 for 2003/04
delivery.
Short-term power prices were exceptionally volatile during July and August 2003,
when an unusually large number of generating units were shut down for annual
maintenance and high demand in France meant that power was exported via the
England-France interconnector. During the summer period the operator of the
National Grid was forecasting a tight margin of supply over demand for the
winter peak demand periods, and called for mothballed plants to be returned to
service. Market prices rose in response to this and a number of oil-fired and
gas-fired units were subsequently returned to service to meet forecast demand,
thereby stabilising prices.
The forward market for electricity to be delivered in 2005 and beyond reflects
in part the impact of the European Union's Emissions Trading Scheme (ETS), which
is scheduled to start on 1 January 2005. Under the scheme, all large
fossil-fired generators will be required to submit allowances to cover their
emissions of carbon dioxide. The initial allowances will be allocated by the
Government according to a National Allocation Plan, which must be approved by
the European Commission. The Government has indicated that the scheme could
increase wholesale electricity prices in the UK by some 10%. As the owner of a
coal-fired power station, British Energy is seeking an equitable allocation of
allowances and preparing to be an active participant in the carbon dioxide
emissions market.
The Government announced an Energy Bill in November 2003, which includes
provisions (amongst others) for extending the electricity trading arrangements
operating in England and Wales to all of Great Britain. The Bill is expected to
become law in summer 2004, and will enable the proposed British Electricity
Transmission and Trading Arrangements (BETTA) to be implemented in April 2005.
These new arrangements will create a much larger market for British Energy's
Scottish generation once the Nuclear Energy Agreement (NEA), under which all of
the Group's Scottish generation is currently sold to Scottish Power and Scottish
and Southern Energy, ends in April 2006 or following the introduction of BETTA,
whichever is earlier. However, the ending of the NEA will mean a loss of the
guaranteed market for the output of our Scottish stations and other routes to
market are being developed.
Trading Strategy
During the year the overriding concern of British Energy was to reduce the
Group's exposure to potential falls in the market price of electricity.
Therefore a prudent trading strategy was adopted to sell forward a high
proportion of our output. 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 diverse routes to market whilst minimising the amount of trading
collateral required. The routes to market include direct sales to industrial and
commercial customers, contracting in the wholesale market, and long-term
contracts (such as the NEA), together with sales of balancing and ancillary
services to National Grid. There are contracts in place for substantially all
planned production in 2004/05. A large majority of these are fixed price
contracts. As of the beginning of June the average price of the fixed price
contracts for 2004/05 was GBP19.5/MWh.
The requirement to provide trading collateral arose when the Group lost its
investment grade rating in September 2002. This loss of investment grade rating
means 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 liquid 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 being payable as well as having an adverse effect on cash
flows. British Energy intends to seek a new credit rating upon the issue of new
bonds as part of the Proposed Restructuring of the Group.
It is inevitable that, in a period of rising prices such as has been seen in
2003/04, hedging forward against falls in price results in a realised price
which is less than the market out-turn. However, a proportion of that output is
contracted at variable prices and can benefit from the recent rise in forward
prices.
Trading Development Programme
During the year we have undertaken a comprehensive review of our trading
capabilities and embarked upon a development programme to improve and extend
existing skills and asset utilisation. This involves recruiting to strengthen
the analysis, risk management and back office functions and reviewing trading
procedures and performance incentives. A new Trading Director, Neil O'Hara, has
also been appointed. Neil O'Hara has over ten years trading and risk management
experience in the energy sectors, including the power, coal and gas sectors.
Neil brings experience from working at AEP, Centrica and RWE. In addition we
will be upgrading the IT systems used within trading. These changes will enable
better risk management and control and should enable us to increase the value of
our trading activities. This trading development programme should be largely
complete by April 2005.
Business Performance
The direct sales business (DSB) has once again shown strong growth, with the
volume supplied during the year reaching 29.1 TWh, an increase of some 30% on
2002/03. The volume of power sold directly to customers through the DSB is now
equivalent to approximately 40% of total output. This growth has been achieved
through increasing the range of customers served, with a particular focus on
multi-site groups. At the same time, the DSB has retained its number one overall
ranking in the customer satisfaction survey of industrial and commercial
customers carried out by the Energy Information Centre for the 20th successive
quarter.
British Energy's realised price (which is calculated by dividing total UK
turnover, net of energy supply costs and miscellaneous and exceptional income,
by total output during the period) for 2003/04 was GBP16.9/MWh, a decrease of 8%
compared with GBP18.3/MWh in 2002/03. The Company benefited from higher prices
for variable priced contracts as the year progressed, but this was offset by a
number of unplanned outages and earlier fixed price contracts at lower prices.
Market purchases at higher prices were required to cover lost generation from
the unplanned outages. Fixed price contracts provided protection against falls
in market price, although certain of these were agreed at lower prevailing
market prices to meet the requirements of the Proposed Restructuring.
Eggborough
Output from the 2000 MW coal-fired power station at Eggborough was 7.6 TWh
during the year compared with 5.7 TWh for the prior year. As Eggborough is
operated primarily as a flexible mid-merit plant, 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. In the draft National
Allocation Plan published by the Government an indicative allocation of 4.9
million tonnes of carbon dioxide emissions allowances under the ETS for each of
the calendar years 2005, 2006 and 2007 has been made for Eggborough (equivalent
to output of approximately 5.4 TWh). However the allocation will not be
finalised until autumn 2004. Additional allowances will need to be acquired if
Eggborough is to maintain its output at 2003/04 levels.
Eggborough's future output will also be affected by the impact of the Large
Combustion Plant Directive (LCPD), which is intended to limit the emissions of
sulphur and nitrogen from fossil-fuel power stations. Good progress has been
made with the project to fit flue gas desulphurisation (FGD) equipment to two of
the four units at Eggborough. Since the year end, the first flue gases from one
unit have been processed by the FGD equipment as part of the active
commissioning of the plant. The work is scheduled to be completed within budget
during the current year.
The Government has been in discussion with the electricity industry in recent
months concerning the implementation of the LCPD. Discussion has focused on
whether to limit future emission rates for fossil-fuel plants or to limit total
emissions based on historic generation (through a National Emission Reduction
Plan); and on whether a plant will be treated as being a whole power station, or
an individual generating unit for the purpose of the LCPD - in which case
Eggborough's four units would be treated as separate plants. Station owners will
have the option to "opt-out" of the LCPD in which case they will be permitted to
run plants for a total of 20,000 hours between 1 January 2008 and 31 January
2015. Clearly the details of the implementation of the LCPD may affect the level
of generation from Eggborough and other fossil-fuel plants in the future.
Discontinued Activities
The disposal of the investment in Bruce Power was completed on 14 February 2003.
In the prior year a loss on disposal of GBP35m was recognised by the Group and
the results of Bruce Power were classified as discontinued activities.
C$20m was retained in an escrow account at completion of the disposal of the
Group's interest in Bruce Power in relation to a possible price adjustment
relating to pensions. On 28 April 2003 the Company announced that this sum had
been released following confirmation that no adjustment was required and was
accounted for in the prior year results.
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 (the
consortium) alleging breach of certain warranties and representations relating
to tax and to the condition of certain plant at the Bruce power station.
Further details can be found below.
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 22 March 2004 the
Company received the sum of C$20m in respect of the restart of Unit 4, and on 25
May 2004 received the further sum of C$10m in respect of the restart of Unit 3
(which has not been accounted for in the results for the year ended 31 March
2004). 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.
Following the completion of the sale of the Group's 50% interest in AmerGen to
Exelon, the Group received consideration of US$277m upon financial close on 22
December 2003 prior to adjustments relating to working capital levels, stocks of
unspent nuclear fuel, inventory, capital expenditures and low level waste
disposal costs to be determined as at the time of closing. Finalisation of these
adjustments is outstanding.
As a result of an accounting adjustment made by Exelon to the value of nuclear
fuel contained in AmerGen's balance sheet dated 21 December 2003 British Energy
may be required to make a payment to Exelon of up to US$13.7m. This amount has
not been provided for in the financial statements. British Energy served a
Dispute Notice on Exelon on 4 June 2004 to preserve its rights. 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.
In December 2003 the Company announced the sale of the Group's 50% interest in
Offshore Wind Power Limited to GB Gas Holdings Limited for an up-front cash
consideration of approximately GBP2m, with deferred consideration of up to
GBP0.7m.
The combined gain on sales of the joint ventures and other businesses was
GBP47m, of which the largest element was the profit on disposal of the Group's
interest in AmerGen of GBP37m.
Financial Review
Group Results
In the following discussion the "period" or "year" refers to the year ended 31
March 2004 and the "prior period" or "prior year" refers to the year ended 31
March 2003. The "current year" refers to the year that will end on 31 March
2005.
The operating result after exceptional operating credits of GBP283m was an
operating profit of GBP340m for the period compared with an operating loss of
GBP3,802m for the prior year, after exceptional operating charges of GBP3,947m.
Exceptional items for the period include a non-cash accounting adjustment for
the partial reversal of GBP295m of the write-down of fixed assets in the prior
year following a further review of fixed assets carrying values.
The profit before taxation was GBP232m for the period and a loss before taxation
of GBP4,292m for the prior year.
AmerGen was sold and a provisional gain on sale was recorded at GBP37m. The sale
of AmerGen contributed to the reduction in net debt which decreased in the year
by GBP240m to GBP310m.
The discussion below will focus primarily on the results of continuing
activities for the year compared to the prior year, both before exceptional
items.
Turnover
Group turnover from continuing activities comprised generation sales, direct
supply sales and miscellaneous income. Turnover for the period was GBP1,516m, a
decrease of GBP12m on the prior year, as detailed below:
Increased/(Decreased) Turnover: GBPm
- owing to increased output 57
- owing to lower electricity prices realised (103)
- owing to increased energy supply costs recharged to 76
customers
Decrease in miscellaneous sales (1)
Decrease in exceptional turnover (41)
(12)
Output increased by a total of 3.1 TWh compared to the prior year, and comprised
output increases of 1.2 TWh from nuclear operations and 1.9 TWh from Eggborough.
Nuclear output was however affected by a number of unplanned outages and in
particular the major outage at Heysham 1 where 3.2 TWh was lost due to cast iron
pipework failure, equivalent to some GBP71m of lost profit contribution
inclusive of imbalance costs and associated fuel savings. Output at Eggborough
was higher than the prior year as it was operated primarily to take advantage of
higher market prices and to provide cover for unplanned outages at nuclear
plants.
The realised price (which is calculated by dividing UK turnover, net of energy
supply costs and miscellaneous and exceptional income, by total output) for the
period was GBP16.9/MWh compared with GBP18.3/MWh in the prior year. A discussion
on the movement of prices and the Company's strategy on trading is contained in
the Power and Energy Trading section above.
Turnover from discontinued activities in the prior year was GBP375m and
represented sales by Bruce Power prior to its disposal on 14 February 2003.
Operating Costs
The operating costs of continuing activities excluding exceptional items were
GBP1,459m in the period, compared to GBP1,480m in the prior year, a reduction of
GBP21m.
Total operating unit costs excluding revalorisation (which is calculated by
dividing the total UK operating cost, net of the exceptional items and energy
supply costs, by total output), was GBP16.5/MWh compared to GBP18.6/MWh,
primarily as a result of higher output.
The component elements of the operating costs are discussed below.
Continuing activities excluding Year ended 31 March Year ended 31 March
exceptional items: 2004 GBPm 2003 GBPm
Fuel 413 371
Materials and services 512 425
Staff costs 224 227
Depreciation charges 50 273
Energy supply costs 260 184
1,459 1,480
Continuing activities - exceptional
items:
Materials and services 25 94
Depreciation (credits)/charges due (295) 3,738
to impairment review
Amounts (credited)/charged to (13) 115
non-operational assets
(283) 3,947
Continuing activities - total
costs:
Fuel 413 371
Materials and services 537 519
Staff costs 224 227
Depreciation (credits)/charges (245) 4,011
Energy supply costs 260 184
Amounts (credited)/charged to (13) 115
non-operational assets
Total operating costs 1,176 5,427
Fuel costs in total amounted to GBP413m for the period compared with GBP371m.
Nuclear fuel costs were GBP318m compared with GBP298m and coal costs were GBP95m
compared with GBP73m.
The GBP22m increase in coal costs relates primarily to the increase in output
from Eggborough over the period.
The costs of nuclear fuel increased by GBP20m in total, of which GBP7m was
attributable to increased output, offset by savings and efficiencies of GBP1m.
The main increase, however, was due to a non-recurring credit in the prior year
costs of GBP14m following a one-off review of contract cost schedules with BNFL.
On 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 front end contracts became effective
on 1 April 2003 but 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 period have been prepared on the basis of the
historic BNFL contracts in respect of back end fuel costs, pending satisfaction
of the restructuring 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 result for the year does not reflect the
profit and loss account savings that will arise under the revised BNFL back end
contracts, which amounted to GBP58m in the year. The total saving under the
revised contracts will be recognised on the completion of the restructuring,
together with other restructuring adjustments. The benefit has been calculated
using an average electricity price, as defined in the revised BNFL back end
contracts, of GBP17.6/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 which 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 totalled GBP306m
at 31 March 2004, an increase of GBP193m from GBP113m at 31 March 2003.
This is also set out in note 31 to the financial statements.
Amounts in current liabilities due to BNFL but not expected to be paid by the
Group provided the Proposed Restructuring is completed
GBPm GBPm
Opening balance at 1 April 2003 113
Amounts payable to BNFL under the 249
historic back end contracts for the
period
Less: Amounts paid/payable for the
period under the revised BNFL back
end contracts, analysed as follows;
- Amounts settled (59)
- Amounts included in accruals at (11)
year end
Cash flow benefit arising within 179
the year
Finance charges accrued on amounts 14
stoodstill
Closing balance at 31 March 2004 306
(see note 31 to the financial
statements)
The 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. The ultimate benefit recognised will depend
on a number of factors including the date of restructuring, the market price of
electricity between 1 April 2004 and the date of restructuring as defined in the
contract and the amount of fuel.
Materials and services costs comprise the operating expenses of the power
stations and support functions excluding fuel costs, staff costs and
depreciation. The costs during the year were GBP512m compared with GBP425m, an
increase of GBP87m. The increase is largely explained by capital investment
expenditure of GBP92m that was expensed as operating costs in the period. This
arises because it was not possible to demonstrate that this expenditure enhanced
the value of the Company's fixed assets after taking account of the impairment
review. The Group has reviewed the capital investment expenditure of GBP92m
incurred, primarily on the power stations, and concluded that of this, an amount
estimated at GBP70m may have been capitalised in the absence of the impairment
review. The balance of capital investment expenditure of GBP22m has been
classified as refurbishment cost within materials and services.
Staff costs decreased by GBP3m from GBP227m to GBP224m mainly due to reduced
severance costs of GBP11m partly offset by salary inflation and increased
headcount.
Depreciation charges were GBP50m for the period compared to GBP273m. The charges
for depreciation in the period were significantly affected by the fixed assets
write-down of GBP3,738m at 31 March 2003 (see note 12 of the financial
statements).
Energy supply costs mainly comprise the costs incurred for the use of the
distribution and transmission systems and are fully recovered through turnover.
This year energy supply costs also include costs of GBP36m related to the
purchase of Renewable Obligation Certificates (ROCs) which are also recovered
through turnover. The Group is required to purchase ROCs as part of the
regulations governing climate change. Total energy supply costs in the period
were GBP260m compared with GBP184m in the prior year, an increase of GBP76m.
This increase reflects the inclusion of ROC costs and growth in the Direct Sales
Business since 31 March 2003 as discussed above.
Operating costs from discontinued activities in the prior year were GBP278m and
represented the costs of Bruce Power prior to its disposal on 14 February 2003.
The exceptional operating items are analysed below.
Operating Profit/(Loss)
As shown below, Group operating profit before exceptional items for continuing
activities increased by GBP50m to GBP57m for the period.
Year ended 31 March 2004 Year ended 31 March 2003 Variance
GBPm GBPm GBPm
Operating profit before 57 7 50
exceptional items
- continuing activities
Exceptional items 283 (3,906) 4,189
Total operating profit/ 340 (3,899) 4,239
(loss) - continuing
activities
Operating profit - - 97 (97)
discontinued activities
Group operating profit/ 340 (3,802) 4,142
(loss)
The increase in operating profit before exceptional items for continuing
activities of GBP50m over the prior year is explained as follows:
GBPm
Increased/(decreased) operating profit due to:
Output increases - turnover impact 57
Output increases - operating cost impact (31)
Price movements (103)
Capital investment expenditure expensed (92)
Depreciation reduction 223
Other (4)
Increase 50
Share of Operating Profit of Discontinued Joint Venture
The Group's 50% share in AmerGen was sold to Exelon on 22 December 2003. The
Group's share of the operating profit of AmerGen prior to the date of disposal
was GBP21m. The Group's share of operating profit for the prior period was
GBP43m. This reduction of GBP22m was due primarily to an extended outage at
Three Mile Island and the contribution of only a part year result within the
period.
Financing Charges, Net Interest and Revalorisation
The total financing charges were GBP176m made up of revalorisation and net
interest of GBP249m, exceptional financing credits of GBP5m and an exceptional
revalorisation credit of GBP68m. This compares with prior year financing charges
of GBP498m made up of revalorisation and net interest of GBP277m, exceptional
financing charges of GBP62m and an exceptional revalorisation charge of GBP159m.
The total financing charges are analysed below:
Year ended 31 March 2004 Year ended 31 March 2003
GBPm GBPm
Revalorisation of nuclear 215 228
liabilities
Revalorisation of decommissioning (28) (29)
fund
Revalorisation of other provisions - 10
Share of revalorisation of joint (2) (4)
venture
Total revalorisation 185 205
Net interest expense 64 72
Financing charges before 249 277
exceptional items
Exceptional interest (credit)/ (5) 62
charge
Exceptional revalorisation (credit) (68) 159
/charge
Total financing charges 176 498
Revalorisation arises because nuclear liabilities are stated in the balance
sheet at current price levels, discounted at 3% per annum 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 a year's 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 3.5% per annum real.
The net revalorisation charge excluding exceptional items was GBP185m, a
decrease of GBP20m from the prior year principally due to a reduction in
inflation and discontinuation of revalorisation of onerous contract provisions.
The weighted average of RPI and RPIX used to revalorise the Group's nuclear
liabilities was 2.4% compared with 3.0% for the prior year.
The net interest expense charge of GBP64m for the period was GBP8m lower than
the charge for the prior year. The reduction arises from a lower charge in
respect of interest rate swaps and increased interest earned on deposits, partly
offset by a full year charge for standstill interest in the period.
In the prior year there were exceptional interest charges of GBP62m resulting
from the provision for the out of the money element of interest rate swaps which
were no longer considered to be effective as hedges and the write-off of
borrowing costs. The borrowing costs had been previously capitalised and were
being amortised over the expected duration of loan financing in respect of the
acquisition of the Eggborough power station. In the current year there were
exceptional interest credits of GBP5m reflecting a partial reversal of the
provision for interest rate swaps.
The exceptional revalorisation credit of GBP68m in the period results from the
increase in the market value of the UK decommissioning fund and the AmerGen
decommissioning fund. This partially reverses the exceptional charge of GBP159m
in the prior year required as a result of decreases in the values of the funds.
Exceptional Items
The financial results of both years were affected by a number of exceptional
items. The table below summarises the impact of exceptional items before tax.
Year ended 31 March 2004 Year ended 31 March 2003
GBPm GBPm
(Reversal of write-down)/write-down (295) 3,738
of fixed asset carrying values
UK decommissioning fund (credit)/ (13) 13
charge
Write-down of own shares held - 102
Provision for slow moving stocks - 57
Restructuring costs 43 35
Onerous trading contracts - 2
Settlement of claim (18) -
Nuclear Energy Agreement - (41)
Exceptional items included within (283) 3,906
operating results
UK/AmerGen decommissioning fund (68) 159
(credit)/charge
(Credit)/charge for interest rate (5) 56
swap provision
Write-off of capitalised borrowing - 6
costs
Exceptional items included within (73) 221
financing costs
(356) 4,127
Exceptional (gain)/loss on sale of (47) 35
joint venture and businesses
Total net exceptional (credits)/ (403) 4,162
charges
Exceptional items are discussed more fully in notes 4, 5 and 8 to the financial
statements.
Profit/(Loss) Before Tax
The profit before taxation was GBP232m compared with a loss before tax of
GBP4,292m in the prior year. The main reason for the movement of GBP4,524m is
the large exceptional costs in the prior year, some of which were partially
reversed in the period.
Taxation
There was a GBP2m taxation credit on ordinary activities for the period relating
to the release of an over provision of foreign tax in earlier years. The share
of taxation for the discontinued joint venture was nil, comprising a tax charge
on trading results to the date of the AmerGen disposal of GBP9m, offset by
credits for overprovisions of GBP9m in earlier years.
In the prior year there was a net tax credit of GBP368m, comprising tax charges
of GBP18m on North American activities, GBP10m share of taxation for joint
ventures and a GBP396m credit for release of UK deferred tax provisions. The
deferred tax credit in the prior year arose as a result of the large exceptional
charges.
The deferred tax assets of GBP297m and GBP150m at 31 March 2004 and at 31 March
2003 were not recognised because there is insufficient certainty of recovery
within the foreseeable future.
Earnings per Share
The earnings per share in the period was 38.9p compared to a deficit of 654.7p
for the prior year, an improvement of 693.6p.
Review of Fixed Assets Values
In view of the ongoing restructuring, the Directors have reassessed the economic
values and net realisable values of the Group's power stations and compared them
to their book values as at 31 March 2004, in accordance with FRS11 "Impairment
of fixed assets and goodwill". As a result of this review, the carrying value of
fixed assets has been increased by GBP295m to partially reverse the impairment
loss recognised in the prior year. Recognition of changes to asset impairment
calculations is shown as a non-cash exceptional item in the year end financial
statements, included within depreciation charges.
The fundamental objective of FRS11 is to ensure that fixed assets and goodwill
are recorded in financial statements at no more than their recoverable amount.
The recoverable amount is defined as being the higher of "net realisable value"
(expected proceeds of sale less direct selling costs) or "value in use".
Impairment is measured by comparing the carrying value of the fixed assets with
their recoverable amount.
The outlook for electricity prices is the single most significant factor in
assessment of the carrying values of fixed assets. The Directors have considered
market views on future prices of wholesale electricity and also the commercially
available forecasts. They have considered the impact on future prices of the
increases in market electricity prices which occurred in the past year, the
outlook for coal and gas fuel prices, potential for changes in generation
capacity in the UK, and the potential effect on the market of changes in
Government policy particularly in the area of environmental legislation.
The outlook for prices in the UK electricity market has improved since the
Directors carried out their review for the 2003 financial statements, which
resulted in a GBP3,738m write-down of the carrying value of fixed assets.
However, in determining the price assumptions for the valuation the Directors
have taken a cautious view on whether there has been a significant long-term
recovery in market prices. Actual prices may differ from those forecast.
The carrying value of the nuclear stations has been calculated by discounting
the expected future cash flows from continued use of the assets, having made
appropriate assumptions regarding future operating performance. These
assumptions are based on the Directors' best estimates. The discount rate used
was 15% nominal pre-tax, the same as used at 31 March 2003, which is an
assessment of a rate of return that the market would expect for a similar risk
investment. The basis of the valuation of Eggborough is unchanged from the
previous year, that is net realisable value and is based on the value attributed
as part of the Proposed Restructuring.
The calculation of fixed asset carrying values at 31 March 2004 includes cash
flow estimates regarding the level of increase in pension fund contributions
required to repair the actuarial pension fund deficit at 31 March 2004. The
payments included in the fixed asset calculation amount to approximately GBP207m
after being discounted at 15% and are equivalent to a pension fund deficit
calculated on an actuarial basis in the range of GBP330m to GBP440m. Formal
triennial valuations of the British Energy Generation Group or British Energy
Combined Group (together, the Schemes) pension schemes at 31 March 2004 are
currently being undertaken, but the results of these valuations will not be
finalised until later in 2004.
These financial statements do not incorporate the key elements of the
restructuring, which is still subject to EU State aid approval and a large
number of other significant conditions and uncertainties. As a result, the
carrying value of fixed assets in the March 2004 financial statements do not
reflect, for example, the new BNFL contracts or the proposed nuclear liabilities
fund cash sweep arrangements which we anticipate will be included in future
asset impairment tests for financial statements purposes when there is
reasonable certainty of their becoming legally effective.
Net Liabilities
Group net liabilities decreased from GBP3,383m to GBP3,164m due to the profit
after tax of GBP234m and exchange rate translation losses of GBP15m.
Capital Expenditure
There have been no additions to fixed assets recorded in the period as a
consequence of the fixed asset write-down carried out in the prior year. It has
not been possible to demonstrate that the capital investment expenditure
enhanced the value of the Company's fixed assets after taking account of the
impairment review. Included within material and services, an element of
operating costs, in the period were amounts of capital investment expenditure of
GBP92m. Of this amount estimated at GBP70m may have been capitalised in the
absence of the impairment review, with the balance of GBP22m being classified as
refurbishment costs. In the prior years expenditure of GBP112m was capitalised
within fixed assets.
Current Assets
Total current assets increased in the period by GBP323m to GBP1,737m, from
GBP1,414m in the prior year. The largest component of this rise was the GBP240m
increase in cash and liquid funds from GBP333m in the prior year to GBP573m in
the period.
Total stocks reduced by GBP10m. Nuclear fuel stocks reduced by GBP18m in part as
a result of a supply chain review. This reduction was partly offset by an
increase in stores of GBP7m mainly due to the acquisition of certain key
strategic spares at Eggborough following a risk review and an increase in coal
stock of GBP1m.
The level of total debtors reduced by GBP13m to GBP374m. This is due to a
decrease in the taxation and social security balance recorded in debtors of
GBP65m, which was reallocated to current liabilities in the current year. This
decrease is offset by an increase in the pension prepayment of GBP29m and there
was also an increase of GBP23m in trade debtors and other prepayments.
The Nuclear Decommissioning Fund will be used to fund post-defuelling
decommissioning costs. The balance sheet carrying value of the fund has been
restated to a market value of GBP440m compared to GBP334m. The increase in
market value reflects the upturn in equity market values that occurred in the
period and further contributions made by the Company of GBP19m.
Current Liabilities
The level of creditors due within one year (excluding borrowings) has increased
from GBP1,033m to GBP1,250m. The main movement is an increase in the level of
nuclear liabilities classed as due within one year from GBP355m to GBP554m. The
difference arises principally because the liability continues to be recorded
under the historic BNFL back end contracts while payments are based on the
revised BNFL back end contracts.
The other movements within creditors comprise a net increase in the other taxes
and social security balances of GBP40m relating to the reallocation from debtors
of GBP65m, a reallocation of VAT from trade creditors of GBP86m and an increase
in the amount during the period of GBP19m. Trade creditors decreased by GBP18m
due to a reallocation of GBP86m, as mentioned, to the other taxes and social
security balance and an increase in trade creditors of GBP68m. There were other
decreases of GBP4m in retentions, accruals and other creditors.
Provisions
Included in provisions at 31 March 2004 were accrued nuclear liabilities of
GBP1,776m, an increase of GBP103m over the prior year. The liabilities increased
due to additional fuel burnt in the Group's power stations, revalorisation
(inflation and removal of one year's discount to restate the provision at
balance sheet money values) and reduced by cash payments made during the year
and the part release of the provisions for the out of the money element of the
Groups interest rate swaps.
Pensions
The financial statements have been prepared applying SSAP24 in respect of
pensions. Note 24 to the financial statements provides the disclosures required
under the transitional requirements of FRS17, the UK accounting standard dealing
with retirement benefits. The FRS17 valuation is based on a valuation of assets
and liabilities at a particular point in time and does not necessarily take
account of the long-term nature of pension schemes. Movements in equity markets
and bond yields can create considerable volatility in the FRS17 valuation at
different points in time.
Under FRS17, the net pension deficit was GBP352m for the UK Schemes as at 31
March 2004, unchanged from 31 March 2003. However, the value of the Schemes'
assets has increased with the rise of the equity markets, but this was offset by
increased liabilities due to future higher inflation rate assumptions and
improved actuarial information.
The interaction of the pension deficit and the valuation basis for fixed assets
is discussed in note 4 to the financial statements.
The Trustees of the Schemes follow an investment policy whereby a high
proportion of the Schemes' assets is invested in equities. One consequence of
this investment policy, and the methodology and assumptions used for determining
the Schemes' liabilities under FRS17, is that the difference between the market
value of the Schemes' assets and its FRS17 liabilities (i.e. its FRS17 "surplus"
or "deficit") is expected to be volatile. Indeed, the amount of any surplus or
deficit could change significantly over periods as short as a day (in the event
of significant market movements). The results reported should not, therefore, be
taken as an indication of the Schemes' financial position in accordance with
FRS17 on any date other than 31 March 2004.
The funding of the Pension Schemes is based on the results of three-yearly
valuations by independent actuaries rather than on the results of the FRS17
valuation. A valuation will be carried out as at 31 March 2004, however, the
result of the valuation will not be concluded until late autumn 2004.
Whilst the final determination of the actuarial valuation will not be complete
for some months a deficit is expected in the range of GBP330m to GBP440m. The
actual level of increase in future employer contributions will only be agreed
with the Trustees of the Schemes when the valuation is completed.
During the prior year, the actuary of the British Energy Generation Group Scheme
(the main UK pension scheme) carried out an interim review of Scheme assets and
liabilities in order to assess the appropriateness of continued use of the
surplus that arose at the 31 March 2001 valuation. As a result of that review,
the employer's contributions to that Scheme were increased from 10% to 17.1%
with effect from 1 November 2002. The employer's contributions to the British
Energy Combined Group Scheme (the smaller UK pension scheme) were increased from
12% to 15.3% with effect from 1 April 2002. In total, cash contributions by the
Group were GBP34m for the period and GBP31m for the prior year.
There were no changes to the contribution rates in the period.
The Company recognises that the funding of the Pension Schemes is a matter of
concern to Scheme members, to shareholders and to other stakeholders. The
Company will keep the funding issues under close review in the coming year and
will aim to safeguard the interests of scheme members.
The Group balance sheet reported at 31 March 2004 and 31 March 2003 does not
include the FRS17 deficits.
Total Recognised Gains and Losses
In addition to the profit after tax of GBP234m, exchange translation losses on
foreign currency net investments arose amounting to GBP15m. These were all in
relation to the investment in the AmerGen joint venture and its subsequent
disposal.
Liquidity and Capital Resources
Government Facility
Following the sale of AmerGen, the drawings under the Government Facility were
fully repaid. The amount available under the Government Facility reverted back
to GBP200m on 24 December 2003. Further details of the Government Facility are
included in note 1 to the financial statements.
Cash Flow
A reconciliation of profit after tax and exceptional items to earnings before
interest, tax, depreciation and amortisation (EBITDA) is shown in the following
table. EBITDA is a measure commonly reported and widely used by analysts,
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
increase in cash.
Year ended 31 March 2004 Year ended 31 March 2003
GBPm GBPm
Profit/(loss) after tax and 234 (3,924)
exceptional items
Interest (including exceptional 59 134
items)
Revalorisation (including 117 364
exceptional items)
Tax (including exceptional items) (2) (368)
Depreciation charges 50 273
Exceptional depreciation (credits)/ (295) 3,738
charges due to impairment review
EBITDA 163 217
(Gain)/loss on sale of businesses (47) 35
AmerGen profit (21) (43)
Bruce Power contribution - (97)
Net exceptional charges other than 12 168
depreciation, interest, tax and
revalorisation
EBITDA - continuing activities 107 280
Nuclear liabilities charged to 130 105
operating costs
Nuclear liabilities discharged (59) (115)
Regular contributions to (19) (18)
decommissioning fund
Other provisions discharged (3) (45)
Exceptional operating cash costs (25) (154)
Working capital movements 25 191
Operating cash flow from continuing 156 244
activities
Capital expenditure - (112)
Taxation (paid)/received (12) 3
Disposal of investments 171 262
Net interest paid (75) (84)
Net cash outflow of discontinued - (78)
activities
Increase in cash (before equity 240 235
dividends)
Equity Dividend - (31)
Increase in total cash (after 240 204
equity dividends)
The operating cash flow from continuing activities was GBP156m, GBP88m lower
than the prior year after excluding the cash generated by Bruce Power (see note
28 of the financial statements). Included in the period cash flows are capital
investment expenditure amounts totalling GBP92m that are expensed as part of
materials and services costs. Of this, an amount estimated at GBP70m may have
been capitalised in the absence of the impairment review, with the balance of
GBP22m being classified as refurbishment costs. In the prior year capital
expenditure of GBP112m was not deducted in calculating operating cash inflow
from continuing activities.
When adjusted for the capital expenditure, the taxation paid or received, the
receipts from sale of investments, the net interest paid and discontinued
activities, the free cash flow position was GBP240m in the period compared to
GBP235m (before equity dividends paid of GBP31m) in the prior year.
Net cash outflows for interest payments reduced by GBP6m.
Net receipts from disposals of GBP171m (see note 5 of the financial statements)
mainly represented the proceeds from the sale of AmerGen. In the prior year
there were net receipts of GBP262m from the sale of Bruce Power.
Capital Resources
At 31 March 2004, total debt of GBP883m comprised:
A project finance loan of GBP475m secured on the assets of Eggborough Power
Limited (EPL), a subsidiary company that operates the Eggborough coal-fired
power station. At 31 March 2004 the effect of the Group's interest rate
contracts is to classify the borrowings as fixed rate. 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) between BEPET and EPL. The contractual
amounts payable by BEPET under the CTA are calculated so as to cover EPL's
borrowing requirements and operating costs. British Energy also provides a
subordinated loan facility to EPL. The final installment of loan principal will
be repaid in 2011. The 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 in the Proposed Restructuring.
There were no drawings under the Government Facility at 31 March 2004 and 31 May
2004 and the conditions applying to the facility are more fully discussed in
note 1 to the financial statements.
Net debt decreased in the year by GBP240m to GBP310m. This was mainly as a
result of the proceeds from the sale of AmerGen , cash flow benefits from the
revised BNFL back end arrangement and improved cash management procedures.
Future Liquidity and Collateral
At 31 March 2004 and 31 May 2004 the Company had cash and liquid resources,
including amounts posted as collateral, amounting to GBP573m and GBP507m
respectively, of which GBP297m and GBP304m were deposited as collateral in
support of trading 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
Company'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) and maintenance requirements.
The Group lost its investment grade rating in September 2002. British Energy
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 being payable as well as having an adverse effect on cash
flows.
The Government Facility will mature on the earliest of (1) 30 September 2004,
(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.
The Company faced short-term pressures on liquidity during the third quarter
resulting from the combined effect of seasonality, the major unplanned outage at
Heysham 1 and the increased levels of collateral and costs of unplanned outages
brought about by the increased level of volatility in electricity prices. During
the period collateral peaked at GBP355m, in January 2004.
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 Board remains of the opinion that the working capital available to the Group
is not sufficient for the present requirements of the Group. The Company is
taking steps with a view to improving this situation. The receipt of the
proceeds from the disposal of AmerGen significantly increased the Group's
financial flexibility. The Group is continuing to explore initiatives to reduce
the demand for trading collateral and to achieve sufficient liquid resources to
implement the Proposed Restructuring.
The Proposed Restructuring and, therefore, the working capital available to the
Group, remain subject to a large number of significant uncertainties and
important conditions. These include settling certain documents with creditors,
approval of the Scottish Courts, listing of the new shares and new bonds and
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 now expects to receive this notification during this autumn. The
Proposed Restructuring is also conditional on there being no material adverse
change affecting the Group as a whole or Eggborough Power Limited and no
material adverse effect on the value of the creditor's entitlements under the
Proposed Restructuring. 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. Also, for listing purposes, the restructured Group will need to have
sufficient working capital for its present requirements from listing of the new
shares and new bonds. Some uncertainties which may affect the Group's cash flow
position, performance or outlook are described in the Review of Operating
Performance and Financial Review.
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
On 25 May 2004 the Group received the sum of C$10m in respect of the restart of
Unit 3 of the Bruce power station as disclosed in note 34 to the financial
statements.
Contingent Liabilities
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 claim relating to the condition of the plant is based upon alleged erosion
of some of the steam generator 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 net 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 accounting standards, no provision has been
made in the financial statements at 31 March 2004.
The principal tax claim relates to the treatment of expenditure at the Bruce
plant during the period of the Company's ownership that 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 not been recognised in the financial statements of the period. The
consortium claims that allowance of the expenditure for that period would cause
it to lose future deductions. British Energy has rejected the claim and expects
to defend it if it is pursued further. On the basis of advice received, the
Company is confident that the amount of the claim should not, in any event,
materially exceed the amount of the rebate, and that the claim should have no
material cash flow impact on the Group.
Under the Bruce Power sale 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 to the value of nuclear
fuel contained in AmerGen's balance sheet dated 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 to
commence litigation. 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.
Further contingent liabilities of the Group are described in note 32 to the
financial statements for the period.
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
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 the Board's ability to pay dividends, including:
British Energy is required to fund a cash reserve out of the Company's post-debt
service cash flow in order to support the Group's collateral and liquidity
requirements post-restructuring. The initial target amount for the cash reserve
is GBP490m plus the amount by which cash employed as collateral exceeds GBP200m
(Target Amount). It is expected that, when the Proposed Restructuring is
completed, the level of the cash reserves will be below the Target Amount and
therefore there will be no distributions to shareholders until such times as the
cash reserve is at the required level. As a result of the requirements to fund
the cash reserves, the Board is not paying a dividend in respect of the
financial year ended 31 March 2004 and does not expect to pay a dividend in
respect of the financial years ending 31 March 2005 and 2006;
the terms of the Nuclear Liabilities Agreements to be entered into as part of
the Proposed Restructuring also require that once the cash reserve is funded to
the Target Amount, British Energy must make Cash Sweep Payments to the Nuclear
Liabilities Fund (NLF). The NLF Cash Sweep Payment is initially defined as 65%
of the movement in cash, cash equivalents and other liquid assets during the
year after adjusting for, among other things, certain payments made to the NLF
or dividends paid in the year. 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;
the terms of the new bonds to be issued as part of the Proposed Restructuring
contain certain covenants, including a restriction that allows British Energy to
pay a dividend only if no event of default has occurred; and
the Company must have distributable reserves.
Mike Alexander
Chief Executive
Independent Auditors' Report
The Independent Auditors' Report on the financial statements for the year ended
31 March 2004 was not qualified, but contained an explanatory paragraph in
respect of a fundamental uncertainty as follows:
"In forming our opinion, we have considered the adequacy of the disclosures made
in note 1 concerning the preparation of the financial statements on the going
concern basis. The validity of this 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
uncertainties concerning these matters, we consider that it should be drawn to
your attention but our opinion is not qualified in this respect."
17 June 2004
BRITISH ENERGY PLC
RESULTS FOR THE YEAR ENDED 31 MARCH 2004
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 2004
Notes 2004 2003
GBPm GBPm
Turnover:
Group and share of discontinued joint venture turnover 1,660 2,074
Exceptional income 3 - 41
Group and share of discontinued joint venture turnover including
exceptional income 1,660 2,115
Less: share of turnover in discontinued joint venture 3 (144) (212)
Continuing activities 3 1,516 1,528
Discontinued activities 3 - 375
Group turnover 3 1,516 1,903
Operating costs before exceptional items 4 (1,459) (1,758)
Exceptional operating items 4 283 (3,947)
Operating costs after exceptional items 4 (1,176) (5,705)
Group operating profit/(loss):
Continuing activities 340 (3,899)
Discontinued activities - 97
Group operating profit/(loss) 340 (3,802)
Share of operating profit of discontinued joint venture 21 43
Operating profit/(loss): Group and share of discontinued joint venture 361 (3,759)
Exceptional gain/(loss) on sale of joint venture and businesses 5 47 (35)
Financing (charges)/credits:
Revalorisation charges 8 (185) (205)
Net interest 8 (64) (72)
Exceptional revalorisation credits/(charges) 8 68 (159)
Exceptional financing credits/(charges) 8 5 (62)
Profit/(loss) on ordinary activities before taxation 3 232 (4,292)
Taxation on profit/(loss) on ordinary activities 9 2 378
Share of taxation for discontinued joint venture 9 - (10)
Profit/(loss) on ordinary activities after taxation 234 (3,924)
Minority interest - (17)
Profit/(loss) for the year attributable to shareholders 26 234 (3,941)
Earnings/(deficit) per share (p):
Basic 11 38.9 (654.7)
BALANCE SHEETS AS AT 31 MARCH 2004
Group Company
Notes 2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Fixed Assets
Tangible assets 12 931 686 - -
Interest in joint venture:
- share of gross assets - 477 - -
- share of gross liabilities - (406) - -
13 - 71 - -
Other investments 13 6 6 10 14
937 763 10 14
Current assets
Decommissioning fund 14 440 334 - -
Stocks 15 350 360 - -
Debtors 16 374 387 11 85
Investments - liquid funds 30 311 246 249 210
Cash at bank 30 262 87 256 83
1,737 1,414 516 378
Creditors: amounts falling due within one year
- borrowings 18 (197) (152) (110) (110)
- other 17 (1,250) (1,033) (4,496) (3,742)
(1,447) (1,185) (4,606) (3,852)
Net current assets/(liabilities) 290 229 (4,090) (3,474)
Total assets less current liabilities 1,227 992 (4,080) (3,460)
Creditors: amounts falling due after more than
one year
- borrowings 18 (686) (731) (298) (298)
- other 17 (1,893) (1,909) - -
Provisions for liabilities and charges 20 (1,812) (1,735) (5) (9)
Net liabilities 3 (3,164) (3,383) (4,383) (3,767)
Capital and reserves
Called up equity share capital 25 277 277 277 277
Share premium 76 76 76 76
Capital redemption reserve 350 350 350 350
Profit and loss account 26 (3,960) (4,179) (5,179) (4,563)
Equity shareholders' funds 27 (3,257) (3,476) (4,476) (3,860)
Non-equity shareholders' interests 25 93 93 93 93
(3,164) (3,383) (4,383) (3,767)
The accompanying notes are an integral part of the financial statements.
The financial statements were approved by the Board of Directors on 17 June 2004
and signed on its behalf by:
Adrian Montague CBE Martin Gatto
Chairman Interim Finance Director
GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2004
Notes 2004 2003
GBPm GBPm
Net cash inflow from operating activities 28 156 336
Interest paid (85) (91)
Interest received 10 9
Dividends paid on non-equity shares - (2)
Returns on investments and servicing of finance (75) (84)
Taxation (paid)/received 9 (12) 3
Capital expenditure and financial investment - (282)
Acquisitions and disposals
Receipts from sales of investments 5 171 262
Equity dividends paid - (31)
Net cash inflow before use of liquid resources and financing 240 204
Increase in term deposits/bank balances (65) (37)
Management of liquid resources 30 (65) (37)
Minority funding of Bruce Power - 12
Repayment of amounts borrowed net of new loans - (92)
Financing - (80)
Increase in cash 30 175 87
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 MARCH 2004
Notes 2004 2003
GBPm GBPm
Profit/(loss) for the financial year 234 (3,941)
Translation differences on foreign currency net investments 27 (15) (25)
Total recognised gains/(losses) since last annual report 219 (3,966)
The accompanying notes form an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2004
1. BASIS OF PREPARATION
(i) Introduction
The Group accounts are a consolidation of the financial statements of the
Company and all its subsidiary undertakings, and are drawn up on a
non-restructured basis, i.e. on the basis of contracts and agreements in place
at 31 March 2004. In the following discussion British Energy plc is referred to
as 'British Energy' or 'the Company' and 'the Group' refers to the Company and
its subsidiary undertakings.
On 14 February 2003, the Group disposed of its stake in Bruce Power Limited
Patnership ('Bruce Power') and Huron Wind Limited Partnership ('Huron Wind'),
therefore, their results up to the point of disposal have been classified as
discontinued activities within prior reporting periods. 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 year. All other
activities of the Group have been shown as continuing activities.
(ii) 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 (which has subsequently
transferred its interest to Deutsche Bank) and Enron (which has also
subsequently transferred its interest 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').
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.
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.
We have retained a trading relationship with a high proportion of our existing
contracted counterparties during the period since our announcement of 5
September 2002, although in most cases we have 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 our cash flows.
The Company faced short-term pressures on liquidity during the year resulting
from the combined effect of seasonality, the unplanned outage at Heysham 1 and
the increased levels of collateral and costs of unplanned outages brought about
by the increased level of volatility in electricity prices. The Board is
exploring initiatives to achieve sufficient liquid resources to implement the
Proposed Restructuring, including investigating the availability of third party
financing.
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.
(iii) 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.
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 exchanged 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 exchanged
pursuant to the terms of the Creditor Restructuring Agreement itself);
- the amendment and extension of the BNFL contracts for front end and
back end related fuel services for the Group's AGR stations announced on 16 May
2003 and the implementation of a new trading strategy;
- establishing the NLF which will assume financial responsibility for
certain uncontracted nuclear liabilities and decommissioning costs in return for
initial and ongoing contributions from British Energy; and
- the Government funding liabilities relating to certain historic spent
fuel and 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 as aid is compatible with the
common market. The Secretary of State expects to receive this notification this
autumn;
- 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 Scottish Court; 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 (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 ('Newco
1').
In addition, the Eggborough Banks, as creditors with security over the assets of
and shares in EPL, have agreed (subject to certain conditions) to replace their
existing secured claims with a right to payments under an Amended and Restated
Credit Agreement (the 'Amended Credit Agreement') having a payment profile
equivalent to GBP150m of new bonds secured over the assets of and shares in EPL.
The Eggborough Banks will also have an option to acquire the Eggborough station
either through a share or asset purchase in 2010 upon payment of an approximate
GBP104m break fee and the extinguishment of the principal then outstanding under
the Amended Credit Agreement. This option may be accelerated in the event of a
default under the Amended Credit Agreement. The security over the assets of and
shares in EPL under the Amended Credit Agreement will secure both the GBP150m
bond-equivalent payments and, through an indemnity for non-performance, the
option acceleration.
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.
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,
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 Newco 1 as the new parent
company of the Group and a directly wholly owned subsidiary of Newco 1 as an
intermediate holding company ('Newco 2').
The Company proposes to cancel its existing ordinary shares of 4428/43 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 Newco 1 equal to 2.5% of the issued share capital of Newco 1
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 Newco 1 (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 Newco 2. If the disposal is approved
by the shareholders in general meeting, shareholders will receive only the
warrants. If neither proposal is approved by shareholders, they will receive no
shares or warrants.
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 affect 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 affects 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 Newco 1 and Newco
2) 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 UKLA Listing Rules without qualification (whether or not Newco 1 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) occurs at any time before the 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, the NLF will assume financial responsibility
for discharging certain of the Group's uncontracted nuclear liabilities and the
costs of decommissioning the Group's nuclear power stations, and the Secretary
of State will assume financial responsibility for certain of the Group's
contracted nuclear liabilities and any shortfall in the NLF. In consideration
for this assumption of financial responsibility, Newco 2 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 fuel loaded into the Sizewell B
reactor after completion of the Proposed Restructuring; and (iii) an annual
contribution equal to a percentage of the Group's adjusted 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 Newco 1 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 to a maximum of 29.9% of the voting rights in the
Company. The convertible ordinary shares may be converted into ordinary shares
with no such restrictions on voting rights at the election of the NLF and will
be converted automatically on their transfer by the NLF to a third party.
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.
(iv) Principles Underlying Going Concern Assumption
The financial statements have been prepared on a going concern basis in
accordance with FRS18, 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 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. 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. ACCOUNTING POLICIES
(i) Basis of Accounting
The financial statements are prepared under the historical cost convention and
in accordance with applicable accounting standards, except for the departures
noted below.
Commodity trading contracts, where there is no associated physical delivery, are
marked to market using externally derived market prices. This is a departure
from the general provisions of Schedule 4 of the Companies Act 1985. An
explanation of this departure is given in note 2 (xix).
The income recognised by the Group in respect of the long-term rate of return of
the decommissioning fund is unrealised and its recognition is a departure from
one of the accounting principles set out in Schedule 4 of the Companies Act
1985. An explanation of this departure is given in note 2 (xvii).
The preparation of accounts in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the accounts and the reported amounts of revenues
and expenses during the reporting period. Actual results can differ from those
estimates.
In accordance with FRS18 the Directors have reviewed the Group's accounting
policies and confirm that they continue to be the most appropriate. A number of
the policies require the Group to use a variety of estimation techniques.
Significant factors considered when assessing the carrying value of assets
include future electricity prices, expected annual output, expected station
operating costs, remaining station lives and discount rates. Estimates of
output, costs and timing of associated cash flows as well as the expected
regulatory framework are key factors used to apply the stated policies for
long-term nuclear liabilities and decommissioning as discussed further in note 2
(xvi) below.
The effect of the Proposed Restructuring of the Company, as noted above, will be
significant and will result in, among other matters, the reassessment of
estimates and assumptions which have been used to prepare these financial
statements. In particular, the calculation of the carrying value of the nuclear
stations will be reassessed on the basis of the new contracts with BNFL, the
contribution of 65% of cash flow to the Nuclear Liabilities Fund and the likely
review of the risk discount rate applied to the future cash flows.
(ii) Basis of Consolidation
The Group financial statements consolidate the financial statements of British
Energy and all its subsidiary undertakings. Inter-company profits, transactions
and balances are eliminated on consolidation.
(iii) Turnover
Turnover represents sales of electricity, net of electricity purchases, and
sales of other related goods. Turnover is shown net of value added tax and
climate change levy.
Wholesale generation and direct supply sales are recognised on an accruals basis
with reference to meter readings or where required based on management's best
estimate of electricity supplied.
Included within turnover is the mark to market of net unrealised gains and
losses made from trades recorded within the proprietary trading book. Refer to
note (xix) for details of accounting treatment of proprietary trading.
(iv) Fuel Costs - Nuclear Front End
Advanced Gas-cooled Reactors (AGR)
Front end fuel costs consist of the costs of procurement of uranium, conversion
and enrichment services and fuel element fabrication. Fabrication costs
comprise fixed and variable elements. The fixed element is charged to the
profit and loss account as incurred and the variable element, other than for
unburnt fuel at shutdown, is charged to the profit and loss account in
proportion to the amount of fuel burnt.
Pressurised Water Reactor (PWR)
All front end fuel costs are variable and, other than for unburnt fuel at
shutdown, are charged to the profit and loss account in proportion to the amount
of fuel burnt.
Bruce Power
Front end fuel costs are recognised when fuel is loaded into the reactor. The
reactors are continually reloaded and as such this method closely reflects fuel
burnt. British Energy disposed of its interest in Bruce Power on 14 February
2003.
(v) Fuel Costs - Nuclear Back End
AGR
Spent fuel extracted from the reactors is sent for reprocessing and/or long-term
storage and eventual disposal of resulting waste products. Back end fuel costs
comprise the estimated cost of this process at current prices discounted back to
current value in respect of both the amount of irradiated fuel burnt during the
year and an appropriate proportion of unburnt fuel which will remain in the
reactors at the end of their lives. All back end fuel costs, other than for
unburnt fuel at shutdown, are charged to the profit and loss account in
proportion to the amount of fuel burnt.
PWR
Back end fuel costs are based on wet storage in station ponds followed by dry
storage and subsequent direct disposal of fuel. Back end fuel costs comprise
the estimated cost of this process at current prices discounted back to current
value. All back end fuel costs, other than for unburnt fuel at shutdown, are
charged to the profit and loss account in proportion to the amount of fuel
burnt.
Bruce Power
Under the terms of the Bruce Power lease the responsibility for spent fuel,
waste and decommissioning remains with Ontario Power Generation Inc. British
Energy disposed of its interest in Bruce Power on 14 February 2003.
(vi) Unburnt Fuel at Shutdown
Due to the nature of the nuclear fuel process there will be some unburnt fuel in
the reactors at station closure. The front end and back end costs of this fuel
are charged to the profit and loss account over the estimated useful life of
each nuclear station on a straight line basis.
(vii) Fuel Costs - Coal
Fuel costs for coal are determined on a weighted average cost basis.
(viii) Energy Supply Costs
Annual commitments payable under Renewable Obligation Certificates are reflected
in the profit and loss account based on the volume of direct supply sales.
Acquired certificates are recognised as assets on purchase and are offset
against related obligation payments.
(ix) Research and Development
Research and development expenditure is charged to the profit and loss account
as incurred.
(x) Pensions and Other Post-retirement Benefits
The Group continues to provide for UK pension costs in accordance with SSAP24.
Contributions to the Group's defined benefit pension schemes are assessed by
qualified actuaries and are charged to the profit and loss account so as to
spread the cost of pensions over employees' working lives with the Group. The
capital cost of ex-gratia and supplementary pensions is charged to the profit
and loss account, to the extent that the arrangements are not covered by the
surplus in schemes, in the accounting period in which they are granted.
Differences between the amounts funded and the amounts charged to the profit and
loss account are included in the balance sheet.
In Canada, the charges for pensions and other post retirement benefits were
determined annually by actuaries on the basis of management estimates. These
costs consisted of current service costs, interest and adjustments arising from
plan amendments, changes in assumptions, and experience gains or losses, which
were amortised on a straight line basis over the expected average remaining
service lives of the employees covered by the plan. Costs were recorded in the
year in which employees rendered services. British Energy disposed of its
interests in Canada on 14 February 2003.
(xi) Foreign Currencies
Transactions in foreign currencies are recorded at the rate of exchange at the
date of the transaction or, if hedged forward, at the rate of exchange under the
related forward currency contract. Assets and liabilities denominated in
foreign currencies are retranslated into Sterling at the rate of exchange ruling
at the date of the balance sheet or at the contracted rate if applicable. All
differences are taken to the profit and loss account.
For consolidation purposes the assets and liabilities of overseas subsidiary
undertakings and joint ventures are translated at closing exchange rates.
Profit and loss accounts of such undertakings are consolidated at the average
rates of exchange during the year up until the date of disposal. Differences on
foreign exchange arising from the retranslation of the opening net investment
in, and results of, subsidiary and associated undertakings and joint ventures
are taken to reserves. Where appropriate, these are matched with differences
arising on the translation of related foreign currency borrowings and are
reported in the statement of total recognised gains and losses.
(xii) Tangible Fixed Assets and Depreciation, Including
Decommissioning Costs
Fixed assets comprise assets acquired or constructed by the Group. During the
year ended 31 March 2004 all capital expenditure investment that would
previously have been capitalised as fixed assets was expensed as operating costs
following the fixed asset impairment review carried out in the year ended 31
March 2003. This arises because it is not possible to demonstrate that this
expenditure enhanced the value of the Company's fixed assets after taking
account of the impairment review.
Fixed assets (other than assets in the course of construction) are stated in the
balance sheet at cost less accumulated depreciation. Accumulated depreciation
includes additional charges made where necessary to reflect impairment in value.
Assets in the course of construction are stated at cost and not depreciated
until brought into commission.
The carrying values of fixed assets are reviewed for impairment where there has
been a trigger event by assessing the present value of estimated future cash
flows and net realisable value compared with net book value. The calculation of
estimated future cash flows is based on the Directors' best estimates of future
prices, output and costs and is therefore subjective.
The charge for depreciation of fixed assets is based on the straight line method
so as to write-off the costs of assets, after taking into account provisions for
diminution in value, over their estimated useful lives.
The asset lives adopted are subject to regular review and for the year ended 31
March 2004 were:
AGR power stations 25-35 years
PWR power stations 40 years
Bruce power station assets 18 years
Coal power station 12 years
Other buildings 40 years
Other plant and equipment 5 years
The estimated costs for decommissioning the Group's nuclear power stations are
capitalised as part of the cost of construction and are depreciated over the
same lives as the stations. These estimated costs are discounted having regard
to the time scale whereby work will take place over many years after station
closure. The estimated costs include the demolition and site clearance of the
stations' radioactive facilities and the management of waste.
(xiii) Fixed Asset Investments
Investments in subsidiaries are initially recorded at the nominal value of
shares allotted. Fixed asset investments are stated at cost less amortisation
or provisions for diminution in value. The Group's interest in its joint
ventures is stated at cost plus the Group's share of retained earnings up until
the date of disposal. The carrying value of all fixed asset investments is
regularly assessed for permanent impairment and provision made, if appropriate.
Own shares purchased in respect of the Employee Share Option and ShareSave
Option Schemes are held at cost less charges to write down the shares to the
option exercise prices over the minimum lives of the options. The carrying
value of all own share investments is regularly assessed for permanent
impairment and provision made if appropriate. The Group has taken advantage of
the exemption relating to Inland Revenue approved schemes under UITF17 in
respect of Save As You Earn Share Schemes.
(xiv) Stocks of Fuel, Stores and Spares
Stocks of fuel, stores and spares are valued at the lower of cost and net
realisable value. The nuclear fuel stock is reduced by the provision for
unburnt fuel at shutdown (note 2 (vi)). Strategic spares are amortised over the
life of the asset to which they relate.
(xv) Deferred Taxation
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more, or a right to pay less, tax in
the future have occurred at the balance sheet date. The full amount of the
provision is discounted using a discount rate similar to the current post tax
rates of return on UK treasury gilts. Deferred tax assets are recognised only
to the extent that the Directors consider that it is more likely than not that
there will be suitable taxable profits from which the future reversal of the
underlying timing differences can be deducted.
(xvi) Nuclear Liabilities
Nuclear liabilities represent provision for the Group's liabilities in respect
of the costs of waste management of spent fuel and nuclear decommissioning. The
provisions represent the Directors' best estimates of the costs expected to be
incurred. They are calculated based on the latest technical evaluation of the
processes and methods likely to be used, and reflect current engineering
knowledge. The provisions are based on such commercial agreements as are
currently in place, and reflect the Directors' understanding of the current
Government policy and regulatory framework. The Directors carry out an in-depth
review of the adequacy of amounts provided on a five-yearly basis, and also
review the amounts provided for significant change during the intervening years.
Given that Government policy and the regulatory framework on which our
assumptions have been based may be expected to develop and that the Directors'
plans will be influenced by improvements in technology and experience gained
from decommissioning activities, liabilities and the resulting provisions are
likely to be adjusted.
In matching the costs of generating electricity against the income from sales,
accruals are made in respect of the following:
a) Fuel costs - back end
The treatment of back end fuel costs in the profit and loss account has been
dealt with in notes 2(v) and (vi). These accruals cover reprocessing and
storage of spent nuclear fuel and the long-term storage, treatment and eventual
disposal of nuclear waste. They are based, as appropriate, on contractual
arrangements or the latest technical assessments of the processes and methods
likely to be used to deal with these obligations under the current regulatory
regime. Where accruals are based on contractual arrangements they are included
within creditors. Other accruals are based on long-term cost forecasts which
are reviewed regularly and adjusted where necessary, and are included within
provisions.
b) Decommissioning of nuclear power stations
The financial statements include provision for the full cost of decommissioning
the Group's nuclear power stations. Provision is made on the basis of the
latest technical assessments of the processes and methods likely to be used for
decommissioning under the current regulatory regime. The provision established
at the commencement of a power station's operating life is capitalised as part
of the costs of the station and depreciated over the station life.
Accruals and provisions for back end fuel costs and decommissioning are stated
in the balance sheet at current price levels, discounted at a long-term real
rate of interest of 3% per annum to take account of the timing of payments.
Each year the financing charges in the profit and loss account include the
revalorisation of liabilities required to discharge one year's discount from
provisions made in prior years and restate these provisions to current price
levels.
(xvii) Decommissioning Funds
The Group makes contributions into an independently administered fund to cover
all costs of decommissioning nuclear power stations, except de-fuelling costs.
The Group's annual contributions to the fund are assessed by qualified
actuaries, taking into account the amount and timing and expected
decommissioning costs and the periods until station closures. The value of the
asset in the balance sheet represents the contributions made by the Group,
together with an estimated actuarially determined long-term rate of return on
the fund. The change in value arising from applying the estimated long-term
rate of return is taken to the profit and loss account and disclosed as part of
revalorisation.
The revalorisation of the decommissioning fund, which has been taken through the
profit and loss account, is not a realised profit for the purposes of the
Companies Act 1985 because the income is unrealised until the Group receives the
related cash from the fund to reimburse decommissioning expenditure. The
inclusion of this profit in the profit and loss account is a departure from the
requirements of the Companies Act 1985. Revalorisation of the accrued
decommissioning provision is charged to the profit and loss account each year
and accordingly, in the opinion of the Directors, it is necessary to include the
estimated annual long-term rate of return of the fund in the Group's profit and
loss account in order for the financial statements to give a true and fair view.
In the event that the net realisable value as indicated by the market value of
the fund is lower than the value determined under the accounting policy set out
above, the lower value is included in the Group accounts.
The effect of the departure for the UK fund is to increase the profit before tax
by GBP74m (2003: increase the loss before tax by GBP82m) and to reduce the
reported loss before exceptional items for the year by GBP28m (2003: GBP29m).
There is no impact on the net assets at 31 March 2004 and 31 March 2003 as the
fund has been restated at market value. There are no tax consequences of this
departure.
A similar decommissioning fund existed in the United States for AmerGen that was
accounted for on a consistant basis as outlined above for the UK fund. Up until
the date of sale the effect of the departure for the AmerGen Fund was to
increase the profit before tax by GBP36m (2003: increase the loss before tax by
GBP28m) and to reduce the reported loss before exceptional items for the year
ended 31 March 2004 by GBP14m (2003: GBP20m). There was no impact on net assets
as the AmerGen Fund had been restated at market value.
(xviii) Liquid Funds
Cash which is placed on term deposits which mature more than one day after the
end of the financial year or invested in commercial paper, is classified under
current asset investments in the balance sheet and the movement in liquid funds
is disclosed under management of liquid resources in the cash flow statement.
(xix) Financial Instruments and Derivatives
Debt instruments
All borrowings are stated at cost with issue costs being charged to the profit
and loss account on purchase. The interest payable on debt is charged to the
profit and loss account over the life of the borrowing. Premiums and discounts
arising on early repayment of borrowings are recognised in the profit and loss
account as incurred and received.
Commodity contracts
Where there is physical delivery associated with power and coal commodity
contracts they are accounted for on an accruals basis following delivery of the
commodity. Amounts payable or receivable in respect of these contracts are
recorded within trade creditors and debtors respectively and recognised as
turnover.
Where there is no physical delivery associated with these contracts, they are
recorded at fair value on the balance sheet. Where the instrument is for
proprietary trading purposes, the change in fair value is reflected through the
profit and loss account as part of turnover - wholesale generation. This is not
in accordance with the general provisions of Schedule 4 of the Companies Act
1985, which requires that these contracts are stated at the lower of cost and
net realisable value or that, if revalued, any revaluation difference be taken
to a revaluation reserve. However, the Directors consider that this departure is
necessary in order that the financial statements give a true and fair view of
the results of the Group's trading activities, in accordance with Section 226(5)
of the Companies Act 1985. The effect of the departure on the financial
statements is to increase the profit for the year by GBP12m (2003: reduce the
loss for the year by GBP9m) and reduce the net liabilities at 31 March 2004 by
GBP21m (2003: GBP9m).
Futures and power options
Power futures and options are undertaken for hedging and proprietary trading
purposes. Initial margins paid on entering power exchange contracts are
recorded on the balance sheet within restricted cash in 'Investments - liquid
funds' throughout the term of the contract. Where the instrument is a hedge,
the daily margin calls are initially reflected on the balance sheet and
subsequently reflected through the profit and loss account to match the
recognition of the hedged item.
Interest rate swaps
Interest rate swaps are used to manage debt interest rate exposure. Amounts
payable or receivable in respect of interest rate swaps are recognised as
adjustments to the net interest charge over the term of the contracts. Where
derivatives used to manage interest rate risk or to hedge other anticipated cash
flows are terminated before the underlying debt matures, the resulting gain or
loss is deferred on the balance sheet and amortised to the profit and loss
account to match the timing and accounting treatment of the underlying debt. If
the debt is subsequently terminated any unamortised deferred gain or loss is
recognised immediately in the profit and loss account. Where interest rate
swaps are no longer considered effective hedging instruments, any cumulative
losses relating to the fair value of the derivatives are taken to the profit and
loss account in accordance with FRS 12.
Options
The Group used currency options to manage exposure on its disposal of overseas
assets. Premiums received and paid on the contracts are included in the net
sale proceeds in 'Exceptional gain/(loss) on sale of joint venture and
businesses'.
Premiums received and paid on wholesale generation contracts are amortised over
the period of the contracts and are included within turnover.
(xx) Goodwill
Goodwill arising on acquisitions represents the excess of the fair value of the
consideration at acquisition compared to the fair value of the identifiable net
assets acquired. Goodwill is capitalised as an intangible asset on the balance
sheet and amortised on a straight line basis over its estimated useful life.
(xxi) Joint Venture
The Group's share of the results of the joint venture is included in the
consolidated financial statements based on the latest audited accounts of the
joint venture, except where the accounting reference date is not co-terminous
with the parent company, in which case management accounts are used and adjusted
to comply with British Energy accounting policies.
On 22 December 2003 the Group disposed of its interest in AmerGen.
(xxii) Operating Leases
The Group entered into an operating lease with Ontario Power Generation Inc
(OPG) to lease the Bruce Power nuclear plant in Ontario, Canada until 2018.
Under the terms of the agreement a significant initial payment was made. This
consideration plus related transaction costs attributed to the operating lease
prepayment, was amortised on a straight line basis over the expected period of
the lease. Other costs of the Bruce Power lease were charged to the profit and
loss account in accordance with the rental schedule which is included in the
lease agreement. The Group disposed of its investments in Bruce Power and Huron
Wind on 14 February 2003. The results of Bruce Power are classified as a
discontinued activity for the purpose of this report.
Rentals payable under operating leases are charged to the profit and loss
account on a straight line basis over the lease term.
3. TURNOVER, PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAX AND
NET LIABILITIES
The Group's activities consist principally of the generation and sale of
electricity.
The geographical analysis of output, turnover, profit/(loss) on ordinary
activities before tax and net liabilities is noted below.
(i) Output and Turnover
2004 2003
TWh TWh
Output
- United Kingdom 72.6 69.5
- Canada - 19.2
72.6 88.7
GBPm GBPm
Group Turnover
Continuing activities
United Kingdom
- Wholesale generation sales 703 852
- Direct supply sales 782 603
- Turnover from continuing activities excluding exceptional income and
miscellaneous income 1,485 1,455
- Miscellaneous income 31 32
- Exceptional income - 41
Turnover from continuing activities 1,516 1,528
Discontinued activities
Canada - 375
Total turnover 1,516 1,903
Share of turnover in discontinued joint venture 144 212
In the year ended 31 March 2003 the Group agreed revised terms for the Nuclear
Energy Agreement (NEA) with Scottish Power and Scottish and Southern Energy
which resulted in the release of GBP41m in respect of cash previously received,
and was reported as an exceptional item in the results for the year ended 31
March 2003.
Turnover from discontinued activities in Canada in 2003 represented the sales by
Bruce Power which was sold on 14 February 2003.
The turnover, operating profits and net assets 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.
(ii) Profit/(Loss) on Ordinary Activities Before Taxation
A geographical analysis of profit/(loss) on ordinary activities before taxation
is as follows:
2004 2003
GBPm GBPm
United Kingdom 187 (4,388)
Canada - discontinued - 97
187 (4,291)
Share of discontinued joint venture - United States 45 (1)
232 (4,292)
(iii) Net Liabilities
A geographical analysis of the Group's net liabilities as at 31 March is as
follows:
2004 2003
GBPm GBPm
United Kingdom (3,164) (3,454)
United States - 71
(3,164) (3,383)
4. OPERATING COSTS
2004 2003
GBPm GBPm
Continuing activities
- Fuel 413 371
- Materials and services 512 425
- Staff costs (note 6) 224 227
- Depreciation charges 50 273
1,199 1,296
Energy supply costs 260 184
1,459 1,480
Discontinued activities
- Fuel - 17
- Materials and services - 143
- Staff costs (note 6) - 111
- Depreciation charges - 7
- 278
Total operating costs 1,459 1,758
Exceptional operating items
- Materials and services 25 94
- Depreciation (credits)/charges (295) 3,738
- Amounts (credited)/written-off non-operational assets (13) 115
(283) 3,947
Operating costs after exceptional items 1,176 5,705
2004 2003
GBPm GBPm
Analysis of exceptional operating items
Restructuring costs 43 35
Settlement of claim (18) -
Stock obsolescence - 57
Onerous trading contracts - 2
Fixed asset (write-up)/write-down (note 12) (295) 3,738
Investments in own shares write-down (note 13) - 102
UK decommissioning fund (write-up)/write-down (note 14) (13) 13
(283) 3,947
There were exceptional materials and services costs of GBP43m in respect of
costs incurred on advisory fees and other costs associated with restructuring
the Group's activities.
The Group settled 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.
The settlement included a commitment by the Company and Siemens to develop a
mutually beneficial relationship under a long-term supply agreement.
At 31 March 2004 the Directors reassessed the fixed asset carrying values, in
line with the requirements of FRS11, to determine whether any revisions to fixed
asset carrying values were appropriate. In carrying out such a review the
Directors concluded that, pending completion of the Proposed Restructuring, it
was appropriate to carry out a full review of valuations.
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 was based on an assessment of net realisable value. Following the
review the carrying value of fixed assets was increased by GBP295m at 31 March
2004 to reflect reversal of previous impairment losses. The calculation of
fixed asset carrying values at 31 March 2004 includes cash flow estimates
regarding the level of increase in pension fund contributions that may be
required to repair the actuarial pension fund deficit at 31 March 2004. The
potential payments included in the fixed asset calculation amount to
approximately GBP207m after being discounted at 15%, and are equivalent to a
pension fund deficit calculated on an actuarial basis in the range of GBP330m to
GBP440m. Formal triennial valuations of the BEGG and BECG pension schemes at 31
March 2004 are currently being undertaken, but the results of these valuations
will not be finalised until later in 2004.
The electricity price assumptions are a very significant component of the asset
value calculation. The Directors have considered market views on future prices
of wholesale electricity and also the commercially available forecasts. They
have considered the impact on future prices of the increases in market
electricity prices which occurred in the past year, the outlook for coal and gas
fuel prices, potential for changes in generation capacity in the UK, and the
potential effect on the market of changes in Government policy particularly in
the area of environmental legislation. In determining the price assumptions the
directors have taken a cautious view of there being a significant long-term
recovery in market prices. This recovery of market prices during the year has
led to forecasts of future electricity prices being greater than those
underpinning the value in use calculated at 31 March 2003. Greater cash inflows
are therefore anticipated over the lifetime of the nuclear plants, and so an
element of the prior year impairment loss has been reversed. As market prices
are outside the Directors' control actual prices may differ from those forecast.
At 31 March 2004 the market value of the UK decommissioning fund had increased
to GBP440m (31 March 2003: GBP334m), thereby necessitating an exceptional credit
of GBP59m in the twelve months ended 31 March 2004. The GBP59m included a GBP13m
exceptional credit to reverse the write-down on non-operational assets made in
the year ended 31 March 2003. The remaining balance of the restatement to market
value of GBP46m has been dealt with as an exceptional financing credit to
reverse previously written-down revalorisation amounts. The remaining UK
decommissioning fund movements relate to revalorisation of GBP28m and regular
cash contributions of GBP19m.
Exceptional operating costs amounting to GBP3,947m were reported for the year
ended 31 March 2003. These amounts are further explained as follows:
- charges incurred on advisory fees and other costs associated with the
restructuring of the Group's activities of GBP35m in the year ended 31 March
2003;
- a charge of GBP57m in the year ended 31 March 2003 to provide for obsolete
stores and spares;
- a charge of GBP2m for the year to 31 March 2003 to provide for the onerous
pre-New Electricity Trading Arrangements (NETA) contracts with TPL, Total and
Enron;
- exceptional depreciation charge of GBP3,738m in the year ended 31 March 2003
in respect of a write down of an impairment loss in the carrying value of fixed
assets following a review of economic values and net realisable values of fixed
assets;
- a write-down of GBP102m in the year ended 31 March 2003 to reflect permanent
diminution in the value of own shares held in employee trusts; and
- the investments held within the UK decommissioning fund were written-down to
reflect a reduction in market value, resulting in a charge for the year to 31
March 2003 of GBP13m.
2004 2003
GBPm GBPm
Operating costs are stated after charging:
- research and development 14 15
- operating lease costs - Bruce Power - 70
- other 1 -
It is the Group's policy to engage PricewaterhouseCoopers LLP on assignments
where their expertise and experience with the Group are important, or where they
win work on a competitive basis. An analysis of auditors' remuneration on a
worldwide basis is provided below:
2004 2003
Audit services GBP000's % GBP000's %
- Statutory 510 9 480 16
- Audit related regulatory reporting 258 5 215 7
Further assurance services
- Creditors' long form report 2,017 35 - -
- Reporting accountant - working capital report 1,208 21 532 17
- Review of accounting for restructuring 1,114 20 1,111 36
Taxation
- Tax services 510 9 331 11
Other
- Other non-audit services 80 1 409 13
Total 5,697 100 3,078 100
Statutory audit fees for British Energy plc were GBP65,000 (2003: GBP60,000).
5. SALE OF INVESTMENTS
On 22 December 2003 the Group completed the sale of its 50% interest in AmerGen
to Exelon. The Group received initial consideration of US$277m upon financial
close on 22 December 2003 prior to adjustments relating to working capital
levels, stocks of unspent nuclear fuel inventory, capital expenditures and
low-level waste disposal costs to be determined at the time of closing. The
gain on sale calculated below is a provisional estimate pending receipt of
financial statements drawn up as at the date of financial close.
On 23 December 2003 the Group sold its 50% equity interest in Offshore Wind
Power Limited ('Offshore Wind') to GB Gas Holdings Limited, a wholly owned
subsidiary of Centrica plc, for an up front cash consideration of GBP2m and
deferred consideration of up to GBP750,000 which has not been recognised in
these accounts (net book value GBPnil).
The total cash receipts in relation to the discontinued activities of Bruce
Power amounted to GBP17m. The cash receipt of GBP9m received on 28 April 2003 in
relation to Bruce Power was accounted for in the year ended 31 March 2003 as an
adjusting post balance sheet event. The additional receipt of GBP8m received on
22 March 2004 was in relation to the re-start of the Bruce A reactor. These
receipts relate to the discontinued activities of Bruce Power.
The exceptional profit arising from the disposal of joint venture and businesses
and cash consideration which have been recognised in these accounts are analysed
as follows:
Bruce Offshore
Power AmerGen Wind Total
GBPm GBPm GBPm GBPm
Net assets sold - 112 - 112
Accounted for by:
Cash consideration net of transaction costs and
break fee 8 149 2 159
Exceptional gain on sale of joint venture and
businesses 8 37 2 47
Cash flows:
Cash consideration net of transaction costs
received in the year ended 31 March 2004 17 152 2 171
6. EMPLOYEE INFORMATION
(i) Staff costs
2004 2003
GBPm GBPm
Salaries 208 201
Social security costs 19 17
Pension costs (note 24) - 6
Severance charges 2 12
Amounts capitalised (5) (9)
Continuing activities 224 227
Discontinued activities - 111
Total staff costs 224 338
Amounts capitalised within staff costs for the year ended 31 March 2004 are
subsequently expensed as operating costs within materials and services costs
following the fixed assets impairment review carried out.
(ii) Employee numbers
2004 2003
Number Number
Average number of employees during the year:
Continuing operations 5,165 5,103
Discontinued operations - 2,799
Total 5,165 7,902
Average number of full-time equivalent employees by category during the year were:
2004 2003
Number Number
United Kingdom
Power stations:
- nuclear 3,612 3,579
- coal-fired 258 247
Engineering, technical and corporate support 1,257 1,228
North America - continuing operations 12 28
Total continuing operations 5,139 5,082
Canada - discontinued operations - 2,798
5,139 7,880
7. SUMMARY OF DIRECTORS' EMOLUMENTS
2004 2003
GBP'000 GBP'000
Total emoluments, including pension contributions
as Directors 517 585
For management services:
- salaries and other benefits 940 996
- performance related bonuses 405 -
- pension contributions 46 52
1,908 1,633
- compensation for loss of office 146 98
2,054 1,731
Full details of the remuneration and share interests of the Directors are set
out in the Remuneration Committee Report.
8. FINANCING CHARGES/(CREDITS)
2004 2003
Revalorisation: GBPm GBPm
Revalorisation of nuclear liabilities (note 21)
- changes in price levels 97 117
- discharge of one year's discount 118 111
215 228
Revalorisation of other provisions - 10
Revalorisation of decommissioning fund (note 14) (28) (29)
Share of revalorisation of joint venture (2) (4)
Revalorisation charge before exceptional items 185 205
Exceptional revalorisation (credit)/charge (see below) (68) 159
Revalorisation charge 117 364
2004 2003
Interest: GBPm GBPm
Interest on loans repayable within five years:
- bank 11 11
- other 33 24
Interest on loans repayable in five years or more:
- bank 24 38
- other 7 8
Interest receivable (11) (9)
Net interest before exceptional items 64 72
Exceptional (credit)/charge - interest rate swaps (5) 56
Exceptional charge - borrowing costs - 6
Exceptional financing (credit)/charges (5) 62
Interest payable and similar charges 59 134
At 31 March 2004 the market value of the UK decommissioning fund had increased
to GBP440m (31 March 2003: GBP334m), 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 has been recorded in
operating costs to reverse a prior write-down of non-operational assets, and
exceptional credits of GBP46m have been recorded in finance charges for the
twelve months ended 31 March 2004 to reverse the prior write-down of previous
revalorisation. 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.
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.
The total of the UK decommissioning fund and AmerGen decommissioning fund
exceptional revalorisation credits included within financing charges 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. The exceptional credit
is GBP5m for the year ended 31 March 2004.
At 31 March 2003 the market value of the UK decommissioning fund was lower than
the value that would have been derived from revalorising the cost of the
investment. The difference was GBP124m of which GBP111m was recognised as an
exceptional financing charge with the remainder classified as write-offs of
non-operational assets. At 31 March 2003 the British Energy share of the
adjustment required to reduce the AmerGen decommissioning fund to market value
was a charge of GBP48m.
An exceptional charge of GBP56m was recognised for the year ended 31 March 2003
for interest rate swaps, which were no longer considered to be effective. In
addition an exceptional charge of GBP6m was recorded for the write-off of
borrowing costs which had been previously capitalised and were being amortised
over the expected duration of the loan financing the acquisition of the
Eggborough power station.
9. TAXATION
2004 2003
GBPm GBPm
Tax on profit on ordinary activities:
Deferred taxation on ordinary activities before tax - (40)
Unwinding of discount - 14
Credit for the year on ordinary activities (note 23) - (26)
Exceptional deferred tax credit - (370)
Deferred tax credit for the year - (396)
Foreign tax (2) 18
Tax on profit on ordinary activities (2) (378)
2004 2003
Share of taxation for discontinued joint venture: GBPm GBPm
Ordinary activities - 10
There is no UK current tax charge for the year ended 31 March 2004 (2003:
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 exceptional tax credit for the year ended 31 March 2003 of GBP370m related
to a deferred taxation credit on exceptional items of GBP520m offset by the
de-recognition of the deferred taxation assets of GBP150m.
As set out in the Groups Cash Flow Statement, the tax paid of GBP12m in the year
relates to the Group's liability for its share of AmerGen's taxable profits. In
the year ended 31 March 2003 the net tax refund of GBP3m comprised tax paid of
GBP10m in respect of AmerGen and Bruce Power offset by a UK tax refund of
GBP13m.
A reconciliation of the effective tax rate for the current year tax credit,
which solely comprises foreign tax is set out below:
2004 2003
GBPm GBPm
Tax charge/(credit) on Group profit/(loss) at standard rate of 30% 70 (1,288)
Deferred tax:
Current year movement - 396
Impact of discounting (140) 619
Increase in deferred tax asset not recognised 113 150
Total deferred tax movement pre discounting (27) 1,165
(Credits)/expenses not (chargeable)/deductible for tax purposes (16) 140
(Gain)/loss on sale of investments not taxable (13) 11
Lower tax rates on overseas earnings - (6)
Minority interests - (4)
Impact of joint venture (14) -
Over provision for foreign tax in earlier years (2) -
Current tax (credit)/charge for year (2) 18
The share of taxation for the joint venture represents the Group's liability for
its share of AmerGen's taxable profits.
10. LOSS OF THE COMPANY
The Group's results include a loss of GBP616m (2003: loss of GBP6,058m)
attributable to the Company, inclusive of a provision of GBP590m (2003:
provision of GBP6,144m) made in the year for bad and doubtful inter-company
debtors which is eliminated on consolidation. The Company did not have any
distributable reserves at 31 March 2004 or 31 March 2003. As permitted under
Section 230 of the Companies Act 1985 the Company has not published a separate
profit and loss account.
11. EARNINGS/(DEFICIT) PER SHARE
The basic earnings/(deficit) per share for the year has been calculated by
dividing the profit/(loss) on ordinary activities after taxation, minority
interests and non-equity dividends by the weighted average of ordinary shares in
issue during the year, based on the following information:
2004 2003
Profit/(loss) for the year (GBPmillion) 234 (3,941)
Basic weighted average share capital (number of shares, million) 602 602
A calculation of diluted earnings per share has not been provided because the
outstanding share options do not have any dilutive potential at 31 March 2004.
12. TANGIBLE FIXED ASSETS
Other land Other plant
Power and and
Group stations buildings equipment Total
GBPm GBPm GBPm GBPm
Cost
As at 1 April 2003 and 31 March 2004 10,747 47 434 11,228
Depreciation
As at 1 April 2003 10,108 24 410 10,542
Exceptional asset write-up (275) (1) (19) (295)
Charge for the year 38 1 11 50
As at 31 March 2004 9,871 24 402 10,297
Net book value
As at 31 March 2004 876 23 32 931
As at 31 March 2003 639 23 24 686
The net book value of tangible fixed assets includes the following amounts in
respect of freehold land and buildings:
2004 2003
GBPm GBPm
Cost 2,245 2,245
Net Book Value 157 107
The Directors have reviewed the economic values and net realisable values of the
Group's fixed assets and compared them to their book value. A discount rate of
15% (2003: 15%) was applied to the economic value review. As a result of this
review, the value of its fixed assets has been increased by GBP295m (2003:
reduced by GBP3,738m). The background to the review is discussed more fully in
note 4.
The value of fixed assets held by the Company is GBPnil (2003: GBPnil).
13. FIXED ASSET INVESTMENTS
AmerGen
joint Loans Own Other
Group venture to Nirex shares investments Total
GBPm GBPm GBPm GBPm GBPm
Cost/carrying value
As at 1 April 2003 119 37 140 4 300
Foreign exchange (11) - - - (11)
Share of retained profits to
date of disposal 48 - - - 48
Disposal of joint venture (156) - - - (156)
As at 31 March 2004 - 37 140 4 181
Provision for diminution in
value
As at 1 April 2003 48 37 138 - 223
Foreign exchange (4) - - - (4)
Disposal of joint venture (44) - - - (44)
As at 31 March 2004 - 37 138 - 175
Net book value
As at 31 March 2004 - - 2 4 6
As at 31 March 2003 71 - 2 4 77
Other investments relate wholly to the investment held by Lochside Insurance
Limited.
On 22 December 2003 the Group disposed of its interest in AmerGen. An analysis
of British Energy's share of the aggregate net assets of the AmerGen joint
venture as at 31 March 2003 is set out below:
2003
GBPm
Negative goodwill (7)
Tangible assets 144
Stocks 10
Cash 6
Decommissioning fund 306
Debtors 18
Creditors (51)
Decommissioning liabilities (321)
Loan notes (34)
Net assets 71
Negative goodwill related to AmerGen's acquisition of Oyster Creek nuclear power
station in August 2000.
Loans have been made to United Kingdom Nirex Limited to fund development
expenditure for building an intermediate-level nuclear waste repository. These
loans have been fully provided for in the Group's financial statements.
At 31 March 2004 British Energy Employee Share Trust held 21,734,839 ordinary
shares at an average cost of GBP4.68 for a total consideration of GBP101m. At 31
March 2004 the Qualifying Employee Shareholders' Trust held 5,292,103 ordinary
shares at a cost of GBP5.32 per share (GBP28m) and 19,165,471 'A' shares at a
cost of 60p per share (GBP11m).
The market value of the shares held by the employee trusts at 31 March 2004 was
GBP3m, compared to a book value of GBP2m. The long-term prospects of the Company
have deteriorated considerably and the Directors considered it inappropriate to
recognise the increase in value of the shares held in employee trusts.
The Company held investments in Lochside Insurance Limited and British Energy
Finance Limited at 31 March 2004. During the year, the investment in Lochside
Insurance Limited was written down by GBP4m (2003: GBPnil), to a net book value
of GBP4m at 31 March 2004 (2003: GBP8m).
Subsidiary
Company undertakings
GBPm
Cost
As at 1 April 2003 and 31 March 2004 14
Provision for diminution in value
Charge for the year 4
Net book value
At 31 March 2004 10
At 31 March 2003 14
Details of British Energy's principal subsidiary undertakings and other holdings
of more than 10% are as follows:
Country of
registration Group Company
and operation Class of share- share- Principal
share holding holding activity
% %
Subsidiary undertakings
British Energy Generation (UK) Generation and sale
Limited Scotland Ordinary 100 100 of electricity
British Energy Generation England and Generation and sale
Limited Wales Ordinary 100 - of electricity
British Energy Power & Energy
Trading Limited Scotland Ordinary 100 100 Energy trading
Eggborough Power Limited England and Generation and sale
Wales Ordinary 100 - of electricity
Other holdings of more than 10 per cent
United Kingdom Nirex Limited England and Disposal of nuclear
Wales Ordinary 10.8 - waste
Included in the Group and Company accounts are the assets of the British Energy
Employee Share Trust and the assets of the British Energy Qualifying Employee
Share Trust, which are trusts set up to hold shares purchased on behalf of the
Group's employees under the Employee Share Scheme and the British Energy
ShareSave Scheme respectively.
14. DECOMMISSIONING FUND
Group
GBPm
As at 1 April 2003 334
Regular contributions 19
Revalorisation (note 8) 28
381
Exceptional items to mark the fund to market value (note 8) 59
As at 31 March 2004 440
The decommissioning fund asset in the balance sheet normally represents the
contributions made by the Group, together with an estimated actuarially
determined long-term post-tax real rate of return on the fund of 3.5% per annum.
The change in value arising from applying the estimated long-term rate of
return is taken to the profit and loss account as a revalorisation credit. The
decommissioning fund asset is receivable after more than one year and is
restricted in its use.
At 31 March 2004 the market value of the UK decommissioning fund had increased
to GBP440m (31 March 2003: GBP334m), thereby necessitating an exceptional credit
of GBP59m to the profit and loss account in the twelve months ended 31 March
2004 to reverse previously written-down amounts. The market value remains below
the amount which would have been calculated by revalorising on an actuarial
basis the total amounts which have been invested in the fund. As a result of the
UK decommissioning fund receivable being restated at market value, a GBP13m
exceptional credit has been recorded in operating costs to reverse a prior
write-down of non-operational assets, and exceptional credits of GBP46m have
been recorded in finance charges for the twelve months ended 31 March 2004 to
reverse the prior write-down of previous revalorisation.
The Company has no decommissioning fund at 31 March 2004 (2003: GBPnil).
15. STOCKS
Group
2004 2003
GBPm GBPm
Unburnt nuclear fuel in reactors 472 469
Provision for unburnt fuel at station closure (280) (272)
Net unburnt nuclear fuel in reactors 192 197
Other nuclear fuel 61 74
Coal stocks 15 14
Stores/strategic spares 82 75
350 360
The Company has no stock at 31 March 2004 (2003: GBPnil).
16. DEBTORS
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Trade debtors 252 226 4 3
Other debtors 16 89 - -
Prepayments 106 72 7 1
Amounts due from subsidiary undertakings - - - 81
374 387 11 85
Included within the Company's amount due from subsidiary undertakings is
GBP6,734m relating to amounts due from UK subsidiaries all of which have been
provided for (2003: GBP6,144m relating to amounts due from UK subsidiaries all
of which have been provided for and GBP81m which was denominated in foreign
currencies and translated at the year-end exchange rate).
Included within prepayments for the Group is GBP101m (2003: GBP72m) in respect
of pension contribution payments made in advance of their recognition in the
profit and loss account. These amounts fall due after more than one year.
17. CREDITORS
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Amounts falling due within one year:
Nuclear liabilities (note 21) 554 355 - -
Trade creditors 180 198 - -
Retentions 6 5 - -
Other taxes and social security 49 9 - -
Other creditors 317 326 3 1
Accruals 144 140 18 20
Amounts due to subsidiary undertakings - - 4,475 3,721
1,250 1,033 4,496 3,742
Other creditors: amounts falling due after more than one
year
Nuclear liabilities (note 21) 1,893 1,909 - -
Other creditors includes GBP316m (2003: 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 prior year, which gave rise to claims for certain amounts
which have become payable. Interest is payable on standstill balances at a rate
of 6%, other than 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 of the Group. Total and Enron subsequently
transferred their interests to Deutsche Bank.
18. BORROWINGS
The Group's and Company's borrowings at 31 March were as follows:
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Long-term project finance loan - Sterling 475 475 - -
Bonds - Sterling 408 408 408 408
883 883 408 408
The borrowings mature as follows:
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Amounts falling due within one year 197 152 110 110
Amounts falling due after more than one year 686 731 298 298
883 883 408 408
The maturities assume no debt has been accelerated and reflect the standstill
arrangements as part of the Proposed Restructuring.
The long-term project finance loan is secured on the assets of EPL. Amounts
owed by EPL to the lenders are not guaranteed by British Energy plc but British
Energy guarantees the payment of amounts by BEPET to EPL. The contractual
amounts payable by BEPET are calculated so as to cover EPL's borrowing
requirements and operating costs. British Energy also provides a subordinated
loan facility to EPL. The final instalment of loan principal is scheduled to be
repaid in 2011. The loan currently bears interest at LIBOR plus 1.25%. It is
proposed that these arrangements will be restructured as part of the proposed
restructuring of the Group.
19. FINANCIAL INSTRUMENTS AND DERIVATIVES
Disclosures include short-term debtors and creditors and exclude commodity power
contracts.
(i) Interest rate risk profile of financial liabilities
The interest rate profile of financial liabilities of the Group as at 31 March
2004 was:
Currency Total Floating rate Fixed rate Mixed rate Financial
financial financial financial liabilities on
liabilities liabilities liabilities (see which no interest
below) is paid
GBPm GBPm GBPm GBPm GBPm
Sterling 3,883 475 408 33 2,967
Fixed Financial liabilities on
rate financial liabilities which no interest is paid
Currency Weighted average Weighted average period Weighted average period
interest rate for which the rate is until maturity
fixed
% Years Years
Sterling 6.08 4.8 13.1
At 31 March 2004, nil borrowings (2003: GBP475m) were reclassified to fixed rate
financial liabilities due to the effect of the Group's interest rate contracts.
The 2003 balance has been reclassified to floating rate financial liabilities as
the directors believe the swaps used to cover this liability are no longer
effective.
The interest rate profile of mixed rate financial liabilities of the Group as at
31 March 2004 was:
Interest rate agreements 2005 2006 2007 2008 2009 Net fair
value
Fixed:
Notional amounts A (GBP million) 356 332 291 235 174 (28)
Average pay rate 6.6% 6.6% 6.6% 6.6% 6.6%
Average receive rate 4.7% 4.7% 4.7% 4.7% 4.7%
Variable to fixed:
Notional amounts B(GBP million) 30 (3)
Average pay rate 5.8%
Average receive rate 6 month
LIBOR
Collars:
Notional amounts C(GBP million) 70 (2)
Collar spread 5.3% to
6.8%
TOTAL (33)
A. The derivative agreements were amended post 31 March 2003 as part of
the Proposed Restructuring. The effect has been to fix interest payments under
the swaps from October 2004 onwards.
B. The bank has the right to cancel the swap at zero cost on any
cancellation date from April 2005 and every year thereafter.
C. The banks have the right to enter into semi-annual swaps receiving
5.25% and paying 6 month LIBOR for ten years at zero cost in April 2005.
The interest rate profile of financial liabilities of the Group as at 31 March
2003 was:
Currency Total Floating rate Fixed rate Mixed rate Financial
financial financial financial liabilities on
liabilities liabilities liabilities (see which no interest
below) is paid
GBPm GBPm GBPm GBPm GBPm
Sterling 3,729 475 408 56 2,790
Fixed Financial liabilities on
rate financial liabilities which no interest is paid
Currency Weighted average Weighted average period Weighted average period
interest rate for which the rate is until maturity
fixed
% Years Years
Sterling 6.08 5.5 14.6
The interest rate profile of mixed rate financial liabilities of the Group as at
31 March 2003 was:
Interest rate agreements 2004 2005 2006 2007 2008 Net fair
value
Variable to fixed:
Notional amounts (GBP million) 377 356 332 291 235 (47)
Average pay rate 6.6% 6.6% 6.6% 6.6% 6.6%
Average receive rate 6 month 6 month LIBOR 6 month 6 month 6 month
LIBOR LIBOR LIBOR LIBOR
Fixed to variable:
Notional amounts (GBP million) 30 30 (3)
Average pay rate 5.8% 5.8%
Average receive rate 6 month LIBOR 6 month LIBOR
Collars:
Notional amounts (GBP million) 70 70 (6)
Collar spread 5.3% to 6.8% 5.3% to 6 .8%
TOTAL: (56)
(ii) Interest rate risk profile of financial assets
The Group held the following financial assets as at 31 March 2004 and 31 March
2003:
Group
2004 2003
GBPm GBPm
Assets held as part of the financing arrangements of the Group:
Short-term financial assets
Sterling 840 647
Non-sterling 1 1
841 648
Long-term financial assets
Sterling 446 340
1,287 988
Short-term financial assets comprise cash, investments in liquid funds and
debtors (excluding prepayments) all of which have maturity dates within one
year. Cash not immediately required for business purposes is invested in
fixed-rate term deposits and money market funds. At 31 March 2004 the term
deposits and money market funds not used to provide collateral were due to
mature or were available within one month and earned interest at an average rate
of 3.9%. The balance GBP297m, which was deposited in support of collateral
requirements, earned an average rate of 3.1%. Availability of the cash is
restricted over the periods of the collateralised positions.
Long-term financial assets comprise the balance in the UK decommissioning fund
and fixed asset investments.
(iii) Maturity profile of financial liabilities
2004 2003
GBPm GBPm
Less than one year 1,304 1,089
Between one and two years 413 248
Between two and five years 679 834
Over five years 1,487 1,558
3,883 3,729
The analysis of 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 as part of the restructuring of the Group or
earlier termination of the standstill. The maturity profile of borrowings is
likely to change upon completion of the restructuring.
(iv) Borrowing facilities
At 31 March 2004 and 31 March 2003 the Group had the following undrawn committed
borrowing facilities in place, in respect of which all conditions precedent had
been met at that date:
2004 2003
GBPm GBPm
Expiring in one year or less - Government Facility 200 200
(v) Fair values
Set out below is a comparison by category of book values and fair values of all
the Group's financial assets and financial liabilities as at 31 March 2004 and
31 March 2003.
2004 2003
Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm
Primary financial instruments held or issued
to finance the Group's operations:
Short-term assets 810 810 639 639
Short-term borrowings and current portion of
long-term borrowings
(1,261) (1,288) (1,033) (969)
Long-term assets 446 446 340 340
Long-term borrowings and liabilities (2,579) (2,328) (2,640) (2,140)
(2,584) (2,360) (2,694) (2,130)
Financial instruments held or issued for
proprietary trading purposes
Speculative trading contracts 21 21 9 9
Derivative financial instruments used to
manage foreign currency, interest rate and
commodity price risk
Interest rate swaps (33) (33) (56) (56)
(2,596) (2,372) (2,741) (2,177)
The fair value of the short-term assets approximates to book value due to their
short-term maturities.
Short-term borrowings comprise trade creditors and retentions. The book value
of these liabilities has been used to approximate fair value.
Long-term assets comprise the balance in the UK decommissioning fund and other
fixed asset investments. The basis of valuation is referred to in notes 14 and
13 respectively.
Long-term borrowings and liabilities comprise the Group's nuclear liabilities,
bonds and the long-term project finance loan related to the investment in the
Eggborough Power Station. There is no open market information available for the
long-term project finance loan, the value of which has been severely affected by
the financial restructuring of the Group. Therefore, the fair value that has
been attributed to the loan, GBP150m (2003: GBP150m), has been based on the
Directors' best estimate of the net realisable value of the Eggborough Station
upon which this debt is secured. The nuclear liabilities book value has been
used to approximate fair value and the quoted closing clean market price at the
balance sheet date has been used to determine the fair valuation of the
long-term bonds.
The fair value of onerous trading contracts represents the value established
within the terms of the Proposed Restructuring.
The market trading price at balance sheet date was used to determine the fair
valuation of the interest rate swaps.
(vi) Gains and losses on financial instruments held or issued for
trading purposes
The net gain from trading in energy derivatives included in the profit and loss
account for the period to 31 March 2004 is GBP14m (2003: GBP13m).
Interest rate swaps are also held, which do not qualify for hedge accounting.
However, the interest rate swaps are not held for trading purposes, and so
disclosures in the interest rate swaps are given in note 22.
As mentioned in note 2 (xix), where the financial instruments are for
proprietary trading purposes, the movement in the fair value is reflected
through the profit and loss account.
(vii) Hedges
Gains and losses on instruments used for hedging are not recognised until the
exposure that is being hedged is itself recognised. Unrecognised gains and
losses on instruments used for hedging, and the movements therein, are as
follows:
31 March 2004 Unrecognised Unrecognised Total
Gains Losses Unrecognised Deferred
GBPm GBPm GBPm GBPm
Net losses on derivative instruments at
1 April 2003 - - - (2)
Net losses arising in previous period
included in current period profit and
loss account - - - 2
Net losses on derivative instruments at
31 March 2004 - - - -
31 March 2003 Unrecognised Unrecognised Total
Gains Losses Unrecognised Deferred
GBPm GBPm GBPm GBPm
Net losses on derivative instruments at
1 April 2002 - (28) (28) (10)
Net losses arising in previous period
included in current period profit and
loss account - 28 28 8
Net losses arising before 1 April 2002
not included in current period profit
and loss account - - - (2)
Net losses arising in current period
not included in current period profit
and loss account - - - -
Net losses on derivative instruments at
31 March 2003 - - - (2)
Of which:
Net losses expected to be included in
the profit and loss account for the
year ended 31 March 2004 - - - (2)
Net losses expected to be included in
the profit and loss accounts beyond the
year ended 31 March 2004 - - - -
The above analysis excludes and gains and losses in respect of the net
investment as gains and losses arising on these contracts are recorded in the
statement of total recognised gains and losses.
(viii) Currency exposures
The Group used foreign currency borrowings to mitigate the currency exposures
arising from its net investments overseas. Gains and losses arising on net
investments overseas and currency borrowings used to hedge the currency
exposure, have been recognised in the statement of total recognised gains and
losses. The Group did not hold material net monetary assets or liabilities in
currencies other than functional currency of the operating unit involved at 31
March 2004 and 31 March 2003.
As explained in the Review of Operating Performance and Financial Review on
pages 21 and 22 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.
20. PROVISIONS FOR LIABILITIES AND CHARGES
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
Nuclear liabilities (note 21) 1,776 1,673 - -
Other provisions (note 22) 36 62 5 9
1,812 1,735 5 9
21. NUCLEAR LIABILITIES
Back end Back end
fuel costs fuel costs Decomm- 2004
contracted uncontracted issioning Total
GBPm GBPm GBPm GBPm
As at 1 April 2003 2,263 678 996 3,937
Charged to profit and loss account:
- operating costs 114 16 - 130
- revalorisation (note 8) 129 35 51 215
Payments in the year (59) - - (59)
As at 31 March 2004 2,447 729 1,047 4,223
The year end balances of nuclear liabilities are included in the balance sheet
as follows:
2004 2003
GBPm GBPm
Creditors:
- amounts falling due within one year 554 355
- amounts falling due after more than one year 1,893 1,909
Provisions for liabilities and charges 1,776 1,673
4,223 3,937
Fuel costs - back end
Accruals for AGR fuel services relating to spent AGR fuel are based on the terms
of the historic 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.
Decommissioning
The costs of decommissioning the power stations have been estimated on the basis
of ongoing 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.
Projected payment details
Based on current estimates of station lives and lifetime output projections, the
following table shows, in current prices, the likely undiscounted payments, the
equivalent sums discounted at 3% per annum to the balance sheet date and the
amounts accrued to date.
Back end Back end Group
fuel costs fuel costs Decomm- 2004 2003
contracted uncontracted issioning Total Total
GBPbn GBPbn GBPbn GBPbn GBPbn
Undiscounted 5.2 4.7 5.1 15.0 14.7
Discounted 3.5 1.1 1.1 5.7 5.3
Accrued to date 2.4 0.7 1.1 4.2 3.9
The differences between the undiscounted and discounted amounts reflect the fact
that the costs concerned will not fall due for payment for a number of years.
The differences between the discounted amounts and those accrued to date will be
charged to the profit and loss account over the remaining station lives since
they relate to future use of fuel.
Under the terms of the contracts with BNFL referred to above and in accordance
with the projected pattern of payments for decommissioning and other
liabilities, taking account of the decommissioning fund arrangements described
in note 2(xvii) the undiscounted payments in current prices are expected to
become payable as follows:
Back end Back end Group
fuel costs fuel costs Decomm- 2004 2003
contracted uncontracted issioning Total Total
GBPm GBPm GBPm GBPm GBPm
Within five years 1,340 43 126 1,509 1,303
6 - 10 years 1,181 123 206 1,510 1,391
11 - 25 years 1,575 422 320 2,317 2,375
26 - 50 years 649 1,079 54 1,782 1,845
51 years and over 485 3,060 - 3,545 3,489
5,230 4,727 706 10,663 10,403
22. OTHER PROVISIONS
2004
Company
Eggborough Interest interest
site rate 2004 rate swaps
restoration swaps Restructuring Group
total
GBPm GBPm GBPm GBPm GBPm
As at 1 April 2003 3 56 3 62 9
Revaluation to market value - (5) - (5) -
Utilised in the year - (13) (3) (16) (3)
Reclassified as other - (5) - (5) (1)
creditors
As at 31 March 2004 3 33 - 36 5
The interest rate swaps provision of GBP33m is 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. A provision of
GBP56m was created at 31 March 2003 and was reduced to GBP33m at 31 March 2004
through utilisations of GBP13m, amounts reclassified as other creditors of GBP5m
and revaluation to market value of GBP5m. The Company share of the provision was
GBP9m at 31 March 2003, which was reduced to GBP5m at 31 March 2004 through
utilisations of GBP3m and an accruals movement of GBP1m.
23. DEFERRED TAXATION
2004 2003
GBPm GBPm
Accelerated capital allowances 30 (56)
Other long-term timing differences (85) (64)
Short-term timing differences 28 20
Corporation tax losses (348) (262)
Undiscounted asset for deferred tax (375) (362)
Discount 84 212
De-recognition of asset 291 150
Discounted provision for deferred tax - -
The Company does not have a deferred tax liability at 31 March 2004 (2003:
GBPnil).
24. POST RETIREMENT BENEFIT OBLIGATIONS
UK Pension Schemes
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. 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 accounts valuations were that, over the long-term, the investment rate of
return would be 6% per annum for benefits already accrued, and 6.5% for the
return achieved on future contributions. The rate of salary increase would be
4% per annum and the rate of pension increase would be 2.5% per annum. Assets
were taken at market value. At the date of the valuation, the combined market
value of assets of both schemes was GBP1,944m. This represents 119% of the
benefits that had accrued to members after allowing for expected future
increases in earnings.
Formal triennial valuations of BEGG and BECG pension schemes at 31 March 2004
are currently being undertaken, but the results of these valuations will not be
finalised until later in 2004. However, initial indications are suggesting a
range of deficit between GBP330m to GBP440m.
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 year to 31 March 2004 were nil net of
surplus amortisation (2003: GBP6m). At that date there was a SSAP24 prepayment
of GBP101m (2003: GBP72m) in the UK.
Bruce Power Pension Scheme
Following the disposal of British Energy's interest in Bruce Power in 2003 the
Group no longer operates the Bruce Power Pension Plan. As a result FRS17
disclosures are only made with regard to this scheme in relation to prior year
comparatives as applicable.
Bruce Power provided pensions, group life insurance and health care benefits for
retirees in Canada. Pensions were provided through the Bruce Power Pension
Plan, which was a defined benefit scheme and was externally funded and subject
to triennial actuarial valuations. Members of the plan contributed on average
5% of their salaries to the scheme. Bruce Power contributed the balance of the
cost of providing the pension.
Bruce Power also operated a supplemental retirement pension plan that provided
additional pensions to some retirees. This plan was not funded. Retiree group
life insurance and health care benefits were also not pre-funded.
The Group's Bruce Power related pension costs for the period of ownership from 1
April 2002 to 14 February 2003 were GBP12m.
FRS17 Disclosures
The Group has not implemented FRS17 'Retirement benefits' in the accounts for
the year ended 31 March 2004. The disclosures required under the transitional
arrangements for UK and Canadian plans within FRS 17 as advised by the Company's
actuaries are, however, set out below:
(i) UK Pension Schemes
a) Major assumptions for FRS17 disclosures at 31 March:
2004 2003 2002
% pa % pa % pa
Price inflation 2.75 2.25 2.75
Rate of general increase in salaries 4.25 3.75 4.25
Rate of increase of pensions in payment 2.75 2.25 2.75
Discount rate 5.50 5.50 6.00
b) The assets and liabilities of the scheme on an FRS 17 basis and the expected
rates of return at 31 March are:
Value at Value at Value at
Rate of 31 March Rate of 31 March Rate of 31 March
return 2004 Return 2003 Return 2002
% GBPm % GBPm % GBPm
Equities 8.25 1,223 8.5 878 8.0 1,248
Bonds 4.75 345 4.5 438 5.3 412
Property 6.4 202 6.5 183 6.7 175
Others 3.75 25 3.75 26 4.75 7
Total market value of plan assets 1,795 1,525 1,842
Present value of plan liabilities (2,147) (1,877) (1,799)
Pension (liability)/asset before
deferred tax (352) (352) 43
Related deferred tax liability - - (13)
Net pension (liability)/asset (352) (352) 30
No deferred tax asset is recognisable on the pension deficit in 2004 and 2003,
based on application of the deferred tax accounting policy set out in note 2
(xv).
c) Analysis of the amount that would be charged to operating profit on an FRS
17 basis:
2004 2003
(Gain)/loss (Gain)/loss
GBPm GBPm
Operating profit
Current service cost 35 32
Past service cost 1 13
Total charge to operating profits 36 45
Finance income
Expected return on assets in the pension scheme (106) (132)
Interest on pension scheme liabilities 102 107
Net credit to finance income (4) (25)
Total profit and loss account charge before tax 32 20
d) Movement in plan (deficit)/surplus during the year on an FRS 17 basis:
2004 2003
GBPm GBPm
(Deficit)/surplus in plan at beginning of the year (352) 43
Contributions paid 34 31
Current service cost (35) (32)
Past service cost (1) (12)
Other finance income 4 25
Actuarial loss (note 24(e)) (2) (407)
Deficit in the plan at the end of the year (352) (352)
e) History of experience gains and losses which would have been recognised
on an FRS17 basis:
2004 2003
(Gain) As % (Gain) As %
of of
/loss plan /loss plan
GBPm GBPm
Consolidated statement of total recognised gains and losses
Actual return less expected return on post employment plan (201) (11) 410 27
assets
Experience losses arising on plan liabilities 34 2 (3) -
Changes in assumptions (financial and demographic) 169 8 - -
Actuarial loss recognisable in consolidated statement of
total recognised gains and losses before tax 2 407
As % of plan liabilities at end of year - 22
(ii) Bruce Power Pension Scheme
Due to the Group's disposal of its interest in Bruce Power during 2003 the
following disclosure has only been provided where applicable.
a) Major assumptions for FRS 17 disclosures at 31 March:
2003 2002
% pa % pa
Price inflation 2.75 2.75
Rate of general increase in salaries 3.75 3.75
Rate of increase of pensions in payment 2.75 2.75
Discount rate 7.0 7.0
b) The assets and liabilities of the scheme on an FRS 17 basis and the
expected rates of return at 31 March are:
Value at
Rate of 31 March
Return 2002
% GBPm
Equities 8.5 255
Bonds 6.0 151
Others 5.0 16
Total market value of plan assets 422
Present value of plan liabilities (396)
Net pension asset 26
Other non-pension post retirement benefits (64)
Related deferred tax asset 11
Net deficit for post retirement benefits net of tax (27)
c) Analysis of the amount that would be charged to operating profit on an FRS
17 basis:
2003
(Gain)/loss
GBPm
Operating profit
Total charge to operating profits - current service cost 15
Gain on settlements - disposal of Bruce Power (103)
Finance income
Expected return on assets in the pension scheme (26)
Interest on pension scheme liabilities 26
Net credit to finance income -
Total profit and loss account credit before tax (88)
Due to the Group's disposal of its interest in Bruce Power during 2003 there was
no balance sheet impact of the Bruce Power Pension Plan for the 31 March 2003
and 2004 year ends.
d) Movement in plan deficit during the year on an FRS17 basis:
2003
GBPm
Deficit in plan at 1 April 2002 (38)
Current service cost (15)
Gain on settlement 103
Foreign exchange 2
Actuarial loss (52)
Deficit in the plan at 31 March 2003 -
e) History of experience gains and losses which would have been recognised on
an FRS17 basis:
2003
(Gain)/loss
GBPm
Actual return less expected return on post employment plan assets 50
Experience gains and losses arising on plan liabilities -
Changes in assumptions (financial and demographic) 2
Foreign exchange adjustments (4)
Actuarial loss recognisable in consolidated statement of total recognised gains and losses
before tax 48
(iii) Group reconciliation of net liabilities and reserves under FRS 17
2004 2004 2003 2003
GBPm GBPm GBPm GBPm
Net Profit and Net Profit and
liabilities loss account liabilities loss
reserve account
reserve
As reported (3,164) (3,960) (3,383) (4,179)
SSAP 24 prepayment (101) (101) (72) (72)
Net liabilities excluding defined (3,265) (4,061) (3,455) (4,251)
benefit asset
FRS 17 pension asset 1,795 1,795 1,525 1,525
FRS 17 defined benefit liability (2,147) (2,147) (1,877) (1,877)
Including FRS 17 pension liability (3,617) (4,413) (3,807) (4,603)
No deferred tax asset is recognisable on the pension deficit or pension
prepayment in 2004 and 2003, based on application of the deferred tax accounting
policy set out in note 2 (xv).
25. CALLED UP SHARE CAPITAL
2004 2003
GBPm GBPm
Authorised
991,679,020 ordinary shares of 4428/43p each 443 443
720,339,029 'A' shares of 60p each 432 432
One special right redeemable preference share of GBP1 - -
875 875
Allotted, called up and fully paid
620,362,444 ordinary shares of 4428/43p each 277 277
Non-equity shareholders' funds
80,908,247 'A' shares of 60p each 48 48
74,752,351 deferred 'A' shares of 60p each 45 45
One special rights redeemable preference share of GBP1 - -
93 93
370 370
Special rights redeemable preference share of GBP1
The special rights redeemable preference share is redeemable at par at any time
after 30 September 2006 at the option of the Secretary of State, after
consulting the Company. This share, which may only be held by a Minister of the
Crown or other person acting on behalf of HM Government, does not carry any
rights to vote at general meetings, but entitles the holder to attend and speak
at such meetings. The special share confers no rights to participate in the
capital or profits of the Company beyond its nominal value. Certain matters, in
particular, the alteration of specific sections of the Articles of Association
of the Company (including the Article relating to limitations that prevent a
person having the right to have an interest in 15% or more of the voting share
capital), require the prior written consent of the holder of the special share.
'A' shares and deferred shares
The 'A' shares are traded on the London Stock Exchange and at 31 March 2004 had
a market value of 6p (2003: 3p). The deferred shares have a GBPnil fair value at
31 March 2004 (2003: GBPnil).
The 'A' shares and deferred shares do not carry any rights to receive notice of,
attend, speak or vote at any general meeting, unless in the case of 'A' shares
the meeting is due to consider a resolution for the winding up of the Company,
or the non-cumulative preferential dividend to which the 'A' shares are entitled
remains unpaid six months or more after it fell due. On a winding up of the
Company, the 'A' shares have preferential rights over the ordinary shares in
respect of the distribution of capital. The deferred shares do not confer any
rights to participate in the capital or profits of the Company, including on a
winding up of the Company.
The impact on the Company's share capital as a result of the Proposed
Restructuring is discussed more fully in note 1.
Share option schemes
Details of Share Options Schemes are set out on page 41 of the Remuneration
Committee Report. Options outstanding at 31 March 2004, together with their
exercise prices and earliest dates of exercise, are as follows:
Exercise price
Per share Exercise No. of Ordinary Shares
GBP Date 2004 2003
British Energy ShareSave Scheme 4.44 2003 4,353 174,600
4.39 2004 99,444 113,268
1.36 2003 32,449 4,895,405
1.36 2005 3,069,904 3,624,113
2.61 2004 435,619 484,116
2.61 2006 410,851 485,011
2.29 2005 - 499,455
2.29 2007 - 453,946
1.36 2005 1,832,153 3,726,626
1.36 2007 2,633,723 4,616,840
Employee Share Scheme 2.60 2000 6,282,958 6,423,428
4.08 2000 502,572 516,572
5.08 2001 3,829,474 3,915,603
5.29 2002 3,922,000 4,022,000
Senior Management Share Scheme 2.60 2000 1,023,941 1,099,802
3.95 2000 22,264 22,264
5.08 2001 402,252 444,425
6.67 2002 19,865 19,865
5.29 2002 537,985 599,337
3.57 2002 33,952 33,952
2.41 2003 1,454,203 1,636,752
3.18 2004 125,786 125,786
26. PROFIT AND LOSS ACCOUNT
Group Company
2004 2003 2004 2003
GBPm GBPm GBPm GBPm
As at 1 April 2003 and at 1 April 2002 (4,179) (213) (4,563) 1,495
Profit/(loss) for the year 234 (3,941) (616) (6,058)
Foreign currency translation adjustments (15) (25) - -
As at 31 March 2004 and at 31 March 2003 (3,960) (4,179) (5,179) (4,563)
The Company did not have distributable reserves at 31 March 2004 (2003: GBPnil).
27. RECONCILIATION OF MOVEMENT IN EQUITY SHAREHOLDERS' FUNDS
Group
2004 2003
GBPm GBPm
As at 1 April 2003 and at 1 April 2002 (3,476) 490
Profit/(loss) for the financial year 234 (3,941)
Translation differences on foreign currency net investment (15) (25)
As at 31 March 2004 and at 31 March 2003 (3,257) (3,476)
28. RECONCILIATION OF OPERATING PROFIT TO OPERATING NET CASH
FLOWS
Group Group
2004 2003
Total Continuing Discontinued
activities activities Total
GBPm GBPm GBPm GBPm
Operating profit /(loss) 340 (3,899) 97 (3,802)
Depreciation (credit)/charges (includes
fixed asset write-(up)/down and lease
amortisation) (245) 4,012 13 4,025
Nuclear liabilities charged to operating 130 105 - 105
costs
Nuclear liabilities discharged (59) (115) - (115)
Other provisions discharged (3) (45) - (45)
Regular contributions to decommissioning
fund (19) (18) - (18)
Operating exceptional decommissioning fund
movement (13) 13 - 13
Decrease/(increase) in stocks 10 72 (12) 60
Decrease/(increase) in debtors 4 12 (30) (18)
Increase in creditors 11 107 24 131
Net cash inflow from operating activities 156 244 92 336
Payments to acquire tangible fixed assets - (112) (170) (282)
Net cash inflow from operating activities
net of capital expenditure 156 132 (78) 54
29. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2004
GBPm
Increase in cash in the year 175
Increase in liquid resources 65
Decrease in net debt in the year 240
Net debt at 1 April 2003 (550)
Net debt at 31 March 2004 (310)
30. ANALYSIS OF NET DEBT
Term Debt due in Debt due
deposits/ less than after more
Cash at bank one year than one
bank balances year Net debt
GBPm GBPm GBPm GBPm GBPm
Net debt at 1 April 2003 87 246 (152) (731) (550)
Cash flows 175 65 (45) 45 240
Net debt at 31 March 2004 262 311 (197) (686) (310)
31. 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 31 March
2004 have been drawn up on the basis of the historic BNFL contracts in respect
of back end fuel contracts, pending satisfaction of the restructuring conditions
set out in the revised contracts, thereby creating a contingent asset of GBP306m
(2003: GBP113m) 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 2003 113
Amounts payable to BNFL under the historic back end contracts for the period 249
Less: amounts paid/payable for the period under the revised BNFL back end
contracts, analysed as follows:
Amounts settled (59)
Amounts included in accruals at year end (11)
Cash flow benefit arising within the year 179
Finance charges accrued on amounts stoodstill 14
Closing balance at 31 March 2004 306
GBPm
Amounts payable under historic BNFL back end contracts
Opening balance at 1 April 2003 113
Amounts falling due in year 249
Amounts settled (59)
Standstill interest accrued 14
Closing asset balance at 31 March 2004 317
Less: amounts payable under revised BNFL back end contracts
Opening balance at 1 April 2003 -
Amounts falling due in year 70
Amounts settled (59)
Closing liability balance at 31 March 2004 11
Contingent asset at 31 March 2004 306
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 is 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 in October 2003 and Unit 3 restarted in
January 2004 but has not recognised any additional amounts on its balance sheet
at 31 March 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, or 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.
32. 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 accounts. This note describes the
contingent liabilities that are applicable to the Group and the Company.
The Group has been provided with the Credit Facility by the Secretary of State.
As at 31 March 2004, the Group had no drawings under the Government Facility.
Also at 31 March 2004, the Group had cash and liquid investments of GBP573m of
which GBP297m 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,
calculated to cover 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 claim relating to the condition of the plant is based upon alleged erosion
of some of the steam generator 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.
The principal tax claim relates to the treatment of expenditure at the Bruce
Power Station during the period of the Company's ownership which 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
which has not been recognised in the financial statements of the period. The
consortium claims that allowance of the expenditure for that period would cause
it to lose future deductions. British Energy has rejected the claim and expects
to defend it if it is pursued further. On the basis of advice received, the
Company is confident that the amount of the claim should not, in any event,
materially exceed the amount of the rebate, and that the claim should have no
material cash flow impact on the Group.
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 the value of nuclear
fuel contained in AmerGen's balance sheet dated 21 December 2003 British Energy
may be required to make a payment to Exelon of up to US$14m. British Energy
served a Dispute Notice on Exelon on 4 June 2004 to preserve its rights. 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 Group is involved in a number of other claims and disputes arising in the
normal course of business which are not expected to have a material effect on
the Group's financial position.
The Company has given certain indemnities and guarantees in respect of its
subsidiary undertakings. No losses are anticipated to arise under these
indemnities and guarantees, provided relevant subsidiary undertakings continue
as going concerns.
33. FINANCIAL COMMITMENTS
(i) Capital commitments
2004 2003
GBPm GBPm
Capital expenditure contracted but not provided 17 40
(ii) Analysis of annual commitments under operating leases
2004 2003
GBPm GBPm
Other operating leases expiring in:
Two to five years 3 -
(iii) Other contractual commitments
Under contractual arrangements, the Group has the following fuel commitments at
31 March 2004:
2005 2006 2007 2008 2009 Thereafter Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Commitments to purchase
in the year 200 183 93 67 63 859 1,465
At 31 March 2004 the estimated minimum commitment for the supply of coal was
2.4m tonnes, which, at contract prices on 31 March 2004, equates to
approximately GBP82m (2003: GBP68m).
In addition to the liabilities and provisions recognised and described in the
notes to the financial statements the Group has provided certain guarantees and
commitments in respect of the extent of capital expenditure by Eggborough Power
Limited. The Group also enters into commitments to purchase and sell
electricity in the normal course of business.
34. POST BALANCE SHEET EVENTS
The Company was in receipt of a further C$10m on 25 May 2004 in partial
consideration of the restart of the Bruce A units, see note 31.
--------------------------
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: June 17, 2004 BRITISH ENERGY PLC
By:____Paul Heward____
Name: Paul Heward
Title: Director - Investor Relations