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
December 17, 2003
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: Interim Results
dated 17 December 2003
British Energy plc
17 December 2003
INTERIM RESULTS - Part 1
6 months ended 30 September 2003
CHAIRMAN'S STATEMENT
"The UK Government, creditors and shareholders have continued to support the
proposed restructuring plan to secure British Energy's future and long term
viability. For our part, we will continue to focus on delivering a successful
restructuring whilst rebuilding a company which can perform effectively in the
UK energy market."
Summary
- Substantially reduced loss before tax of GBP71m in the 6 month period ended 30
September 2003 compared with a loss of GBP337m in the corresponding period in
2002/3. The loss before exceptionals and tax was GBP90m compared with a loss of
GBP124m in the corresponding period in 2002/3.
- No dividend has been declared for the period. The Board does not expect to
declare or propose any dividend for any period prior to the 2005/06 financial
year.
- UK nuclear output up 10% to 33.3 TWh. On the assumption that Heysham 1 returns
to service during the first half of February 2004, it is expected that total UK
nuclear output will be around 65.5TWh. This compares with total UK nuclear
output of 63.8TWh in the prior year.
- Operating costs on continuing activities before exceptionals fell GBP40m in
the period mainly due to lower depreciation following the fixed asset writedown
at 31 March 2003 Operating profit in the UK for the full year will be consistent
with the Board's expectations, notwithstanding the impact of recent developments
relating to the Sizewell B and Heysham 1 outages.
- Operating cash outflow, after capital expenditure, was GBP26m, compared with
an outflow of GBP71m in the corresponding period in 2002/03, an improvement of
GBP45m. This reflects a reduction of GBP9m in UK capital expenditure, lower
payments to British Nuclear Fuels plc (BNFL) and the absence of outflows to
Bruce Power following the sale of our interest in February 2003.
- The Company is fully contracted for the current financial year with limited
price exposure, and has fixed price sales contracts in place covering over half
of its planned output in 2004/05. The Company will, dependent upon electricity
market prices, also benefit from reduced market risk via the price hedging
arrangements under the revised contracts with BNFL.
- Restructuring events up to 30 September 2003:
- Exchange of contracts with BNFL covering front-end and back-end fuel
contracts. The Company also sold uranics stocks to BNFL for approximately
GBP58m.
- The European Commission published its preliminary views and the
procedures for considering the State Aid application by the UK Government.
- Restructuring events since 30 September 2003:
- The Group agreed the proposed disposal of its 50% interest in AmerGen to
Exelon for US$277m, subject to various adjustments and conditions including
a break fee of US$8.295m payable to FPL Group Inc. (FPL). All US regulatory
approvals have now been received and the Group expects to complete the
disposal shortly and, in any event no later than 31 March 2004.
- The Company achieved formal agreements on the terms of the proposed
restructuring (the Proposed Restructuring) and the continuation of
standstill arrangements with certain creditors and the UK Government. The
creditors who have signed up to the Creditor Restructuring Agreement have
agreed, subject to a large number of important conditions, to exchange
their existing claims for the issue of new bonds and bond equivalent
payments under new arrangements for Eggborough and at least 97.5% of the
new ordinary shares of the new parent company of the British Energy Group.
- Under the Proposed Restructuring, it is proposed that existing
shareholders will receive 2.5% of the equity of the new parent company of
the British Energy Group plus warrants to subscribe for 5% of the new
equity, subject to the proposed scheme of arrangement with shareholders
being approved and implemented as part of the Proposed Restructuring.
- The UK Government granted a temporary increase in its credit facility to
the Company (the Credit Facility) to GBP275m from the previous level of
GBP200m due to pressures on the Company's liquidity resulting from the
combined effects of the increasing levels of collateral brought about by
the increased volatility in electricity prices and the recent outages at
Sizewell B and Heysham 1. The additional GBP75m will mature by the earlier
of receipt by British Energy of the AmerGen disposal proceeds or 22
February 2004.
Key financials are shown below:
6 Months Ended 6 Months Ended Year Ended
30 Sept 2003 30 Sept 2002 31 March 2003
GBPm GBPm GBPm
Turnover 677 909 1,903
Operating Loss (33) (157) (3,802)
Loss Before Tax (71) (337) (4,292)
Net Operating Cashflow (26) (71) 54
Net Debt (621) (966) (550)
Total Unit Costs (including 1.92p/KWh 2.35p/kWh 2.16p/kWh
revalorisation)
The Proposed Restructuring, if implemented, will result in significant changes
to British Energy's financial position, including significant changes to the
Company's liabilities and costs. The financial information contained in this
document does not take into account those significant changes, which will not
take effect unless and until the Proposed Restructuring is implemented.
Further details regarding the Company's business and financial performance are
set out in the Management's Discussion and Analysis (MD&A) and Financial
Statements, which appear later in this document. In addition the circular sent
to shareholders on 5 December 2003 regarding the proposed disposal of the
Company's 50% interest in AmerGen includes detailed information regarding the
Company and the Proposed Restructuring.
Restructuring
On 1 October 2003 British Energy entered into a formal agreement (the Creditor
Restructuring Agreement) with Teesside Power Limited, Total Gas & Power Limited,
Enron Capital & Trade Europe Finance LLC, The Royal Bank of Scotland plc (RBS),
BNFL and the ad hoc committee of British Energy's bondholders in relation to the
continuation of the standstill and ultimate recognition and compromise of their
claims and an agreement with the UK Government and others in relation to the
restructuring of the Group's nuclear liabilities. By 31 October 2003
bondholders representing with RBS 88.8% of the combined amount owing to
bondholders and RBS, together with all the lenders and swap providers in the
Eggborough bank syndicate had signed up to the Creditor Restructuring Agreement.
The creditors who have signed up to the Creditor Restructuring Agreement have
agreed, subject to a large number of important conditions, to exchange their
claims for new bonds and bond equivalent payments under new arrangements for
Eggborough and at least 97.5% of the new ordinary shares in the restructured
group excluding the impact of any warrants issued. In the case of the
bondholders and RBS the exchange will be made pursuant to a scheme of
arrangement with them (the Creditors' Scheme) which will require approval at
meetings of the bondholders and RBS and the sanction of the court. RBS and the
bondholders who have signed up the Creditor Restructuring Agreement have agreed
to vote in favour of the Creditors' Scheme.
As part of the Proposed Restructuring, British Energy will seek to restructure
shareholders' interests either:
i. By a scheme of arrangement with shareholders (the Members'
Scheme) requiring shareholder approval and the sanction of the court; or
ii. If the shareholders do not vote in favour of the Members' Scheme
(or if it otherwise lapses) by the disposal by the Company of all of its
subsidiaries and other assets with shareholder approval (the Disposal Route).
However, if the shareholders do not vote in favour of the Members' Scheme and
shareholder approval in respect of the Disposal Route is not obtained, all of
the Company's shares will be de-listed (if not already de-listed to give effect
to the AmerGen disposal) in order for the Proposed Restructuring to be completed
without the requirement for a shareholder vote.
If the proposed Members' Scheme is implemented, shareholders will receive new
shares representing 2.5% of the issued share capital of the new parent company
of the Group immediately following implementation of the Proposed Restructuring.
In addition, existing shareholders will also receive warrants entitling them
to subscribe for new shares equal to 5% of the fully diluted share capital of
the new parent company of the Group immediately following completion of the
Proposed Restructuring, exercisable 5 years from the completion of the
restructuring. The subscription price for the warrants is GBP28.95m in aggregate
equivalent to an equity market capitalisation of the Group of GBP550m following
implementation of the Proposed Restructuring. In the event that the Members'
Scheme is not implemented, but the Disposal Route is approved, shareholders
would not receive any new shares but would receive the same warrants entitling
them to subscribe for new shares equal to 5% of the equity. In the event that
shareholders did not vote in favour of either the Members' Scheme or the
Disposal Route, they would receive nothing.
In the circular (the AmerGen Circular) sent to shareholders on 5 December 2003
concerning the proposed disposal of British Energy's interest in AmerGen (the
Disposal) the Board gave notice that in view of the importance of the Disposal
in the context of the Proposed Restructuring, if shareholders did not vote in
favour of the Disposal then in order to try and secure the financial stability
of the Company, the Board had decided that it would de-list the Company's shares
from the Official List of the UKLA and cease trading on the London Stock
Exchange in order to proceed with the Disposal without the approval of
shareholders (which upon de-listing will cease to be required). This decision
was taken reluctantly by the Board and reflects their belief that the Disposal
is a critical part of a successful restructuring of the Group.
Going Concern
The AmerGen Circular included a statement on and a description of working
capital of which the following is an extract:
"The Board is of the opinion that the working capital available to the Resultant
Group is not sufficient for the present requirements of the Resultant Group,
that is, for at least the next twelve months from the date of this document.
The Company is taking steps, with a view to improving this situation. The Board
has agreed with the Secretary of State a temporary increase in the Government
Facility. The Company expects to receive the proceeds from the Disposal before
31 March 2004 which will significantly increase the Group's financial
flexibility. Over the longer term, the Board is exploring initiatives to reduce
the demand for trading collateral and to achieve sufficient liquid resources to
implement the Proposed Restructuring."
(Within the AmerGen Circular, "The Resultant Group" was defined as British
Energy and its subsidiary undertakings after closing; the "Government Facility"
was defined as the Credit Facility; and "the Disposal" was defined as the
proposed disposal by British Energy of its interest in AmerGen to Exelon).
This statement was prepared for the purposes of the Listing Rules of the UK
Listing Authority. The standards which govern the preparation of financial
statements are different and require the Board to consider the going concern
requirements for the foreseeable future, a period greater than 12 months.
Notwithstanding this statement, the Board has decided to publish these Interim
Results on a going concern basis because the Company is seeking to implement the
Proposed Restructuring. Further details are set out in Note 1 - Basis of
Preparation - in the Notes to the Financial Statements.
Whilst we have made significant progress in taking forward the Proposed
Restructuring, it remains subject to a large number of significant uncertainties
and important conditions, including receipt by the Secretary of State of Trade
and Industry (Secretary of State) of a satisfactory notification from the
European Commission that in so far 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 expects to receive the European Commission's decision by mid
2004. 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) and in
the meantime may require prepayment of the Credit Facility if she concludes that
the Proposed Restructuring cannot be completed in the manner or timescale
envisaged.
If the Disposal is not completed, or if there is a material downwards adjustment
to the consideration for the Disposal, or 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 timescales envisaged or required, or
if there is a material deterioration in the Group's cashflow performance or
outlook or if the Credit Facility ceases to be available or if the standstill
or restructuring arrangements which the Group has entered into with certain
creditors are terminated, British Energy may be unable to meet its financial
obligations as they fall due and consequently the Group 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.
New York Stock Exchange (NYSE)
On 28 August 2003, the Company was notified by the NYSE that British Energy did
not at that time comply with the NYSE's continued listing standard relating to
minimum market capitalisation and shareholders' equity. The Company is
currently in discussions with the NYSE with regard to its ability to meet the
continued listing standard. The Company currently does not, and may not in the
future, comply with the minimum listing standard of the NYSE, and may,
therefore, lose its listing on the NYSE.
Bruce Disposal
The disposal of British Energy's 82.4% interest in Bruce Power was completed on
14 February 2003 to a consortium of three parties for a consideration of C$677m
subject to various adjustments. Under the master purchase agreement, a further
C$100m was payable to British Energy contingent upon the restart of two of the
four Bruce A units. C$50m would have been released had the first unit restarted
by 15 June 2003 and an additional C$50m would have been released to British
Energy had the second unit restarted by 1 August 2003. C$5m is deducted from the
C$50m payable in respect of each unit for its failure to restart by the
scheduled restart date and a further C$5m is deducted on the first day of each
successive calendar month that each reactor fails to re-start.
Bruce A Unit 4 was restarted in October 2003 and Unit 3 has now received
regulatory clearance to restart. In view of the delays incurred the amounts
recoverable in respect of the restarts will be significantly lower than the
maximum of C$100m but the amounts and the timing of the payments still have to
be confirmed.
A further withholding of C$20m in respect of potential adjustments for pension
deficits was paid to British Energy in full on 28 April 2003.
The proceeds received in respect of the disposal of Bruce Power have been used
to repay or collateralise amounts drawn under the Credit Facility and to fund
working capital requirements.
Dividend Policy
The Board intends to distribute to shareholders as much of the Company's
available cash flow as prudently possible, consistent with the long-term
development of the business. However, under the terms of the Proposed
Restructuring, there are certain restrictions on the Board's ability to pay
dividends, as follows:
- British Energy is required to fund a cash reserve out of the Company's
post-debt service cash flow in order to support British Energy'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 (the 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 time as the cash reserve is at the required level. As a result of the
requirement to fund the cash reserves, the Board does not expect to pay a
dividend in respect of the financial year ending 31 March 2005.
- The terms of the Nuclear Liabilities Agreements also require that once
the cash reserve is funded to the level 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 contain certain covenants, including a
restriction that allows British Energy to pay a dividend only if no event of
default has occurred.
Board Changes & Staff
Earlier this year, I referred to the appointment of new Independent Directors.
Following the appointment of William Coley and Pascal Colombani to the Board on
1 June, Sir Robert Walmsley was appointed as an Independent Director on 1 August
2003. Sir Robert was previously a nuclear expert in the Ministry of Defence in
the UK. This combined experience of these three appointments reinforces the
Board's nuclear credentials as we focus on the performance and reliability of
the UK nuclear fleet.
Under the terms of our Proposed Restructuring, we will be looking to appoint two
further Independent Directors from candidates proposed by the Bondholders,
subject to review and nomination to the Board by the Nominations Committee.
The Board has decided to undertake an evaluation of its performance and
functioning, as recommended in the Higgs review, which will consider advice from
stakeholders.
On 8 December Keith Lough, our Finance Director, resigned from the Board of
British Energy but stays with us for the time being to undertake special
projects. Keith joined British Energy as Finance Director in September 2001 and
has played a critical role in taking forward the Proposed Restructuring and I
would like to thank Keith for the tremendous work he has done in seeking to
secure British Energy's restructuring. On 8 December 2003, the Company
appointed Martin Gatto to the Board as Interim Finance Director. Martin was
previously with Midlands Electricity and Somerfield plc. The Board has arranged
for there to be sufficient overlap in the transition period to ensure that the
responsibilities of the Finance Director are fulfilled at all times.
In these trying and difficult times, I would like to thank all our staff and to
congratulate them on continuing to conduct themselves in a highly professional
manner.
ADRIAN MONTAGUE
CHIEF EXECUTIVE'S REVIEW OF OPERATING PERFORMANCE
The Company continues to make significant progress towards achieving the
Proposed Restructuring, which, if it is fully approved, offers us an opportunity
to demonstrate that we can deliver improved performance. The challenge for us
is to deliver enhanced and reliable output from our stations thereby enabling us
to build up our cash reserves and restore our profitability. In this respect, I
am pleased to report an improvement in our overall operational performance as
well as a good start for our programmes to tackle the root causes of
under-performance. However, the current unplanned outage at Heysham 1 and the
extended statutory outage at Sizewell B represent a clear indication of the
scale of the challenges facing us.
The key figures in the results were the loss before tax of GBP71m compared with
a loss of GBP337m a year ago. There were exceptional credits amounting to GBP19m
in the period and details of these are covered elsewhere in the report.
The reduction in the Group's loss before tax reflected an increase in UK output
of 3.8 TWh and a net reduction of GBP40m in UK operating costs, with lower
depreciation (as a result of the substantial write downs of generation assets
last year) more than off setting increases in other operating costs. The
Group's results include a contribution from our 50% share in AmerGen but there
was no contribution from Bruce Power following the sale of our interest in
February 2003.
UK Nuclear Generation
Total UK nuclear output increased to 33.3 TWh in the period compared with output
of 30.3 TWh a year ago. There were strong performances from the Sizewell B and
Heysham 2 power stations. During the period British Energy completed four
statutory maintenance outages, being the majority of such work in this financial
year. Output in the first half of the previous year was adversely affected by
unplanned outages at Torness.
Since 30 September 2003, the Company's output has been adversely affected by the
extended statutory maintenance outage at Sizewell B and the on-going unplanned
outage at Heysham 1. This is covered in more detail in Current Trading and
Outlook, later in this Statement.
UK nuclear costs per unit excluding revalorisation fell 17% to 1.53p/kWh as
compared with 1.85p/kWh in the same period last year. The operating unit costs
for the reporting period are calculated by taking the total operating costs
before exceptional items which were GBP686m and subtracting GBP177m applicable
to non-nuclear activities. The resulting figure of GBP509m was then divided by
nuclear output of 33.3 TWh.
The principal reasons for the reduction in nuclear unit costs relate to the
higher output and the lower depreciation charge. Fuel costs were GBP8m higher
primarily as a result of the increased output, offset by a price reduction.
When the revised BNFL arrangements, which underpin our cost improvement strategy
are fully implemented, nuclear front-end and back-end fuel costs will be
significantly reduced. In addition these contracts simplify our AGR fuel
procurement activities.
At the time of the Preliminary Results in June 2003, we announced that we had
launched a number of programmes to tackle the root causes of under-performance.
Shortly afterwards we engaged an external team to assist us to scope the
problem and make recommendations on what needed to be done. We have received
their initial suggestions and are reviewing these with them. These programmes
underline the importance that the Company is placing on achieving greater
reliability whilst consistently meeting its targets for cost efficient
operations and striving to achieve high operational standards.
The programmes are unlikely to have a material effect on the expected level of
capital and revenue expenditure i in the current financial year or the financial
year ending 31 March 2005. For the period thereafter, we are undertaking further
analysis of the impact of the programmes, focusing on costs and benefits, in
order to determine how far the levels of investment in the nuclear fleet will
require to be greater than expected in the business plan and in the Company's
announcement of 1 October 2003. The Board believes that it is likely to
increase the level of investment that will be required compared to previous
expectations but these should deliver greater plant reliability. The Company
will give a further up-date on the progress of these programmes at the time of
our next Preliminary Results.
UK Power & Energy Trading
Trading conditions were volatile through the period. Forward base load prices
for the period from October 2002 to September 2003 have varied significantly,
ranging from 1.7p/kWh to over 2.1p/kWh.
The revised front-end and back-end fuel contracts that have been agreed with
BNFL provide an important partial hedge against market price movement on
approximately 50% of the Company's total nuclear output. Further risk
mitigation has been (and will continue to be) delivered through the Group's
trading strategy. The Board believes that short-term and medium-term risk
reduction will continue to be achieved through a trading mix that includes
medium-term direct sales to industrial and commercial customers as well as
contracting in the wholesale electricity markets.
Overall our UK achieved selling price for the period was 1.58p/kWh versus 1.73p/
kWh in the comparable period in 2002. This decline reflects intense competition
in generation, which resulted in lower market prices. These lower prices for
both wholesale and directly supplied power prevailed through the latter half of
2002 and the first half of 2003, when the bulk of the Company's generation for
delivery in the period was sold. The achieved price compared with total UK
generation costs of 1.92p/kWh (including nuclear, Eggborough and corporate
overheads plus revalorisation) which was 18% lower than the same period last
year. We managed our risk exposure by continuing to use diverse channels to
market and making best use of the flexibility of our Eggborough 2000MW coal
fired plant. The average achieved selling price was calculated by taking the
total sales which were GBP560m, excluding energy supply costs of GBP103m and
miscellaneous income of GBP14m and dividing this by total output of 35.5 TWh.
Eggborough generated 2.2 TWh in the period. Apart from providing a backup in
the event of nuclear unplanned outages, Eggborough also provides shape to our
nuclear base load output thereby enabling us to better meet our customers'
needs. It is also used to meet short-term requirements in the balancing market.
In September 2002, in view of the Group's financial position, the Board decided
to revise the Group's wholesale contracting policy. Following this, the decision
was taken to fix a greater proportion of the Group's income to minimise risks
and reduce the Group's exposure to volatility in the wholesale price of
electricity. As a result, the Group is fully-contracted for the current
financial year with limited price exposure for the rest of the year and a
current forecast for average achieved price of 1.74p/KWh. For future years, the
Group has less forward cover. For Summer 2004 and Winter 2004/2005, the Group
has in total contracted to sell approximately 96 per cent. of its planned output
and has fixed price sales contracts in respect of approximately 55 per cent. of
its output. The fixed price contracts for next year are at an average price of
1.81p/kWh . When taken together with the hedge provided by the revised BNFL
contracts, the exposure of the Group to the market price for electricity in the
financial year ending March 2005 is only 4 per cent of its total output or
approximately 3TWh.
We extended our Direct Sales Business to an annual volume of 29 TWh. It now has
over 1200 customers and serves over 6500 sites. This represents an increase of
30% in volume, 40% in customers and 30% in sites on an annualised basis. The
Direct Supply Business continues to be highly rated for its customer service,
having won its 18th consecutive quarterly customer service award.
A revised date of April 2005 has been announced by Ofgem, the industry
regulator, for the implementation of the British Electricity Transmission and
Trading Arrangements (BETTA), an enlarged market covering England, Wales and
Scotland, subject to legislation which was announced in the Queen's Speech to
Parliament on 26 November 2003.
The Nuclear Energy Agreement (NEA) under which all of British Energy's
electricity generated from its two Scottish stations is sold will terminate on
the earlier of the introduction of BETTA or 1 April 2006, subject to European
Commission approval.
UK Operating Costs
Total materials and services costs for the whole business which comprise the
operating expenses of all our power stations and support functions excluding
fuel costs, staff costs and depreciation increased by GBP28m when compared to
the prior period. The increase included a reduction of GBP111m in depreciation
charges due to the fixed asset write-down in 2002/03 and a reduction of GBP16m
related to exceptional items and an increase of GBP47m due to the expensing of
capital investment expenditure. Capital investment expenditure has been expensed
to the profit and loss account in the reporting period, following the fixed
asset write down carried out at 31 March 2003. Staff costs have increased in
line with salary inflation.
North America
The operating profit for our 50% interest in AmerGen was GBP43m in the period,
compared with GBP45m in the same period in 2002/03. AmerGen achieved total
output of 10.6 TWh in the period representing an average load factor of 98%.
In September 2003, British Energy announced the proposed sale of its interest in
AmerGen to the FPL Group Inc (FPL) subject to Exelon's first right of refusal.
Exelon subsequently exercised this right and has agreed, subject to various
conditions, to acquire our 50% interest in AmerGen for US$277m subject to
various adjustments including a break fee payable to FPL for US$8.295m. All US
regulatory approvals relating to this sale have now been received.
There was no operating contribution from Bruce Power in the period following the
sale of our interest in February 2003.
Current Trading & Outlook
For the period from 1 April 2003 to 30 November 2003, the total output of the
Group (excluding AmerGen) amounted to 46.7 TWh, of which 42.8 TWh was derived
from its nuclear fleet and 3.9 TWh from the Eggborough coal-fired station.
However, British Energy's trading strategy has limited the benefit from price
rises in the current year.
As announced on 23 and 29 October 2003, during a routine maintenance outage at
Sizewell B, the Company discovered certain anomalies in 2 welds that required
further investigation. This investigation was completed and Sizewell B returned
to service on 15 November 2003.
On 16 December the Company announced that having now reviewed the results of the
inspections of the sea water cooling pipework at Heysham 1, it has decided that
it is necessary to extend the current outage in order to replace further
pipework. In light of this, the Company has revised its annual UK nuclear output
forecast for the year ending 31 March 2004 downwards from 67TWh to around
65.5TWh on the assumption that Heysham 1 returns to service in the first half of
February 2004.
Based on the above assumption it is estimated that the lost output arising from
the continuing outage at Heysham 1, together with the recent extended statutory
outage at Sizewell B, will be approximately 3.2 TWh with an aggregate gross cash
cost of approximately GBP95m. This compares with the previously announced
estimates of 1.7 TWh and GBP50m respectively.
The Board believes that operating profit in the UK for the full year will be
consistent with its expectations, notwithstanding the impact of developments
relating to the Sizewell B and Heysham 1 outages discussed above and the impact
of the increased level of prices in the UK generation market. However, as a
result of the non-cash impact of revised revalorisation assumptions, profit
before tax for the full year is likely to come in below the Board's previous
expectations.
Based on the performance in the year to date in controlling operating costs and
in achieving fuel efficiencies, the Company remains confident that it will
achieve the margin improvements of GBP25m over its business plan in the current
financial year. The improvement is reflected in the lower total costs of 1.92p/
kWh in the period, compared with 2.35p/kWh in the corresponding period in 2002
and 2.17p/kWh in the year ended 31 March 2003.
In the light of increased pressure on the Group's liquid resources and as a
result of a combination of the recent unplanned outages and the increased levels
of collateral and costs of such outages brought about by the increased
volatility of electricity prices, the Company has taken steps with a view to
improving the working capital position of the Group. The Board has agreed with
the Secretary of State a temporary increase in the Credit Facility from GBP200m
to GBP275m. The additional GBP75m will mature by the earlier of the receipt by
British Energy of the proceeds of the AmerGen Disposal or 22 February 2004. The
Company expects to receive the proceeds from the disposal of AmerGen shortly
and, in any event, no later than 31 March 2004 which will significantly increase
the Group's financial flexibility. Over the longer term, the Board is exploring
initiatives to reduce the demand for trading collateral and to achieve
sufficient liquid resources to implement the Proposed Restructuring.
As at 12 December 2003, excluding amounts reserved for interest payments,
British Energy had cash, including amounts placed as collateral, of GBP379m. Of
this, GBP359m was deposited as collateral in support of the Group's trading and
operational requirements. As at 12 December 2003, the Group had drawings of
GBP94m under the Credit Facility, leaving availability under such facility of
GBP106m (not taking into account the temporary increase of GBP75m described
above).
Future Reporting Requirements
In the lead up to restructuring becoming effective, British Energy is moving to
quarterly reporting of results as required under the terms of the restructuring
agreements. By the June 2004 quarter, the published results will include full US
GAAP financial statements and disclosures as if the Company were a US domestic
registrant.
MIKE ALEXANDER
Further Information
Contacts
Investor Relations Media Enquires
Paul Heward Andrew Dowler
Telephone 01355 262201 Telephone 0207 831 3113
There will be an investor/analyst conference call for investors at 15:30hrs UK
time. Dial in: 0845 1462004; International dial in: +441452 556 640.
Find this News Release on our web site: www.british-energy.com
Information Regarding Forward-Looking Statements
This report contains certain "forward-looking" statements as defined in Section
21E of the United States Securities Exchange Act 1934. Such forward-looking
statements include, among others, statements concerning the anticipated
development of the UK electricity industry, the future development of regulation
of the UK electricity industry, the effect of these developments on our
business, financial condition or results of operations, our Proposed
restructuring, our expectations as to the growth of our business, our
expectations with regard to our future investments in energy related projects in
the UK and internationally and other statements of expectation, belief, future
plans and strategies and other matters that are not historical facts concerning
our business operations, financial condition and results of operations. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which are in some cases beyond our control and may cause our
actual results or performance to differ materially from those expressed or
implied by such forward-looking statements. Due to the uncertainties and risks
associated with these forward-looking statements, which speak only as of the
date hereof, we are claiming the benefit of the safe harbour provision referred
to above.
BRITISH ENERGY PLC
17 December 2003
INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2003
Part 2
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this section are "forward-looking" statements (as defined
in Section 21E of the US Securities Exchange Act of 1934).
Such forward-looking statements include, amongst others:
- Statements concerning our proposed restructuring and the effect of our
proposed restructuring on our business and financial condition or results of
operations.
- Other matters that are not historical facts concerning our business
operations, financial condition and results of operations.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors which are in some cases beyond our control and may cause our
actual results or performance to differ materially from those expressed or
implied by such forward-looking statements. Due to the uncertainties and risks
associated with these forward-looking statements, which speak only as the date
hereof, we are claiming the benefit of the safe harbour provision referred to
above.
In the following discussion the "reporting period" refers to the six months
ended 30 September 2003 and the "prior period" refers to the six months ended 30
September 2002 unless otherwise stated. The following discussion and analysis
should be read in conjunction with the financial statements for the six months
ended 30 September 2003 and the notes thereto which are included in this report.
British Energy's financial statements have been prepared in accordance with UK
GAAP. A description of the differences between UK GAAP and US GAAP as they
relate to the Group are set out in Note 37 of our Form 20-F for the year ended
31 March 2003.
INTRODUCTION
British Energy has interests in eight nuclear power stations and one coal-fired
plant in the United Kingdom. In addition the Group has interests through its
joint venture, AmerGen, in three reactors in the USA but has recently announced
the proposed sale of its interests in AmerGen to Exelon.
RESTRUCTURING UPDATE
On 5 September 2002 the Board of Directors announced that it had initiated
discussions with the UK Government with a view to seeking immediate financial
support to implement a longer-term financial restructuring. The Board of
Directors decided to initiate discussions with the UK Government based on
several factors including:
- Its review of the revised forecast for UK nuclear generation for the
fiscal year ending 31 March 2003 (which indicated output of approximately 63 TWh
as compared with the original target output of 67.5 TWh, due to unplanned
outages particularly those at Torness and Dungeness B nuclear power stations).
- The failure of negotiations with British Nuclear Fuels plc, or BNFL,
to reach agreement on the terms of revisions to our fuel contracts, and
- Its review of the long-term prospects of the British Energy Group of
Companies (the 'Group').
On 9 September 2002 the UK Government granted the Group a Credit Facility in
order to provide working capital and cash collateral in support of its
electricity trading contracts in the United Kingdom and certain procurement
contracts. The Credit Facility currently provides for an aggregate principal
amount of GBP200m (which was temporarily increased to GBP275m on 27 November
2003) and will mature, subject to certain conditions, at the earlier of the date
required by the EC, completion of our proposed restructuring, and 30 September
2004.
On 1 October 2003, British Energy (the 'Company') announced that it had agreed
the terms of a proposed restructuring (the 'Proposed Restructuring') of the
Group with certain of its creditors and the Secretary of State for Trade and
Industry (the 'Secretary of State'). The Proposed Restructuring is based on the
heads of terms signed on 14 February 2003. The Company entered into an
agreement dated 1 October 2003 (as amended by a side letter entered into on 31
October 2003) with certain of its creditors (the 'Creditor Restructuring
Agreement') setting out the terms of the Proposed Restructuring. Completion of
the Proposed Restructuring is subject, amongst other things, to receipt by the
Secretary of State of a satisfactory notification from the European 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 expects to receive this notification by mid 2004.
The restructuring proposals set out in the Creditor Restructuring Agreement were
subject to certain creditor approvals being obtained by 31 October 2003. On 31
October 2003, the Company confirmed that the initial requirements relating to
creditor approvals and sign-ups to the Proposed Restructuring had been
satisfied.
RECENT DEVELOPMENTS
Credit Facility Agreement
On 27 November 2003 British Energy announced that it had agreed a temporary
increase in the amount of the Credit Facility to GBP275m with the Secretary of
State. The increase was required because of pressures on the Company's
liquidity resulting from the combined effects of requirements for increased
collateral brought about by greater volatility in electricity prices and the
recent outages of Sizewell B and Heysham 1. The temporary increase in the
facility of GBP75m will be available until the earlier of the receipt of the
proceeds from the disposal of its 50% interest in AmerGen Energy Company LLC
('AmerGen') and 22 February 2004.
New York Stock Exchange Listing
On 28 August 2003 the Board of British Energy was notified by the New York Stock
Exchange ('NYSE') that British Energy did not at that time comply with the
NYSE's continued listing standard relating to the minimum market capitalisation
and shareholders' equity. The Company is currently in discussions with the NYSE
with respect to its ability to meet the continuing listing standard. The
Company currently does not, and may not in the future, comply with the minimum
listing standard of the NYSE, and may, therefore, lose its listing on the NYSE.
Sale of AmerGen
In the United States the Group has a 50% interest in AmerGen. Exelon Generation
Company LLC ('Exelon'), owns the remaining 50% interest. AmerGen owns and
operates three nuclear power stations in Clinton, Illinois; Oyster Creek, New
Jersey and Three Mile Island, Pennsylvania respectively with a combined capacity
of 2,500 MW. The operation of these nuclear power stations is integrated with
the operation of Exelon's nuclear power stations.
The AmerGen stations have fixed arrangements in place with the former owners of
the stations or with Exelon for the sale of all their output at agreed prices
over the currently licensed lives of the stations. As a result the Group has
limited exposure to electricity market price movements in the United States.
On 11 September 2003, the Company announced that it, and certain of its
subsidiaries, had entered into a conditional agreement to dispose of British
Energy's 50% interest in AmerGen to the FPL Group Inc. ('FPL') for approximately
US$277m (GBP167m, translated at $1.66 : GBP1 based on the hedge rates
applicable), subject to various potential adjustments including a break fee
payable to FPL for US$8.295m.
This announcement highlighted the fact that the Group's joint venture partner in
AmerGen, Exelon, had a right of first refusal ('ROFR') arising under the limited
liability company agreement related to AmerGen to purchase the Group's interest
in AmerGen on the same terms as those offered by FPL.
On 3 October 2003, Exelon exercised its ROFR indicating that it would purchase
the Company's interest in AmerGen (to be effected through a sale of the entire
share capital of the Company's subsidiary, British Energy US Holdings Inc. ('
BEUSH')) on the same terms and conditions and at the same price as offered by
FPL (the 'Disposal'). The terms and conditions of the Disposal were formally
recorded in a legally binding agreement entered into on 10 October 2003.
The Group expects to complete the Disposal shortly and in any event not later
than 31 March 2004, subject to approval by an Extraordinary General Meeting of
shareholders which is scheduled to take place on 22 December 2003.
The value of net assets of BEUSH which are the subject of the transaction was
recorded as GBP119m (translated at the balance sheet exchange rate of US$1.66 :
GBP1.00).
Bruce A restart
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, a further C$100m was payable to British Energy contingent
upon the restart of two of the Bruce A units. C$50m would have been released to
British Energy had the first unit restarted by 15 June 2003 and an additional
C$50m would have been released to British Energy had the second unit restarted
by 1 August 2003. 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. At
30 September 2003 these units had not restarted therefore the Group has not
recognised any amount in respect of contingent consideration on its Balance
Sheet at 30 September 2003 because of uncertainties regarding their realisation,
and there is likely to be a significant reduction in the aggregate amount
payable to British Energy.
Recent Outages
On 23 October 2003, the Company announced that an unusual indication from
ultrasonic inspection of two welds in the turbine steam system led to a
requirement for further investigation at its Sizewell B nuclear power station.
The indication was discovered during a statutory maintenance outage, which takes
place at the plant at 18 monthly intervals.
On 29 October 2003, the Company announced that the additional tests at Sizewell
B had revealed no significant surface defects and that work continued to
characterise and assess the significance of the unusual indication found from
the original examination. At that time, the Company also announced that, based
on these findings, it estimated that it was unlikely that invasive repairs would
be required. The plant returned to service on 15 November 2003.
On 28 October 2003 both reactors at Heysham 1 were safely shut down following a
failure of a seawater cooling pipe within the turbine hall. Both reactors were
shut down manually and the site's safety systems operated normally. There was
no radiological release. The leak in the pipe was stopped and the water was
removed from the turbine hall. On 16 December the Company announced that the
inspections of the sea-water cooling pipes at Heysham 1 have now been completed
and having reviewed the inspection results received, British Energy has decided
it is necessary to extend the current outage in order to replace further
pipework. As a consequence it is now expected that the outage on the two units
will continue until the first half of February 2004.
FACTORS AFFECTING RESULTS OF OPERATIONS
Group Performance
The loss on ordinary activities before taxation was GBP71m for the reporting
period. The operating loss for the period was GBP33m, an improvement of GBP162m
when compared to the prior period (after exclusion of the results of Bruce Power
which was sold in February 2003). The change in operating result of continuing
activities can be summarised as follows.
Changes in operating
result
Increase/(decrease)
GBPm GBPm
Increased turnover pre-exceptionals 15
Exceptional turnover credit in prior period (41)
Total reduction in turnover (26)
Reduced exceptional charges 148
Reduced depreciation 111
Charge for write-off of capital investment expenditure (47)
Energy supply cost changes (9)
Fuel cost increases due to higher output (26)
Cost savings 11
Total reduction in operating costs 188
Improvement in operating loss position 162
UK Operations
The results of UK operations are principally affected by changes in plant
output, achieved electricity prices, operating costs, and revalorisation
charges. Each of these factors is discussed below.
Plant Output
Nuclear output for the reporting period was 33.3 TWh (representing a 79% load
factor), an increase of 3.0 TWh over the prior period.
Nuclear output is subject to a number of factors, principally the frequency and
duration of outages (being any period when the station is not generating). The
nuclear regulatory regime in the United Kingdom requires each nuclear power
station to be shut down periodically for maintenance and inspection as a
condition of that power station's nuclear site licence, which is referred to as
a statutory outage. Certain nuclear power stations must be shut down to allow
for refuelling, which is referred to as a refuelling outage. In addition,
nuclear power stations must be shut down for planned maintenance, inspection and
testing or to address an unplanned technical malfunction or engineering failure,
all of which we refer to as other outages.
Eggborough, which is the Group's sole coal burning station, produced 2.2 TWh
during the reporting period, an increase of 0.8 TWh compared to the prior
period.
Achieved Electricity Prices
The achieved selling price (which is calculated by dividing total wholesale and
direct energy sales net of energy supply costs by total output during the
period) for the reporting period was 1.58p/kWh, as compared with our achieved
selling price for the prior period which was 1.73p/kWh, a decrease of 9%. This
decline reflects intense competition in generation and lower market prices for
both wholesale and directly supplied power. These lower prices prevailed
throughout 2002 and the first half of 2003 when the bulk of the power for
delivery in the period to 30 September 2003 was sold. Significant protection
against further falls in wholesale price has been achieved by implementing a new
trading strategy. This strategy also reduces the potential benefit from rises
in wholesale price in the current year and, to a lesser extent, in the following
two years.
Operating Costs
A high proportion of the Company's operating costs are fixed in nature and are
discussed more fully later in this report.
Revalorisation
Revalorisation, which is included in financing charges, results from the
combined effect of inflation for the period, and unwinding of the discount rate
required to restate the Group's nuclear liabilities at the money values
applicable at the balance sheet date.
Exceptional Operating and Financing Items
During both the reporting period and the prior period our financial results have
been affected by a number of exceptional operating and financing items. The
table below summarises the impact of exceptional operating and financing items
(before tax) under UK GAAP for both the reporting period and the prior period.
Six months ended 30 September
2003 2002
GBPm GBPm
Restructuring costs 37 7
Onerous trading contracts - 46
Write down of investment in own shares - 98
Release of Nuclear Energy Agreement provisions - (41)
UK decommissioning fund (credit)/write down (39) 103
US decommissioning fund credit (14) -
Interest rate swaps provision credit (3) -
Total (19) 213
During the reporting period we recognised net exceptional operating and
financing income of GBP19m as compared with net exceptional operating and
financing charges of GBP213m during the prior period. Exceptional operating and
financing items comprised:
2003
- An exceptional charge of GBP37m related to advisory and other costs associated
with the Company's Proposed Restructuring.
- At 30 September 2003 the market value of the UK decommissioning fund had
increased to GBP398m, thereby necessitating an exceptional credit of GBP39m in
the reporting period 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.
- At 30 September 2003 the market value of British Energy's share of the US
decommissioning fund had increased to GBP321m, thereby necessitating an
exceptional credit of GBP14m in the period to restate the Group's investment in
AmerGen by reversing previously written-down revalorisation. The market value
remains below the amount which would have been calculated by revalorising the
value of the fund on an actuarial basis.
- At 30 September 2003 the value of the interest rate swaps provision was marked
to market with the resultant change in fair value during the period producing an
exceptional credit of GBP3m.
2002
- An exceptional charge of GBP7m related to advisory and other costs associated
with the Company's Proposed Restructuring.
- An exceptional charge of GBP46m resulted from provision for three significant
out-of-the-money trading contracts due to lower than anticipated electricity
prices in the United Kingdom. These contracts had previously been accounted for
as a hedge against our electricity output in the UK. However following the
introduction of NETA these contracts were no longer accounted for as hedge
contracts and, because they were out-of-the-money, they were provided for as
onerous contracts under UK GAAP.
- The exceptional charge of GBP98m related to the write down in value of British
Energy shares held in trust to honour employee share options.
- An exceptional credit of GBP41m related to the revised terms for the
electricity supply agreement with Scottish Power and Scottish and Southern
Energy. Under the terms of the agreement, the Company was in a position to
release a balance of GBP41m in respect of cash previously received.
- The exceptional charge of GBP103m related to a write down in the market value
of our UK decommissioning fund. The market value of our UK decommissioning fund
declined relative to its book value as a result of the world wide decline in
prices of equity securities.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003, COMPARED WITH
THE SIX MONTHS ENDED 30 SEPTEMBER 2002.
The discussion below will focus on continuing activities and compare the six
months ended 30 September 2003 (the 'reporting period') with the six months
ended 30 September 2002 (the 'prior period') unless otherwise stated.
Turnover
Turnover for continuing activities in the reporting period was GBP677m, a
decrease of GBP26m compared with the prior period. The principal factors
resulting in this decrease are set forth below.
Changes in turnover
Increase/(decrease)
GBPm
Change in UK turnover
Due to increased output 77
Due to lower electricity prices (55)
Decrease in miscellaneous income (7)
Change in turnover prior to exceptional items 15
Due to exceptional NEA income credit in prior period (41)
Decrease in turnover from continuing activities (26)
Output in the United Kingdom was 35.5 TWh in the reporting period as compared
with 31.7 TWh in the prior period. Nuclear generation output was 33.3 TWh in
the reporting period compared with 30.3 TWh in the prior period. Eggborough
output increased from 1.4 TWh to 2.2 TWh.
Increased output from our UK power stations resulted in increased turnover of
GBP77m. Our achieved selling price during the reporting period was 1.58p/kWh, a
decrease of 9% as compared with the prior period, resulting in a decrease in UK
turnover of GBP55m.
In the prior period the Company 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 credit within UK turnover (see "Exceptional
Operating and Financing Items").
Operating Costs
Six months ended 30 September
2003 2002 (Increase)/
decrease
Continuing Activities excluding exceptional costs GBPm GBPm GBPm
Fuel 184 167 (17)
Material and services 262 218 (44)
Staff costs 112 111 (1)
Depreciation 25 136 111
Energy supply costs 103 94 (9)
686 726 40
Continuing Activities - exceptional items
Materials and services 37 53 16
Amounts (credited)/written off non-operational assets (13) 119 132
24 172 148
Continuing Activities - total costs
Fuel 184 167 (17)
Materials and services 299 271 (28)
Staff costs 112 111 (1)
Depreciation 25 136 111
Energy supply costs 103 94 (9)
Amounts (credited)/written off non-operational assets (13) 119 132
710 898 188
Discontinued Activities - total costs - 168 168
Total operating costs 710 1,066 356
Total operating costs were GBP710m in the reporting period, a decrease of
GBP356m compared with GBP1,066m in the prior period. The total operating costs
of continuing activities excluding exceptional items in the reporting period was
GBP686m. This was GBP40m less than the GBP726m incurred in the prior period.
Fuel
Fuel costs increased by GBP17m in the reporting period compared to the prior
period. Increased output from our UK power stations resulted in GBP26m of
additional costs partly offset by efficiency savings of GBP8m and price
reductions of GBP1m. On 16 May 2003, the Company announced that it had exchanged
contracts with British Nuclear Fuels plc, or BNFL, covering front-end and
back-end fuel services. The front-end contracts became effective on 1 April 2003
and payments to BNFL are being made as if the new back-end contracts had become
effective on 1 April 2003. The financial statements for the reporting period
have been drawn up on the basis of the previous BNFL contracts in respect of
back end fuel costs, pending satisfaction of the restructuring conditions set
out in the new contracts thereby creating a contingent asset of GBP220m
(inclusive of principal amounts accrued at 31 March 2003) which will be
recognised upon completion of the proposed restructuring.
Materials and Services
Materials and services costs comprise the operating expenses of our power
stations and support functions excluding fuel costs, staff costs and
depreciation.
The costs during the reporting period increased by GBP28m when compared to the
prior period. The increase included a reduction of GBP16m related to exceptional
items and an increase of GBP47m due to the expensing of capital investment
expenditure. Capital investment expenditure has been expensed to the profit and
loss account in the reporting period, following the fixed asset write down
carried out at 31 March 2003.
Staff Costs
Staff costs during the reporting period increased by GBP1m compared with the
prior period. The increase was primarily due to salary inflation.
Depreciation
Depreciation charges were GBP25m during the reporting period compared with
GBP136m in the prior period. This decrease of GBP111m was primarily due to the
fixed asset write down of GBP3,738m at 31 March 2003 (see Note 7(ii) of the
accompanying Interim Financial Statements).
Energy Supply Costs
Energy supply costs in the UK were GBP103m in the reporting period compared with
GBP94m in the prior period. The increase primarily reflects the 35% increase of
direct supply volume.
Non-operational Assets
There was an exceptional credit against non-operational assets in the reporting
period of GBP13m compared with an exceptional cost of GBP119m in the prior
period. The credit of GBP13m in the reporting period relates to the mark to
market value adjustment of the UK decommissioning fund and reverses the write
down made in the year ended 31 March 2003. The GBP119m in the prior period
consisted of exceptional charges relating to the write down of own shares
investments and the write down of the UK decommissioning fund receivable.
Discontinued Activities
British Energy sold its operations in Bruce Power in February 2003. The
operating costs in the prior period were GBP168m.
Operating Loss
30 September
Decrease /
(Increase)
2003 2002 to losses
GBPm GBPm GBPm
Continuing activities (9) (64) 55
Discontinued activities - 38 (38)
Exceptional items (24) (131) 107
Total (33) (157) 124
The operating loss in the reporting period was GBP33m compared with an operating
loss of GBP157m in the prior period.
Excluding exceptional items and discontinued activities, the operating loss in
the reporting period was GBP9m, compared with an operating loss of GBP64m in the
prior period. The decrease in the loss was primarily due to increases in
turnover of GBP15m and the decreased depreciation charges of GBP111m, partly
offset by the GBP47m of capital investment expenditure charged to operating
costs.
Share of Operating Profit of Joint Ventures
Our share of the operating profit of AmerGen decreased by GBP2m to GBP43m in the
reporting period. The output from the three AmerGen power stations totalled
10.6 TWh in the reporting period, an increase of 0.9 TWh compared with 9.7 TWh
in the prior period. As indicated above we are in the process of selling our
interest in AmerGen.
Financing Charges
30 September
(Increase)/
decrease
2003 2002
GBPm GBPm GBPm
Revalorisation of nuclear liabilities 116 120 4
Other revalorisation (17) (6) 11
Revalorisation 99 114 15
Net interest expense 25 29 4
Financing charges before exceptional items 124 143 19
Exceptional revalorisation and interest (43) 82 125
Total financing charges 81 225 144
Financing charges in the reporting period decreased by GBP144m compared with the
prior period.
The revalorisation charge excluding exceptional items was GBP99m in the
reporting period compared with GBP114m in the prior year. The decrease in
revalorisation charges primarily reflects no revalorisation charge being made in
the reporting period in respect of amounts owing to Teesside Power Limited
('TPL'), Total Gas & Power Limited ('Total') and Enron Capital & Trade Europe
Finance LLC ('Enron') due to the Standstill Agreement reached as part of the
Proposed Restructuring, removing the need for revalorisation in respect of the
three contracts in question. The weighted average UK inflation rate was 1.5% in
the reporting period compared with 1.7% in the prior period and also resulted in
lower revalorisation in the reporting period.
In the reporting period there were exceptional credits of GBP40m in respect of
revaluation of our decommissioning fund receivables and GBP3m in respect of a
provision for interest rate swaps. The prior period exceptional charge was a
write down of GBP82m in respect of the decommissioning fund receivable.
Excluding these exceptional items, financing charges decreased by GBP19m to
GBP124m in the reporting period.
Taxation
The tax charge for the reporting period was GBP8m. The tax charge comprises the
overseas tax charge of GBP8m in respect of the Group's liability for its share
of AmerGen's taxable profits. There was no UK tax charge for either period as
tax losses were incurred.
The tax charge for the prior period, excluding tax relating to exceptional
items, was GBP78m. This comprised a UK deferred tax charge of GBP60m, an
overseas (Canadian) tax charge of GBP11m, an overseas (Canadian) deferred tax
credit of GBP4m and an GBP11m charge in respect of AmerGen.
Loss on Ordinary Activities
As a result of the factors discussed above, there was a loss on ordinary
activities after taxation for the reporting period of GBP79m compared with a
loss of GBP403m in the prior period.
Minority Interests
The minority interest at 30 September 2002 was in respect of the 17.6% share of
Bruce Power profits entitlement of minority partners. The Group's investment in
Bruce Power was sold on 14 February 2003.
Loss per Share
There was a loss per share of 13.1p per share in the reporting period compared
with a loss per share of 68.1p per share in the prior period.
In view of the Company's financial situation, no dividend is being proposed in
respect of the reporting period. No dividend was proposed in respect of the
prior period.
Capital Expenditure
During the six months ended 30 September 2003 amounts that would previously have
been capitalised as fixed assets totalling to GBP47m were expensed as operating
costs following the fixed asset impairment review carried out in the year ended
31 March 2003. In the prior period capital expenditure amounted to GBP147m and
included GBP91m for Bruce Power which was sold in February 2003.
The Directors will review the economic assumptions underlying the calculation of
fixed asset carrying values at 31 March 2004 in line with the requirements of
FRS11, and make revisions as appropriate.
Research and Development
We support primarily scientific and engineering research activity directed
toward securing further improvements in the reliability, performance and safety
of our generating business and related activities. In the six months ended 30
September 2003 and 2002 our expenditure on research and development was GBP6m
and GBP8m respectively.
Liquidity and Capital Resources
Cash Flow
The table below sets out the key components of operating cash flow for the
periods indicated.
30 September
Increase/
(decrease)
2003 2002
GBPm GBPm GBPm
Operating loss including exceptional items (33) (157) 124
Exceptional items 24 131 (107)
Operating loss excluding exceptional items (9) (26) 17
Depreciation 25 143 (118)
Nuclear liabilities discharged and charged to operating costs plus
regular contributions to the decommissioning fund 35 (20) 55
Movements in other provisions (2) (31) 29
Working capital excluding exceptional items (75) 10 (85)
Net cash flow from operating activities (26) 76 (102)
Capital expenditure - (147) 147
Net cash flow from operating activities net of capital expenditure (26) (71) 45
The improvement in operating cash flow reflects the following:
- Discontinuation of Bruce Power operations which was a cash outflow of
GBP39m in the prior period;
- Capital investment expenditure, which has been expensed to the profit
and loss account in the current period, has been reduced by GBP9m in the UK
operations;
- Payments to BNFL in respect of nuclear liabilities discharged have
fallen by GBP49m and are based on the new contracts;
- The GBP85m working capital movement from the prior period to the
reporting period is due in part to the exceptional release of accrual in June
2002 of GBP41m in relation to the agreement of revised terms for the Nuclear
Energy Agreement with Scottish Power and Scottish and Southern Energy. Also,
contributing to the difference was the low output in September 2002 which
resulted in lower trade debtor balances of GBP45m due from Nuclear Energy
Agreement and Grid Trade Master Agreement and had the effect of improving the
working capital cash flow.
Financing
The cash flow for financing activities, comprises returns on investment,
servicing of finance, dividend payments and repayments of amounts borrowed net
of new loans. Financing activity generated an inflow of GBP58m in the reporting
period compared with an outflow of GBP58m in the prior period.
Acquisitions and disposals
Acquisitions and disposals activity yielded an inflow of GBP9m in the reporting
period, reflecting receipt of pension related cash retentions in respect of the
disposal of our interests in Bruce Power. The prior period cash outflow in
respect of acquisitions and disposals was GBP2m.
Management of liquid resources
The net cash outflow due to movements in financial investments and increases in
term deposits was GBP69m in the reporting period compared with a net inflow of
GBP187m in the prior period. This reflects balances on term deposits rising from
GBP246m at 31 March 2003 to GBP315m at 30 September 2003. Balances at 30
September 2002 were GBP22m compared with GBP209m at 31 March 2002.
Capital Resources
At 30 September 2003, we had total debt of GBP980m comprising
- A project finance loan of GBP475m secured on the assets of Eggborough
Power Limited (EPL), our subsidiary that operates our Eggborough coal-fired
power station. Amounts owed by EPL to the lenders are not guaranteed by British
Energy plc but British Energy guarantees the payment of amounts by British
Energy Power and Energy Trading Limited ("BEPET") to EPL under the Capacity and
Tolling Agreement ('CTA'). The contractual amounts payable by BEPET under the
CTA are calculated so as to cover EPL's borrowing requirements and operating
costs. British Energy also provides a subordinated loan facility to EPL. The
final instalment 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. At 30
September 2003 the effect of the Group's interest rate contracts is to classify
the borrowings as fixed rate.
- 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 deferred as part of the standstill arrangements in our
financial restructuring.
- Drawings of GBP97m under the GBP200m Credit Facility with the UK
Government (temporarily increased to GBP275m on 27 November 2003). The Credit
Facility with the UK Government is available to use for cash and collateral
purposes.
The UK Government is entitled to require immediate repayment of the Credit
Facility if, in the opinion of the Secretary of State for Trade and Industry,
the restructuring cannot be implemented in the manner or timescale envisaged.
The facility agreement is cross-guaranteed by the principal Group subsidiaries
(excluding Eggborough Power (Holdings) Limited and Eggborough Power Limited) and
is secured by, among other things, fixed and floating charges and/or share
pledges granted by those subsidiaries. This facility agreement also contains a
requirement to provide further security as required by the Secretary of State
for Trade and Industry 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 is a breach of law.
Future liquidity
Our main source of liquidity is from our operating businesses. Cash generation
by our operating businesses is dependent upon the reliability of our power
stations to produce electricity, the selling price achieved for our product,
operational risk and capital investment expenditure and maintenance
requirements.
The Group lost its investment grade rating in September 2002. British Energy
will seek a new credit rating upon the issuance of new bonds as part of the
restructuring of the Group. The loss of our investment grade rating has meant
that we now have to provide significant levels of collateral to our
counter-parties in order to maintain trading arrangements, thereby substantially
reducing the levels of cash resources available to us.
The Company is facing short term pressures on liquidity resulting from the
combined effect of seasonality, the unplanned outages at Sizewell B and Heysham
1 and the increased levels of collateral and costs of unplanned outages brought
about by the increased level of volatility in electricity prices. In view of
these pressures, on 27 November 2003, the Secretary of State agreed, subject to
formal documentation, to temporarily increase the amount of the Credit Facility
from GBP200m to GBP275m. The temporary increase in the Credit Facility will
reduce to GBP200m at the earlier of receipt of AmerGen proceeds and 22 February
2004. The Credit Facility will mature on the earlier of the date required by the
EC, 30 September 2004 and the date on which the restructuring plan becomes
effective if earlier, as more particularly described in Note 1 to the Financial
Statements.
The Board is 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, discussed further below, with a view to improving this situation, in
addition to the temporary increase in the Credit Facility.
Since first seeking support from the Secretary of State, British Energy has made
a good deal of progress towards restructuring the Group and achieving long term
financial viability. This year, British Energy completed the sale of Bruce
Power in February, achieved agreement in principle on the Proposed Restructuring
and binding standstill arrangements with key creditors in February and March,
exchanged revised contracts with BNFL for front-end fuel services and back-end
fuel services in March and May respectively, entered into a conditional
agreement in October to sell its 50% interest in AmerGen to Exelon and reached
binding agreements in October with key creditor constituencies for the continued
standstill and ultimate recognition and compromise of their claims and with the
Secretary of State and the Nuclear Liabilities Fund for the restructuring of the
Group's nuclear liabilities.
The Proposed Restructuring and, therefore, the working capital available to the
Group, remains subject to a large number of significant uncertainties and
important conditions. These include receipt by the Secretary of State of a
satisfactory notification from 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 ('EC Approval'). The Secretary of State expects to receive
this notification by mid-2004. 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.
The Company expects to receive the proceeds from the disposal of AmerGen before
31 March 2004 which will significantly increase the Group's financial
flexibility. Over the longer term, the Board is exploring initiatives to reduce
the demand for trading collateral and to achieve sufficient liquid resources to
implement the Proposed Restructuring.
If the disposal of AmerGen is not completed, or if there is a material downward
adjustment to the purchase consideration for the disposal of AmerGen, 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 performance or outlook, or if the Government Facility ceases
to be available or if the 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.
ITEM 3 : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussions about our risk management activities include
"forward-looking" statements that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
The following discussion relates to the financial instruments, derivative
instruments and derivative commodity instruments held by us at 30 September
2003, which are potentially sensitive to changes in interest rates, foreign
exchange rates, commodity prices and equity markets. We use foreign exchange
contracts and other derivative instruments to hedge the primary market exposures
associated with our underlying assets, liabilities and committed transactions.
None of the instruments we have entered into are leveraged or held for
speculative purposes. We use fixed rate interest rate borrowings and deposits
to reduce our exposure to fluctuations in interest rates.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Overview
The main financial risks we face are interest rate risk (on cash deposits and
borrowings), exchange rate risk (principally on fuel purchases) and trading risk
in England and Wales in respect of both price and volume output on the sale of
our electricity. We are also exposed to risk associated with fluctuations in
the equity markets through the Decommissioning Funds and Pension Schemes. We
have instituted policies for managing each of these risks, which have been
approved by the Board of Directors. Each of these risks is discussed in more
detail below.
Our electricity trading risks are managed by the Power and Energy Trading
Division. The Power and Energy Trading Division operate within policies and
procedures approved by the Board of Directors on the recommendation of the
Executive Director responsible for Trading acting on the advice of the Trading
Risk Sub-Committee, which is a sub-committee to the Group Risk Management
Committee.
Non-trading risks (i.e. cash resources, debt finance and financial risks) are
managed by the central treasury function (the "Treasury"). The Treasury
operates within policies and procedures approved by the Board of Directors on
the recommendation of the Finance Director acting on the advice of an executive
committee. The Treasury function uses appropriate instruments, within specified
limits, to manage financial risk but is not permitted to take speculative, open
positions. Both the Treasury and the Power and Energy Trading Division are
subject to regular scrutiny from our internal auditors.
Interest Rate Risk Management
Debt at 30 September 2003 comprised a project finance loan of GBP475m, bonds in
an aggregate principal amount of GBP408m and drawings of GBP97m under the Credit
Facility. Debt at 31 March 2003 comprised a project finance loan of GBP475m and
bonds in an aggregate principal amount of GBP408m. The market value of our debt
varies with fluctuations in prevailing interest rates in the United Kingdom.
The Eggborough related derivative agreements (nominal amount of GBP398m as at 31
March 2003) have been amended post 31 March 2003. The effect has been to fix
the respective receive side of the swap transactions from October 2003 onward.
At 30 September 2003 the total of investments in liquid funds and cash at bank
amounted to GBP359m, and had maturity dates due within one year. Cash not
immediately required for business purposes is invested in fixed-rate term
deposits. At 30 September 2003 these term deposits were due to mature within one
day and earned interest at an average rate of 3.5%. Term deposits and bank
balances at 30 September 2003 include GBP315m of cash which has been deposited
in collateral bank accounts. Availability of this cash is, therefore, restricted
over the periods of the collateralised positions. At 31 March 2003 we held
short-term deposits totalling GBP16m which had maturity dates of within seven
days.
Because the deposit terms are short term, the carrying value at 30 September
2003 approximates to the fair market value.
Foreign Exchange Risk Management
There are potential future foreign currency receivables in respect of the
retentions outstanding from the sale of Bruce Power and the potential sale of
AmerGen. When these cash flows become more certain in the future the Group will
evaluate currency hedging opportunities, balancing the cost and availability of
entering into such transactions against the underlying currency risk.
At 30 September 2003 we had no foreign exchange contracts in place.
In addition, at 31 March 2003, there were deferred losses of GBP2m accounted for
as part of stock which arose on the rollover of maturing forward contracts used
for hedging the future purchase of fuel prior to and including the year ended 31
March 2003. See note 20 to our consolidated financial statements at 31 March
2003.
Electricity Trading Risk Management
Our trading activities principally relate to supporting our generation business.
Our trading operations, therefore, principally act as wholesale marketers
rather than as pure financial traders, with the principal objective of
increasing the return on our assets while hedging the market risk associated
with the output of the plants.
Under NETA any mismatch between actual metered generation (or demand) and the
notified contract position is exposed to the prices in the balancing mechanism
run by the grid system operator. Based on experience to date prices in the
balancing mechanism encourage forward contracting, as the price for spilling
energy to the system tends to be lower than the forward market price, whereas
the price for purchasing top-up supplies tends to be higher than the forward
market price.
We manage the risks in the wholesale market through a contracting strategy that
builds a portfolio of forward contracts with a variety of terms. Contracts are
sold through several routes to market including bespoke bilateral contracts,
brokered over-the-counter trades in standard products, exchange trading and
direct sales to industrial and commercial customers. The objective is to sell
forward all of our planned nuclear generation in England and Wales ahead of
delivery. Eggborough provides a flexible generation capability which fulfils
three purposes designed to enhance our profitability. Firstly, it provides a
means for compensating for unplanned lost output from nuclear units at short
notice; secondly it provides the capability to profile the generation shape to
meet the requirements of both wholesale and directly-supplied customers; and
thirdly, it provides a flexible capability that is offered to the system
operator via the balancing mechanism. Output from our two stations in Scotland
will continue to be sold under the terms of the Nuclear Energy Agreement to
Scottish Power and Scottish and Southern Energy until April 2006, or the
introduction of British Electricity Transmission and Trading Arrangements,
whichever is earlier.
Our policy is to manage our credit exposure to trading and financial
counterparties within clearly defined limits. Electricity trading activities
are strictly monitored and controlled through delegated authorities and
procedures, which include specific criteria for the management of counterparty
credit exposures.
Equity Risk Management
The Decommissioning Fund was established to provide for the eventual
decommissioning of our UK nuclear power stations. Cash contributions are made
on a quarterly basis to a payment profile set out in a contract between us and
the Decommissioning Fund and are invested by the trustees of the Decommissioning
Fund in UK marketable fixed income debt, equity securities and property. We are
solely responsible for contributions to the Decommissioning Fund. Therefore,
the level of future contributions, which are reviewed every five years in
conjunction with our review of ultimate decommissioning costs, depend partly on
the estimated long-term investment performance of the equity and debt
instruments in which the contributions are invested and returns on investments
in property. Income from dividends and other returns on the underlying
investments are retained by the Decommissioning Fund and then invested in debt
and equity securities.
The decommissioning fund included debt and equity securities with market values
of GBP36m and GBP319m respectively.
The balance on the decommissioning fund is recorded at GBP398m at 30 September
2003 which approximates to its market value.
ITEM 4 : CONTROLS AND PROCEDURES
The management of British Energy plc, including the Chief Executive Officer and
Finance Director, have evaluated the effectiveness of the Group's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) and concluded that, as of the end of the period covered by this report, the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this report has been made known to them in a
timely fashion. The required information was effectively recorded, processed,
summarised and reported within the time period necessary to prepare this report.
British Energy plc's disclosure controls and procedures are effective in
ensuring that information required to be disclosed in British Energy plc's
reports under the Exchange Act are accumulated and communicated to management,
including the Chief Executive Officer and the Finance Director, as appropriate
to allow timely decisions regarding required disclosure. There have been no
significant changes in British Energy plc internal controls over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, British
Energy plc's internal control over financial reporting.
INDEX OF CONTENTS
FINANCIAL STATEMENTS
GROUP PROFIT AND LOSS ACCOUNT
GROUP BALANCE SHEET
GROUP CASH FLOW STATEMENT
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
NOTES TO THE ACCOUNTS
1. BASIS OF PREPARATION
2. TURNOVER AND OPERATING PROFIT
3. OPERATING COSTS
4. FINANCING CHARGES/(CREDITS)
5. TAXATION
6. LOSS PER SHARE
7. FIXED ASSETS
8. CREDITORS AND PROVISIONS
9. RECONCILIATION OF OPERATING CASH FLOW
10. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
11. COLLATERAL
12. CONTINGENT ASSETS
13. CONTINGENT LIABILITIES
14. POST BALANCE SHEET EVENTS
INDEPENDENT REVIEW REPORT TO BRITISH ENERGY PLC
GROUP PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 (unaudited)
Total Group Results
6 months 6 months Year
ended ended ended
Notes 30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Group and share of joint venture turnover - continuing 795 995 2,074
activities
Exceptional income 2 - 41 41
Group and share of joint venture turnover including 795 1,036 2,115
exceptional income
Less: share of turnover in joint venture (118) (127) (212)
Turnover:
Continuing activities 2 677 703 1,528
Discontinued activities - 206 375
Turnover 2 677 909 1,903
Operating costs before exceptional items 3 (686) (894) (1,758)
Exceptional operating items 3 (24) (172) (3,947)
Operating costs after exceptional items (710) (1,066) (5,705)
Operating (loss)/profit:
Continuing activities (33) (195) (3,899)
Discontinued activities - 38 97
Operating (loss)/profit (33) (157) (3,802)
Share of operating profit of joint venture 43 45 43
Operating profit/(loss): Group and share of joint 10 (112) (3,759)
venture
Loss on sale of business - - (35)
Financing (charges)/credits:
Revalorisation and net interest 4 (124) (143) (277)
Exceptional financing charges 4 3 - (62)
Exceptional revalorisation credits/(charges) 4 40 (82) (159)
Loss on ordinary activities before taxation (71) (337) (4,292)
Taxation on loss on ordinary activities 5 - (60) 378
Share of taxation for joint venture 5 (8) (6) (10)
Loss on ordinary activities after taxation (79) (403) (3,924)
Minority interest - (7) (17)
Loss for the period attributable to shareholders (79) (410) (3,941)
Loss per share (p):
Basic 6 (13.1) (68.1) (654.7)
GROUP BALANCE SHEET
AT 30 SEPTEMBER 2003 (unaudited)
Notes 30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Fixed assets
Tangible assets and investments 7 793 4,850 763
Current assets
Decommissioning fund 398 332 334
Stocks 376 526 360
Debtors 385 618 387
Investments - liquid funds 11 315 22 246
Cash at bank 44 62 87
1,518 1,560 1,414
Creditors: amounts falling due within one year 8 (1,393) (885) (1,185)
Net current assets 125 675 229
Total assets less current liabilities 918 5,525 992
Creditors: amounts falling due after more than one year 8 (2,613) (2,726) (2,640)
Provisions for liabilities and charges 8 (1,776) (2,598) (1,735)
Net (liabilities)/assets (3,471) 201 (3,383)
Capital and reserves
Called up equity share capital 277 277 277
Share premium 76 76 76
Capital redemption reserve 350 350 350
Profit and loss account (4,267) (646) (4,179)
Equity shareholders' (deficit)/funds (3,564) 57 (3,476)
Non-equity shareholders' funds 93 93 93
Minority interests - 51 -
(3,471) 201 (3,383)
GROUP CASH FLOW STATEMENT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 (unaudited)
6 months 6 months Year
ended ended ended
Note 30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Net cash (outflow)/inflow from operating activities 9 (26) 76 336
Returns on investment and servicing of finance (39) (20) (84)
Taxation (paid)/received (15) 6 3
Payments to acquire tangible fixed assets - (147) (282)
Capital expenditure and financial investment - (147) (282)
Acquisitions and disposals 9 (2) 262
Equity dividends paid - (34) (31)
Management of liquid resources (69) 187 (37)
Financing 97 (4) (80)
(Decrease)/increase in cash (43) 62 87
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 (unaudited)
6 months 6 months Year
ended ended Ended
30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Loss for the period (79) (410) (3,941)
Translation differences on foreign currency net (9) (24) (25)
investments
Total recognised losses since last report (88) (434) (3,966)
Notes to the Accounts
for the six months ended 30 September 2003 (unaudited)
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
(i) Introduction
These interim financial statements have been prepared on the basis of accounting
policies consistent with those set out in the Group financial statements for the
year ended 31 March 2003. 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 subsidiaries.
Fixed annual charges are apportioned to the interim period on the basis of time
elapsed. Other expenses are accrued in accordance with the same principles used
in the preparation of the annual accounts.
On 14 February 2003 the Group disposed of its stake in Bruce Power and Huron
Wind, therefore, their results up to the point of disposal have been classified
as discontinued operations within prior reporting periods. All other activities
of the Group have been shown as continuing activities.
The financial statements for the six months ended 30 September 2003 are
unaudited but have been formally reviewed by the auditors and their report to
the Company is set out below. The figures for the year ended 31 March 2003 have
been extracted from the full financial statements for that year, which have been
delivered to the Registrar of Companies. The report of the auditors on these
accounts was unqualified and did not contain a statement under either section
237(2) or section 237(3) of the Companies Act 1985. The auditors' report
included within the Report and Accounts of the Group for the year ended 31 March
2003 includes a reference to a fundamental uncertainty in respect of the going
concern basis of the Group. The interim financial statements were approved by
the Board of Directors on 16 December 2003.
(ii) Background to 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 'Credit
Facility') to provide working capital for British Energy'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 Credit Facility for up to GBP650m
until 29 November 2002 to give the Company sufficient opportunity to develop a
restructuring plan. The Credit 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 Credit 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 28 November 2002 British Energy announced that the Credit Facility had been
further extended until 9 March 2003.
On 14 February 2003 British Energy and certain of its subsidiaries announced
that they had entered into binding standstill agreements, namely:
(a) The Standstill Agreement between British Energy and its
subsidiaries and the bank syndicate that provided financing for the Eggborough
coal fired power station (the 'Eggborough Banks'), The Royal Bank of Scotland
plc ('RBS') as provider of a letter of credit to the Eggborough Banks; our
significant trade creditors, Teesside Power Limited ('TPL'), TotalFinaElf Gas
and Power Limited now Total Gas & Power Limited ('Total') and Enron Capital &
Trade Europe Finance LLC ('Enron') (TPL, Total and Enron 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 (collectively the 'Bondholders').
On 7 March 2003 British Energy announced that the UK Government had agreed to
extend the Credit Facility in the reduced amount of GBP200m, such that it would
mature on the earlier of (1) 30 September 2004, (2) the date on which the
proposed restructuring, as outlined in (iii) below, (the 'Proposed
Restructuring') becomes effective or (3) any date notified by the Secretary of
State to British Energy on which repayment of amounts outstanding under the
Credit Facility are required as a result of a Commission decision or an
obligation under EC law (the 'Final Maturity Date'). In the meantime the
Secretary of State may require repayment of the Credit Facility if she concludes
that the Proposed Restructuring cannot be completed in the manner or time scales
envisaged.
The Group's ability to provide alternative credit support to parent company
guarantees for our trading operations is, and will, until the completion of the
Proposed Restructuring, be subject to our continued access to funds under the
Credit Facility. We have retained a trading relationship with a high proportion
of our existing contracted counter-parties 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 Credit Facility was temporarily increased to GBP275m on 27 November 2003.
The additional GBP75m matures on the earlier of 22 February 2004 or the receipt
of the proceeds from the sale of AmerGen.
The Company agreed the proposed disposal of its 50% interest in AmerGen to
Exelon for US$277m, subject to various adjustments and conditions including a
break fee of US$8.295m payable to FPL Group Inc. The Company expects to
complete the disposal shortly and, in any event no later than 31 March 2004.
Over the longer term the Board is exploring initiatives to reduce the demand for
trading collateral and to achieve sufficient liquid resources to implement the
Proposed Restructuring, including investigating the availability of third party
financing.
1. BASIS OF PREPARATION (Continued)
(iii) Terms of the Proposed Restructuring
On 1 October 2003, the Company announced that it had agreed the terms of the
proposed restructuring of the Company (the Group) with certain of the Group's
creditors and the Secretary of State (the 'Proposed Restructuring'). The
restructuring proposals are set out in:
(a) The Creditor Restructuring Agreement dated 1 October 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
entered into between the Company, BEGUK, BEG, British Energy Power and Energy
Trading Limited ('BEPET'), British Energy Investment Limited ('BEIL'), District
Energy Limited, British Energy International Holdings Limited ('BEIHL'), British
Energy US Holdings Inc. ('BEUSH'), 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 Proposed Restructuring is based on the heads of terms signed on 14 February
2003.
The principal features of the Proposed Restructuring include:
- Compromising the existing claims of Significant Creditors in exchange
for new bonds and new ordinary shares and settling new off-take arrangements for
Eggborough;
- 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 for uncontracted nuclear liabilities and
decommissioning costs to which British Energy would make initial and ongoing
contributions;
- The Government funding liabilities relating to historic spent fuel and
any shortfall in the NLF.
Creditor Restructuring Agreement
The restructuring proposals set out in the Creditor Restructuring Agreement were
subject to certain initial requirements for creditor approvals and sign ups
being obtained by 31 October 2003 which have been satisfied.
Completion of the Proposed Restructuring is subject to a number of initial
conditions including, amongst other things, the receipt by the Secretary of
State of a satisfactory notification from the European 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 expects to receive
this notification by mid 2004.
In addition, the Proposed Restructuring is conditional upon there being no
material adverse change. 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 British Energy 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 (see
below) or the new Eggborough arrangements.
Under the terms of the Creditor Restructuring Agreement the creditors have
agreed (subject to certain conditions) to extinguish their existing claims
against the Group in exchange for GBP275m of new bonds, GBP150m of bond
equivalent payments by means of the CTA Global Bond (see below) and at least
97.5% of the issued ordinary shares of the new parent company of the Group
('Newco1').
The Eggborough Banks, as creditors with security over Eggborough Power Station,
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 CTA Global Bond to be held by EPL (the 'CTA
Bonds'). In addition, the Eggborough Banks will 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
Eggborough Power station under the Amended Credit Agreement will secure both the
GBP150m bond-equivalent payments and, through an indemnity for non-performance,
the option acceleration.
As part of the Proposed Restructuring, the Company proposes to cancel its
existing shares at 4428/43 pence each and A shares of 60 pence each under a
scheme of arrangement with shareholders (the 'Members' Scheme'), and issue new
ordinary shares equal to 2.5% of the issued share capital of Newco1 to
shareholders immediately following implementation of the Proposed Restructuring
as well as warrants to subscribe for a further 5.0% of fully diluted share
capital (excluding the impact of conversion of the NLF Cash Sweep Payment (see
below)) immediately following implementation of the Proposed Restructuring.
This will result in a very significant dilution to the holdings of the existing
shareholders. If the shareholders do not approve the Members' Scheme or for any
other reason the Members' Scheme is not implemented, but shareholders instead
vote in favour of the Company selling all its business and assets to Newco 2,
they will receive only the warrants. If the shareholders do not vote in favour
of either proposal, they will receive no shares or warrants.
1. BASIS OF PREPARATION (Continued)
(iii) Terms of the Proposed Restructuring (continued)
The Creditor Restructuring Agreement restricts 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 until the earliest of;
(i) 30 September 2004 under the Standstill Agreement of 14
February 2003 or the Restructuring Longstop Date once new standstill
arrangements are entered into pursuant to the restructuring, such date being 12
noon on the earlier of 31 January 2005 and 120 days from the satisfaction of the
initial conditions to the Proposed Restructuring;
(ii) termination of the Creditor Restructuring Agreement, the
new standstill arrangements or the bondholders restructuring agreement in
accordance with their terms; or
(iii) the completion of the Proposed Restructuring (the '
Standstill Period').
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 until the completion, or earlier
termination, of the Proposed Restructuring. 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).
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 Credit Facility; and any of the
Company, BEG, BEGUK, BEPET or EPL failing to discharge certain continuing
obligations. If the standstill arrangements terminate, the Creditor
Restructuring Agreement will also terminate and vice versa.
The Creditor Restructuring Agreement also contains certain covenants by British
Energy for the benefit of the Consenting Creditors that have signed the
agreements, including certain limitations on acquisitions and disposals, a
prohibition on the payment of dividends and on the issuing of equity and a
negative pledge.
Government Restructuring Agreement
The Government Restructuring Agreement provides for the circumstances in which
the Secretary of State will support the Proposed Restructuring, including
entering into the agreements with the Group and, in certain cases, the NLF which
effect the proposals regarding the manner in which the decommissioning and other
uncontracted liabilities of the Group are to be funded and the agreements
relating to the funding of certain of the contracted nuclear liabilities of the
Group (the 'Nuclear Liabilities Agreements'). It also effects some further
amendments to the Credit Facility. As noted above the Credit Facility will
terminate (unless previously extended) on the Final Maturity Date.
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/were conditional on, inter alia:
- 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 two newly
incorporated public companies created to effect the restructuring (Newco 1 and
Newco 2 an intermediate holding company) 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
Credit Facility;
- receipt by the Secretary of State of copies of letters
from the Group's auditors and financial advisers giving the confirmations
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
British Energy Group in the Government Restructuring Agreement 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 British
Energy party under 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 and if a material adverse change (as defined in the
Creditor Restructuring Agreement) occurs at any time before the order
sanctioning the scheme of arrangement to be proposed by the Company to RBS and
the Bondholders 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.
1. BASIS OF PREPARATION (Continued)
(iii) Terms of the Proposed Restructuring (continued)
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, the restructured Group 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 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, and not to exceed, 65% subject to adjustment) (the 'NLF Cash Sweep
Payment').
The entitlement of the NLF to the NLF Cash Sweep Payment is convertible into an
equity shareholding in Newco1 equal to the same percentage of the thereby
enlarged issued share capital. 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%.
In addition, under the Nuclear Liabilities Agreements British Energy is required
to establish and maintain cash reserves to provide collateral for trading and
operations, cover lost revenue and costs resulting from plant outages and to
meet other working capital requirements (the 'Cash Reserve'). The initial
target amount for the Cash Reserve is GBP490m plus the amount by which cash
employed as collateral exceeds GBP200m.
The above is a summary only and investors and others are strongly advised to
read the entire announcement which was issued by the Company on 1 October 2003,
which contains additional important information not included in this summary.
(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 and the Directors are currently seeking an alternative to
liquidating the Company or ceasing to trade. The validity of this assumption
depends on the continuation of the standstill arrangements with certain
creditors and the financial assistance from the Secretary of State under the
Credit Facility and no material deterioration in the Group's cash flow
performance or outlook, the completion of the AmerGen disposal without any
material downward adjustment to the purchase consideration, 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. This assumption is, therefore subject to a large number of
significant uncertainties and important considerations.
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.
Notes to the Accounts
For the six months ended 30 September 2003 (unaudited)
2. TURNOVER AND OPERATING PROFIT
6 months 6 months Year
ended ended ended
30 Sep 03 30 Sep 02 31 Mar 03
(a) Turnover TWh TWh TWh
Output
United Kingdom 35.5 31.7 69.5
Canada (discontinued) - 10.6 19.2
35.5 42.3 88.7
Continuing activities: GBPm GBPm GBPm
United Kingdom
Wholesale generation sales 323 374 852
Direct supply sales 340 267 603
Turnover from continuing activities excluding exceptional 663 641 1,455
credits
Miscellaneous income 14 21 32
Exceptional income - 41 41
Turnover from continuing activities 677 703 1,528
Discontinued activities: Canada - 206 375
Total turnover 677 909 1,903
Turnover from discontinued activities in 2002 and 2003 represents the sales by
Bruce Power which was acquired on 12 May 2001 and sold on 14 February 2003.
In the six months ended 30 September 2002 the Company 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 2002/03
results.
(b) Operating (loss)/profit
A geographical analysis of operating (loss)/profit before exceptional items is
as follows.
6 months 6 months Year
ended ended Ended
30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
United Kingdom (9) (64) 7
Canada - 38 97
(9) (26) 104
Notes to the Accounts
For the six months ended 30 September 2003 (unaudited)
3. OPERATING COSTS
6 months 6 months Year
ended ended Ended
30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Continuing Activities
Fuel 184 167 371
Materials and services 262 218 425
Staff costs 112 111 227
Depreciation 25 136 273
583 632 1,296
Energy supply costs 103 94 184
686 726 1,480
Discontinued Activities
Fuel - 11 17
Materials and services - 93 143
Staff costs - 61 111
Depreciation - 3 7
- 168 278
Total operating costs 686 894 1,758
Exceptional operating items
Materials and services 37 53 94
Depreciation - - 3,738
Amounts (credited)/written off non-operational assets (13) 119 115
24 172 3,947
Analysis of exceptional items
Restructuring costs 37 7 35
Stock obsolescence - - 57
Onerous trading contracts - 46 2
Fixed asset write down - - 3,738
Investments in own shares write down - 98 102
UK decommissioning fund (credit)/write down (13) 21 13
24 172 3,947
There were exceptional materials and services costs in respect of advisory fees
and other costs associated with restructuring the Group's activities. Costs of
GBP37m were incurred within the six months ended 30 September 2003.
The GBP13m exceptional credit on the UK decommissioning fund reverses the write
down made in the year ended 31 March 2003. At 30 September 2003 the market value
of the UK decommissioning fund had increased to GBP398m (31 March 2003:
GBP334m), thereby necessitating an exceptional credit of GBP39m in the period to
reverse previously written-down revalorisation amounts. The remaining balance of
the restatement to market value of GBP26m has been dealt with as an exceptional
financing credit (see Note 4).
Exceptional operating costs amounting to GBP172m and GBP3,947m were reported for
the six months ended 30 September 2002 and the year ended 31 March 2003
respectively. 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, GBP7m of which was charged in the six months ended 30 September 2002.
- A charge of GBP57m in the year ended 31 March 2003 to provide for obsolete
stores and spares.
- A charge of GBP46m in the six months to 30 September 2002, and total charge of
GBP2m for the year to 31 March 2003 to provide for the onerous pre-NETA
contracts with TPL, Total and Enron.
- Exceptional depreciation charge of GBP3,738m in the year ended 31 March 2003
in respect of a review of economic values and net realisable values of fixed
assets (see note 7(ii)).
- A write down of GBP102m in the year ended 31 March 2003 (of which GBP98m was
charged in the six months ended 30 September 2002) to reflect permanent
diminution in the value of own shares held in employee trusts.
- The investments held within the UK decommissioning fund were written down to
reflect a reduction in market value, resulting in a charge for the six months to
30 September 2002 of GBP21m, and a total charge for the year to 31 March 2003 of
GBP13m.
Notes to the Accounts
For the six months ended 30 September 2003 (unaudited)
4. FINANCING CHARGES/(CREDITS)
6 months 6 months Year
ended ended ended
30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Revalorisation of nuclear liabilities
changes in price levels 57 65 117
release of discount for the period 59 55 111
116 120 228
Revalorisation of other provisions - 10 10
Revalorisation of decommissioning fund (16) (14) (29)
Share of revalorisation of joint venture (1) (2) (4)
Revalorisation charge before exceptional items 99 114 205
Interest payable less receivable 25 29 72
Total financing charges prior to exceptional (credits)/ 124 143 277
charges
Exceptional revalorisation (credits)/charges (40) 82 159
84 225 436
Exceptional interest and other financing (credits)/charges (3) - 62
81 225 498
At 30 September 2003 the market value of the UK decommissioning fund had
increased to GBP398m (31 March 2003: GBP334m), thereby necessitating an
exceptional credit of GBP39m in the period 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 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 a
GBP26m exceptional credit has been recorded in finance charges to reverse prior
write-down of previous revalorisation.
The market value of the AmerGen decommissioning fund had also increased over the
six months to 30 September 2003, and the British Energy share of the exceptional
credit is GBP14m.
At 30 September 2003 the value of the interest rate swaps provision was marked
to market and the resultant valuation was lower than the book value, thereby
resulting in an exceptional credit of GBP3m.
At 30 September 2002 and 31 March 2003 the market value of the UK
decommissioning fund was lower than the values that would have been derived from
revalorising the cost of the investment. The differences were GBP103m and
GBP124m of which GBP82m and GBP111m respectively were recognised as exceptional
financing charges 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. 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.
5. TAXATION
6 months 6 months Year
ended ended ended
30 Sep 03 30 Sep 02 31 Mar 03
GBPm GBPm GBPm
Tax on results excluding exceptional items (8) (78) (2)
Tax on exceptional items - 12 370
(8) (66) 368
The tax charge for the six months ended 30 September 2003 comprises an overseas
tax charge of GBP8m in respect of the Group's liability for its share of
AmerGen's taxable profits.
The exceptional tax credit for the year ended 31 March 2003 of GBP370m relates
to a deferred taxation credit on exceptional items of GBP520m offset by the
de-recognition of the deferred taxation asset of GBP150m.
For the six months ended 30 September 2002 the GBP12m credit relates to the
taxation effect of the exceptional items incurred.
6. LOSS PER SHARE
The loss per share for the period has been calculated on the basis of a loss on
ordinary activities after taxation, minority interests and non-equity dividends
of GBP79m (30 September 2002: loss of GBP410m; 31 March 2003: loss of
GBP3,941m); and by reference to a weighted average of 602 million ordinary
shares (30 September 2002: 602 million ordinary shares; March 2003: 602 million
ordinary shares).
Notes to the Accounts
For the six months ended 30 September 2003 (unaudited)
7. FIXED ASSETS
(i) Investment in Own Shares
Tangible assets and investments includes amounts in respect of own shares held
in trust to satisfy obligations under share options granted to Directors and
employees of the Company.
As at 30 September 2003 the British Energy Employee Share Trust held 21,734,839
ordinary shares at an average cost of GBP4.68 for a total consideration of
GBP101m. The Qualifying Employee Share Trust ('QUEST') held 5,292,103 ordinary
shares at a cost per share of GBP5.32 per share (GBP28m) and 19,165,471 'A'
shares at a cost of 60p per share (GBP11m).
The book value of the shares held by the employee trusts was written down to
their market value of GBP2m in the accounts of the year ended 31 March 2003 to
recognise the diminution in value due to the deterioration of the long-term
prospects of the Company.
(ii) Carrying Value of Fixed Assets
The Directors reviewed the economic values and net realisable values of the
Group's fixed assets at 31 March 2003 and compared them to their book value. As
a result of this review the carrying value of fixed assets was written down by
GBP3,738m.
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.
The electricity price assumptions were a very significant component of the asset
value calculation. The Directors considered the market's views on future prices
of wholesale electricity and also the forecasts specifically commissioned for
the Company. In determining the price assumptions the Directors took a cautious
view on there being a significant recovery in prices. As market prices are
outside the Directors' control actual prices may differ from those forecast.
The Directors will review the economic assumptions underlying the calculation of
fixed asset carrying values at 31 March 2004 in line with the requirements of
FRS11, and make revisions as appropriate.
(iii) Investment in AmerGen
The Company announced on 10 October 2003 that it had entered into a legally
binding agreement to dispose of British Energy's entire 50% interest in AmerGen
to Exelon Generation Company LLC ('Exelon'), which is the Company's partner in
AmerGen, for approximately US$277m (GBP167m at an exchange rate of $1.66 :
GBP1.00 based on the hedge rates applicable), in cash subject to certain
pre-closing adjustments including a break fee payable to FPL Group Inc. for
US$8.295m. The disposal of British Energy's interest in AmerGen will be effected
through the sale of its subsidiary, BEUSH to Exelon.
The disposal is subject to approval by the Company's Shareholders at an
Extraordinary General Meeting to be held on 22 December 2003. All US regulatory
approvals have been received and the Company expects to complete the disposal
shortly and, in any event not later than 31 March 2004.
British Energy or Exelon may terminate the agreement if the disposal has not
been completed by 10 April 2004, but this right to terminate will be deferred
for a further six months provided completion has not occurred simply because
regulatory approvals are still awaited, so long as reasonable efforts are still
being made to obtain these outstanding approvals.
The value of net assets of BEUSH which are the subject of the transaction was
recorded as GBP119m translated at the balance sheet exchange rate of $1.66 :
GBP1.00.
8. CREDITORS AND PROVISIONS
Other
creditors
Nuclear Deferred and
Liabilities Debt tax provisions Total
GBPm GBPm GBPm GBPm GBPm
Creditors:
Amounts falling due within one year 463 270 - 660 1,393
Amounts falling due after more than
one year 1,903 710 - - 2,613
Provisions for liabilities and charges 1,731 - - 45 1,776
As at 30 September 2003 4,097 980 - 705 5,782
As at 30 September 2002 3,828 1,050 458 873 6,209
As at 31 March 2003 3,937 883 - 740 5,560
Nuclear liabilities include accruals for AGR fuel services relating to spent AGR
fuel are based on the terms of contracts with BNFL (dated 30 March 1995 and 3
June 1997), most of which include fixed prices subject to indexation, or the
Group's estimates where no contracts exist. Provisions for services relating to
the disposal of nuclear waste and the storage and disposal of PWR spent fuel are
based on cost estimates derived from the latest technical assessments. The
costs of decommissioning the power stations have been estimated on the basis of
technical assessments of the processes and methods likely to be used for
decommissioning under the current regulatory regime. The estimates are designed
to reflect the costs of making the sites of the power stations available for
alternative use in accordance with the Group's decommissioning strategy.
8. CREDITORS AND PROVISIONS (continued)
Other creditors include GBP316m in respect of claims relating to onerous trading
contracts. These contracts are pre-NETA electricity trading contracts with
Enron, TPL, and Total. The Enron and Total contracts were terminated during the
year ended March 2003, which gave rise to claims for certain amounts which have
become payable. Interest is payable and being paid on standstill balances at a
rate of 6%, other than for the bonds and the amounts due to the Eggborough banks
which continue under their original terms. These accounts reflect the claim
amounts which have been agreed in principle with Enron, TPL and Total for the
purposes of the Proposed Restructuring of the Group.
The analysis of the maturity of borrowings has been prepared based on the dates
when the borrowings mature under the existing contractual arrangements.
However, the standstill arrangements which have been put in place have the
effect of deferring the payments of certain amounts due until the Bonds and
Eggborough project finance loan are replaced 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.
Included in provisions is an interest rate swaps provision in respect of swap
contracts which were put in place to hedge interest rate risk. The Directors
have reviewed the necessity for these swaps in the context of the financial
restructuring of the Group and have concluded that the swaps are no longer
effective as hedges. A provision of GBP56m was created at 31 March 2003 and has
been reduced to GBP41m at 30 September 2003 through utilisations of GBP6m,
accruals movement of GBP6m and revaluation of GBP3m.
9. RECONCILIATION OF OPERATING CASH FLOW
6 months
ended
30 Sep 03
6 months ended 30 Sep 02 Year ended 31 Mar 03
Dis- Dis-
Total Continued continued Total Continued continued Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating (loss)/profit
including exceptional items (33) (195) 38 (157) (3,899) 97 (3,802)
Exceptional items 24 131 - 131 3,906 - 3,906
Operating (loss)/profit
excluding exceptional items (9) (64) 38 (26) 7 97 104
Depreciation 25 136 7 143 274 13 287
Nuclear liabilities charged
to operating costs 63 57 - 57 105 - 105
Nuclear liabilities (19) (68) - (68) (115) - (115)
discharged
Movements in other provisions (2) (31) - (31) (45) - (45)
Regular contributions to the
decommissioning fund (9) (9) - (9) (18) - (18)
(Increase)/decrease in
working capital excluding
exceptional items (75) 3 7 10 36 (18) 18
Net cash (outflow)/inflow
from operating activities (26) 24 52 76 244 92 336
Payments to acquire tangible
fixed assets - (56) (91) (147) (112) (170) (282)
Net cash (outflow)/inflow
from operating activities net
of capital expenditure (26) (32) (39) (71) 132 (78) 54
Operating cash flows for the six months ended 30 September 2003 include an
outflow of GBP19m (30 September 2002: nil; 31 March 2003: GBP30m) which relates
to advisory fees and other costs associated with restructuring the Group's
activities.
10. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
GBPm
Increase in debt in the period (97)
Decrease in cash (43)
Increase in liquid resources 69
Increase in net debt (71)
Net debt at 1 April 2003 (550)
Net debt at 30 September 2003 (621)
11. COLLATERAL
Investments in liquid funds at 30 September 2003 include GBP315m of cash which
has been deposited in collateral bank accounts for trading purposes.
Availability of this cash is, therefore, restricted over the periods of the
collateralised positions.
Notes to the Accounts
For the six months ended 30 September 2003 (unaudited)
12. 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 restructuring but payments are
being made as if the new back-end contracts had become effective on 1 April
2003. The financial statements for the period to 30 September 2003 have been
drawn up on the basis of the previous BNFL contracts in respect of back end fuel
contracts, pending satisfaction of the restructuring conditions set out in the
new contracts, thereby creating a contingent asset of GBP220m (inclusive of
principal amounts accrued at 31 March 2003) which will be recognised upon
completion of the proposed restructuring.
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. C$50m would have been
released to British Energy had the first unit restarted by 15 June 2003 and an
additional C$50m would have been released to British Energy had the second unit
restarted by 1 August 2003. 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. At 30 September 2003 these units had not restarted therefore the Group
has not recognised any amount in respect of cash retentions on its Balance Sheet
at 30 September 2003 because of uncertainties regarding their realisation, and
there is likely to be a significant reduction in the aggregate amount payable to
British Energy.
13. 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 which are applicable to the Group and the Company.
The Group has been provided with the Credit Facility by the Secretary of State.
As at 30 September 2003, the Group had drawings of GBP97m under the financing
facility, all of which had been deposited as collateral in support of the
Group's trading and operational requirements. Also at this date, the Group had
cash and liquid investments of GBP359m of which GBP315m had been deposited as
collateral.
The following security has been granted for obligations under the Credit
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.
- Pledge and mortgage of shares in certain Group subsidiaries in favour
of the Secretary of State.
- Pledge agreement between British Energy US Holdings Inc and the
Secretary of State over certain membership interests in British Energy US
Investments LLC and certain limited partnership interests in British Energy LP.
Amounts owing by EPL to the Eggborough bank syndicate 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 a Creditor
Restructuring Agreement with certain significant creditors (including the
Eggborough bank syndicate) and BNFL relating to the standstill, recognition and
compromise of their claims. However, while the Directors believe that the
amounts of the agreed claims currently reflect the amounts legally claimable, in
the event of restructuring not being completed different amounts may be
calculated as being claimable.
On 25 September 2002 the Nuclear Generation Decommissioning Fund Limited (the '
Fund') served a default notice relating to the solvency of the Company, British
Energy Generation Limited and British Energy Generation (UK) Limited. Unless
the default is cured to the satisfaction of the Fund, or waived, the Fund has
the right to require accelerated payment of all of the contributions due to the
Fund prior to the next quinquennial review in Autumn 2005. Annual payments are
in the region of GBP18m. The Fund has agreed not to take enforcement action
without further notice while the Group progresses satisfactorily towards
achieving restructuring. If the conditions to restructuring are satisfied, the
Fund and others will enter into a Deed of Termination whereby the Fund agrees
that it shall take no action to enforce its rights pursuant to the default
notice.
The Group has given certain indemnities and guarantees in respect of the
disposal of its investment in Bruce Power. The Group does not currently
anticipate any losses will arise in connection with them.
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.
14. POST BALANCE SHEET EVENTS
On 10 October 2003 British Energy entered into a legally binding agreement with
Exelon to dispose of its entire 50% interest in AmerGen. See Note 7(iii) for
full details.
On 27 November 2003 British Energy announced that it had agreed with the
Secretary of State a temporary increase in the amount of the Credit Facility
from GBP200m to GBP275m. The temporary increase in the Credit Facility will be
available until the earlier of the receipt of the proceeds from the disposal of
the Group's 50% interest in AmerGen and 22 February 2004. As at 12 December
2003 the Group had drawings under the Credit Facility amounting to GBP94m.
In October 2003 there were unplanned outages at Sizewell B and Heysham 1 nuclear
power stations. Sizewell B returned to service on 15 November 2003 and Heysham
1 is estimated to return to service in the first half of February 2004.
Investments in liquid funds at 12 December 2003 include GBP359m of cash which
has been deposited in collateral bank accounts for trading and operating
purposes. Availability of this cash is, therefore, restricted over the periods
of the collateralised positions.
INDEPENDENT REVIEW REPORT TO BRITISH ENERGY PLC
Introduction
We have been instructed by the Company to review the financial information which
comprises the profit and loss account, balance sheet, cash flow statement,
statement of total recognised gains and losses and related notes. We have read
the other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the
financial information.
Directors' Responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the Directors. The Directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review Work Performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and, therefore,
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information. This report has been
prepared for and only for the Company for the purpose of the Listing Rules of
the Financial Services Authority and for no other purpose. We do not, in
producing this report, accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or in to whose hands it may
come save where expressly agreed by our prior consent in writing.
Fundamental uncertainty - going concern
In arriving at our review conclusion, we have considered the adequacy of the
disclosures made in note 1 concerning the preparation of the interim financial
information on the going concern basis. The validity of this assumption depends
on the continuation of the standstill arrangements with certain creditors and
the financial assistance from the Secretary of State under the Credit Facility
and no material deterioration in the Group's cash flow performance or outlook,
the completion of the AmerGen disposal without any material downward adjustment
to the purchase consideration, 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. In view of the
significance of the uncertainty concerning these matters we consider that it
should be drawn to your attention but our conclusion is not qualified in this
respect.
Review conclusion
On the basis of our review, we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 September 2003.
PricewaterhouseCoopers LLP
Chartered Accountants
Edinburgh
16 December 2003
Notes:
(a) The maintenance and integrity of the British Energy plc website is
the responsibility of the Directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors accept
no responsibility for any changes that may have occurred to the interim report
since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from legislation in other
jurisdictions.
CERTIFICATION
I, Mike Alexander, Chief Executive Officer of British Energy plc, certify that:
1. I have reviewed this report of British Energy plc, (the
"registrant");
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have;
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report; and
(c) disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the registrants
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrants internal control over financial reporting.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function);
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarise and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls.
Date: 16 December 2003 Name: Mike Alexander
Title: Chief Executive Officer
CERTIFICATION
I, Martin Gatto, Interim Finance Director of British Energy plc, certify that:
1. I have reviewed this report of British Energy plc, (the
"registrant");
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have;
(d) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(e) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report; and
(f) disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the registrants
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrants internal control over financial reporting;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function);
(c) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarise and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(d) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls.
Date: 16 December 2003 Name Martin Gatto
Title: Interim Finance Director
(appointed 8 December 2003)
CERTIFICATION PURSUANT TO
18 U.S.C.SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of British Energy plc for the period ending 30
September 2003 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Mike Alexander, Chief Executive Officer, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of British Energy plc.
Date: 16 December 2003 Name: Mike Alexander
Title: Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C.SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of British Energy plc for the period ending 30
September 2003 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Martin Gatto, Interim Finance Director, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of British Energy plc.
Date: 16 December 2003 Name Martin Gatto
Title: Interim Finance Director
(appointed 8 December 2003)
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: December 17 2003 BRITISH ENERGY PLC
By:____Paul Heward____
Name: Paul Heward
Title: Director - Investor Relations