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
September 28, 2005
BRITISH ENERGY GROUP PLC
(Registrant's name)
Systems House
Alba Campus
Livingston
EH54 7EG
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F..X.. Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ..... No ..X..
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b):
Exhibit Index
The following document (bearing the exhibit number listed below) is furnished
herewith and is made a part of this Report pursuant to the General Instructions
for Form 6-K:
Exhibit Description
No. 1 RNS Announcement, re: 1st Quarter Results dated 28 September, 2005
For immediate release
28 September 2005
BRITISH ENERGY GROUP PLC
RESULTS FOR THE FIRST QUARTER ENDED 3 JULY 2005 OF THE FINANCIAL YEAR ENDING 31
MARCH 2006 (Q1 05/06)
In the following discussion the 'three-month period' or the 'quarter' refers to
the quarter ended 3 July 2005 unless otherwise stated. In this discussion
references to 'British Energy', the 'Company' or the 'Group' are to British
Energy Group plc.
This set of quarterly results has been prepared to 3 July 2005 and reflects the
four:four:five week quarterly reporting cycle.
This is the first time since completion of the restructuring on 14 January 2005
that British Energy has published results for its first quarter. Therefore this
report does not contain any comparative quarterly financial information but,
where appropriate, does contain comparative quarterly non-financial information.
Highlights
Quarter ended Quarter ended
3 July 2005 before 3 July 2005 after
re-measurement* re-measurement
Revenue (GBPm) 521 487
Operating costs (GBPm) 444 442
Operating profit (GBPm) 77 45
Profit before tax (GBPm) 64 32
EBITDA - continuing activities (GBPm) 121 89
Cash and liquid funds (GBPm) 510 510
Net Debt (GBPm) 166 166
Realised price (GBP/MWh) 24.7 23.0
Operating unit cost (GBP/MWh) 20.6 20.7
Operating margin (GBP/MWh) 4.1 2.3
Earnings per share (p) 6.7 2.8
Quarter ended Quarter ended
3 July 2005 30 June 2004
Output (TWh) 17.4 16.4
Nuclear (TWh) 15.7 15.0
Coal (TWh) 1.7 1.4
Items marked * represent the results of operations adjusted to reflect the
result before exceptional charges and other movements arising from
re-measurement. During the quarter there were no exceptional charges. For the
first quarter the re-measurement adjustments relate solely to the re-measurement
impact of IAS 39 on the results for the quarter. British Energy believes that
the results before re-measurement provide a better indication of the underlying
business performance.
- EBITDA for the quarter was GBP121m* before re-measurement impact, GBP89m
after re-measurement impact.
- Results reflect a return to profitability and the benefit of higher
electricity prices with an operating margin of GBP4.1/MWh at contracted
summer prices.
- Realised price was GBP24.7/MWh for the quarter up 37% compared to
the first quarter 2004/05.
- Operating cash inflow from operations was GBP59m for the quarter.
Net debt decreased in the quarter by GBP54m to GBP166m.
- Total output for the quarter was 17.4 TWh in line with plan (Nuclear 15.7
TWh, Coal 1.7 TWh) compared to 16.4 TWh (Nuclear 15.0 TWh, Coal 1.4 TWh)
in the first quarter of 2004/05.
- Second quarter output as of 25 September 2005 was 14.8 TWh
(Nuclear 14.0 TWh, Coal 0.8 TWh).
- As at 25 September 2005, approximately 85% of planned output for the year
ending 31 March 2006 fixed at an average contracted price of GBP31.8/MWh.
This includes the impact of capped price arrangements and higher prices for
Eggborough taking advantage of the differential between peak and baseload
prices.
- Net additional losses from Heysham 1 and Hartlepool expected to
increase by 0.5 TWh to around 1.5 TWh.
- The Nuclear Liabilities Fund (NLF) Cash Sweep percentage was 64.80% at 3
July 2005, down from 64.99% at 31 March 2005 as a result of the exercise
of a number of the Company's warrants.
- No accrual for any potential NLF Cash Sweep payment has been made in these
quarterly financial statements in line with the Group's accounting policy.
- In accordance with the dividend policy set out within the accounts for the
period ended 31 March 2005, no dividend has been declared for the quarter.
Bill Coley, Chief Executive Officer said:
"The results reflect underlying improvement in our performance as a result of
the changes we are making. We remain tightly focused on improving the
operational reliability of our plant - and resolving the current issues at
Hartlepool and Heysham 1 is another step toward that objective. The Company's
improved profitability and positive cash contribution in the first quarter
reflects higher realised prices for summer power contracts and underlines our
confidence in British Energy's prospects."
Review and Outlook
Total output for the quarter was 17.4 TWh of which nuclear output was 15.7 TWh,
and output from Eggborough was 1.7 TWh. Second quarter output as of 25 September
2005 was 14.8 TWh of which nuclear output was 14.0 TWh in line with plan. During
the quarter, statutory outages were completed at Sizewell B and outages
commenced at Heysham 1 and Hunterston B. During the planned outages the Group
completed various plant improvements which were scheduled as part of the
Performance Improvement Programme (PiP). Unplanned losses for the quarter were
1.8 TWh leading to reduced Unplanned Capability Loss Factor (UCLF) at most
stations, partially offset by an overrun of the Sizewell B statutory outage.
Statutory outages at Heysham 1 and Hunterston B were completed during the second
quarter and the statutory outage at Dungeness B commenced. The statutory outage
of one unit at Dungeness B is progressing and the other unit at Dungeness B is
shut down for an unplanned outage and may require further work before their
return to service.
On 12 September 2005, the Company announced it had elected to maintain the
shutdown of two reactors at Hartlepool and to shutdown two reactors at Heysham 1
as a result of inspections to boiler closure units. The return to service of all
four units is dependent on the successful outcome of further inspections and a
programme of work at each unit. As a consequence, the return to service of the
four units is expected during mid to end October 2005. As a result, the net
additional unplanned losses are currently expected to increase by 0.5 TWh to
around 1.5 TWh. Whilst more challenging, the Company reconfirms it expects the
average annual nuclear output over the next two years to be 63 TWh.
Operating profit before depreciation and amortisation (EBITDA) for the quarter
was GBP121m before the IAS 39 re-measurement impact reflecting the benefit of
increased electricity prices. Operating costs were in line with plan and reflect
increased revenue spend associated with investment in plant during 2005/06. As
at 3 July 2005 the Group had cash and cash equivalents and restricted cash
balances amounting to GBP510m, of which GBP250m was deposited as collateral in
support of trading and operating activities.
Forward market prices for electricity for winter 2005/06 delivery have increased
during the quarter, however they continue to show considerable volatility. As at
25 September 2005, the Company had fixed price contracts in place for
approximately 85% of planned output for the financial year 2005/06 at an average
contract price of approximately GBP31.8/MWh. This price includes the impact of
capped price arrangements of approximately 5 TWh at around GBP30/MWh and the
benefit of higher prices achieved as a result of Eggborough taking advantage of
the differential between peak and baseload prices. This price excludes Balancing
Services Use of System and other electricity market participation charges of
around GBP0.7/MWh, market costs incurred through output variation and
unreliability expected to be around GBP1.0/MWh. The level of output at fixed
prices has been impacted by unplanned losses at Heysham 1 and Hartlepool and the
requirement to manage collateral. The Company intends to progressively close out
its exposure to market prices for the financial year 2005/06 subject to limits
on trading collateral which are easing and has made satisfactory progress in
fixing prices for the financial year 2006/07.
On 15 September 2005, the Group announced the completion of the necessary
technical and economic evaluation regarding the potential accounting life
extension at Dungeness B. This has resulted in the accounting life of Dungeness
B being extended by ten years to 2018, five years beyond the accounting life
extension assumed as part of the fair value exercise related to the
restructuring on 14 January 2005.
During the quarter, investment expenditure across the whole Group on plant
projects, major repairs and strategic spares, including costs associated with
PiP, totalled GBP41m, of which GBP18m has been capitalised. In addition, GBP24m
of overhaul costs were capitalised in the quarter. Based on its current
expectations of future electricity prices and output, and therefore financial
resources, the Company reconfirms that investment in plant projects, major
repairs and strategic spares including costs associated with PiP across the
whole Group is expected to be in the range of GBP230m to GBP250m for the year
ending 31 March 2006.
On 21 September 2005, the Department for Environment Food and Rural Affairs
issued an update regarding the implementation of the Large Combustion Plant
Directive ("LCPD"). The update indicated that the Government will apply emission
limit values to control emissions from power stations in the UK from January
2008. The update gave no further clarification as to whether Eggborough would be
treated as having separate plants for the purposes of LCPD. If the final
decision is to consider the four units at Eggborough as a single plant for LCPD
purposes then there could be a requirement to materially restrict the operations
of the two non-FGD units from 2008 in order to comply with the proposed emission
limit values.
Explanatory notes
These results for British Energy have been prepared under International
Financial Reporting Standards (IFRS) for the quarter ended 3 July 2005. This is
the first set of quarterly results prepared under IFRS. As part of the
transition from United Kingdom Generally Accepted Accounting Principles (UK
GAAP) to IFRS, a Restatement of Results for Transition to International
Financial Reporting Standards was published on 21 September 2005.
Electricity demand in the UK is seasonal, in that demand and prices are
generally lower in summer than in winter. As a result, British Energy (and other
generators) schedule a significant proportion of planned outages for the summer
months. This seasonality in both prices and output has a direct effect on
financial performance and cash flows.
A summary of the results is set out below:
Output and Unit Costs Quarter ended Quarter ended
3 July 2005 before 3 July 2005 after
re-measurement (GBPm) re-measurement (GBPm)
Output (TWh)
- Nuclear 15.7 15.7
- Coal 1.7 1.7
Total Output 17.4 17.4
Realised price (GBP/MWh) 24.7 23.0
Total operating unit cost (GBP/MWh) 20.6 20.7
Margin (GBP/MWh) 4.1 2.3
(All numbers rounded)
Income Statement Summary Quarter ended Quarter ended
3 July 2005 before 3 July 2005 after
re-measurement (GBPm) re-measurement (GBPm)
Revenue 521 487
Operating costs 444 442
Operating profit 77 45
Profit before tax 64 32
EBITDA(note 1) Summary Quarter ended Quarter ended
3 July 2005 before 3 July 2005 after
re-measurement (GBPm) re-measurement (GBPm)
Operating profit 77 45
Add: Depreciation 43 43
Add: Amortisation 1 1
EBITDA 121 89
Details of cash and net debt are summarised in the table below.
As at 3 Jul 05 As at 31 Mar 05
Cash Balances (GBPm) (GBPm)
Cash not used for collateral 260 240
Cash used for collateral 250 216
Cash, cash equivalents and restricted cash 510 456
Total Debt (676) (676)
Net Debt (166) (220)
Safe Harbour
This document contains certain "forward-looking" statements as defined in
Section 21E of the US Securities Exchange Act of 1934, including statements with
respect to British Energy's business plans, the performance of its stations,
electricity prices and other matters that are not historical facts concerning
the business operations, financial condition and results of operations of
British Energy. These forward-looking statements typically contain words such as
"intends", "expects", "anticipates", "estimates", "aim", "believe", "assume",
"should" and words of similar import, which are predictions of or indicate
future events or future trends. These forward-looking statements involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of British Energy and may cause actual results or performance
to differ materially from those expressed or implied from such forward-looking
statements. British Energy has identified some important factors that may cause
such differences in its Form 20-F for the financial year ended 31 March 2005 and
the report and accounts for period ended 31 March 2005 both of which have been
filed with the US Securities and Exchange Commission.
Due to the uncertainties and risks associated with these forward-looking
statements, which speak only as to the date hereof, we are claiming the benefit
of the safe harbour provision referred to above.
Management Presentation and Conference Call
Management will host a conference call for analysts, institutional investors and
bondholders at 2.00pm (UK time) today, 28 September 2005 and dial in facilities
can be accessed by:
UK local rate no: 0845 113 0049
UK international no: +44 (0) 1452 542 303
US no: 1866 389 9778
Replay facility - 7 days, UK dial in:
UK local rate no: 0845 245 5205
UK International no: +44 (0) 1452 550 000
UK PIN (access) no: 9732439 #
For further information please contact:
John Searles, Investor Relations: 01506 408 715
Andrew Dowler, Media: 020 7831 3113
A copy of this release and a copy of the presentation in pdf file format can be
found on the Company's web site at www.british-energy.com.
Notes:
1. EBITDA is defined by the Company as operating profit before interest, income
taxes, depreciation and amortisation and has been presented both including
and excluding the effects of re-measurement. The Company has included
information concerning EBITDA because it believes that it is used by certain
investors as one measure of the Company's financial performance. EBITDA is
not a measure of financial performance under IFRS and is not necessarily
comparable to similarly titled measures used by other companies. EBITDA
should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with IFRS) as a
measure of liquidity.
28 September 2005
British Energy Group plc
Results for the Quarter Ended 3 July 2005
Management's Discussion and Analysis - Financial Condition and Results Of
Operations
Overview and Outlook
In the following discussion the 'quarter' refers to the quarter ended 3 July
2005 unless otherwise stated. In this discussion references to 'British Energy'
or the 'Company' are to British Energy Group plc. References to the 'Group' are
to the Company and its subsidiaries. The results of operations have been
adjusted to reflect the result before exceptional charges and other movements
arising from re-measurement for the impact of IAS 39 'Financial Instruments:
Recognition and Measurement' (IAS 39) for the quarter. During the quarter there
were no exceptional charges. British Energy believes that the adjusted measures
provide a better indication of the underlying business performance.
The Group was successfully restructured on 14 January 2005 and continues to own
and operate eight nuclear power stations and one coal-fired power station in the
UK. The Company's three imperatives are achieving world-class nuclear
operational performance; improving its financial stability; and pursuing life
extensions for its stations.
To achieve these goals the Group is investing in activities required to improve
output and reliability of its nuclear power stations while managing energy price
risk through its electricity trading division. To support this, investment in
plant projects, major repairs and strategic spares including costs associated
with the Performance Improvement Programme (PiP) for the quarter was GBP41m and
the Company confirms that investment is expected to be in the range of GBP230m
to GBP250m for the financial year 2005/06. Safety and environmental performance
also continue to be a fundamental priority of the Company.
Total output for the quarter was 17.4 TWh of which nuclear output was 15.7 TWh,
in line with plan, and output from Eggborough was 1.7 TWh. Second quarter output
as of 25 September 2005 was 14.8 TWh of which nuclear output was 14.0 TWh in
line with the Company's expectation to generate nuclear output of 63 TWh per
annum on average over the current and next financial year. During the quarter,
statutory outages were completed at Sizewell B and outages commenced at Heysham
1 and Hunterston B. During the planned outages the Group completed various plant
improvements which were scheduled as part of PiP. Unplanned losses for the
quarter were 1.8 TWh leading to reduced Unplanned Capability Loss Factor (UCLF)
at most stations, partially offset by an overrun of the Sizewell B statutory
outage. Statutory outages at Heysham 1 and Hunterston B were completed during
the second quarter and the statutory outage at Dungeness B commenced.
Operating profit before depreciation and amortisation (EBITDA) for the quarter
was GBP121m before the IAS 39 re-measurement impact reflecting the benefit of
increased electricity prices. Operating costs were in line with plan and reflect
increased revenue spend associated with investment in plant during 2005/ 06. As
at 3 July 2005 the Group had cash and cash equivalents and restricted cash
balances amounting to GBP510m, of which GBP250m was deposited as collateral in
support of trading and operating activities.
Forward market prices for electricity for winter 2005/06 delivery have increased
during the quarter, however they continue to show considerable volatility. As at
25 September 2005, the Company had fixed price contracts in place for
approximately 85% of planned output for the financial year 2005/06 at an average
contract price of approximately GBP31.8/MWh. This price includes the impact of
capped price arrangements of approximately 5 TWh at around GBP30/MWh and the
benefit of higher prices achieved as a result of Eggborough taking advantage of
the differential between peak and baseload prices. The level of output at fixed
prices has been impacted by unplanned losses at Heysham 1 and Hartlepool and the
requirement to manage collateral. The Company intends to progressively close out
its exposure to market prices for the financial year 2005/06 subject to limits
on trading collateral which are easing and has made satisfactory progress in
fixing prices for the financial year 2006/07.
In accordance with the dividend policy set out within the accounts for the
period ended 31 March 2005 and in the Dividend Policy section below, no dividend
has been declared for the quarter.
On 15 September 2005, the Group announced the completion of the necessary
technical and economic evaluation regarding the potential life extension at
Dungeness B. This has resulted in the accounting life of Dungeness B being
extended by ten years to 2018, five years beyond the extension assumed as part
of the restructuring related fair value exercise.
Key Points on Results
- EBITDA for the quarter was GBP121m* before re-measurement impact,
GBP89m after re-measurement impact.
- Operating profit was GBP77m* in the quarter before re-measurement impact,
GBP45m after re-measurement impact.
- Profit before tax of GBP64m* was recorded in the quarter before
re-measurement impact, GBP32m after re-measurement impact.
- Total output for the quarter was 17.4 TWh. Nuclear output in the quarter
(94 days) was up by 5% to 15.7 TWh, compared with 15.0 TWh in the 2004/05
first quarter (91 days). Coal output was 1.7 TWh in the quarter compared
to 1.4 TWh in the first quarter of 2004/05.
- Realised price (which is calculated by dividing revenue, before any
re-measurement impact, energy supply costs recharged to customers and
miscellaneous income, and is net of energy purchase costs, by total output
during the period) was GBP24.7/MWh for the quarter.
- Total operating unit costs, excluding revalorisation (which are calculated
by dividing the total operating costs, before any re-measurement, energy
supply costs recharged to customers and energy purchases, by total output
during the period), were GBP20.6/MWh for the quarter.
- Operating cash inflow from operations was GBP59m for the quarter. Net debt
decreased in the quarter by GBP54m to GBP166m.
- The Nuclear Liabilities Fund (NLF) Cash Sweep percentage was 64.80% at 3
July 2005, down from 64.99% at 31 March 2005 as a result of the exercise of
a number of the Company's warrants. No accrual for any potential NLF Cash
Sweep payment has been made in these quarterly financial statements. In
accordance with the Government Contribution Agreement, an accrual will be
made for the weighted average NLF Cash Sweep percentage payment applied to
adjusted net cash flow as at 31 March 2006 to the extent adjusted net cash
flow arising from operations during the year is above GBP290m plus posted
collateral (subject to a GBP200m minimum) at 31 March 2006.
Items marked * represent the results of operations adjusted to reflect the
result before exceptional charges and other movements arising from
re-measurement. During the quarter there were no exceptional charges. For the
first quarter the re-measurement adjustments relate solely to the re-measurement
impact of IAS 39 on the results for the quarter. British Energy believes that
the adjusted measures provide a better indication of the underlying business
performance.
Explanatory Notes
This report contains British Energy's results prepared under International
Financial Reporting Standards (IFRS) for the quarter ended 3 July 2005. This is
the first set of quarterly results prepared under IFRS. As part of the
transition from United Kingdom Generally Accepted Accounting Principles (UK
GAAP) to IFRS a Restatement of Results for Transition to International Financial
Reporting Standards was published on 21 September 2005. The main areas of
difference between UK GAAP and IFRS for British Energy are:
- goodwill
- pensions
- deferred tax
- financial instruments
This is the first time since completion of the restructuring of the Group on 14
January 2005 that British Energy has published results for its first quarter.
Therefore this report does not contain any comparative quarterly financial
information but, where appropriate, does contain comparative quarterly
non-financial information.
From 1 April 2005, the Company has operated a 4:4:5 week reporting cycle for
quarterly reporting, with reporting periods ending on a Sunday. Accordingly,
this set of quarterly results has been prepared to 3 July 2005. The annual
results will be prepared to 31 March 2006.
Electricity demand in the UK is seasonal, in that demand and prices are
generally lower in summer than in winter. As a result, British Energy (and other
generators) schedule a significant proportion of planned outages for the summer
months. This seasonality in both prices and output has a direct effect on
financial performance and cash flows.
Certain statements in this document are 'forward-looking' statements as defined
in Section 21E of the US Securities Exchange Act of 1934. Such forward-looking
statements include, among others:
- the anticipated development of the UK electricity industry, the future
development of regulation of the UK electricity industry, the effect of
these developments on our business, financial condition or results of
operation; and
- other matters that are not historical facts concerning the Group's business
operations, financial condition and results of operations.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors which are in some cases beyond the Group's control and may
cause its actual results or performance to differ materially from those
expressed or implied by such forward-looking statements. Due to the
uncertainties and risks associated with these forward-looking statements, which
apply only as at the date hereof, the Company is claiming the benefit of the
safe harbour provision contained in Section 21E of the US Securities Exchange
Act of 1934.
EBITDA is defined by the Company as operating profit before interest, income
taxes, depreciation and amortisation and has been presented both including and
excluding the effects of re-measurement. The Company has included information
concerning EBITDA because it believes that it is used by certain investors as
one measure of the Company's financial performance. EBITDA is not a measure of
financial performance under IFRS and is not necessarily comparable to similarly
titled measures used by other companies. EBITDA should not be construed as an
alternative to operating income or to cash flows from operating activities (as
determined in accordance with IFRS) as a measure of liquidity.
British Energy has also prepared a quarterly report on a Form 6-K under US GAAP
for the quarter ended 3 July 2005. The full financial statements prepared under
UK GAAP for the period ended 31 March 2005 and the notes thereto are not
included in this report but are available on the British Energy website
(www.british-energy.com).
The following discussion and analysis should be read in conjunction with the
unaudited financial statements for the quarter ended 3 July 2005 and the notes
thereto which are included in this report.
OPERATIONAL REVIEW
Plant Output
Nuclear output was 15.7 TWh (a 73% load factor) for the quarter (94 days). The
nuclear output for the quarter ended 30 June 2004 (91 days) was 15.0 TWh (a 72%
load factor). During the period a statutory outage was completed at Sizewell B,
and one started at each of Heysham 1 and Hunterston B. Since successfully
completing its statutory outage, following an overrun, Sizewell B has operated
continuously at full power. There were planned outages amounting to 3.8 TWh of
lost output. Unplanned losses for the quarter were 1.8 TWh leading to reduced
UCLF at most stations, offset by the Sizewell B statutory outage overrun.
Output from the coal-fired power station at Eggborough was 1.7 TWh during the
quarter. For the quarter ended 30 June 2004, the output was 1.4 TWh. As
Eggborough is operated primarily as a flexible mid-merit plant, its output level
is influenced by market prices, the Company's contracted trading position and
the extent to which it is operated as cover for unplanned outages at the nuclear
power stations.
Performance Improvements
Work continues to implement PiP with the aim to improve the reliability of the
nuclear power stations and reduce the level of unplanned nuclear losses. Last
year the focus was on improvements relating to people, plant and processes and
is now on implementation, with an emphasis on integrating PiP across the
business.
Considerable progress has been made during the quarter in putting the processes
and support in place. Managers are carrying out task observations across all
sites to allow the identification and removal of obstacles from the daily
activities of staff that affect safety and reliability.
Non-outage defect backlog has reduced by 11% in the quarter as a result of
focusing on equipment reliability, work management and an improved operational
focus. Both nuclear reportable events and unplanned trips show an improving
trend in the quarter.
Independent of internal improvement monitoring arrangements, a number of
favourable WANO assessments have been received recently with positive reports
received from recent reviews at Sizewell B, Hinkley Point and Heysham 1 and 2.
Investment Expenditure
During the quarter, investment expenditure across the whole Group on plant
projects, major repairs and strategic spares, including costs associated with
PiP, totalled GBP41m, of which GBP18m has been capitalised. In addition, GBP24m
of overhaul costs were capitalised in the quarter. The main investment in plant
in the period included additional safety work at Hartlepool and Heysham 1,
turbine work at Heysham 1, low pressure rotor refurbishment at Heysham 2 and
Hunterston and generator transformer refurbishment at Hartlepool. Based on its
current expectations of future electricity prices and output, and therefore
financial resources, the Company reconfirms that investment in plant projects,
major repairs and strategic spares including costs associated with PiP across
the whole Group is expected to be in the range of GBP230m to GBP250m for the
year ending 31 March 2006.
Safety and Environmental Performance
A key priority of the Group is to manage the safety of our plant, people and the
general public. Lost time accidents for staff and non-staff have increased
during the quarter largely due to an increased number of accidents involving
non-staff. We remain absolutely committed to safety and ensuring the safety of
our staff, non-staff and the general public.
The environmental performance of the Group also continues to remain a
fundamental priority of the Company. Environmental performance indicators have
been reclassified and as a result we have no comparable data but the indicators
in the year to date are ahead of the Group's expectations.
Operational Update
On 12 September 2005, the Company announced it had elected to maintain the
shutdown of two reactors at Hartlepool and to shutdown two reactors at Heysham 1
as a result of inspections to boiler closure units. The return to service of all
four units is dependent on the successful outcome of further inspections and a
programme of work at each unit. As a consequence, the return to service of the
four units is expected during mid to end October 2005. As a result, the net
additional unplanned losses are currently expected to increase by 0.5 TWh to
around 1.5 TWh. Whilst more challenging, the Company reconfirms it expects the
average annual nuclear output over the next two years to be 63 TWh.
Flue Gas Desulphurisation (FGD) installation on Units 3 and 4 at Eggborough has
been completed and the plant was taken over from the contractors on 1 September
2005.
Inspections carried out during the Unit 4 outage at Eggborough in the quarter
revealed evidence of cracking on a number of the turbine blades. The affected
turbine blades will be removed and this unit is expected to return to service as
planned, albeit with a small reduction in capacity. Inspections of other units
showed that cracking was not widespread.
On 21 September 2005, the Department for Environment Food and Rural Affairs
issued an update regarding the implementation of the Large Combustion Plant
Directive (LCPD) pending a formal decision by the Government expected before the
end of this year. The update indicated that the Government will apply emission
limit values to control emissions of sulphur dioxide, nitrogen oxides and
particulates from power stations in the UK from January 2008. The update
repeated the European Commission's view that existing plants whose waste gases
are discharged through a common stack should be considered as a single plant for
the purposes of the LCPD, however it gave no further clarification of whether
multiple generating units each with their own separate flue (as at Eggborough)
can be treated as separate plants for the purposes of the LCPD pending further
discussions with the European Commission.
If the final decision is to consider the four units at Eggborough as a single
plant for LCPD purposes then there could be a requirement to materially restrict
the operations of the two non-FGD units from 2008 in order to comply with the
proposed emission limit values.
NDA Strategy
The Nuclear Decommissioning Authority published its draft strategy document and
has provided an opportunity for full and open consultation on the issue of
decommissioning the UK's nuclear waste legacy. As major stakeholders, we intend
to play a full part in this consultation.
The Company has contracts with Springfields Fuels Limited (a subsidiary of BNFL
plc) for the supply of AGR fuel and with British Nuclear Group (a subsidiary of
BNFL plc) for the receipt of all the spent fuel from the Group's AGR stations.
These contracts are for the full lifetime of the Group's AGR stations.
Quinquennial Review
The quinquennial review of our nuclear liabilities is underway and the results
of this review will be finalised towards the end of 2005. The review may result
in a significant change in value of the nuclear liabilities due to changes in
strategy and cost estimates but as a result of the arrangements with the NLF and
Government, any change in value of the nuclear liabilities will be offset by an
equal and opposite change in the value of the NLF receivable.
TRADING REVIEW
Trading Position
Forward market prices for electricity for winter 2005/06 delivery have increased
during the quarter, however they continue to show considerable volatility. As at
25 September 2005, the Company had fixed price contracts in place for
approximately 85% of planned output for the financial year 2005/06 at an average
contract price of approximately GBP31.8/MWh. This price includes the impact of
capped price arrangements of approximately 5 TWh at around GBP30/MWh and the
benefit of higher prices achieved as a result of Eggborough taking advantage of
the differential between peak and baseload prices. This price excludes Balancing
Services Use of System and other electricity market participation charges of
around GBP0.7/MWh and market costs incurred through output variation and
unreliability expected to be around GBP1.0/MWh. The level of output at fixed
prices has been impacted by unplanned losses at Heysham 1 and Hartlepool and the
requirement to manage collateral. The Company intends to progressively close out
its exposure to market prices for the financial year 2005/06 subject to limits
on trading collateral which are easing and has made satisfactory progress in
fixing prices for the financial year 2006/07.
Realised price (which is calculated by dividing revenue, before any
re-measurement impact, energy supply costs recharged to customers and
miscellaneous income, and is net of energy purchase costs, by total output
during the period) was GBP24.7/MWh for the quarter.
Collateral
The Group's strategy for securing part of its income through fixed price
contracts means that in a volatile and rising electricity market collateral
requirements are also volatile and rising. The Group's ability to secure longer
term certainty on its income is limited by the amount of collateral and headroom
available to cover collateral volatility. The Group mitigates a certain amount
of this risk by selling electricity through a number of routes to market
including through its direct supply business (to large industrial and commercial
customers) which does not require as much collateral and also through the use of
financial products which provide electricity price protection but require less
collateral.
FINANCIAL REVIEW FOR THE QUARTER ENDED 3 JULY 2005
Group Performance
The unaudited results for the quarter can be summarised as follows:
Quarter ended
3 July 2005 Quarter ended Quarter ended
Business 3 July 2005 3 July 2005
performance Re-measurement Total
GBPm GBPm GBPm
Group revenue 521 (34) 487
EBITDA 121 (32) 89
Operating profit/(loss) 77 (32) 45
Financing charges (13) - (13)
Profit/(loss) before tax 64 (32) 32
The discussion below focuses on the business performance results as British
Energy believes that this adjusted measure provides a better indication of
underlying performance.
Revenue
Group revenue from continuing activities comprised generation sales, direct
supply sales and miscellaneous income. Revenue was GBP521m for the quarter.
The analysis of revenue for the quarter is as follows:
Quarter ended
3 July 2005
GBPm
Group revenue
Wholesale generation sales 230
Direct supply sales net of energy supply costs 204
434
Energy supply costs recharged to customers 82
Miscellaneous income 5
Revenue 521
Wholesale generation sales includes revenue from Energy Purchases which cost
GBP4m.
Output can be analysed as follows:
Quarter ended
3 July 2005
TWh
Nuclear 15.7
Eggborough 1.7
Total 17.4
The realised price for the quarter was GBP24.7/MWh.
Operating Costs
Operating costs were GBP444m for the quarter, as detailed below.
Quarter ended
3 July 2005
GBPm
Fuel costs - nuclear 84
Fuel costs - fossil 53
Total fuel costs 137
Energy purchases 4
Materials and services 100
Staff costs 80
Depreciation 43
Amortisation 1
Other operating income (3)
Energy supply costs 82
NLF Cash Sweep payment -
Total operating costs 444
Total operating unit costs were GBP20.6/MWh for the quarter.
The component elements of the operating costs are discussed below.
Fuel Costs
Total fuel costs amounted to GBP137m for the quarter. Nuclear fuel costs were
GBP84m for the quarter and Eggborough fuel costs for the quarter were GBP53m.
Eggborough fuel costs included GBP24m attributable to carbon costs.
The market price of CO2 allowances has risen since the beginning of 2005 and was
approximately EUR25/tonne at 3 July 2005, increasing the marginal cost of coal
and gas generation.
Energy Purchases
Energy purchases of GBP4m primarily represent the cost of contracts entered into
in order to obtain Renewable Obligation Certificates (ROCs) and Levy Exemption
Certificates (LECs).
Materials and Services
Materials and services costs comprise the operating expenses of the power
stations and support functions excluding fuel costs, staff costs and
depreciation. The costs during the quarter were GBP100m.
Staff Costs
Staff costs were GBP80m for the quarter and included pension costs of GBP14m.
Employer contributions to the pension scheme were GBP17m for the quarter
reflecting the impact of new salary sacrifice arrangements introduced from 1
April 2005.
Depreciation
Depreciation charges were GBP43m for the quarter.
Amortisation
Amortisation charges on capitalised software costs were GBP1m for the quarter.
Other Operating Income
The other operating income of GBP3m for the quarter relates to utilisation,
excluding revalorisation, of the net commodity contracts provision, which was
established on restructuring.
Energy Supply Costs
Energy supply costs mainly comprise the costs incurred for the use of the
distribution and transmission systems and accrued costs of ROCs under the
Renewable Obligation and are fully recovered through revenue. Total energy
supply costs were GBP82m for the quarter.
NLF Cash Sweep Payment
In accordance with the Group's accounting policy these quarterly financial
statements make no accrual for any potential future NLF Cash Sweep payment that
may be payable based on the full year results.
Operating Profit
The Group operating profit for business performance was GBP77m for the quarter.
Financing Charges
The total financing charges are analysed below:
Quarter ended
3 July 2005
GBPm
Revalorisation of nuclear liabilities 67
Revalorisation of nuclear liabilities receivable and NLF receivable (67)
Revalorisation of fixed decommissioning obligation 4
Revalorisation of contracts provision 4
Total revalorisation 8
Net interest expense 7
Net credit to finance charge for pension liability (2)
Total financing charges 13
Revalorisation of nuclear liabilities arises because nuclear liabilities are
stated in the balance sheet at current price levels, discounted at 3% per annum
real from the eventual payment dates. The revalorisation charge is the
adjustment that results from restating these liabilities to take into account
the effect of inflation in the period and to remove the effect of the discount
for the quarter.
A revalorisation credit arises in respect of movements in the value of nuclear
liabilities receivable and the NLF receivable to take account of the underlying
movement in nuclear liabilities.
Revalorisation charges arise in respect of the fixed decommissioning obligation
and the contracts provision to reflect the unwinding of the discount for the
quarter.
IAS 39 and Contract Provisions
The total movements on the IAS 39 values and the net commodity contracts
provision established as part of the fair value exercise are analysed below:
Contract
IAS 39 values provision Total
GBPm GBPm GBPm
As at 1 April 2005 34 238 272
Charge/(credit) to the income statement 32 (3) 29
Revalorisation - 4 4
Increase in hedge reserve through the statement of recognised income and 52 - 52
expense
As at 3 July 2005 118 239 357
Following the adoption of IAS 39 at 1 April 2005 the opening value of GBP34m has
risen by GBP84m to GBP118m. The effect on operating profit in the quarter has
been a reduction of GBP32m with the balance of GBP52m being recognised through
the statement of recognised income and expense.
The contract provision relates to contracts outwith the scope of IAS 39, which
were initially valued at the restructuring effective date of 14 January 2005.
The provision is being utilised over the lives of these contracts. The
provision has increased by GBP1m in the quarter.
Taxation
Income tax is calculated on the profit for the period, before taking account of
the income statement effect of any adjustments to the measurement and
classification of financial instruments required by IAS 39, at the anticipated
annual effective rate applicable to this profit. Any charge for the NLF Cash
Sweep payment included in the annual results will not be tax deductible and
therefore the anticipated annual effective rate is significantly more than the
standard rate of 30%. Adjustments to profit arising from the application of
measurement and classification rules for financial instruments contained in IAS
39 are tax effected at the standard rate of 30%. There is no current tax charge
in the period due to the availability of trading losses carried forward. The
charge of GBP26m before re-measurement and GBP16m after re-measurement in the
period consists of deferred tax only.
Profit after Tax
As a result of the factors discussed above, the net profit for the period
attributable to equity shareholders was GBP38m before re-measurement and GBP16m
after re-measurement.
Earnings per Share
There was an earnings per share of 6.7p for the quarter, based on the net profit
for the period before the effect of re-measurement divided by the weighted
average number of ordinary shares in issue during the period. After the effect
of re-measurement, earnings per share was 2.8p for the quarter.
The diluted earnings per share for the quarter was 6.6p before the effect of
re-measurement and 2.8p after the effect of re-measurement. The conversion
rights of the NLF Cash Sweep is not considered dilutive.
Actuarial Loss on Pensions
There has been one significant change in the actuarial assumptions adopted at 3
July 2005 compared with 31 March 2005 that mainly contributed to the actuarial
loss on pensions of GBP172m that has been recorded in the statement of
recognised income and expense. The discount rate used to value the liabilities
has changed from 5.5% per annum to 5.0% per annum in line with market changes in
the yield on long-dated corporate bonds over the period. The effect of the
change in the discount rate is to place a higher value on the pension
liabilities, resulting in a significant actuarial loss in the quarter.
Research and Development
The Group supports primarily scientific and engineering research activities
directed toward securing further improvements in the reliability, performance
and safety of the generating business and related activities. For the quarter
expenditure on research and development was GBP3m which is included within
material and services costs.
Future Reporting
At the Company's recent Annual General Meeting a resolution was passed that
amended the Company's Articles of Association. These changes allow the Group to
deregister from the US Securities and Exchange Commission subject to receiving
consent from the holders of the Group's bonds to the cessation of reporting
under US GAAP.
The next set of quarterly results to be presented will be for the quarter ending
2 October 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operating Activities
A reconciliation of profit after tax to earnings before interest, income taxes,
depreciation and amortisation (EBITDA) is shown in the following table. EBITDA
is a measure commonly reported and widely used by analysts, certain investors
and other interested parties, as well as a measure used internally by the Group.
The EBITDA is further reconciled to the operating cash inflow and movement in
restricted cash and then to the increase in total cash.
Quarter ended
3 July 2005
GBPm
Profit after tax before the effect of re-measurement 38
Net interest expense 7
Net revalorisation charges 8
Net credit to financing charges for pension liabilities (2)
Taxation 26
Amortisation 1
Depreciation 43
EBITDA before the effect of re-measurement 121
Effect of re-measurement (32)
EBITDA after the effect of re-measurement 89
Regular contributions to NLF (12)
Working capital movements (26)
Loss on disposal of property, plant and equipment 1
Net interest paid (6)
IAS 39 movements 47
Operating cash inflow and movement in restricted cash 93
Capital expenditure (44)
Exercise of warrants 5
Increase in total cash 54
Represented by:
Increase in cash and cash equivalents 20
Increase in restricted cash 34
Total decrease in net debt 54
The operating cash inflow and movement in restricted cash for the quarter was
GBP93m. When adjusted for capital expenditure, net interest paid and the
exercise of warrants there was an increase in total cash of GBP54m for the
quarter. The adverse movement on working capital of GBP26m for the quarter can
be attributed mainly to a reduction in trade and other payables.
Management of Restricted Cash
The balances on the term deposit accounts holding the collateral amounts
increased by GBP34m from GBP216m at 31 March 2005 to GBP250m at 3 July 2005.
Also included in restricted cash at 31 March 2005 and 3 July 2005 was GBP5m.
Capital Resources
At 3 July 2005, total debt of GBP676m comprised:
- The Amended Credit Agreement, a long-term project finance loan, of GBP145m
secured on the assets of Eggborough Power Limited (EPL), a subsidiary
company that operates the Eggborough coal-fired power station. The loan
bears interest at a rate of 7.0%.
- An aggregate principal amount of GBP531m Sterling denominated guaranteed
bonds due between 2005 and 2022 (the Bonds). The Bonds have a coupon
of 7.0%.
The long-term project finance loan is secured by a mortgage of shares in EPL, an
assignment of the EPL Share Purchase Agreement and Tax Deed of Covenant and a
debenture comprising fixed and floating charges over EPL assets.
Net debt decreased in the quarter by GBP54m to GBP166m.
Liquidity
At 3 July 2005 the Group had cash and cash equivalents and restricted cash,
including amounts posted as collateral, amounting to GBP510m, of which GBP250m
was deposited as collateral in support of trading activities.
The Group's main source of liquidity is its operating businesses. Cash
generation by the operating businesses is dependent upon the reliability of the
Group's power stations in producing electricity, the realised selling price for
electricity, operational risk and investment expenditure and maintenance
requirements.
The lack of an investment grade credit rating has meant that the Group continues
to provide significant levels of collateral to counterparties in order to cover
their trading exposures and maintain trading arrangements, thereby substantially
reducing the levels of cash resources available to the Group.
The Group's future liquidity may also be impacted by the additional employer
pension contributions set out within the 'Financial Review' section of our
report and accounts for the period ended 31 March 2005. Our exposures to market
risk have not changed materially since 31 March 2005.
Post Balance Sheet Events
On 15 September 2005, the Group announced the completion of the necessary
technical and economic evaluation regarding the potential life extension at
Dungeness B. This has resulted in the accounting life of Dungeness B being
extended by ten years to 2018, five years beyond the extension assumed as part
of the restructuring related fair value exercise.
On 12 September 2005, the Company announced it had elected to maintain the
shutdown of two reactors at Hartlepool and to shutdown two reactors at Heysham 1
as a result of inspections to boiler closure units. The return to service of
all four units is dependent on the successful outcome of further inspections and
a programme of work at each unit. As a consequence, the return to service of
the four units is expected during mid to end October 2005. As a result, the net
additional unplanned losses are currently expected to increase by 0.5 TWh to
around 1.5 TWh. Whilst more challenging, the Company reconfirms it expects the
average annual nuclear output over the next two years to be 63 TWh.
On 21 September 2005, the Department for Environment Food and Rural Affairs
issued an update regarding the implementation of the Large Combustion Plant
Directive (LCPD) pending a formal decision by the Government expected before the
end of this year. The update indicated that the Government will apply emission
limit values to control emissions of sulphur dioxide, nitrogen oxides and
particulates from power stations in the UK from January 2008. The update
repeated the European Commission's view that existing plants whose waste gases
are discharged through a common stack should be considered as a single plant for
the purposes of the LCPD, however it gave no further clarification of whether
multiple generating units each with their own separate flue (as at Eggborough)
can be treated as separate plants for the purposes of the LCPD pending further
discussions with the European Commission.
If the final decision is to consider the four units at Eggborough as a single
plant for LCPD purposes then there could be a requirement to materially restrict
the operations of the two non-FGD units from 2008 in order to comply with the
proposed emission limit values.
Contingent Liabilities
On 12 February 2004, British Energy Limited and certain of its subsidiaries
received a notice of warranty claims from the consortium which purchased the
Group's 82.4% interest in Bruce Power LP alleging breach of certain warranties
and representations relating to tax and to the condition of certain plant at the
Bruce power station.
The principal tax claim relates to the treatment of expenditure at the Bruce
Power plant during the period of the Group's part ownership and is currently
being considered by the Canadian tax authorities. The treatment proposed by
British Energy could result in a rebate of a material amount of tax to the Group
that has never been recognised in the financial statements. The consortium
claims that allowance of the expenditure for that period would cause it to lose
future deductions. British Energy has rejected the tax claim and expects to
defend it if it is pursued further. The Company is confident that the amount of
the tax claim should not, in any event, materially exceed the amount of the
rebate, and that the tax claim should have no material cash flow impact on the
Group.
The claim relating to the condition of the plant is based upon alleged erosion
of certain parts of the steam generators, including the support plates, through
which boiler tubes pass, which it is alleged resulted in an extended outage of
one unit at the plant to carry out repair works and loss of revenues and costs
of approximately C$64.5m. The consortium also claims that the alleged erosion
may reduce the operating life of the unit and/or result in further repairs
involving further losses. British Energy has rejected the claim and expects to
defend it if it is pursued further. No provision has been made in the financial
statements at 3 July 2005 for either claim.
Under the agreement with the consortium C$20m is retained in trust to meet any
representation and warranty claims, and this may be retained pending agreement
or determination of the claims.
Dividend Policy
The Board intends to distribute to shareholders as much of the Company's
available cash flow as prudently possible, but not until the operational
requirements of the business permit. In addition, under the terms of the
restructuring, there are certain restrictions on or factors affecting the
Board's ability to pay dividends, including:
- the requirement to fund a cash reserve out of the Group's post-debt service
cash flow in order to support the Group's collateral and liquidity
requirements following the 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). There will be no
distributions to shareholders until such time as the cash reserve is at the
required level. As a result of the requirements to fund the cash reserve,
the Board is not proposing a dividend in respect of the quarter ended 3
July 2005 and does not currently expect to propose a dividend before the
financial year ending 31 March 2007.
- the terms of the Nuclear Liabilities Agreements entered into as part of the
restructuring also require that once the cash reserve is funded to the
Target Amount, the Company must make NLF Cash Sweep payments to the NLF.
The NLF Cash Sweep payment was 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 greatly reduces the amount of cash available for distribution to
shareholders.
- the terms of the bonds issued as part of the restructuring contain certain
covenants, including a restriction that allows British Energy to pay a
dividend only if no event of default has occurred; and
- the requirement for the Company to have distributable reserves.
Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see the '
Financial Review' section of our report and accounts for the period ended 31
March 2005. Our exposures to market risk have not changed materially since 31
March 2005.
NON-GAAP FINANCIAL MEASURES
Business Performance
Business performance excludes certain re-measurement items (see below) and is
presented as management believes that exclusion of these items provides readers
with a clear and consistent presentation of the underlying operating performance
of the Group's business.
Re-measurement
The impact of re-measurement reflects exceptional charges and other movements,
including the impact of IAS 39. The scope of IAS 39 includes all financial
instruments i.e. loans, trade receivables, payables, investments, cash and
derivatives, as well as certain commodity contracts. The standard requires that
all derivatives, including certain commodity contracts, are fair valued on the
balance sheet, with changes from re-measurement being recorded in the income
statement unless cash flow hedge accounting is applied.
Unrealised gains and losses in respect of commodity contracts are disclosed
separately as re-measurements. Realised gains and losses relating to these
contracts are included in business performance. Management considers that this
presentation best reflects the underlying performance of the business since it
distinguishes between the temporary timing differences associated with
re-measurement under IAS 39 rules and actual realised gains and losses.
Exceptional charges, by their nature, are not indicative of the underlying
operating performance of the Group.
For a reconciliation between the overall results and business performance and
details of re-measurement items, see the consolidated income statement.
Realised Price
Realised price is calculated by dividing revenue (before any re-measurement
impact, energy supply costs recharged to customers and miscellaneous income, and
net of energy purchase costs) by total output during the period. The
adjustments to revenue allow management and investors a better understanding of
the net price that customers are paying for our electricity.
Total Operating Unit Costs
Total operating unit costs are calculated by dividing the total operating costs
(before any re-measurement, energy supply costs recharged to customers and
energy purchase costs) by total output during the period.
EBITDA
EBITDA is operating profit before interest, income taxes, depreciation and
amortisation and has been presented both including and excluding the effects of
re-measurement. The Company has included information concerning EBITDA because
it believes that it is used by certain investors as one measure of the Company's
financial performance. EBITDA is not a measure of financial performance under
IFRS and is not necessarily comparable to similarly titled measures used by
other companies. EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in accordance
with IFRS) as a measure of liquidity.
CONSOLIDATED INCOME STATEMENT
FOR THE QUARTER ENDED 3 JULY 2005 (UNAUDITED)
Quarter ended
3 July 2005 Quarter ended Quarter ended
Notes Business 3 July 2005 3 July 2005 2 July 2004 to
performance Re-measurement Total 31 March 2005
GBPm GBPm GBPm GBPm
Revenue 2 521 (34) 487 499
Energy purchases (4) 4 - (17)
Fuel costs (137) (2) (139) (127)
Materials and services (100) - (100) (82)
Staff costs (80) - (80) (82)
Energy supply costs (82) - (82) (73)
Other operating income/(costs) 3 - 3 (8)
Operating profit/(loss) before depreciation and
amortisation (EBITDA) 121 (32) 89 110
Depreciation (43) - (43) (40)
Amortisation (1) - (1) (1)
Operating profit/(loss) 77 (32) 45 69
Financing (charges)/credits
Net revalorisation charges 3 (8) - (8) (5)
Interest payable (12) - (12) (10)
Interest receivable 5 - 5 5
Net credit to finance charges for pension 2 - 2 1
liabilities
Profit/(loss) before tax 64 (32) 32 60
Taxation 4 (26) 10 (16) (19)
Net profit/(loss) for the period attributable to
equity shareholders 38 (22) 16 41
Earnings/(deficit) per share (p):
Basic 5 6.7 (3.9) 2.8 7.3
Diluted 5 6.6 (3.8) 2.8 7.0
The Income Statement for the period 2 July 2004 to 31 March 2005 represents the
trading results for the period from 15 January 2005 to 31 March 2005, the period
after the acquisition of British Energy Limited by British Energy Group plc.
CONSOLIDATED BALANCE SHEET
AS AT 3 JULY 2005 (UNAUDITED)
As at As at
Notes 3 July 2005 31 March 2005
GBPm GBPm
Assets
Non-current assets
Property, plant and equipment 1,684 1,686
NLF receivable 1,902 1,863
Nuclear liabilities receivable 2,118 2,131
Deferred income tax asset 487 429
Goodwill and intangible assets 377 376
Receivables due after more than one year 3 4
6,571 6,489
Current assets
Inventories 335 331
Nuclear liabilities receivable 185 181
Trade and other receivables 315 327
Cash and cash equivalents 255 235
Restricted cash 255 221
Financial instruments - commodity contracts 20 -
1,365 1,295
Total assets 7,936 7,784
Liabilities
Current liabilities
Borrowings (50) (50)
Trade and other payables (388) (378)
Nuclear liabilities (185) (181)
Provisions for other liabilities and charges (166) (230)
Financial instruments - commodity contracts (118) -
(907) (839)
Non-current liabilities
Borrowings (626) (626)
Pension fund liability 6 (548) (381)
Provision for nuclear liabilities (1,902) (1,863)
Provisions for other liabilities and charges (130) (108)
Nuclear liabilities (2,118) (2,131)
NLF liabilities (209) (210)
Financial instruments - commodity contracts (20) -
Deferred income (5) (5)
(5,558) (5,324)
Total liabilities (6,465) (6,163)
Net assets 1,471 1,621
Equity
Called up equity share capital 57 56
Share premium 13 -
Other reserves 767 767
Hedge reserve (57) -
Warrant reserve 42 51
Retained earnings 649 747
Total equity 1,471 1,621
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
FOR THE QUARTER ENDED 3 JULY 2005 (UNAUDITED)
Quarter ended 2 July 2004 to
3 July 2005 31 March 2005
GBPm GBPm
Adjustment for the implementation of IAS 39 after tax at 1 April 2005 (15) -
Losses on hedges recognised for the period ended 3 July 2005 (52) -
Actuarial (losses)/gains on retirement benefits for the period ended 3 July 2005 (172) 82
Tax on items taken directly to equity for the period ended 3 July 2005 67 (25)
Net (losses)/gains recognised directly in equity (172) 57
Profit for the period 16 41
Total recognised income and expense for the period (156) 98
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE QUARTER ENDED 3 JULY 2005 (UNAUDITED)
Called up equity Other Hedge Warrant Share Retained Total
share capital reserves reserve reserve premium earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 April 2005 56 767 - 51 - 747 1,621
Net (losses)/gains
recognised directly on
equity - - (57) - - (115) (172)
Share based payments - - - - - 1 1
Profit for the period - - - - - 16 16
Exercise of warrants 1 - - (9) 13 - 5
Balance at 3 July 2005 57 767 (57) 42 13 649 1,471
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED 3 JULY 2005 (UNAUDITED)
Quarter ended 2 July 2004 to
3 July 2005 31 March 2005
GBPm GBPm
Operating activities
Operating profit for the period 45 69
Amortisation charges 1 1
Depreciation 43 40
Loss on disposal of property, plant and equipment 1 -
IAS 39 movement 47 -
Movement in other provisions - 19
Interest paid (12) (12)
Interest received 6 3
Regular contributions to NLF (12) (5)
(Increase)/decrease in inventories (4) 23
Decrease in trade and other receivables 12 65
(Increase)/decrease in restricted cash (34) 69
Decrease in trade payables and other payables (34) (84)
Net cash inflow generated from operations 59 188
Cash flows from investing activities
Net cash acquired with subsidiary - 113
Purchases of property, plant and equipment (42) (35)
Purchases of intangible assets (2) -
Proceeds from disposal of property - 7
Net cash used in investing activities (44) 85
Cash flows from financing activities
Exercise of warrants 5 -
Repayments of borrowings - (28)
Share issue expense - (10)
Proceeds from sale of own shares - 3
Costs associated with sale of investments - (3)
Net cash used in financing activities 5 (38)
Net change in cash and cash equivalents 20 235
Cash and cash equivalents at beginning of the period 235 -
Cash and cash equivalents at the end of the period 255 235
The Statement of Cash Flows for the period 2 July 2004 to 31 March 2005
represents the trading cash flows for the period from 15 January 2005 to 31
March 2005, the period after the acquisition of British Energy Limited by
British Energy Group plc, except the financing category which, prior to the date
of the acquisition, also reflects the cash flows from the issue of equity by the
Company following its incorporation.
Notes to the financial statements
1. Basis of Preparation
These quarterly financial statements have been prepared on a basis consistent
with International Financial Reporting Standards (IFRS) in issue that are
effective or available for early adoption at the Group's first annual reporting
date, 31 March 2006, but do not include all the disclosures in IAS 34 on interim
reporting. Based on these IFRSs, the Board of Directors have made assumptions
about the accounting policies expected to be adopted when the first IFRS annual
financial statements are prepared for the year ending 31 March 2006. The
quarterly financial statements require management to make judgements, estimates
and assumptions that affect the application of policies and reported amounts of
assets and liabilities, income and expenses.
The accounting policies are consistent with those that the Directors intend to
use in the next annual financial statements as set out in the 'Restatement of
Results for Transition to International Financial Reporting Standards' as
published on 21 September 2005. The Group's proposed accounting policies are
included in note 10. Notwithstanding this, the IFRSs that will be effective or
available for voluntary early adoption in the annual financial statements for
the year ending 31 March 2006 are subject to change and to the issue of
additional interpretations and therefore cannot be determined with certainty.
This is the first set of quarterly results for the first three months of the
financial year for British Energy and therefore no comparative information is
provided.
To assist investors to compare the underlying financial performance of the
Group, 'business performance' income statement figures are shown before the
impact of exceptional charges and other movements arising from re-measurement.
For the first quarter the adjustments relate solely to the re-measurement of IAS
39.
References to 'British Energy' or the 'Company' are to British Energy Group plc.
References to the 'Group' are to the Company and its subsidiaries.
The financial statements for the quarter ended 3 July 2005 are unaudited but
have been reviewed by the auditors and their report to the Company is set out
below.
These quarterly financial statements were approved by the Board of Directors on
28 September 2005.
2. Output, Revenue and Segment Information
Through consideration of our product, geographic area and regulatory
environment, the Group has concluded that it has one business, being the
generation and sale of electricity in the UK, resulting in one operating segment
of Generation and Trading.
Quarter ended 15 January to
3 July 2005 31 March 2005
TWh TWh
Output
Nuclear power stations 15.7 14.3
Coal-fired power station 1.7 2.5
17.4 16.8
2 July 2004 to
Quarter ended
3 July 2005 Quarter ended
Business 3 July 2005 3 July 2005 Quarter ended
performance Re-measurement Total 31 March 2005
GBPm GBPm GBPm GBPm
Revenue
Wholesale generation sales 230 (34) 196 250
Direct supply sales net of energy supply costs 204 - 204 170
434 (34) 400 420
Energy supply costs recharged to customers 82 - 82 73
Miscellaneous income 5 - 5 6
521 (34) 487 499
Wholesale generation sales includes revenue from Energy Purchases which cost
GBP4m (2005 GBP17m).
3. Net Revalorisation Charges
Quarter ended 2 July 2004 to
3 July 2005 31 March 2005
GBPm GBPm
Revalorisation of nuclear liabilities
- changes in price levels 35 23
- discharge of discount for period 32 27
Revalorisation of nuclear liabilities receivable (38) (29)
Revalorisation of NLF receivable (29) (21)
Revalorisation of contracts provision 4 2
Revalorisation of fixed decommissioning obligations 4 3
Net revalorisation charges 8 5
4. Taxation
There is no current tax charge in the period due to the availability of trading
losses carried forward. The charge in the period of GBP26m before
re-measurement and GBP16m after re-measurement consists solely of deferred tax.
5. Earnings Per Share
The basic earnings per share for the period has been calculated by dividing the
profit after taxation by the weighted average number of ordinary shares in
issue during the period. The diluted earnings per share calculation is based on
the weighted average of 564 million ordinary shares in issue together with the
dilutive potential of 17 million ordinary shares in respect of warrants. The
effect of the NLF Cash Sweep is not considered to be dilutive. The adjustment
mechanism for the NLF Cash Sweep percentage set out in the Contribution
Agreement is designed such that the shareholders' interest in the Group after
taking account of the NLF Cash Sweep remains consistent. For example, in the
event that a NLF Cash Sweep payment is made without a corresponding dividend
then the NLF Cash Sweep percentage is diluted as if shareholders had reinvested
a corresponding amount as new equity in the Group.
3 July 2005 3 July 2005 31 March 2005 31 March 2005
Basic Diluted Basic Diluted
Net profit for the period (GBPm) 16 16 41 41
Weighted average share capital (number of shares, million) 564 581 561 579
6. Pension Costs
There has been one significant change in the actuarial assumptions adopted at 3
July 2005 compared with 31 March 2005. The discount rate used to value the
liabilities has changed from 5.5% per annum to 5.0% per annum in line with
changes in the yield on long-dated corporate bonds over the period. The effect
of the change in the discount rate is to place a higher value on the pension
liabilities, giving rise to a significant actuarial loss over the period.
7. Contingent Assets
The Group has certain contingent assets as a result of its disposal of its 82.4%
interest in Bruce Power LP. In addition to the consideration payable by the
consortium under the master purchase agreement, up to a further C$100m was
payable to British Energy contingent upon the restart of two of the Bruce A
units under a trust agreement (the Trust Agreement) entered into on the same
date. Had the first unit restarted by 15 June 2003, C$50m would have been
released to British Energy and an additional C$50m would have been released to
British Energy had the second unit restarted by 1 August 2003. An amount of C$5m
was to be deducted from the C$50m payable in respect of each unit for its
failure to restart by the scheduled restart date or by the first day of each
successive calendar month following the scheduled restart date. The Group
received C$20m on 22 March 2004 and C$10m on 25 May 2004 in partial
consideration under the Trust Agreement. British Energy commenced arbitration
proceedings in Ontario against the Ontario Provincial Government (the Province)
in December 2004 seeking the payment of additional consideration under the Trust
Agreement on the basis that Bruce A Units 3 and 4 restarted earlier than the
dates claimed by the Province. No additional amounts appear on our balance sheet
at 3 July 2005 because of uncertainties regarding their realisation. The amounts
recoverable in respect of the restarted units will be substantially lower than
the maximum C$100m but the amounts and timing of the payments have still to be
confirmed.
8. Contingent Liabilities
On 12 February 2004 British Energy Limited received a notice of warranty claims
from the consortium which purchased the Group's 82.4% interest in Bruce Power LP
alleging breach of certain warranties and representations relating to tax and to
the condition of certain plant at the Bruce Power Station.
The principal tax claim relates to the treatment of expenditure at the Bruce
Power Station during the period of the Group's part ownership and is currently
being considered by the Canadian tax authorities. The treatment proposed by
British Energy could result in a rebate of a material amount of tax to the Group
that has not been recognised in the financial statements. The consortium claims
that allowance of the expenditure for that period would cause it to lose future
deductions. British Energy has rejected the tax claim and expects to defend it
if it is pursued further. The Group is confident that the amount of the claim
should not, in any event, materially exceed the amount of the rebate, and that
the tax claim should have no material cash flow impact on the Group.
The claim relating to the condition of the plant is based upon alleged erosion
of certain parts of the steam generators, including the support plates, through
which boiler tubes pass, which it is alleged resulted in an extended outage of
one unit at the plant to carry out repair works and loss of revenues and costs
of approximately C$64.5m. The consortium also claims that the alleged erosion
may reduce the operating life of the unit and/or result in further repairs
involving further losses. British Energy has rejected the claim and expects to
defend it if it is pursued further.
Under the agreement with the consortium C$20m is retained in trust to meet any
representation and warranty claims, and this may be retained pending agreement
or determination of the claims.
The Group has given certain indemnities and guarantees in respect of the
disposal of its investment in AmerGen.
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
on a going concern basis.
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.
9. Non-adjusting Post Balance Sheet Events
On 15 September 2005, the Group announced the completion of the necessary
technical and economic evaluation regarding the potential accounting life
extension at Dungeness B. This has resulted in the life of Dungeness B being
extended by ten years to 2018, five years beyond the extension assumed as part
of the restructuring related fair value exercise.
On 12 September 2005, the Company announced it had elected to maintain the
shutdown of two reactors at Hartlepool and to shutdown two reactors at Heysham 1
as a result of inspections to boiler closure units. The return to service of
all four units is dependent on the successful outcome of further inspections and
a programme of work at each unit. As a consequence, the return to service of
the four units is expected during mid to end October 2005. As a result, the net
additional unplanned losses are currently expected to increase by 0.5 TWh to
around 1.5 TWh. Whilst more challenging, the Company reconfirms it expects the
average annual nuclear output over the next two years to be 63 TWh.
On 21 September 2005, the Department for Environment Food and Rural Affairs
issued an update regarding the implementation of the Large Combustion Plant
Directive (LCPD) pending a formal decision by the Government expected before the
end of this year. The update indicated that the Government will apply emission
limit values to control emissions of sulphur dioxide, nitrogen oxides and
particulates from power stations in the UK from January 2008. The update
repeated the European Commission's view that existing plants whose waste gases
are discharged through a common stack should be considered as a single plant for
the purposes of the LCPD, however it gave no further clarification of whether
multiple generating units each with their own separate flue (as at Eggborough)
can be treated as separate plants for the purposes of the LCPD pending further
discussions with the European Commission.
If the final decision is to consider the four units at Eggborough as a single
plant for LCPD purposes then there could be a requirement to materially restrict
the operations of the two non-FGD units from 2008 in order to comply with the
proposed emission limit values.
10. Proposed IFRS Accounting Policies
The principal accounting policies as set out below are expected to be applied in
preparing the Group's results for the year ending 31 March 2006.
Basis of consolidation
The Group financial statements consolidate the financial statements of British
Energy Group plc (BEG plc) and all of its subsidiary undertakings. BEG plc was
incorporated on 2 July 2004. As a consequence of the restructuring, under a
Scheme of Arrangement under section 425 of the Companies Act 1985, the Company
acquired British Energy plc on 14 January 2005. The restructuring has been
accounted for under the principles of acquisition accounting. The application of
acquisition accounting principles means that all the separate assets and
liabilities of British Energy plc have been recorded at fair value at the date
of acquisition with goodwill arising on the difference between the value of net
assets of British Energy plc and the acquisition consideration paid. Only the
post acquisition results are included in the Group income statement, statement
of changes in equity and cash flow statement.
Inter-company profits, transactions and balances are eliminated on
consolidation.
Significant estimates used in applying accounting policies
The principal accounting polices adopted by BEG plc in the consolidated
financial statements are as set out below. The application of a number of these
policies required the Group to use a variety of estimation techniques and
applying judgement to best reflect the substance of underlying transactions.
Significant factors considered when assessing the carrying value of assets
include future electricity prices, expected annual output, expected station
operating costs, remaining station lives and discount rates. BEG plc has
determined that a number of its accounting policies can be considered
significant, in terms of the management judgement that has been required to
determine the various assumptions underpinning their application in the
financial statements presented, which, under different conditions, could lead to
material difference in these statements. The policies where significant
judgements and estimates have been made are:
- Application of business combination accounting rules;
- Accounting for property, plant and equipment;
- Estimation of liabilities for spent nuclear fuel and decommissioning
costs; and
- Estimation of defined benefit pension scheme liabilities.
Revenue
Revenue is recognised by the Group when persuasive evidence of a sales
arrangement exists, delivery of goods or services has occurred, the amount of
revenue can be measured reliably, collectibility of the related receivable
amount is probable and the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Revenue represents the fair value of the consideration receivable for sales of
electricity and sales of other related goods and services. It is shown net of
value added tax, electricity purchases relating to short term balancing and
hedging activities, and climate change levy. Revenue is also shown after
elimination of sales within the Group.
Wholesale generation and direct supply sales are recognised on an accruals basis
with reference to meter readings of electricity supplied. Where required, a
management estimate is included of the value of units supplied to customers
between the date of their last meter reading and the accounting period end.
Fuel Costs - Nuclear Front End
Advanced Gas-cooled Reactors (AGR)
Front end fuel costs consist of the costs of procurement of uranium, conversion
and enrichment services and fuel element fabrication. Fabrication costs comprise
fixed and variable elements. All costs are capitalised into inventory and
charged to the income statement in proportion to the amount of fuel burnt.
Pressurised Water Reactor (PWR)
All front end fuel costs are variable and are capitalised into inventory and
subsequently charged to the income statement in proportion to the amount of fuel
burnt.
Fuel Costs - Nuclear Back End
AGR
Spent fuel extracted from the reactors is sent for reprocessing and/or long-term
storage and eventual disposal of resulting waste products. Back end fuel costs
comprise:-
a) a cost per tonne of uranium in AGR fuel, in respect of amounts payable
on loading of fuel into any one of the AGR reactors and
b) a rebate/surcharge against the cost mentioned in (a) above that is
dependent on the out-turn electricity price in the year and the amount of
electricity generated.
The loading related cost and the rebate/surcharge is capitalised into inventory
and charged to the income statement in proportion to the amount of fuel burnt.
PWR
Back end fuel costs are based on wet storage in station ponds followed by dry
storage and subsequent direct disposal of fuel. Back end fuel costs comprise the
estimated cost of this process at current prices discounted back to current
value. Back end fuel costs are capitalised into inventory on loading and charged
to the income statement in proportion to the amount of fuel burnt.
Unburnt Fuel at Shutdown
Due to the nature of the nuclear fuel process there will be some unburnt fuel in
the reactors at station closure. The costs of this unburnt fuel (final core) is
fully provided at the balance sheet date and any changes in the carrying value
of nuclear fuel attributed to the final core are charged to the income statement
in the accounting period.
Fuel Costs - Coal (including Emission Rights)
Fuel costs for coal are determined on a weighted average cost basis. Fuel costs
for coal also include costs of emission allowances. The Group recognises
liabilities in respect of its obligations to deliver emission allowances to the
extent that the allowances to be delivered exceed those previously acquired by
the Group, either by allocation from the Government or a similar body or through
purchase. Any liabilities recognised are measured based on the period end
estimates of the amounts that will be required to satisfy the net obligation.
Inventory - Stores
Inventory held in stores is recorded at the lower of cost and net realisable
value.
Employee Benefits - Post Retirement Benefit Obligations
The Group provides for pension costs in accordance with IAS 19 (2004) 'Employee
Benefits'. Contributions to the Group's defined benefit pension schemes are
assessed by qualified actuaries. BEG plc operates two separate pension
arrangements in the UK within the Electricity Supply Pension Scheme, which is a
defined benefit scheme. Pension scheme assets are measured using market values,
which for securities is based on bid price values. Pension costs are assessed
using the projected unit method so that the cost of providing pensions is
charged to the income statement in a manner which spreads the service cost over
the expected service lives of employees. The pension obligation is measured as
the present value of the estimated future cash outflows, discounted using the
interest rates on UK government securities of appropriate maturity. The
expected return on the schemes' assets and the increase during the period in the
present value of the schemes' liabilities arising from the passage of time are
included in other finance income. Actuarial gains and losses are recognised
immediately within the Statement of Recognised Income and Expense.
The capital cost of ex-gratia and supplementary pensions is charged to the
income statement, to the extent that the arrangements are not covered by the
surplus in schemes, in the accounting period in which they are granted.
Certain additional unfunded retirement benefits are provided to eligible
employees. The cost of providing such benefits is charged to the income
statement as they accrue.
NLF Funding Arrangements
Under the arrangements with the Secretary of State the NLF will fund, subject to
certain exceptions, the Group's qualifying uncontracted nuclear liabilities and
qualifying decommissioning costs. To the extent there is any surplus remaining
in the NLF after all obligations have been discharged, this amount will be paid
to the Secretary of State. The Group is responsible for funding certain excluded
or disqualified liabilities and will, in certain circumstances, be required to
compensate or indemnify the NLF and the Secretary of State in relation to such
liabilities. The Group's obligations under these arrangements with the Secretary
of State are guaranteed by certain companies within the Group.
In consideration for the assumption of these liabilities by the Secretary of
State and the NLF, British Energy Holdings plc (a subsidiary of BEG plc) issued
GBP275m in New Bonds to the NLF at RED. The Group will also make the following
payments to the NLF (i) an annual contribution (NLF Cash Sweep payment)
initially equal to 65% of the British Energy Group's adjusted net cash flow,
adjusted for certain corporate actions but never to exceed 65% (ii) fixed
decommissioning contributions equal to GBP20m per annum (indexed to RPI but
tapering off as the nuclear power stations are currently scheduled to close);
and (iii) GBP150,000 (indexed to RPI) for every tonne of uranium in PWR fuel
loaded into the Sizewell B reactor after RED.
The NLF has the right from time to time to convert all or part of the NLF Cash
Sweep payment into convertible shares of the Company. On a full conversion, the
NLF would hold up to 65% of the thereby enlarged equity share capital of the
Company. However, the terms of the Convertible Shares include a limit on the
voting rights of such shares equal to a maximum of 29.9% whilst held by the NLF.
The annual NLF Cash Sweep payment can only be determined after the end of the
financial year and is contingent based on cash generation in the year.
Therefore, it is only recognised and provided for when it becomes determinable
and not in any interim financial periods. It will be recorded as an operating
cost of the applicable financial year. The annual NLF Cash Sweep payment
becomes payable twenty business days after publication of the annual report and
accounts.
The fixed decommissioning obligations of annum have been recorded as a liability
on the balance sheet at their discounted value and disclosed as the NLF
liability. The NLF liability is reduced as payments are made to the NLF. Each
year the financing charges in the income statement include the revalorisation of
NLF liabilities required to discharge one year's discount from the liability.
PWR fuel loaded after RED will increase the qualifying nuclear liability
recognised for back end PWR fuel costs as set out above and will increase the
NLF receivable by a corresponding amount. The difference between the payment of
GBP150,000 (indexed to RPI) per tonne made to the NLF on the loading of PWR fuel
and the increase in the liability recognised, and therefore the increase in NLF
receivable, is recorded as a back end fuel cost or credit as appropriate in the
year of loading.
Goodwill
Goodwill arising on acquisitions represents the excess of the fair value of the
consideration at acquisition compared to the fair value of the identifiable net
assets acquired. Goodwill is capitalised as an intangible asset on the balance
sheet. Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill balances are assessed for impairment at
least annually and at other balance sheet dates if there is any indication of
impairment.
Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income and expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for tax currently payable is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date.
The tax expense relating to items recognised directly in equity are recognised
in equity and not in the income statement.
Deferred tax is provided in full, using the liability method, on temporary
differences, carry-forward of unused tax assets and unused tax losses, arising
between the tax bases of assets and liabilities and their carrying amounts in
the consolidated financial statements.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilised. The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilised.
Property, Plant and Equipment and Depreciation, including Decommissioning Costs
Property, plant and equipment comprises assets acquired or constructed by the
Group. Property, plant and equipment (other than assets in the course of
construction) are stated in the balance sheet at cost less accumulated
depreciation. The fair value of property, plant and equipment acquired as a
result of the restructuring has been deemed to be the cost amount recognised at
that date. Cost includes expenditure that is directly attributable to the
acquisition of the items. Accumulated depreciation includes additional charges
made where necessary to reflect impairment in value.
Assets in the course of construction are stated at cost and not depreciated
until brought into commission.
The charge for depreciation of property, plant and equipment is based on the
straight line method so as to write off the costs of assets, after taking into
account provisions for diminution in value, over their estimated useful lives.
The asset lives adopted are reviewed annually and for the year ended 31 March
2006 were:
AGR power stations 5 - 17 years
PWR power station 29 years
Coal power station 10 years
Other buildings 30 years
Other plant and equipment 18 months - 5 years
Expenditure incurred to replace a component of an item of property, plant and
equipment that is accounted for separately, or to improve its operational
performance is included in the asset's carrying amount or recognised as a
separate asset as appropriate when it is probable that future economic benefits
in excess of the originally assessed standard of performance of the existing
asset will flow to the Group and the cost of the item can be measured reliably.
Expenditure to improve safety or in order to meet increased regulatory standards
is also capitalised. Expenditure on major inspection and overhauls of production
plant is capitalised, within other plant and equipment, when it meets the asset
recognition criteria and is depreciated over the period until the next outage.
Interest on major capital projects is included in the cost of the fixed asset
from the date of cash settlement until the date of commissioning. Asset
additions are depreciated over the remaining useful life of the related asset.
The estimated costs for decommissioning the Group's nuclear power stations and
restoring the sites on which they are located are capitalised as part of the
cost of construction and are depreciated over the same lives as the stations.
These estimated costs are discounted having regard to the time scale whereby
work will take place over many years after station closure. The estimated costs
include the demolition and site clearance of the stations' radioactive
facilities and the management of waste.
Major spare parts are classified as property, plant and equipment and assigned
to individual stations when they are expected to be utilised over more than one
period. They are depreciated using the applicable station lifetime estimate.
Other expenditure, including that incurred on preliminary studies and on the
initiation of new technologies not yet adopted, is charged to the income
statement as incurred. All other maintenance, repairs and renewals are charged
to the income statement during the financial period in which they are incurred.
Gains and losses on the disposal of property, plant and equipment are included
in operating profit/loss.
Intangible Assets (excluding Goodwill)
The costs of acquired computer software costs are capitalised on the basis of
the costs incurred to acquire and bring the specific software in to use, and are
amortised over their estimated operational lives for a maximum of five years.
Costs directly associated with the development of computer software programmes
that are expected to generate economic benefits over a period in excess of one
year are also capitalised and amortised over their estimated operational lives.
ROCs and LECs are classified as intangible assets and are valued at cost.
Impairment of Tangible and Intangible Assets (excluding Goodwill)
At each balance sheet date, the Group reviews its tangible and intangible assets
(excluding goodwill) to determine whether there is any indication that those
assets may have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated to determine the extent of any
impairment loss.
NLF Receivable and Nuclear Liabilities Receivable
The Government indemnity is provided to indemnify any future shortfall on NLF
funding of qualifying uncontracted nuclear liabilities (including PWR back-end
fuel services) and qualifying nuclear decommissioning costs.
The NLF receivable asset recognised represents the aggregate value of the NLF
and the Government indemnity such that the receivable equals the present value
of the associated qualifying nuclear liabilities.
The Government indemnity is also provided to cover services for spent AGR fuel
loaded pre-restructuring. The nuclear liabilities receivable is recognised in
respect of the indemnity such that the receivable equals the present value of
the associated qualifying nuclear liabilities.
The NLF receivable and the nuclear liabilities receivable are stated in the
balance sheet at current price levels, discounted at a long-term real rate of
interest of 3% per annum to take account of the timing of payments. Each year
the financing charges in the income statement include the revalorisation of
these receivables required to match the revalorisation of the nuclear
liabilities.
Nuclear Liabilities
Nuclear liabilities represent provision for the Group's liabilities in respect
of the costs of waste management of spent fuel and nuclear decommissioning. The
provisions represent the Directors' best estimates of the costs expected to be
incurred. They are calculated based on the latest technical evaluation of the
processes and methods likely to be used, and reflect current engineering
knowledge. The provisions are based on such commercial agreements as are
currently in place, and reflect the Directors' understanding of the current
Government policy and regulatory framework. Given that Government policy and the
regulatory framework on which our assumptions have been based may be expected to
develop and that the Directors' plans will be influenced by improvements in
technology and experience gained from decommissioning activities, liabilities
and the resulting provisions are likely to be adjusted.
In matching the costs of generating electricity against the income from sales,
accruals are made in respect of the following:
a) Fuel costs - back end
The treatment of back end fuel costs in the income statement has been dealt with
under the accounting policies for fuel costs above. These nuclear liabilities
cover reprocessing and storage of spent nuclear fuel and the long-term storage,
treatment and eventual disposal of nuclear waste. They are based, as
appropriate, on contractual arrangements or the latest technical assessments of
the processes and methods likely to be used to deal with these obligations under
the current regulatory regime. Where accruals are based on contractual
arrangements they are included within creditors. Other accruals are based on
long-term cost forecasts which are reviewed regularly and adjusted where
necessary, and are included within provisions.
b) Decommissioning of nuclear power stations
The financial statements include provision for the full cost of decommissioning
the Group's nuclear power stations. Provision is made on the basis of the latest
technical assessments of the processes and methods likely to be used for
decommissioning under the current regulatory regime.
Accruals and provisions for back end fuel costs and decommissioning are stated
in the balance sheet at current price levels, discounted at a long-term real
rate of interest of 3% per annum to take account of the timing of payments. Each
year the financing charges in the income statement include the revalorisation of
liabilities required to discharge one year's discount from provisions made in
prior years and restate these provisions to current price levels.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, with banks and short-term
deposits with a maturity of three months or less. Restricted cash primarily
consists of cash pledged as collateral.
Financial Instruments
Implementation of IAS 32 and IAS 39
The Group has applied IAS 32 and the full version of IAS 39 in the financial
year ending 31 March 2006 rather than the European Union ('EU') adopted
regulation of November 2004 which endorsed IAS 39 with the exception of certain
provisions relating to (i) the use of the full fair value option for liabilities
and (ii) hedge accounting. Applying the full version of the standard has no
impact on the group's financial statements.
In accordance with the transitional arrangements set out in IFRS 1, the Group
has not restated the prior period's comparative figures to show the effect of
IAS 32 and IAS 39. For the period ended 31 March 2005, financial instruments
continue to be accounted for in accordance with the Group's previous policies
for financial instruments under UK GAAP.
Recognition, classification and subsequent measurement of financial assets and
liabilities
IAS 39 requires that all financial assets be initially recognised at fair value
in the balance sheet with changes in fair value reported through the income
statement. Exceptions apply to assets classified as loans and receivables and
held-to-maturity investments, which are measured at amortised cost using the
effective interest method, and also to equity investments in instruments whose
fair value can not be reliably measured, which are recognised and measured at
cost.
Financial liabilities are measured at amortised cost using the effective
interest method. The Group measures all debt instruments initially at fair
value, and this is taken to be the fair value of the consideration received.
Transaction costs (any such costs incremental to and directly attributable to
the issue of the financial instruments) are included in the calculation of the
effective interest rate and are, in effect, amortised through the income
statement over the life of the instrument. Derivative instruments, and
commodity contracts that fall within the scope of IAS 39, are carried at fair
value with special rules applying to all financial instruments which form part
of a hedging relationship.
Accounting for derivatives and commodity contracts
The Group's activities expose it primarily to risks associated with electricity
generation, the purchase of fuel for use in the generation process, and the
supply of electricity to end customers in both the wholesale and retail markets.
The Group follows a trading strategy of selling forward a proportion of the
Company's output to reduce the Group's exposure to potential falls in the market
price of electricity. The use of derivative financial instruments occurs
primarily within the Group's electricity trading and coal procurement
activities.
The Group's accounting objective is to report earnings results that are
consistent with its operational strategies. As such, the Group aims to
recognise the earnings effects of derivative transactions executed to hedge
economic business risks in the income statement in the period in which the
economically hedged operational activity affects earnings. The Board has
endorsed the use of derivative financial instruments as hedging tools and the
Group uses derivative and non-derivative financial instruments to manage its
exposures. Physical and financially settled instruments are held by the Group to
match offsetting physical positions and are not held for financial trading
purposes.
Where commodity contracts, such as electricity and fuel, are entered into in
accordance with the Group's own purchase, sale or usage requirements they are
accounted for on an accruals basis following delivery of the commodity and are
thereby excluded from the scope of IAS 39. Amounts payable or receivable in
respect of these contracts are recorded within trade creditors and trade
receivables respectively. Where a commodity contract is not entered in to or
does not continue to be held to meet the Group's own purchase, sale or usage
requirements the recognition and measurement requirements of IAS 39 are applied.
Derivative financial instruments are initially recognised at fair value and all
changes in fair value are subsequently accounted for through the income
statement unless the derivative qualifies as a hedging instrument.
Changes in the fair value of derivative financial instruments that are
designated and are effective as hedges of future cash flows are recognised
directly in equity, in the cash flow hedge reserve, and the ineffective portion
of the hedge is recognised immediately in the income statement.
The Group designates derivatives as hedging instruments when it is expected that
there will be a high inverse correlation between the changes in fair value of
the hedging instrument and the changes in the fair value of the cash flows of
the hedged item. This is measured primarily using the dollar offset method. Such
correlation is required to be within the limits of 80% to 125% for hedge
accounting to be permitted. Prospective and retrospective testing is carried out
on a regular basis, at least on each reporting date, to establish whether the
assumptions and application criteria for hedge accounting going forward continue
to be supported. The Group discontinues hedge accounting where the hedging
relationship correlation is outside the required parameters.
Derivative instruments are de-designated from a hedge relationship when:
- The hedging instrument or item expires or is settled;
- The forecast transaction is no longer considered to be highly probable; and
- The hedging instrument no longer qualifies for hedge accounting under
IAS 39 rules.
At that time, any cumulative gain or loss on the hedging instrument recognised
in equity is retained in equity until the forecast transaction is settled. If a
hedged transaction is no longer expected to occur, the net cumulative gain or
loss recognised within equity is transferred to the income statement of the
period.
Valuation of commodity contracts and derivatives
The group's valuation policy for derivative and other financial instruments is
to maximise the use of quoted prices from active trading markets.
Futures, swaps, and forward agreements are valued against the appropriate
market-based curves. Three types of curves (price, volatility and correlation)
may be required depending upon the liquidity of the market and type of product
traded forward price curves are developed using market prices from
independent sources for liquid commodities, markets and products and
modelled for illiquid commodities, markets and products. Volatility curves are
modelled for open positions in illiquid markets and implied volatility curves
are developed from actively traded options. Correlation curves are developed
using either implied correlations or using historical forward correlations and
other relevant market data.
Where necessary, structured transactions are disaggregated into their traded
core components, and each component is valued against the appropriate
market-based curves. The fair value of a structured deal is the summation of
the fair value of its core components.
Purchase contracts are valued against the quoted bid price and sales contracts
are valued against the quoted offer prices, with no provisions made for
liquidity. Valuation adjustments are made for the time value of money, which is
applied to all contracts, and credit risk, which will be applied where
applicable.
Embedded derivatives
The Group also evaluates contracts for embedded derivatives, and considers
whether any embedded derivatives have to be separated from the underlying host
contract and accounted for separately in accordance with IAS 39 requirements.
Where embedded derivatives have terms that are not closely related to the terms
of the host contract in which they are included, they are accounted for
separately from the host contract as derivatives, with changes in the fair value
recorded in the income statement, to the extent that the hybrid instrument is
not already accounted for at fair value.
Embedded derivatives are valued either by directly valuing the derivative
element in line with the processes described above or by valuing the embedded
derivative as the difference between the value of the hybrid instrument and the
host contract (excluding the derivative element).
Offsetting of derivative assets and liabilities
The Group offsets a financial asset and a financial liability and reports the
net amount only when the Group has a legally enforceable right to set off the
amounts and intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously.
Impact on Effective Tax Rate
Income tax for interim reporting periods is calculated by applying an estimate
of the annual effective tax rate to the interim result excluding IAS 39
adjustments, and by calculating tax at the standard rate for the IAS 39
adjustments arising within the period.
Share-based Payments
BEG has two share compensation schemes, a Long Term Deferred Bonus Plan, and a
Share Incentive Plan. BEG plc accounts for its share compensation schemes in
accordance with IFRS 2 'Share-based Payments' using the Black-Scholes option
pricing model under which fair value is calculated for the share compensation
schemes and updated at subsequent balance sheet dates.
The fair value of the share compensation schemes is charged to the income
statement over the period from the date the schemes were granted to the date at
which the compensation is expected to vest on the employees. The corresponding
credit is included in Shareholders' Equity. The Group issues equity-settled
share-based payments to certain employees under the terms of the Group's various
employee share compensation schemes. Equity-settled share-based payments are
measured at fair value at the date of grant. The fair value determined at the
grant date of equity-settled share-based payments is expensed on a straight-line
basis over the vesting period, based on an estimate of the shares that will
ultimately vest.
INDEPENDENT REVIEW REPORT TO BRITISH ENERGY GROUP PLC
Introduction
We have been instructed by the company to review the financial information for
the quarter ended 3 July 2005 which comprises the consolidated income statement,
consolidated balance sheet, consolidated statement of recognised income and
expense, consolidated statement of changes in equity, consolidated statement of
cash flows, and associated notes. We have read the other information contained
in the quarterly report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
Directors' responsibilities
The quarterly report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority.
As disclosed in note 1, the next annual financial statements of the group will
be prepared in accordance with accounting standards adopted for use in the
European Union. This quarterly report has been prepared in accordance with the
basis set out in Note 1.
The accounting policies are consistent with those that the directors intend to
use in the next annual financial statements. As explained in note 1, there is,
however, a possibility that the directors may determine that some changes are
necessary when preparing the full annual financial statements for the first time
in accordance with accounting standards adopted for use in the European Union.
The IFRS standards and IFRIC interpretations that will be applicable and adopted
for use in the European Union at 31 March 2006 are not known with certainty at
the time of preparing this interim financial information.
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 disclosed accounting policies have
been applied. 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 and therefore provides a lower level of assurance.
Accordingly we do not express an audit opinion on the financial information.
This report, including the conclusion, has been prepared for and only for the
company for the purpose of the Listing Rules of the Financial Services Authority
and for no other purpose. We do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown or into whose hands it may come save where expressly agreed by our
prior consent in writing.
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 quarter ended 3
July 2005.
PricewaterhouseCoopers LLP
Chartered Accountants
Edinburgh
28 September 2005
Notes:
(a) The maintenance and integrity of the British Energy Group plc website is
the responsibility of the Directors; the work carried out by the auditors
does not involve consideration of these matters and, accordingly, the
auditors accept no responsibility for any changes that may have occurred to
the quarterly report since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and
dissemination of financial information may differ from legislation in other
jurisdictions.
GLOSSARY
AGR (Advanced Gas-cooled Reactor)
The second generation of gas-cooled nuclear reactor built in the UK.
BETTA
British Electricity Transmission and Trading Arrangements.
Baseload Generation
Mode of operation of a power station at a constant high level of output for a
sustained period of time to assist in meeting minimum national demand.
Bruce
The Bruce A and B nuclear power stations in Ontario, Canada.
Decommissioning
The process whereby a nuclear power station is shut down at the end of its
economic life, eventually dismantled, and the site made available for other
purposes.
DSB
Direct supply business.
Energy Supply Costs
These mainly comprise the costs incurred for the use of the distribution and
transmission systems, recovered through revenue, and accrued costs of Renewable
Obligation Certificates (ROCs).
EPL
Eggborough Power Limited.
ETS
Emissions Trading Scheme.
FGD (Flue Gas Desulphurisation)
Equipment fitted to coal-fired power stations to reduce sulphur dioxide
emissions.
Market Price
The price for annual forward baseload contracts.
MW (megawatt): MWh (megawatt-hour)
One megawatt equals 1,000 kW: one megawatt-hour represents one hour of
electricity consumption at a constant rate of 1 MW.
NDA
Nuclear Decommissioning Authority.
NLF
An independently administered fund into which the Group makes contributions to
cover all qualifying uncontracted nuclear liabilities including costs of
decommissioning nuclear power stations and PWR back end fuel costs.
Operating Unit Cost
Calculated by dividing the total operating cost, excluding re-measurement,
energy supply costs recharged to customers and energy purchases, by total
output.
Outage (Planned and Unplanned)
A period during which a reactor is shut down. The periodic shutdown of a reactor
including for maintenance, inspection and testing or, in some cases, for
refuelling is known as a planned outage. In the UK, some planned outages are
known as statutory outages and are required by the conditions attached to the
nuclear site licence needed to operate the station. Unscheduled shutdown of a
reactor for a period is known as an unplanned outage.
PiP
The Performance Improvement Programme.
PWR (Pressurised Water Reactor)
The most recent type of nuclear reactor to be constructed in the UK which uses
pressurised water as both the coolant and the moderator.
Quinquennial Review
The five-yearly review of the assumptions underlying the Group's provision for
certain nuclear liabilities.
Realised Price
This is the average price of electricity sold during the relevant period. It is
calculated by dividing revenue, excluding re-measurement impact, energy supply
costs recharged to customers and miscellaneous income, and net of energy
purchase costs, by total output during the period.
Renewable Obligation Certificates
Eligible renewable generators receive Renewable Obligation Certificate (ROCs)
for each MWh of electricity generated. These certificates can then be sold to
suppliers, in order to fulfil their renewables obligation.
Restructuring
The restructuring of the Group completed on 14 January 2005.
Restructuring Effective Date (RED)
14 January 2005.
Revalorisation
Revalorisation arises because nuclear liabilities are stated in the balance
sheet at current price levels, discounted at 3% per annum from the eventual
payment dates. The revalorisation charge is the adjustment that results from
restating these liabilities to take into account the effect of inflation in the
year and to remove the effect of one year's discount as the eventual dates of
payment become one year closer. Revalorisation charges arise in respect of the
fixed decommissioning obligation to reflect the unwinding of the discount for
the period. A revalorisation credit arises in respect of movements in the value
of nuclear liabilities and the NLF receivable to take account of the underlying
movement in nuclear liabilities.
Statutory Outage
The planned shutdown of nuclear reactors for regulatory inspection and
maintenance.
TW (terawatt): TWh (terawatt-hour)
One terawatt equals 1,000 GW: one terawatt-hour represents one hour of
electricity consumption at a constant rate of 1 TW.
Unit Capability Factor
The percentage of maximum energy generation that a plant is capable of supplying
to the electrical grid, limited only by factors within the control of plant
management.
Unplanned Capability Loss Factor
Unplanned capability loss factor is defined as the ratio of the unplanned energy
losses during a given period of time, to the reference energy generation,
expressed as a percentage.
WANO
The World Association of Nuclear Operators. A nuclear industry organisation
which encourages peer review and collects and shares operating data worldwide
which is then used to benchmark performance.
Warrants
Warrants entitling the holder to subscribe for shares in British Energy Group
plc.
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: September 28, 2005 BRITISH ENERGY GROUP PLC
By:____John Searles____
Name: John Searles
Title: Director - Investor Relations