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
For the Quarter ended September 30, 2002
AES Drax Energy Limited
18 Parkshot
Richmond
Surrey TW9 2RG
England
------------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
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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
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AES DRAX ENERGY LIMITED
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Interim Financial Information 3
Item 2. Discussion and Analysis of Financial Condition and
Results of Operations 3
Item 3. Market Risks 17
PART II OTHER INFORMATION
Item 1. Legal and Regulatory Developments 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
APPENDIX 20
1
PRESENTATION OF CURRENCY AND FINANCIAL INFORMATION
Amounts set forth in the financial statements included in the appendix to
this report are stated in pounds sterling. In this report, references to
"(pound)", "pounds sterling" or "Pounds" are to the currency of the United
Kingdom, which we sometimes refer to as the UK. References to "US dollars",
"US$" or "$" are to the currency of the US. In this report, "US GAAP" means US
generally accepted accounting principles and "UK GAAP" means UK generally
accepted accounting principles.
FORWARD LOOKING STATEMENTS
Certain statements included in this report are forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements speak only as of the date hereof. Forward
looking statements can be identified by the use of forward-looking terminology
such as "believe," "expects," "may," "intends," "will," "should" or
"anticipates" or the negative forms of other variations of these terms of
comparable terminology, or by discussions of strategy. Future results covered by
the forward-looking statements may not be achieved. Forward looking statements
are subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements.
Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we have identified some of these risks, uncertainties and
other important factors in this report and you should also review "Item 1. Key
Information - Risk Factors" in our Annual Report on Form 20-F for the year ended
December 31, 2001, ("2001 Annual Report") which is hereby incorporated by
reference herein.
You should also consider, among others, the following important factors:
o general economic and business conditions in the UK;
o changes in governmental regulations affecting the Drax Power Station
and the UK electric power industry generally, including the impact of
the New Electricity Trading Arrangements ("NETA") that were
implemented on March 27, 2001 on the market for electricity in the UK;
o power prices and resource availability and pricing;
o general industry trends;
o changes to the competitive environment;
o changes in business strategy, development plans or vendor
relationships in the market for power in the UK and that our prinicpal
hedging arrangement relating to power sales has been terminated and we
will now be operating as a fully merchant plant;
o availability, terms and deployment of capital;
o interest rate volatility;
o changes in currency exchange rates, inflation rates and conditions in
financial markets; and
o availability of qualified personnel.
These forward-looking statements speak only as of the date of this report.
We do not intend to publicly update or revise these forward-looking statements
to reflect events or circumstances after the date of this report, and we do not
assume any responsibility to do so.
MARKET DATA AND INDUSTRY TERMS
In this report, we rely on, and refer to, information and statistics
regarding economic conditions and trends, the market for electric power and our
market share in the sectors of that market in which we compete. We obtained this
information and statistics from various third-party sources and/or our own
2
internal estimates. We believe that these sources and estimates are reliable,
but we have not independently verified them and cannot guarantee their accuracy
or completeness.
The Drax Power Station's business is the generation and sale of
electricity. Generated electricity is sold under a two-part pricing method,
representing the two main products, capacity and energy, produced by electric
generating facilities. Energy refers to the sale of actual electricity produced
by a power station and capacity refers to the generating capability of a
particular plant. Under the current market structure Drax Power Station sells
both electricity capacity, which is expressed as kilowatts ("KW"), megawatts
("MW"), gigawatts ("GW") or terawatts ("TW") of electricity available for use at
any point in time, and electrical energy, which is expressed as kilowatt hours
("KWh"), megawatt hours ("MWh"), gigawatts hours ("GWh") or terawatts hours
("TWh") of electricity produced or consumed over a period of time. One KW =
1,000 watts, one MW = 1,000KW, one GW = 1,000MW and one TW = 1,000GW.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL INFORMATION
The appendix to this quarterly report contains the unaudited condensed financial
statements of the following companies:
Page
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A AES DRAX ENERGY LIMITED
Report and Financial Statements for the quarter ended 30
September 2002 A1-7
B AES DRAX POWER FINANCE HOLDINGS LIMITED
Report and Financial Statements for the quarter ended
30 September 2002 B1-7
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCING CONDITION AND RESULTS OF
OPERATION
General
AES Drax Energy Limited is a holding company with no material operations.
We were formed on February 28, 2000 in order to issue the 11.25% Senior Secured
Notes due 2010 and the 11.5% Senior Secured Notes due 2010, which we refer to as
the notes or the high yield notes. Our only asset is the indirect ownership of
100% of the outstanding capital stock of AES Drax Power Limited ("AES Drax"),
the owner of the Drax Power Station. We are entirely dependent on the receipt of
distributions from our direct and indirect subsidiaries to meet our obligations
under the notes. AES Drax Energy is a wholly owned subsidiary of The AES
Corporation. The AES Corporation files annual (audited) and quarterly
(unaudited) reports with the Securities and Exchange Commission under the
Securities and Exchange Act of 1934 (the "1934 Act"), which are publicly
available. We filed our 2001 Annual Report under the 1934 Act with the
Securities and Exchange Commission on April 30, 2002, which is also publicly
available.
Recent Developments
Credit Rating Downgrades
During the week of October 7, 2002, we understand that Moody's and Standard
& Poor's began discussions with TXU Europe Group plc ("TXU Europe") regarding
its credit ratings. TXU Europe is the guarantor under the Hedging Contract
(which has now been terminated) between AES Drax and TXU Europe Energy Trading
Limited ("TXU Energy"). The Hedging Contract historically accounted for
approximately 60% of the revenues generated by AES Drax. It was understood at
that time that TXU Europe's parent, TXU Corp, would inject U.S.$700 million into
TXU Europe to assist in
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restructuring certain of TXU Europe's contracts and to reduce debt. Such
commitments, however, were made contingent on TXU Corp maintaining its own
credit ratings.
On October 14, 2002, TXU Europe was downgraded by Standard & Poor's (to B+
from BBB-) and by Moody's (to B3 from Baa3). On the same day, AES Drax Holdings
Limited was also downgraded by Standard & Poor's to B, negative outlook, which
resulted in all three rating agencies, including Moody's and Fitch, rating its
senior debt, the Eurobonds (which are financed by a syndicate of banks, the
"Senior Lenders") and the senior bonds (the "Senior Bonds") (which are secured
and rank pari passu with the Eurobonds), below investment grade. Our high yield
notes, which are structurally subordinated to the senior debt of AES Drax
Holdings, were also downgraded to C by Standard and Poor's, Ca by Moody's and CC
by Fitch.
Discussions with TXU Energy and TXU Europe on Restructuring of the Hedging
Contract
Due to TXU Europe's credit ratings downgrades, and the announcement by TXU
Corp on October 14, 2002 that it would not inject any additional capital into
TXU Europe, AES Drax was requested by TXU Europe and TXU Energy to restructure
the Hedging Contract. Beginning on October 14, 2002, AES Drax engaged in
discussions with TXU Europe and TXU Energy regarding a possible restructuring of
the Hedging Contract. However, no agreement was reached.
Notices under the Hedging Contract
As a result of TXU Europe's credit ratings downgrade and TXU Energy's
failure to make timely payments of (pound)25,536,456 due under the Hedging
Contract on October 14, 2002, AES Drax:
o gave notice, as of October 15, 2002, to TXU Energy to deliver a letter
of credit for the benefit of AES Drax in accordance with the terms of
the Hedging Contract. Failure to issue the letter of credit by
November 4, 2002 would permit AES Drax to terminate the Hedging
Contract, subject to receiving the necessary consents from the Senior
Lenders.
o delivered, as of October 15, 2002, a demand for non-payment and
notified TXU Energy that AES Drax had rights to terminate the Hedging
Contract due to TXU Energy's inability to pay its debts as they fell
due as evidenced by its failure to make the payment due to AES Drax on
October 14, 2002. This payment was made on October 17, 2002, as a
result of which this demand no longer had any effect.
As a result of our credit ratings downgrade, TXU Energy gave notice, as of
October 15, 2002, to AES Drax to deliver a letter of credit for the benefit of
TXU Energy in accordance with the terms of the Hedging Contract. Failure to
issue the letter of credit by November 4, 2002 would permit TXU Energy to
terminate the Hedging Contract subject to rights which AES Drax and the security
trustee, who acts as trustee for all our secured senior creditors (including the
holders of the Eurobonds and Senior Bonds), had under a Direct Agreement with
TXU Energy which granted certain cure and other rights for an additional 90 days
following November 4, 2002.
Discussions with Senior Lenders and Key Suppliers
As a result of the foregoing events, AES Drax Holdings began discussions
with its Senior Lenders and AES Drax's key suppliers during the week of October
14, 2002, regarding appropriate actions that should be taken in view of these
events.
Apart from TXU Energy's request for a letter of credit under the Hedging
Contract, certain of AES Drax's counterparties under power purchase agreements
requested additional credit support pursuant to such contracts triggered by the
aforementioned ratings downgrades. On October 29, 2002, a number of the Senior
Lenders agreed to backstop up to (pound)4.16 million of letters of credit
pursuant to the existing working capital facility of AES Drax for the purpose of
providing credit support to counterparties purchasing power from AES Drax or
credit support desirable in connection with AES Drax's electricity arrangements.
To date, except in connection with the Hedging Contract, AES Drax has been able
to deliver credit support required to continue its electricity trading and to
provide its electricity trading counterparties with the credit support required
by them.
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In addition, AES Drax agreed with UK Coal, the primary coal supplier to the
Drax Power Station, certain amendments to the supply arrangements, including:
o Suspension of coal deliveries until the week of November 4, 2002 with
purchases at a reduced level of 80,000 tons per week for each week
until November 18, 2002.
o Ongoing delivery levels subsequent to November 18, 2002 were then
agreed providing for delivery of 40,000 tonnes during the week
commencing November 18, 2002 and 70,000 tonnes per week for the four
weeks commencing November 25, 2002.
o In exchange for modifications on coal delivery, AES Drax is paying for
coal deliveries weekly, with payment in the week following delivery,
up to the end of December 2002. If any additional coal deliveries are
taken from UK Coal above these levels, payment will be on normal
monthly terms.
Discussions with TXU Europe on Standstill Arrangement
On October 21, 2002, TXU Europe announced the sale of its U.K. retail and
generation assets to Powergen, a wholly-owned subsidiary of E.ON AG. The
purchase price for the assets was announced as cash of (pound)1.37 billion and
the assumption of (pound)247 million of securitized receivables. Immediately
following the announcement of the sale, TXU Europe met with all but one of its
current Power Purchase Agreement counterparties, including AES Drax. At this
meeting, TXU Europe proposed that all of these counterparties execute a
standstill arrangement to provide TXU Europe additional time to evaluate various
options and renegotiate certain contracts. AES Drax did not agree any standstill
arrangements with TXU Europe.
Notice of Termination under the Hedging Contract by TXU Energy
As described above, TXU Energy had until November 4, 2002 to issue a letter
of credit before AES Drax would have a right to deliver a notice of termination
of the Hedging Contract. TXU Energy failed to deliver the required letter of
credit on November 4, 2002. On November 5, 2002, AES Drax delivered a notice to
TXU Energy informing TXU Energy of their failure to deliver the required letter
of credit in accordance with the notice delivered on October 15, 2002 and that,
although AES Drax was not delivering a notice of termination, TXU Energy was on
notice that AES Drax had such right and that the failure to exercise such right
immediately was not a waiver of its rights. Termination by AES Drax of the
Hedging Contract required the consent of the Senior Lenders. As a result of the
foregoing events, AES Drax Holdings engaged in discussions with its Senior
Lenders regarding the possible termination of the Hedging Contract. Upon any
termination of the Hedging Contract by AES Drax, under the terms of the Hedging
Contract, AES Drax would be entitled to receive a termination sum from TXU
Energy of approximately (pound)270 million, guaranteed by TXU Europe.
AES Drax also had until November 4, 2002 to issue a letter of credit before
TXU Energy would have a right to deliver a notice of termination. When AES Drax
failed to deliver the letter of credit by November 4, 2002, TXU Energy delivered
a notice as required by the Hedging Contract and, pursuant to the Direct
Agreement, that it proposed to terminate the Hedging Contract on February 3,
2003 on the basis that AES Drax Holdings did not meet the required credit rating
under the Hedging Contract and AES Drax had failed to deliver the required
letter of credit. Under the Direct Agreement, such termination right was subject
to certain rights (including cure rights) which AES Drax and the security
trustee had under such agreement. These rights could be exercised until February
3, 2003.
Settlement Discussions with TXU Energy and TXU Europe; Termination of the
Hedging Contract by AES Drax
As a result of the foregoing events, AES Drax began discussions with TXU
Europe regarding settlement of the termination sum due under the Hedging
Contract as well as amounts owing for power consumed by TXU Energy for October
and November 2002. AES Drax's willingness to continue these discussions was
dependent on receiving on time (pound)49,323,680 (including VAT) for power
purchased in October 2002 under the Hedging Contract.
5
On November 7, 2002 Moody's downgraded the senior debt of AES Drax Holdings
to Caa1 from Caa2 and our high yield notes from Ca to C. The downgrades were
attributed to developing events with TXU Europe and TXU Energy, including the
delivery of the notices described above.
On November 12, 2002, AES Drax Holdings received conditional approval from
the Senior Lenders to terminate the Hedging Contract.
On November 14, 2002, TXU Energy failed to make the October payment despite
having provided certain assurances that payment would be made on time.
On November 15, 2002, TXU Energy sought an order from the court to restrain
AES Drax from presenting a petition to the court for its winding up. A hearing
was scheduled to hear the merits for seeking such a restraining order on
November 18, 2002.
During the weekend of November 16 and 17, 2002, TXU Energy, TXU Europe and
AES Drax continued their discussions regarding payment of a termination sum as
well as payment for power consumed in October and November 2002. By the
afternoon of Sunday, November 17, 2002, a tentative agreement was reached
pursuant to which TXU Energy would pay AES Drax an aggregate of (pound)290
million (plus VAT) as a termination sum and for power consumed in October and
for November 2002, with delivery of power through November 22, 2002 and then
termination of the Hedging Contract. This tentative agreement was rejected by
the Board of Directors of TXU Energy in the early morning of November 18, 2002,
with TXU Energy significantly reducing the amount it was prepared to pay by
(pound)30 million. This offer was immediately rejected by AES Drax. Throughout
the negotiations, TXU Energy was informed that if agreement could not be
reached, AES Drax would consider exercising its right to terminate the Hedging
Contract.
Although there were further discussions during the morning of November 18,
2002, and AES Drax made numerous attempts to obtain a written proposal from TXU
Energy stipulating an amount it was prepared to pay as a settlement sum and for
power consumed in October and November 2002, no offer capable of acceptance by
AES Drax was received and no agreement as to settlement was reached. AES Drax
then delivered to TXU Energy a notice of termination of the Hedging Contract in
accordance with the terms of the Hedging Contract. The termination notice made
the following demands (but without prejudice to any other rights or remedies
which AES Drax had) of TXU Energy:
o payment of Capacity Damages in the amount of(pound)266,482,876 plus
VAT;
o payment of(pound)49,323,679.86 (including VAT) for power consumed in
October 2002;
o payment of approximately(pound)35,117,729 (including VAT) for power
consumed from November 1, 2002 to the termination time (4:00 p.m.
(London time)) on November 18, 2002; and
o withdrawal of all calls for power subsequent to the termination time
to permit AES Drax to begin selling power in the market.
In addition to the notice of termination delivered to TXU Energy, AES Drax
also delivered a demand for payment to TXU Europe, as guarantor under the
Hedging Contract, for payment of all amounts then due under the Hedging
Contract. In accordance with the terms of the guarantee, payment was required to
be made within three business days of delivery of the demand for payment.
Administration of TXU U.K. Ltd, TXU Energy and TXU Europe
On November 19, 2002, TXU Europe filed a petition on behalf of itself, TXU
U.K. Ltd. and TXU Energy, seeking protection from its creditors. On the same
day, the United Kingdom High Court approved the petition, putting the three
companies into temporary administration and appointing administrators for each
of them.
As a result of TXU Europe and TXU Energy entering administration, AES Drax
and TXU Energy agreed not to proceed with the hearing relating to AES Drax's
petition to wind up TXU Energy, since no creditor may present a winding up
petition against an English company which is in administration.
6
Consequences of Termination of the Hedging Contract
The termination of the Hedging Contract is an event which will become an
event of default under the Indenture for the Senior Bonds unless AES Drax
Holdings obtains a ratings affirmation from all three ratings agencies within 30
days of November 18, 2002. AES Drax Holdings has stated that it can give no
assurance that it will be able to obtain the requisite ratings affirmation,
although this event of default will be waived as part of the standstill
arrangements with the Senior Lenders and holders of the Senior Bonds (see -
"Agreement in Principle on Standstill Agreement with Senior Creditors").
The termination of the Hedging Contract, absent ratings affirmations,
constituted an immediate default under our high yield notes. Although the high
yield noteholders have the right to accelerate payment of the high yield notes
immediately, pursuant to intercreditor arrangements the high yield noteholders
have no enforcement rights until 179 days following delivery of certain required
notices under the intercreditor agreements.
Distributions on the High Yield Notes
As previously disclosed by us and by AES Drax Holdings in the filings on
Form 6-K made on September 3, 2002, certain of the forward looking debt service
cover ratios at June 30, 2002, were below the threshold required to permit
distributions of 1.25:1, at 1.19:1. As a result, AES Drax Holdings was not
permitted to make distributions to us to permit interest due on the high yield
notes to be paid on August 30, 2002. The AES Corporation, however, made a
contribution to us which together with amounts then held in the high yield note
debt service reserve fund was sufficient to make the payments then due. At the
time the AES Corporation stated that there were no assurances that it would
agree to make any similar payments in the future. As also disclosed in the
September filing any improvement in the forward looking ratios would depend on a
favorable change in the forward curve for electricity prices during the period
from June 30 to December 31, 2002. Such improvements have not occurred and due
to the developments described above, we expect our ratios will be below 1.19:1
at December 30, 2002. In addition, as part of the standstill arrangements, AES
Drax Holdings will be deferring certain principal payments due to its Senior
Lenders. As a result of the foregoing, AES Drax Holdings will not be permitted
to make any distributions to us on December 31, 2002, to permit us to make
required payments to our high yield noteholders at the end of February 2003.
Moreover, there are insufficient funds in the high yield note debt service
reserve account to cover such payments. If we are unable to pay the interest due
on the notes on time at the end of February 2003, such failure would constitute
an event of default under the notes although any enforcement rights would be
subject to a 90-day grace period as well as the terms and conditions of certain
intercreditor arrangements.
Agreement in Principle on Standstill Agreement with Senior Creditors
On November 27, 2002, AES Drax Holdings reached an agreement in principle
regarding certain standstill arrangements with the steering committee
representing the Senior Lenders and an ad hoc committee formed by holders of the
Senior Bonds. The purpose of the standstill is to provide AES Drax and the
senior creditors with a period of stability during which discussions regarding
consensual restructuring of the project can take place. The standstill period
would expire on May 31, 2003, unless extended. The Senior Lenders and the
holders of the Senior Bonds will agree to waive certain events of default under
the Eurobonds or the Senior Bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security.
A copy of the term sheet for the standstill agreement is attached as an
exhibit to the Form 6-K filed by AES Drax Holdings with the SEC on November 27,
2002.
AES Drax Holdings is expecting to enter into the definitive Standstill
Agreement as soon as possible and would anticipate it becoming effective within
the next two weeks, although it has stated that it can provide no assurances
that the requisite majority of the Senior Lenders and Senior Bondholders will
agree to enter into the Standstill Agreement.
General
The following discussion contains forward-looking statements regarding AES
Drax and its operations. These statements are based on the current plans and
expectations of AES Drax and involve
7
risks and uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements.
The economics of any electric power facility are primarily a function of
the price of electricity, the quantity of electricity that is produced and sold
and the level of operating expenses incurred. Generally, the greater the
percentage of time a unit is operating, the greater the revenues associated with
that unit.
Through the first quarter of 2001 AES Drax's business activities
concentrated on selling electricity generated by the Drax Power Station into
the Pool. The Pool remained in place until March 27, 2001 when NETA was
implemented. The market for wholesale electric energy and energy services was
largely deregulated as a result of implementation of the NETA compared with the
prior Pool arrangements. Over-capacity, increased competition and a
fragmentation of the electricity market in England and Wales has had a dramatic
impact on wholesale electricity prices, with current wholesale prices having
declined on average close to 40% from prices being received in the Pool. In a
competitive market where operation is based on bids made by owners of
generating assets in the region, AES Drax expected that owners of lower
marginal cost facilities would bid lower prices, and therefore these facilities
would be in operation more often than higher marginal cost facilities. However,
the trend has been that participants in the NETA have bid lower prices to avoid
having to "flex" their plant (increase and decrease output whilst under
contractual agreements) and suffer the penalties for being out of balance
(unable to match actual output against contracted output). In addition,
participants have also been operating plant at less than full capacity to
provide them with reserve power, which can be called upon to cover any outages
or restrictions to their plant. This makes the generation market less economic,
as plants are operating at lower thermal efficiencies (increased cost of
production); it also ensures that the current level of demand is shared amongst
more operators, thus encouraging older, less efficient and less environmentally
friendly plant to run.
As a result of the termination of the Hedging Contract, we are in the
process of revising our overall business, marketing and trading strategy. Our
new strategy, in the framework of operating as a fully merchant plant, will be
based upon the continuation of the existing non-speculative trading strategy,in
which we will only sell the physical output of the plant. Our desired position
is to hedge our output forward where possible utilizing the systems for
marketing power either direct to counter parties, through brokers or via the
Balancing Mechanism. All three of these routes to market are already in place
and have been used at AES Drax extensively over the past year. We expect to
agree a new trading strategy with our senior creditors as part of agreeing the
Standstill Agreement.
Results of Operations
AES Drax's results of operations through the period covered by this report
relied on payments made to it by TXU Energy under the Hedging Contract, on
revenues from the sale of electric energy, capacity and other related products,
its ability to successfully operate under NETA, its trading strategy and on the
level of its operating expenses.
As a result of termination of the Hedging Contract, the following results
are not necessarily indicative of results we expect to achieve in the fourth
quarter or in future periods, as we only began operating as a fully merchant
plant as of November 19, 2002.
The Hedging Contract was terminated on November 18, 2002 following the
failure by TXU Energy to pay for the power supplied by AES Drax to TXU Energy in
respect of the month of October and part of the month of November (up to the
date of termination). The termination of the Hedging Contract will have a
significant impact upon the results of AES Drax for the year ended December 31,
2002 and for the future results of the company as we migrate to becoming a
fully-merchant plant. In the financial statements to December 31, 2002 we have
estimated that we shall need to record a provision of approximately (pound)165
million and a contingency in respect of the potential "Capacity Damages" payable
under the termination of the contract of approximately (pound)266 million.
The (pound)165 million provision consists of four distinct elements:
8
o The revenues from TXU Energy under the Hedging Contract comprise of
two components, a capacity fee (which was essentially fixed) and a
variable call payment, which was based upon the volumes of power sold
by AES Drax to TXU Energy. Under the Hedging Contract, the cashflows
received in respect of the capacity fees were shaped, so that the
payments were higher through the first and fourth quarter of each
calendar year. However, the accounting policy that we adopted was to
smooth the receipt of the capacity fees and treat them as a fixed
amount received each month. In 2002, the capacity fees payable were
approximately (pound)18.8 million pounds per month.
However, as at the end of September, our balance sheet included an
amount of accrued income in respect of the TXU Energy capacity fees,
as the cash receipts in the period to September 2002 were
approximately (pound)70.9 million less than the revenues reflected on
the income statement. Therefore, we shall need to create a provision
for this accrued income during the quarter ended December 2002.
o Prior to the commencement of the Hedging Contract in April 2000, AES
Drax paid TXU Energy a (pound)10 million fee in respect of Clause
14.15 of the Hedging Contract, which stated that:
AES Drax shall, no later than 2 Banking Days after the date on which
it has acquired the Drax Power Station pay to TXU Energy a fee of
(pound)10,000,000 for services provided by TXU Energy in connection
with the structuring of the transactions contemplated by this
Agreement.
The accounting treatment was to amortise this fee over the life of the
Hedging Contract, a period of approximately 15 years. As at September
30, 2002 a balance of (pound)8.3 million remains. Therefore, due to
the termination of the Hedging Contract we will write-off this balance
during the quarter ended December 31, 2002.
o In addition, AES Drax paid (pound)1.2 million of professional fees
relating to the renegotiating of the Hedging Contract due to the
introduction of NETA and its conversion to the new trading
regulations.
The accounting treatment adopted was to amortise these costs over the
remaining life of the Hedging Contract, a period of approximately 13
years. As at September 30, 2002 a balance of (pound)1.1 million
remains. Therefore, due to the termination of the Hedging Contract we
will write-off this balance during the quarter ended December 31,
2002.
o A provision in respect of the power sold to TXU Energy under the
Hedging Contract during October and in the period to November 18,
2002, when the contract was terminated. TXU Energy have not paid us
for this power and a provision of approximately (pound)84.8 million
will be required during the quarter ended December 31, 2002.
Selected Consolidated Profit and Loss Data in accordance with UK GAAP:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- ------------
(in pound000's) (in pound000's)
Revenues..................................... 112,291 133,159 387,170 442,638
Gross Profit................................. 72,869 77,077 237,311 234,549
Administrative expenses...................... (48,130) (45,382) (132,141) (122,100)
Operating profit............................. 24,739 31,695 105,170 112,449
Interest receivable and similar income....... 5,027 4,481 18,076 12,623
Interest payable and similar charges......... (51,710) (42,656) (155,829) (146,309)
Loss on ordinary activities before taxation.. (21,895) (6,480) (32,583) (8,515)
Loss on ordinary activities after taxation... (21,747) (8,679) (41,707) (29,752)
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Operating Results for the three and nine month periods ended September 30, 2002
and 2001
Revenues for the quarter ended September 30, 2002 totalled (pound)112.3
million (2001: (pound)133.2 million). The 15.7% decrease in revenues for the
third quarter of 2002, compared to the same period in 2001, is due principally
to a reduction in the volume of electricity sold during the end of the summer
season, as a result of the impact of competitive pressures and over-capacity in
the UK generation market. Revenues for the nine months ended September 30, 2002
totalled (pound)387.2 million (2001: (pound)442.6 million), a decrease of 12.5%.
Sales in the third quarter of 2002 totalled 3,322.3 GWh (2001: 4,173.4
GWh). The majority of this reduction was due to lower take up by TXU Energy
under the Hedging Contract, with a reduction of 508.4 GWh from the same period
in 2001. This decline in volume is primarily due to the effects of competition,
as TXU Energy reduced its calls due to the pressure of low market prices and the
25% of over-capacity that exists in the UK generation market. The year-to-date
position for 2002 has seen a reduction in volumes of GWh sold to a total of
12,698.4 GWh for the nine months ended September 30, 2002 (2001: 16,394.3 GWh).
The following graph shows the trend in Annual Baseload Contracts for the
year ended December 31, 2001 (such contracts are where electricity is supplied
24 hours per day, 7 days per week). The chart indicates that for 2001 baseload
prices fluctuated between (pound)18.00 - 21.00 per MWh.
ANNUAL BASELOAD PRICES
POUND/MWh
----------------------
8-Oct 18.77
12-Oct 18.58
25-Oct 18.68
1-Nov 18.18
5-Nov 18.26
8-Nov 18.28
19-Nov 18.02
26-Nov 18.17
3-Dec 18.41
10-Dec 18.28
17-Dec 18.60
2-Jan 18.45
In the first nine months of 2002, continuing the trend which began in the
last half of 2001, annual baseload prices have continued to fall, reaching lows
of approximately (pound)15/MWh in April and August of this year. In the third
quarter of 2002, annual baseload prices averaged approximately (pound)16/MWh, a
level that represented an increase from the low levels seen in March 2002. In
November, prices increased slightly to approximately (pound)17/MWh due to the
ongoing uncertainty within the UK market that has been created by the impact of
lower prices, financial problems at British Energy, the administration of TXU
Europe companies, overcapacity and the withdrawal of major companies from the UK
market.
10
ANNUAL BASELOAD PRICES
POUND/Mwhr
----------------------
9-Aug-02 15.51
16-Aug-02 15.83
23-Aug-02 15.82
30-Aug-02 16.04
6-Sep-02 16.04
13-Sep-02 16.19
20-Sep-02 16.52
27-Sep-02 15.98
4-Oct-02 16.30
11-Oct-02 16.95
18-Oct-02 17.18
25-Oct-02 17.78
1-Nov-02 16.94
8-Nov-02 16.86
15-Nov-02 17.18
22-Nov-02 16.98
Cost of sales for the quarter ended September 30, 2002, which are primarily
fuel costs, were (pound)39.4 million, compared to (pound)56.1 million for the
quarter ended September 30, 2001. Cost of sales for the nine month period also
show a reduction in fuel costs to (pound)149.9 million compared to (pound)208.1
million for the same period in 2001. The reduction in fuel burnt for the third
quarter of 2002, compared to the same period in 2001, is due to the reduction in
generation from 4,376.6 GWh to 3,472.9 GWh, a reduction of 20.6%, which reflects
the reduced electricity sales. The generation for the nine months to September
30, 2002 declined by 20.9% compared to the same period in 2001, with generation
levels at 13,564.9 GWh versus 17,155.9 GWh for the 2001 period. The impact of
the reduction is also reflected in AES Drax's load factor, which decreased from
66.2% for the nine months ended September 30, 2001 to 52.4% for the nine months
ended September 30, 2002.
The cost of fuel remained in line with expectations due to the transition
to supply contracts with all our major coal suppliers. This, together with the
reduced generation, gives the benefit of reduced fuel costs.
Gross profit (revenues less cost of goods sold) was (pound)72.9 million
(2001: (pound)77.1 million) for the quarter ended September 30, 2002. This gives
a gross margin for the third quarter of 2002 and the first nine months of
approximately 64.9% (2001: 57.9%) and 61.3% (2001: 53.0%) respectively. The
improvement in the gross margin during the third quarter and the first nine
months of 2002 compared to the same periods in 2001, is mostly due to a slight
improvement in the average selling price; an increase in the proportion of our
electricity that was sold to TXU Energy under the Hedging Contract from 58.6%
for the nine months ended September 2001 to 59.8% for the nine months ended
September 2002, and the reduced fuel costs of approximately (pound)0.90/MWh from
contracts with our major suppliers.
o The average selling price (total revenues divided by total volume of
electricity sold) has increased by 5.7% in the third quarter of 2002,
compared to the same period in 2001, taking into account all of our
sources of income.
o Our fuel costs have decreased by 7% in 2002, which reflects the move
from Innogy plc as our main supplier, to UK Coal Mining Limited.
Administrative expenses for the quarter ended September 30, 2002 were
(pound)48.1 million (2001: (pound)45.3 million) and for the year ended September
30, 2002 were (pound)132.1 million (2001: (pound)122.1 million). These expenses
consist primarily of fixed operations, maintenance and other variable costs and
the expenditure was broadly in line with our expectations.
The 6.1% increase in administrative expenses during the quarter ended
September 30, 2002 is primarily due to the expenditure incurred during the
outages that have been carried out during the nine months to September 30, 2002.
We have been reviewing the amount of work that was carried out to determine the
elements that we can capitalise and therefore approximately (pound)5.2 million
of outage expenditure has been expensed this quarter and (pound)2.9 million has
been capitalised.
The 8.2% increase in these expenses for the nine months ended September 30,
2002 over the same period in 2001 is due to the following:
11
o The increase in our insurance premiums following renewal in November
2001, when our premiums increased from approximately (pound)3.7
million per annum to (pound)7.5 million per annum. This significant
increase in the premiums payable was due to:
o The impact of September 11th on the insurance market as a
whole.
o The withdrawal of certain insurers from the power sector.
o Insufficient capacity available in the insurance market at
the time of renewal.
o AES Drax's claims history during the first year of the
policy.
This added approximately (pound)4.9 million to our insurance expense
for the period ended September 30, 2002 compared to the same period
in 2001. These costs are projected to be approximately (pound)11.5
million for the year ended December 31, 2002.
o The amortisation of an acquisition adjustment for the fuel contract
with Innogy plc was completed when the contract expired in September
2001, which was discussed in the previous quarter. This adjustment
had a beneficial effect on our amortisation expense during the first
half of 2001; so as this is no longer available, this has increased
our amortisation expense for the period ended September 30, 2002 by
(pound)17.7 million.
o The impact of the above increased expenditure has to some extent been
off-set by savings generated in other areas including:
o Salaries are approximately (pound)1.2 million lower than the
same period in 2001, with reduced staffing levels and
encouraging people to transfer onto contracts where their
overtime is built into their basic salary.
o Maintenance expenditure has been reduced by approximately
(pound)8.9 million, primarily as a result of the deferral of
the major outage on Unit 2, into 2003. In addition, we have
seen expenditure deferred as a result of lower generation
levels and a reduction in costs, through our own
cost-cutting initiatives. Our commitments under the Hedging
Contract and the running regime of the plant has meant that
it has been difficult to release plant (bring it out of
service) as often as maintenance routines would dictate.
Therefore some maintenance expenditure has been deferred and
rescheduled until such time as the plant can be released.
o A (pound)0.8 million reduction in process costs resulting
from reduced levels of generation, these costs comprise
mainly of chemicals and other raw materials consumed during
the production of electricity. The consumption of limestone
in the FGD (flue gas desulphurisation) process has reduced
and the scheduling of "just in time" deliveries of coal
have reduced our coal handling charges.
o A (pound)0.5 million reduction in other support costs as a
reduction of our own cost-cutting efforts and the impact of
lower generation.
o NETA administrative costs, charged by Elexon, have actually
increased by approximately pound0.9 million during this
period.
Operating profit from continuing operations was (pound)24.7 million (2001:
(pound)31.7 million) for the quarter ended September 30, 2002 and an operating
profit of (pound)105.2 million (2001: (pound)112.4 million) for the nine months
ended September 30, 2002.
Interest receivable and other income was (pound)5.0 million for the third
quarter of 2002 and (pound)4.5m for the third quarter of 2001, representing an
increase of approximately 13.3% over 2001. The interest income for the nine
months ended September has also increased from (pound)12.6 million in 2001 to
(pound)18.1 million in 2002, an overall increase of 43.2%. This income
represents not only the interest accrued on the various bank balances held by
AES Drax, but also reflects the benefits accrued from the Harich Swap.
Interest payable and similar charges were (pound)51.7 million for the third
quarter of 2002, compared with (pound)42.7 million for the third quarter in
2001, representing an increase of approximately 21.2%. The nine monthly interest
payable and similar charges for 2002 were (pound)155.8 million (2001:
(pound)146.3 million), an increase of 6.5%. The interest expense comprises two
major components:
12
(i) The bank debt, which has a principal under UK GAAP of (pound)1.37
billion as at December 31, 2001, accruing interest at 8.9% per annum.
This principal is calculated by deducting the proceeds of the issuance
of the Senior Bonds from the value of the Original Bonds issued at
financial close ((pound)1.725 billion).
(ii) The Senior Bonds, which have a principal of approximately (pound)400
million, of which half accrues interest at 10.41% and the other half
at 9.07%.
(ii) The notes, which have a principal of(pound)267 million, of
which(pound)135 million accrues interest at 11.25% and (pound)132
million accrues interest at 11.5%.
The additional interest expense charged, in addition to the above, reflects
the impact of the various interest rate and foreign currency swaps that AES Drax
has in place, plus the costs of the letter of credit used to fund the Required
Balance under the Eurobonds. The interest rate swaps, in particular, are
currently increasing our interest expense as interest rates (GBP 6 month LIBOR)
had fallen to an unexpected low of 4.13625% as at December 31, 2001, which
applied across the period from January 1 to June 28, 2002. This has added an
additional (pound)7.3 million to our interest expense for the first six months
of 2002. The applicable interest rate was re-set from July 1, 2002 at 4.3288%,
which will add (pound)6.8 million to our interest expense for the six months to
December 31, 2002. However, these swaps are 15 year instruments and we believe
that we shall benefit from their protection over the life of the loans.
As more fully described above under "Recent Developments - Distribution on
the High Yield Notes", certain of the debt service cover ratios were
insufficient at June 30, 2002 to permit AES Drax Holdings to make a distribution
to us. We therefore had insufficient cash to make the approximately (pound)15
million interest payment due to our high yield noteholders on August 30, 2002.
The high yield note debt service reserve account was funded with approximately
(pound)7.5 million, resulting in an approximate shortfall of (pound)8 million.
AES Corporation, however, made a contribution to us to cover the shortfall in
the August interest payment, but made no assurance that it would agree to make
any similar payments in the future.
The level of interest expense reflects the significant borrowings we made
to finance the acquisition of the Drax Power Station.
The net effect of the reduced costs of sales and increased administrative
expenses and interest payable costs is that we incurred a loss on ordinary
activities before taxation of (pound)21.9 million (2001: Loss of (pound)6.5
million) for the quarter ended September 30, 2002. The nine months results also
show an increased loss, from (pound)21.2 million in 2001 to (pound)32.6 million
in 2002.
We incurred a corporation tax credit of (pound)0.1 million (2001: Tax
charge (pound)2.2 million) for the third quarter ended September 30, 2002 and a
corporation tax charge of (pound)9.1 million (2001: (pound)8.5 million) for the
nine months to September 30, 2002. This equates to an effective tax rate credit
of 0.7% (2001: Charge of 33.9%) for the third quarter of 2002, even though UK
corporation tax rate is currently 30%. The reason for the tax credit for the
quarter to September 30, 2002 is due to the impact on deferred tax of expensing
the outage costs in this quarter. The tax charge for the nine months to
September 30, 2002 has increased compared to the same period last year primarily
due to the significant value of the disallowable items in our tax computation
that are added back when calculating the taxable profits in 2002 and 2001.
LIQUIDITY
Following the termination of the Hedging Contract and the appointment of
joint administrators for TXU Energy and TXU Europe on November 18 and 19, 2002
respectively, AES Drax has traded on a fully merchant basis to generate revenue.
AES Drax did not receive payment for sales made to TXU Energy in October and
November 2002 prior to termination and the receipt and timing of such payment,
together with amounts relating to AES Drax's claim for Capacity Damages, will
now be subject to the administration process relating to TXU Energy and TXU
Europe. In addition to adopting a fully merchant strategy since termination, AES
Drax immediately following termination entered into an agreement with National
Grid to supply power for the first five days post-termination, which provided
the benefit of advanced payments ahead of the normal GTMA settlement date (tenth
business day of the following month). AES Drax has taken steps to restrict cash
outflows by consuming stocks
13
of coal and hence reducing coal purchases, agreeing rescheduled payments with UK
Coal, negotiating the deferment of payments for rates and VAT, agreeing a refund
of on-account corporation tax payments and generally instituting rigorous
creditor payment approval processes.
Our ability to enter into any new medium term contracts is likely to be
dependent on the availability of additional credit support. In connection with
developing its new electricity trading policy, AES Drax is working with its
senior creditors to ensure that such credit support is available and the freeing
up of certain cash under the Group Account Agreement for this purpose is to be
addressed under the Standstill Agreement.
Cash Flow
Under the standstill agreement, the Senior Lenders and Senior Bondholders
would agree to certain amendments and waivers to their respective financing
documents which will permit AES Drax to have access to at least (pound)30
million of funds currently unavailable under the financing documentation,
(pound)15 million of which will be released from the Insurance Reserve Account,
set up previously as part of the bank waiver/insurance renewal process earlier
this year. These funds, subject to certain consent rights of the steering
committee of the Senior Lenders and the ad hoc committee of Senior Bondholders,
will be available to provide credit support to electricity counterparties and
suppliers and for working capital needs.
Interest due at the end of December 2002 on the Eurobonds and the Senior
Bonds will be paid on the due date from the Debt Service Reserve Account. The
Debt Service Reserve Account for payments on the Eurobonds and Senior Bonds is
fully funded, although AES Drax Holdings has to obtain certain waivers to permit
such funds to be used to make payments due at the year-end. The requisite
amendments and waivers necessary are contemplated under the terms of the
Standstill Agreement. In addition, the principal amortization payment due to the
holders of the Eurobonds on December 31, 2002 will be deferred during the
standstill period.
The recent downgrades of AES Drax Holdings' Senior Debt increases the
interest payable on the Eurobonds, where the margin above GBP LIBOR has now
increased to 300 basis points. S & P have decided to keep ratings unchanged at
present, but stated they expect to downgrade their ratings on AES Drax Holdings'
Senior Debt to "D", once the Standstill Agreement is signed.
Based on cashflow forecasts prepared on the basis of the measures being
implemented and the additional credit support and working capital that is
anticpated to be made available as part of the Standstill Agreement, as well as
AES Drax's implementation of an electricity trading strategy as a fully merchant
plant, AES Drax believes that it will have adequate cashflow to satisfy its
operational needs through March 2003.
However, following the loss of the Hedging Contract, we are undertaking a
full review of the carrying value of all assets, which may result in further
write offs in our fourth quarter results. At this stage, we are unable to
determine the full extent of the impairment write-off.
SIGNIFICANT DEVELOPMENTS DURING 2002
In addition to the developments described under "Recent Developments"
above, the following other significant developments have occurred during 2002.
Insurance and Bank Waiver
The current Insurance policy expired at midnight on November 26, 2002.
The insurance cover required under AES Drax Holdings' financing
documentation is not available in the market place at the current time in terms
of either the maximum combined Material damage / Business Interruption
deductible required ((pound)10 million) or the maximum loss cover ((pound)1.3
billion).
14
A further complication arose because of the termination of the Hedging
Contract shortly prior to renewal, as the business interruption loss methodology
agreed for the current policy was based upon the Hedging Contract being in
place. Until experience has been gained of AES Drax's operating regime, trading
strategy and price captures operating as an all-merchant plant, insurers are
unable to obtain and agree a basis on which to provide conventional Business
Interruption Insurance.
Therefore, following discussion with the Senior Lenders, it was agreed that
we should seek to renew the insurance on the basis of material damage cover only
initially and during the 6 month period of the Standstill Agreement we would
examine the options for re-introducing business interruption coverage.
The insurance cover that we have entered into on renewal for the year to
November 26, 2003 is for material damage only, with a (pound)5m each and every
event deductible and $1 billion ((pound)600 million) maximum loss cover. There
is 100% participation in this renewal. The premium is some (pound)5.2 million
per annum (plus IPT), a reduction of some (pound)6 million on our previous
annual premium.
The Bank's Insurance Adviser reviewed the basis for renewal and the Senior
Bond Indenture was amended as of November 26, 2002 to reflect the current
insurance cover, as the original requirements under the Senior Bond Indenture
were no longer available on commercially reasonable terms. As part of the
Standstill Agreement, the Senior Lenders will provide a temporary waiver in
respect of the failure to obtain insurance cover as required under AES Drax
Holdings' financing documentation.
Required Debt Service Coverage Ratios
Under the Calculations and Forecasting Agreement AES Drax is required to
advise the Bank's Monitoring Committee of any Required Changes to the Financial
Model, which is used as the basis for determining Debt Service Cover Ratios. As
part of this process, in connection with the calculation of ratios at June 30,
2002, the Banks requested that the Electricity Market Adviser and the Coal
Adviser provide them with updated electricity market parameters and forecast
coal prices.
On July 31, 2002 AES Drax requested that the following Required Changes be
taken into account:
o Changes to the indexation calculations to ensure that the Financial
Model properly takes account of forward price movements.
o Coal stock depletions - the model assumed that all coal burn
requirements were met from existing coal contracts or additional
purchases of coal, without depletion of the coal stock. The model was
adjusted to allow the reduction in coal stocks where the tonnage of
coal burnt was greater than the tonnage of coal delivered, provided a
minimum level of strategic stock is modelled at all times.
o Interest income earned on the funds held by AES Drax in the Proceeds
Account would be taken into account.
As part of this re-forecasting exercise AES Drax also proposed the
inclusion of certain assumptions about the benefits accrued from the burning of
Petcoke, initially on a one unit trial basis, but subsequently on a full
commercial basis. AES Drax has submitted a request to the Environment Agency for
permission to burn a 15% blend of Petcoke and coal, on a single unit to prove
that there is no adverse impact upon the environment. Assuming that this trial
is successful and that approval is obtained, AES Drax hoped to be able to
proceed with utilizing Petcoke on a commercial basis.
Based upon the incorporation of the above assumptions into the Financial
Model, AES Drax believed that it could pass the Debt Service Cover Ratio (DSCR)
Tests required under the Facility Agreement and would be able to distribute
funds from AES Drax Power Limited to AES Drax Holdings to pay the senior debt
service and from AES Drax Holdings to AES Drax Energy to pay the subordinated
debt service and replenish the High Yield Debt Service Reserve Account. In
addition, AES Drax also hoped to be able to pay a dividend back to its parent
company, the AES Corporation.
On July 1, 2002 funds were transferred from the Proceeds Account into the
Holding Account in AES Drax Power Ltd. These funds were to be held in this
account pending approval of the re-forecast and passing the DSCR Tests.
15
On August 19, 2002 the Bank's Monitoring Committee confirmed that the
Required Changes in respect of coal stocks and interest income would be
accepted, but that any benefits assumed from Petcoke should be excluded from the
Financial Model until its use has been approved by the Environment Agency. AES
Drax agreed to withdraw its request for a Required Change in respect of
indexation changes, as this change did not have a material effect on the debt
service cover ratios. The outcome of this final determination of the re-forecast
was that there is one period (twelve months ended June 30, 2004), falling within
both the two-year and five-year projected debt service cover ratio tests, where
the debt service cover ratio of 1.19:1 was below the required threshold of
1.25:1. As a result of failing to satisfy this ratio, AES Drax Holdings was not
permitted to make the anticipated distributions which included funds required to
make debt service payments on the high yield notes on August 30, 2002. The
failure to satisfy this ratio was principally due to the forward price curve for
electricity prices.
This failure of forward-looking debt service cover ratio tests created a
potential payment default under the High Yield Bond Indenture, as there were
insufficient funds therefore available in the High Yield Debt Service Reserve
Account to pay the debt service due on the Notes on August 30, 2002 in full.
This information was provided to the Rating Agencies and on August 20 and 21,
2002, Fitch and Moody's respectively, downgraded the Senior Debt (to `BB' and
`Ba2' respectively) and the Notes (to `C' and `Caa2' respectively). S & P also
downgraded the Notes (to `CCC') on August 20, 2002. On August 21, 2002 AES
Corporation issued a press release stating that they would provide the
additional funds required to meet the debt service payments due on the Notes on
August 30, 2002. AES Corporation arranged to provide AES Drax with funds
totaling $10.8 million, which when added to the funds remaining in the Debt
Service Reserve Account, of approximately (pound)7.5 million ensured that the
Noteholders received their full interest payments on August 30, 2002. AES
Corporation also indicated in its press release that there was no assurance that
it would make funds available in the future to enable AES Drax Energy to make
debt service payments if distributions continued to be blocked.
The recent downgrades of AES Drax Holdings' Senior Debt increases the
interest payable on the Eurobonds, where the margin above GBP LIBOR has now
increased to 300 basis points. S & P have decided to keep ratings unchanged at
present, but stated they expect to downgrade their ratings on the Senior Debt to
"D", once the Standstill Agreement is signed.
MANAGEMENT
Neither we, nor any of our subsidiaries, other than AES Drax, have any
operations or any management or employees.
The following tables set forth certain information concerning the directors
of AES Drax as of November 31, 2002.
DIRECTORS
Name Age Position
---- --- --------
Garry Levesley.................... 42 President & Plant Manager
John Turner....................... 43 Project Director
Neil Hopkins...................... 38 Group Accountant
Lord Taylor of Blackburn.......... 73 Non-Executive Director
Joseph Brandt..................... 38 Group Manager
Naveed Ismail..................... 41 Group Manager
In 2000, Garry Levesley was promoted to the level of Vice-President of the
global AES Corporation having worked with AES since September 1994 and
furthermore, replaced Naveed Ismail on September 10, 2002 as Station Manager and
President of AES Drax Power Limited., thus enabling Naveed Ismail to focus on
other AES Power plants in the UK. His experience within AES covers the
construction and operation of the Medway Power Plant in Kent, Plant Manager of
power plants in Hungary, management of the Altai Energo utility in Kazakhstan
and for the past 3 years he has lived in Moscow where he was leader of the AES
Silk Road Group, which manages all AES businesses in the Former Soviet Union and
Central Asia. The appointment of Mr Levesley as a Vice President of AES
Corporation and as President and Station Manager of AES Drax Power Station
reflects the importance of Drax within the AES Corporation Portfolio.
16
Joseph Brandt was appointed a director of AES Drax Holdings Limited on
October 21, 2002. Mr Brandt currently leads the Restructuring Office at AES
Corporation.
Three directors, Ian Foy, John Grimes and John Prickett, resigned on
November 13, 2002. They continue to serve the company as Business Leaders.
During the first quarter of 2002, Amanda Cade, one of our Company
Secretaries resigned and has subsequently been replaced by Angela Padbury.
Angela Padbury was appointed as a Company Secretary on 30 May 2002.
ITEM 3. MARKET RISKS
AES Drax is exposed to market risks associated with interest rates, foreign
exchange rates and commodity prices. We have utilised financial instrument
contracts to hedge against such fluctuations. We utilize financial and commodity
derivatives solely for the purpose of hedging exposures to market risk. We do
not enter into derivative instruments for speculative purposes.
AES Drax believes that there have been no material changes in exposure to
market risks during the third quarter of 2002 compared with the exposure set
forth in our Annual Report filed with the Commission on Form 20-F for the year
ended December 31, 2001.
Interest Rate Risk
AES Drax is exposed to risk resulting from changes in interest rates as a
result of the bank debt that was utilised to finance the purchase of the Drax
Power Station. Our Hedging Policy, agreed with the Senior Lenders, is that at
least 50% of the senior bank debt ((pound)421.3 million) must be hedged. We
currently have executed (pound)565.2 million of interest rate swaps, including
cap and floor agreements to effectively fix or limit our interest rate exposure
on the underlying financing.
From July 1, 2002 one of the interest rate swaps was refinanced and the
optionality removed from the swap, which will offer a cash benefit by reducing
the principal by 25% and reducing the impact under US GAAP of FAS 133 and its
associated volatility.
The sensitivity of interest payments on the unhedged portion of the
floating rate debt obligations under the Eurobonds is such that if interest
rates were to increase by 100 basis points from January 1, 2003, our semi-annual
interest obligation would increase by approximately (pound)811,800 (2001:
(pound)870,600). Similarly, if the interest payable were to decrease by 100
basis points, our semi-annual floating rate interest payment obligation would
decrease by (pound)811,800 (2001: (pound)870,600).
The actual interest rate payable in respect of the obligations under the
Euorbonds during the period from June 30, 2001 to December 31, 2001 was 7.2313%,
compared to 7.665% during the period from January 1, 2001 to June 30, 2001. The
actual interest rate payable in respect of the period from January 1, 2002 to
June 28, 2002 was 6.33625% and from July 1, 2002 to December 31, 2002 will be
6.52875%. However, due to the impact of the downgrades of our Senior Debt by the
various rating agencies over the last few months this rate will increase to GBP
LIBOR plus 3%, from January 1, 2003.
Foreign Exchange Rate Risk
AES Drax is exposed to foreign currency risk. A key component of this risk
is that some of our monetary obligations are in U.S. Dollars. Therefore, AES is
exposed to changes in the U.K. Pound / U.S. Dollar exchange rate. Where
possible, we have attempted to limit potential foreign exchange exposure by
entering into (pound)200 million of foreign currency swap agreements, to manage
our risk related to these foreign currency fluctuations. The weighted average
exchange rate which underlies these transactions is (pound)1.00 : $1.5128. Our
exposure under these swaps would only increase our interest rate expense if
either the (pound)1 vs $1 exchange rate increased to greater then $1.67 :
(pound)1.00, or the 6-month GBP LIBOR interest rate increased to approximately
9%. We believe that the hedging currently in place for the Dollar Bonds offers
good protection.
17
Under the terms of the Indenture for the Notes (Section 4.31) we are
required to have at all times in full force and effect Currency Hedging
Agreements which ensure that we receive an aggregate amount in U.S. dollars at
least equal to all scheduled interest payments in respect of the principal
outstanding on the dollar denominated High Yield Notes, that is in excess of
$160 million. Currently, this requires that we have a Currency Hedging Agreement
with a notional principal of at least $40 million. On May 30, 2002 a Currency
Hedging Agreement was entered into with Deutsche Bank AG New York in compliance
with the provisions of Section 4.31 of the Indenture.
Commodity Price Risk
AES Drax is exposed to the impact of market fluctuations in the price of
electricity. We have used a hedging strategy, where appropriate, to hedge our
financial performance against the effects of fluctuations in electricity
commodity prices. The implementation of this strategy involves the use of
contracts and options.
PART II
OTHER INFORMATION
ITEM 1. LEGAL AND REGULATORY DEVELOPMENTS
AES Drax Energy Limited is not party to any legal proceedings other than in
the ordinary course of business, the ultimate resolution of which is not
expected to have a material adverse effect on the financial position or
profitability of AES Drax Energy Limited or the other AES Drax companies.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are currently defaults on the Senior Bonds. In accordance with the
proposed Standstill Agreement certain defaults and events of default will be
permanently waived and certain defaults and events of default will be
temporarily waived. See "Item 2 - Discussion and Analysis of Financial Condition
and Results of Operation - Recent Developments". Such waivers will only become
effective if at least a majority in principal amount (based on the sterling
equivalent of the dollar bonds) of the holders of the Senior Bonds execute the
Standstill Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
18
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 authorised.
AES DRAX ENERGY LIMITED
Date: 3 December 2002 By: /s/ Garry Levesley
---------------------------
Garry Levesley
Director
Date: 3 December 2002 By: /s/ John Turner
---------------------------
John Turner
Director
19
APPENDIX
20
AES DRAX ENERGY LIMITED
Financial Statements
30 September 2002
1
AES DRAX ENERGY LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 September 2002
Three months ended Nine months ended
30 September 30 September 30 September 30 September
2002 2001 2002 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000
TURNOVER - continuing operations 112,291 133,159 387,170 442,638
Cost of sales (39,422) (56,082) (149,859) (208,089)
-------- -------- ------- -------
GROSS PROFIT 72,869 77,077 237,311 234,549
Administrative expenses (48,130) (45,382) (132,141) (122,100)
-------- -------- ------- -------
OPERATING PROFIT - continuing operations 24,739 31,695 105,170 112,449
Interest receivable and other income 5,076 4,481 18,076 12,623
Interest payable and similar charges (51,710) (42,656) (155,829) (146,309)
-------- -------- ------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (21,895) (6,480) (32,583) (21,237)
Tax on loss on ordinary activities 148 (2,199) (9,124) (8,515)
-------- -------- ------- -------
RETAINED LOSS FOR THE FINANCIAL PERIOD (21,747) (8,679) (41,707) (29,752)
TRANSFERRED FROM RESERVES ======== ======== ======= ========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
periods other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
2
AES DRAX ENERGY LIMITED
CONSOLIDATED BALANCE SHEET
30 September 2002
30 September 31 December
2002 2001
(pound)'000 (pound)'000
FIXED ASSETS
Intangible assets 569,203 594,610
Tangible assets 1,120,881 1,140,245
--------- ---------
1,690,084 1,734,855
--------- ---------
CURRENT ASSETS
Stocks 60,378 62,563
Debtors 953,283 964,349
Cash at bank and in hand 89,679 64,554
--------- ---------
1,103,340 1,091,466
CREDITORS: amounts falling due within one year (109,132) (102,714)
--------- ---------
NET CURRENT ASSETS 994,208 988,752
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 2,684,292 2,723,607
CREDITORS: amounts falling due after more than
one year (2,586,285) (2,587,423)
PROVISIONS FOR LIABILITIES AND CHARGES (20,918) (17,388)
--------- ---------
77,089 118,796
========= =========
CAPITAL AND RESERVES
Called up share capital 172,000 172,000
Profit and loss account (94,911) (53,204)
--------- ---------
TOTAL EQUITY SHAREHOLDERS' FUNDS 77,089 118,796
========= =========
3
AES DRAX ENERGY LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Nine months ended 30 September 2002
Nine months Nine months
ended ended
30 September 30 September
2002 2001
(pound)'000 (pound)'000
Net cash inflow from operating activities 139,039 167,795
Returns on investments and servicing of finance
Interest received 18,133 12,759
Interest paid (123,305) (136,382)
------- -------
Net cash outflow from returns on investments and
servicing of finance (105,172) (123,623)
------- -------
Taxation (3,460) (5,829)
Capital expenditure
Payments to acquire tangible fixed assets (5,282) (4,476)
Receipts from sale of tangible fixed assets - 29
------- -------
(5,282) (4,447)
------- -------
Cash inflow before use of liquid resources
and financing 25,125 33,896
Management of liquid resources
Increase in restricted cash deposits 15,739 (956)
Financing
Repurchase of share capital - (38,000)
------- -------
- (38,000)
------- -------
Increase/(decrease) in cash in the period 40,864 (5,060)
======= =======
4
AES DRAX ENERGY LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Energy Limited and its subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the nine months
ended September 30, 2002 and 2001, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results
of operations for the period ended September 30, 2002 are not
necessarily indicative of the results of operations to be expected for
the full year. The accompanying financial statements are unaudited and
should be read in conjunction with the financial statements, which are
incorporated herein by reference to the Company's Annual Report on Form
20-F for the year ended December 31, 2001.
2. POST BALANCE SHEET EVENT
On 14 October, 2002 TXU Corp withdrew financial support for its
subsidiary TXU Europe. As a consequence of this, TXU Europe Energy
Trading Limited ("TXU Energy"), was granted an administration order on
November 19, 2002. As a result of the administration order, we expect to
make provisions of (pound)165 million in the financial statements for
the year ended 31 December, 2002, covering the amounts owed by TXU
Energy in respect of the Hedging Contract with AES Drax and the
termination of that contract. Amounts to be written-off in respect of
September 30, 2002 balances total (pound)80.3 million; the remainder
relates to provisions to be made in respect of unpaid amounts for power
sold to TXU Energy under the Hedging Contract during October and
November 2002.
Standstill Agreement with Senior Creditors
On November 28, 2002, AES Drax reached an agreement, in principle,
regarding certain standstill arrangements with the steering committee
representing the bank lenders and an ad hoc committee formed by holders
of the senior bonds. The purpose of the standstill is to provide AES
Drax and the senior creditors with a period of stability during which
discussions regarding consensual restructuring of the project can take
place. The standstill period would expire on May 31, 2003, unless
extended. The bank lenders and the senior bondholders would agree to
waive certain events of default under the Eurobonds or the senior bonds,
as applicable, not to accelerate payment of the obligations and would
not seek to enforce security.
Under the Standstill Agreement, the Company's bank lenders and senior
bondholders would agree to certain amendments and waivers to their
respective financing documents which will permit AES Drax to have access
to at least (pound)30 million of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the steering committee of the bank lenders and the ad hoc committee
of senior bondholders, will be available to provide credit support to
electricity counterparties and suppliers and for working capital needs.
Failure to enter into a definitive Standstill agreement or the failure
to effect a satisfactory restructuring of the project would lead to an
event of default under the senior bonds and the notes.
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the accounts.
The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the approximate effect on
net income and shareholders' equity is shown in the following table.
Deferred taxation
Under UK GAAP, deferred taxation is provided at the anticipated tax
rates on timing differences arising from the inclusion of items of
income and expenditure in taxation computations in periods different
from those in which they are included in the financial statements, to
the extent that it is probable that an asset or a liability will
crystallise in the foreseeable future, in accordance with FRS19. Under
US GAAP, deferred taxation is provided on all temporary differences
under the liability method, subject to a valuation allowance where
applicable in respect of deferred taxation assets, in accordance with
SFAS 109, Accounting for Income Taxes.
5
AES DRAX ENERGY LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP will result in an increase in the amount allocated to
tangible fixed assets resulting in additional depreciation expense.
Pensions
The directors do not believe the adoption of FAS 87 costs would differ
materially from the pension costs under UK GAAP.
Interest
Under UK GAAP, interest is charged on the (pound)1,725 million
Guaranteed Secured Bonds. Under US GAAP, (pound)425 million forward
purchase of equity is offset against the (pound)1,725 million Guaranteed
Secured bond. Therefore, interest under US GAAP is charged on the net
(pound)1,300 million.
The (pound)1,300 million represents a senior secured bank facility.
Repayment of the bank facility is secured by a security interest in the
(pound)1,725 million Guaranteed Secured Bonds. Enforcement of the bank
facility will give the bank lenders the right to enforce the security
package granted under the Guaranteed Secured Bonds. Interest on the bank
facility accrues at LIBOR + 1.8%. Principal repayments are due
semi-annually over a fifteen year period commencing 30 June 2000.
Principal repayments of (pound)25 million, (pound)370 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on 30 June 2000, 2 August 2000, 31
December 2000, 30 June 2001, 31December 2001 and 30 June 2002,
respectively.
Goodwill
Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over
the fair value of the identifiable net assets acquired. Goodwill is
capitalised and amortised over twenty years. Under US GAAP, the
acquisition has been treated as an acquisition of assets and accordingly
the entire purchase price, including certain liabilities assumed, has
been allocated to tangible fixed assets and depreciated over the
estimated useful lives of the assets, being thirty five years.
Severance accrual
Under US GAAP, an accrual would be recorded as part of the acquisition
of AES Drax Power Limited for the estimated cost of severing certain
employees of AES Drax Power Limited. No such accrual has been recorded
under UK GAAP.
Derivative Instruments and Hedging Activities
In order to comply with US GAAP, adjustments are required to be made in
relation to SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. This results in the creation of derivative assets and
liabilities, together with corresponding gains and losses on all
derivative instruments and hedges.
Three months ended Nine months ended
30 September 30 September 30 September 30 September
2002 2001 2002 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000
Net loss under UK GAAP (21,747) (8,679) (41,707) (29,752)
US GAAP adjustments:
Goodwill 8,469 8,469 25,407 25,407
Additional depreciation (4,837) (4,837) (14,512) (14,512)
Deferred tax 5,070 5,459 23,701 9,685
Additional depreciation due to (5,082) (5,082) (15,245) (15,245)
deferred tax
Push down interest 12,867 11,206 35,503 32,619
Derivative (loss)/gain (246) (8,731) 1,450 (9,915)
------ ------ ------ ------
Net (loss)/income under US GAAP (5,506) (2,195) 14,597 (1,713)
====== ====== ====== ======
6
AES DRAX ENERGY LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
30 September 31 December
2002 2001
(pound)'000 (pound)'000
Shareholders' equity under UK GAAP 77,089 118,796
US GAAP adjustments:
Cumulative effect of previous adjustments 72,332 72,454
Goodwill 25,407 33,876
Additional depreciation (14,512) (19,350)
Deferred tax 23,701 14,978
Additional depreciation due to deferred tax (15,245) (20,326)
Push down loan adjustment 35,503 43,874
Derivatives (3,992) (53,174)
------- -------
Shareholders' equity under US GAAP 200,283 191,128
======= =======
7
AES DRAX POWER FINANCE HOLDINGS LIMITED
Financial Statements
30 September 2002
1
AES DRAX POWER FINANCE HOLDINGS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 September 2002
Three months ended Nine months ended
30 September 30 September 30 September 30 September
2002 2001 2002 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000
TURNOVER - continuing operations 112,291 133,159 387,170 442,638
Cost of sales (39,422) (56,082) (149,859) (208,089)
------- ------- ------- -------
GROSS PROFIT 72,869 77,077 237,311 234,549
Administrative expenses (48,130) (45,382) (132,141) (122,100)
------- ------- ------- -------
OPERATING PROFIT - continuing operations 24,739 31,695 105,170 112,449
Interest receivable and other income 5,076 4,481 18,076 12,623
Interest payable and similar charges (51,710) (42,656) (155,829) (146,468)
------- ------- ------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (21,895) (6,480) (32,583) (21,396)
Tax on loss on ordinary activities 148 (2,199) (9,124) (8,515)
------- ------- ------- -------
RETAINED LOSS FOR THE FINANCIAL PERIOD
TRANSFERRED FROM RESERVES (21,747) (8,679) (41,707) (29,911)
======= ======= ======= =======
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
periods other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
2
AES DRAX POWER FINANCE HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
30 September 2002
30 September 31 December
2002 2001
(pound)'000 (pound)'000
FIXED ASSETS
Intangible assets 569,203 594,610
Tangible assets 1,120,881 1,140,245
--------- ---------
1,690,084 1,734,855
--------- ---------
CURRENT ASSETS
Stocks 60,378 62,563
Debtors 952,881 963,946
Cash at bank and in hand 89,685 64,560
--------- ---------
1,102,944 1,091,069
CREDITORS: amounts falling due within one year (109,127) (102,708)
--------- ---------
NET CURRENT ASSETS 993,817 988,361
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 2,683,901 2,723,216
CREDITORS: amounts falling due after more than
one year (2,757,285) (2,758,423)
PROVISIONS FOR LIABILITIES AND CHARGES (20,918) (17,388)
--------- ---------
(94,302) (52,595)
========= =========
CAPITAL AND RESERVES
Called up share capital 1,000 1,000
Profit and loss account (95,302) (53,595)
--------- ---------
TOTAL EQUITY SHAREHOLDERS' FUNDS (94,302) (52,595)
========= =========
3
AES DRAX POWER FINANCE HOLDINGS LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Nine months ended 30 September 2002
Nine months Nine months
ended ended
30 September 30 September
2002 2001
(pound)'000 (pound)'000
Net cash inflow from operating activities 139,038 129,954
Returns on investments and servicing of finance
Interest received 18,134 12,759
Interest paid (123,305) (136,541)
-------- --------
Net cash outflow from returns on investments
and servicing of finance (105,171) (123,782)
-------- --------
Taxation (3,460) (5,829)
Capital expenditure
Payments to acquire tangible fixed assets (5,282) (4,476)
Receipts from sale of tangible fixed assets - 29
-------- --------
(5,282) (4,447)
-------- --------
Cash inflow/(outflow) before use of liquid
resources and financing 25,125 (4,104)
Management of liquid resources
Increase in restricted cash deposits 15,739 (956)
-------- --------
Increase/(decrease) in cash in the period 40,864 (5,060)
======== ========
4
AES DRAX POWER FINANCE HOLDINGS LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Power Finance Holdings Limited and its subsidiaries (the "Company").
Intercompany transactions and balances have been eliminated.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the nine months
ended September 30, 2002 and 2001, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results
of operations for the period ended September 30, 2002 are not
necessarily indicative of the results of operations to be expected for
the full year. The accompanying financial statements are unaudited and
should be read in conjunction with the financial statements, which are
incorporated herein by reference to AES Drax Energy Limited's Annual
Report on Form 20-F for the year ended December 31, 2001.
2. POST BALANCE SHEET EVENT
On 14 October, 2002 TXU Corp withdrew financial support for its
subsidiary TXU Europe. As a consequence of this, TXU Europe Energy
Trading Limited ("TXU Energy"), was granted an administration order on
November 19, 2002. As a result of the administration order, we expect to
make provisions of (pound)165 million in the financial statements for
the year ended 31 December, 2002, covering the amounts owed by TXU
Energy in respect of the Hedging Contract with AES Drax and the
termination of that contract. Amounts to be written-off in respect of
September 30, 2002 balances total (pound)80.3 million; the remainder
relates to provisions to be made in respect of unpaid amounts for power
sold to TXU Energy under the Hedging Contract during October and
November 2002.
Standstill Agreement with Senior Creditors
On November 28, 2002, AES Drax reached an agreement, in principle,
regarding certain standstill arrangements with the steering committee
representing the bank lenders and an ad hoc committee formed by holders
of the senior bonds. The purpose of the standstill is to provide AES
Drax and the senior creditors with a period of stability during which
discussions regarding consensual restructuring of the project can take
place. The standstill period would expire on May 31, 2003, unless
extended. The bank lenders and the senior bondholders would agree to
waive certain events of default under the Eurobonds or the senior bonds,
as applicable, not to accelerate payment of the obligations and would
not seek to enforce security.
Under the Standstill Agreement, the Company's bank lenders and senior
bondholders would agree to certain amendments and waivers to their
respective financing documents which will permit AES Drax to have access
to at least (pound)30 million of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the steering committee of the bank lenders and the ad hoc committee
of senior bondholders, will be available to provide credit support to
electricity counterparties and suppliers and for working capital needs.
Failure to enter into a definitive Standstill agreement or the failure
to effect a satisfactory restructuring of the project would lead to an
event of default under the senior bonds and the notes.
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the accounts.
The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the approximate effect on
net income and shareholders' equity is shown in the following table.
Deferred taxation
Under UK GAAP, deferred taxation is provided at the anticipated tax
rates on timing differences arising from the inclusion of items of
income and expenditure in taxation computations in periods different
from those in which they are included in the financial statements, to
the extent that it is probable that an asset or a liability will
crystallise in the foreseeable future, in accordance with FRS19. Under
US GAAP, deferred taxation is provided on all temporary differences
under the liability method, subject to a valuation allowance where
applicable in respect of deferred taxation assets, in accordance with
SFAS 109, Accounting for Income Taxes.
5
AES DRAX POWER FINANCE HOLDINGS LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP will result in an increase in the amount allocated to
tangible fixed assets resulting in additional depreciation expense.
Pensions
The directors do not believe the adoption of FAS 87 costs would differ
materially from the pension costs under UK GAAP.
Interest
Under UK GAAP, interest is charged on the (pound)1,725 million
Guaranteed Secured Bonds. Under US GAAP, (pound)425 million forward
purchase of equity is offset against the (pound)1,725 million Guaranteed
Secured bond. Therefore, interest under US GAAP is charged on the net
(pound)1,300 million.
The (pound)1,300 million represents a senior secured bank facility.
Repayment of the bank facility is secured by a security interest in the
(pound)1,725 million Guaranteed Secured Bonds. Enforcement of the bank
facility will give the bank lenders the right to enforce the security
package granted under the Guaranteed Secured Bonds. Interest on the bank
facility accrues at LIBOR + 1.8%. Principal repayments are due
semi-annually over a fifteen year period commencing 30 June 2000.
Principal repayments of (pound)25 million, (pound)370 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on 30 June 2000, 2 August 2000, 31
December 2000, 30 June 2001, 31 December 2001 and 30 June 2002,
respectively.
Goodwill
Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over
the fair value of the identifiable net assets acquired. Goodwill is
capitalised and amortised over twenty years. Under US GAAP, the
acquisition has been treated as an acquisition of assets and accordingly
the entire purchase price, including certain liabilities assumed, has
been allocated to tangible fixed assets and depreciated over the
estimated useful lives of the assets, being thirty five years.
Severance accrual
Under US GAAP, an accrual would be recorded as part of the acquisition
of AES Drax Power Limited for the estimated cost of severing certain
employees of AES Drax Power Limited. No such accrual has been recorded
under UK GAAP.
Derivative Instruments and Hedging Activities
In order to comply with US GAAP, adjustments are required to be made in
relation to SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. This results in the creation of derivative assets and
liabilities, together with corresponding gains and losses on all
derivative instruments and hedges.
Three months ended Nine months ended
30 September 30 September 30 September 30 September
2002 2001 2002 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000
Net loss under UK GAAP (21,747) (8,679) (41,707) (29,911)
US GAAP adjustments:
Goodwill 8,469 8,469 25,407 25,407
Additional depreciation (4,837) (4,837) (14,512) (14,512)
Deferred tax 5,070 5,459 23,701 9,685
Additional depreciation due to (5,082) (5,082) (15,245) (15,245)
deferred tax
Push down interest 12,867 11,206 35,503 32,619
Derivative (loss)/gain (246) (8,731) 1,450 (9,915)
------ ------ ------ ------
Net (loss)/income under US GAAP (5,506) (2,195) 14,597 (1,872)
====== ====== ====== ======
6
AES DRAX POWER FINANCE HOLDINGS LIMITED
NOTES TO THE ACCOUNTS
Nine months ended 30 September 2002
3. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
30 September 31 December
2002 2001
(pound)'000 (pound)'000
Shareholders' equity under UK GAAP (94,302) (52,595)
US GAAP adjustments:
Cumulative effect of previous adjustments 72,332 72,454
Goodwill 25,407 33,876
Additional depreciation (14,512) (19,350)
Deferred tax 23,701 14,978
Additional depreciation due to deferred tax (15,245) (20,326)
Push down loan adjustment 35,503 43,874
Derivatives (3,992) (53,174)
------- ------
Shareholders' equity under US GAAP (28,892) 19,737
======= ======
7