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 June 30, 2003
Commission File Number: 333-13096
AES DRAX HOLDINGS LIMITED
Drax Power Station
P.O Box 3
Selby
North Yorkshire
YO8 8PQ
England
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(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 if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ________
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ________
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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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):82-_________
AES DRAX HOLDINGS LIMITED
INDEX
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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 12
Item 4. Controls and Procedures 12
PART II OTHER INFORMATION
Item 1. Legal and Regulatory Developments 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits 13
SIGNATURES 14
APPENDIX 15
i
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 United States. In this report, "US GAAP"
means US generally accepted accounting principles and "UK GAAP" means UK
generally accepted accounting principles.
The financial statements for the AES Drax companies are prepared in
accordance with UK GAAP, which differs in certain significant respects from US
GAAP. For a discussion of these differences and a reconciliation between UK and
US GAAP, see note 2 to our financial statements included in this report.
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 or
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 factors in this report, and you should also review "Item 3. Key
Information--Risk Factors" and "Item 5. Operating and Financial Review and
Prospects" in our annual report on Form 20-F for the year ended December 31,
2002 (the "2002 ANNUAL REPORT"), which we incorporate 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 changes in the
New Electricity Trading Arrangements ("NETA"). NETA was implemented on
March 27, 2001;
o general industry trends;
o changes to the competitive environment;
o power prices and resource availability and pricing;
o changes in business strategy, development plans or vendor
relationships in the market for power in the UK;
o that the principal hedging arrangement relating to power sales from
the Drax Power Station has been terminated, and the Drax Power Station
is currently operating as a fully-merchant plant;
o that since December 12, 2002, we are operating under standstill
arrangements with, among others, certain of our senior creditors,
initially under the "ORIGINAL STANDSTILL AGREEMENT", and, after expiry
thereof on May 31, 2003, under the "FURTHER STANDSTILL AGREEMENT",
and, after expiry thereof on June 30, 2003, under the "THIRD
STANDSTILL AGREEMENT", which became effective July 11, 2003, and,
after expiry thereof on August 14, 2003, under the "FOURTH STANDSTILL
AGREEMENT", which became effective August 22, 2003 and expires on
September 30,
1
2003, unless terminated earlier or extended in accordance with its
terms. A conformed copy of the Fourth Standstill Agreement was
furnished to the US Securities and Exchange Commission (the "SEC") on
a Form 6-K, dated August 22, 2003. The arrangements put in place under
the Original Standstill Agreement, the Further Standstill Agreement,
the Third Standstill Agreement and the Fourth Standstill Agreement are
referred to herein as the "STANDSTILL ARRANGEMENTS";
o availability, terms and deployment of capital;
o interest rate volatility;
o changes in currency exchange rates, inflation rates and conditions in
financial markets;
o availability of qualified personnel; and
o a change in the interpretation of tax laws.
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 these statistics from various third-party sources and/or our own
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. Until November 2002, when the hedging contract (the "HEDGING
CONTRACT") between AES Drax Power Limited and TXU Europe Energy Trading Limited
("TXU EUROPE") was terminated, generated electricity was sold under a two-part
pricing method, representing the two main products, capacity and energy. Under
the current market structure, all generated electricity is sold as electrical
energy, produced by the Drax Power Station's electricity 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. Electrical
energy is expressed as kilowatt hours ("KWH"), megawatt hours ("MWH"), gigawatts
hours ("GWH") or terrawatts 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. The sale of electrical capacity is expressed as kilowatts
("KW"), megawatts ("MW"), gigawatts ("GW") or terrawatts ("TW") of electricity
available for use at any point in time.
2
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 HOLDINGS LIMITED
Condensed Financial Statements for the quarter ended June 30, 2003 A1 - 7
B AES DRAX POWER LIMITED
Condensed Financial Statements for the quarter ended June 30, 2003 B1 - 7
C AES DRAX LIMITED
Condensed Financial Statements for the quarter ended June 30, 2003 C1 - 7
D AES DRAX ELECTRIC LIMITED
Condensed Financial Statements for the quarter ended June 30, 2003 D1 - 7
E AES DRAX ACQUISITION LIMITED
Condensed Financial Statements for the quarter ended June 30, 2003 E1 - 7
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
AES Drax Holdings Limited is a holding company with no material operations.
We were formed on August 26, 1999 in connection with the financing of our
acquisition of the Drax Power Station from National Power plc (now called Innogy
plc). Our only asset is our ownership of all of the share capital of AES Drax
Electric Limited, which owns all of the outstanding capital stock of AES Drax
Limited, which owns all of the outstanding capital stock of AES Drax Power
Limited, 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
financial obligations. We are a wholly owned indirect subsidiary of The AES
Corporation. However, as of August 5, 2003, The AES Corporation withdrew its
support for, and participation in the discussions between AES Drax Holdings
Limited and its senior creditors regarding a consensual restructuring (the
"RESTRUCTURING"). The AES Corporation files quarterly and annual reports with
the SEC under the Securities and Exchange Act of 1934, as amended (the "1934
ACT"), which are publicly available. On May 16, 2003, we filed our 2002 Annual
Report under the 1934 Act with the SEC, which is also publicly available. We
sometimes refer to AES Drax Holdings Limited, AES Drax Power Limited, AES Drax
Limited, AES Drax Electric Limited and AES Drax Acquisition Limited as "AES
DRAX".
3
SIGNIFICANT DEVELOPMENTS DURING THE SIX MONTHS ENDED JUNE 30, 2003 AND RECENT
DEVELOPMENTS
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002 for the purpose of providing AES
Drax Holdings Limited and its senior creditors with a period of stability during
which discussions regarding the Restructuring could take place. Although the
standstill period under the Original Standstill Agreement terminated on May 31,
2003, AES Drax reached agreement on two further standstill agreements, which
have now expired, and is currently operating under the Fourth Standstill
Agreement. The Fourth Standstill Agreement expires on September 30, 2003, unless
terminated earlier or extended in accordance with its terms.
Based on negotiations through the end of June, AES Drax Holdings Limited,
The AES Corporation, the steering committee (the "STEERING COMMITTEE")
representing the syndicate of banks (the "SENIOR LENDERS") which financed the
Eurobonds issued by AES Drax Holdings Limited to finance the acquisition of the
Drax Power Station, and the ad hoc committee formed by holders of AES Drax
Holdings Limited's Senior Bonds (the "AD HOC COMMITTEE" and, together with the
Steering Committee, the "SENIOR CREDITORS COMMITTEES"), reached agreement on
more detailed terms of the Restructuring, and each of the Senior Creditors
Committees, the AES Drax Companies and The AES Corporation indicated their
support for a Restructuring to be implemented based upon the proposed
restructuring terms (the "RESTRUCTURING PROPOSAL") that were published by us on
Form 6-K on June 30, 2003.
On July 23, 2003, we received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the Restructuring
and to purchase certain debt to be issued in the Restructuring described in the
Restructuring Proposal (the "INTERNATIONAL POWER PROPOSAL"), which letter was
filed by us on Form 6-K on July 24, 2003.
On July 28, 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to AES Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring unless
each member of the Senior Creditors Committees met certain conditions by no
later than August 5, 2003. A copy of the letter was filed on Form 6-K on July
28, 2003.
On July 30, 2003, the directors of AES Drax Holdings Limited and AES Drax
Power Limited appointed Gordon Horsfield and Gerald Wingrove as directors of AES
Drax Holdings Limited and AES Drax Power Limited. They, together with Lord
Taylor of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to AES Drax Holdings Limited.
As previously disclosed by us on Form 6-K filed with the SEC on August 6,
2003, on the evening of August 5, 2003 The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of AES Drax Holdings Limited and AES Drax Power
Limited and stated their intention to resign as directors from the boards of the
other Drax companies (other than AES Drax Power Finance Holdings Limited and AES
Drax Energy Limited) (with their resigning from AES Drax Acquisition Limited,
AES Drax Electric Limited and AES Drax Limited on August 8, 2003). Accordingly,
the boards of each of AES Drax Holdings Limited and AES Drax Power Limited now
comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald Wingrove, the
boards of each of AES Drax Electric Limited and AES Drax Limited comprise Lord
Taylor of Blackburn, Gordon Horsfield and Gerald Wingrove and the board of AES
Drax Acquisition Limited comprises Gordon Horsfield and Gerald Wingrove.
On August 14, 2003, we announced that we received a letter from Goldman
Sachs International, pursuant to which it proposed to participate in the
Restructuring in place of The AES Corporation, which letter was filed by us on
Form 6-K on August 14, 2003.
On August 19, 2003, we received a letter from International Power plc,
pursuant to which it revised the International Power Proposal, which letter was
filed by us on Form 6-K on August 20, 2003.
4
On August 21, 2003, we received a letter from BHP Billiton in respect of
the Restructuring, which letter was filed by us on Form 6-K on August 21, 2003.
On August 30, 2003, we announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman Sachs
International, and having noted the letter received from Miller, McConville,
Christen, Hutchison and Waffel, and following discussions with the senior
creditors of AES Drax, we entered into an exclusive arrangement with
International Power plc on the basis of a revised offer received from
International Power plc on August 30, 2003 to participate in the Restructuring.
Details of the offer were filed by us on Form 6-K on September 2, 2003. AES Drax
expects to finalize the detailed terms of the Restructuring in order to complete
the Restructuring by the end of this year.
For a discussion of significant events in 2002 and recent developments
since the beginning of 2003, we refer you to "Item 4. Information on the
Company--Significant Developments During 2002 and Recent Developments" in our
2002 Annual Report and to our other SEC filings since such Report was filed,
each of which we incorporate by reference herein.
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 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. Important factors that
could cause actual results to differ include risks set forth in "Item 3. Key
Information--Risk Factors" in our 2002 Annual Report.
The economics of any electric power facility are primarily a function of
the price of electricity, the quantity of electricity which 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.
The market for wholesale electric energy and energy services has now been
largely deregulated as a result of implementation of NETA compared with the
prior pool arrangements. In a competitive market where operation is based on
bids made by owners of generating assets in the region, AES Drax expects that
owners of lower marginal cost facilities will bid lower prices, and therefore
these facilities will be in operation more often than higher marginal cost
facilities.
The Drax Power Station is capable of operating at high availability due to
the high quality of its design and construction under the direction of the
Central Electricity Generating Board. As we have moved back into baseload
operation through the first half of 2003, both the plant availability and forced
outage rates have improved. For the three months ended June 30, 2003, the Drax
Power Station's weighted average (based on capacity) equivalent availability
factor was 83.43% and its forced outage rate was 4.79%, compared to 83.30% and
10.29%, respectively, for the three months ended June 30, 2002.
RESULTS OF OPERATIONS
AES Drax's results of operations depend 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.
The Hedging Contract historically accounted for a significant portion of
the revenues generated by AES Drax, including during the six months ended June
30, 2002. As a result of the termination of the Hedging Contract on November 18,
2002, the Drax Power Station began operating as a fully merchant plant as of
November 19, 2002.
5
SELECTED CONSOLIDATED PROFIT AND LOSS DATA IN ACCORDANCE WITH UK GAAP:
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------------ ------------------ ----------------- ----------------
(IN(POUND)'000'S) (IN(POUND)'000'S)
Revenues....................................... 92,960 129,035 229,347 274,879
Cost of Sales.................................. (65,741) (48,972) (142,962) (110,437)
Gross Profit................................... 27,219 80,063 86,385 164,442
Administrative expenses........................ (46,012) (44,683) (86,706) (89,322)
Operating (loss) / profit...................... (18,793) 35,380 (321) 75,120
Interest receivable and similar income......... 7,299 6,833 11,464 12,774
Interest payable and similar charges........... (44,665) (44,319) (90,778) (88,403)
Loss on ordinary activities before taxation.... (56,159) (2,106) (79,635) (509)
Loss on ordinary activities after taxation..... (57,464) (5,383) (82,102) (9,781)
OPERATING RESULTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AND
2002
Revenues for the quarter ended June 30, 2003 totalled (pound)93.0 million,
compared to (pound)129.0 million for the same period in 2002, a decrease of
27.9%, and revenues for the first six months of 2003 totalled (pound)229.3
million, compared to (pound)274.9 million for the same period in 2002,
representing a 16.6% decrease.
The decreases in revenues for 2003, compared to the same periods in 2002,
are due principally to the loss of the capacity payment payable by TXU Europe
under the Hedging Contract, which was terminated on November 18, 2002, and an
overall decline in capture price from an average of (pound)30.42/MWh during the
second quarter of 2002 to (pound)16.19/MWh during the second quarter of 2003.
Sales volumes in the second quarter of 2003 totalled 5,740.4 GWh, compared to
4,241.6 GWh for the same period in 2002. The increase in volume was due to the
increase in our sales, which have had to compensate for the loss of the Hedging
Contract and therefore the price achievable, as the plant now operates on a
fully merchant basis in the UK market and is no longer restricted to generation
levels per the Hedging Contract.
The following graph shows the trend in Annual Baseload Contracts for the
period ended August 22, 2003 (such contracts are where electricity is supplied
24 hours per day, 7 days per week). The chart indicates that for 2002 baseload
prices fell from around (pound)18.45/MWh in December 2001 to (pound)16.92/MWh by
December 31, 2002. The graph also reflects the trend in baseload prices through
August 2003, which shows a recovery from the previous low prices experienced in
2002.
6
[GRAPHIC OMITTED]
ANNUAL BASELOAD PRICES
21
20
19
18
17
16
15
02/01/02 02/02/02 02/03/02 02/04/02 02/05/02 02/06/02 02/07/02
02/08/02 02/09/02 02/10/02 02/11/02 02/12/02 02/01/03 02/02/03
02/03/03 02/04/03 02/05/03 02/06/03 02/07/03 02/08/03
During the first quarter of 2003, prices increased sharply through January
when we successfully hedged some of our output. We believe that this price peak
was caused by uncertainty in the market place following the administration of
TXU Europe and certain other companies in the TXU group and the issues faced by
British Energy at that time. Generally, the forward curve continued to rise
throughout the year as capacity margins tightened.
Cost of sales for the quarter ended June 30, 2003, which are primarily fuel
costs, were (pound)65.7 million, compared to (pound)49.0 million for the quarter
ended June 30, 2002. Cost of sales for the six month period ended June 30, 2003
also shows an increase to (pound)143.0 million compared to (pound)110.4 million
for the same period in 2002. The increase in fuel burnt for the second quarter
of 2003, compared to the same period in 2002, is due to the increase in
generation from 4,435.8 GWh during the second quarter of 2002 to 5,995.5 GWh
during the second quarter of 2003, as the plant has operated on a fully merchant
basis and has increased the volume of sales in the second quarter of 2003. The
impact of this increase is also reflected in AES Drax's load factor, which has
increased to 69.6% for the quarter ended June 30, 2003, compared to 51.3% for
the same period in 2002.
The cost of fuel remained in line with expectations due to the transition
to supply contracts with all our major coal suppliers.
Gross profit (revenues less cost of goods sold) was (pound)27.2 million for
the quarter ended June 30, 2003, compared to (pound)80.1 million for the same
period in 2002, and totalled (pound)86.4 million for the six months ended June
30, 2003, compared to (pound)164.4 million for the same period in 2002. This
gives a gross margin of approximately 29.3% for the second quarter of 2003,
compared to 62.0% for the same period in 2002, and a gross margin of 37.7% for
the six months to June 30, 2003, compared to 59.8% for the same period in 2002.
The downturn in the gross margin during the second quarter of 2003 compared to
the same period in 2002, is mainly attributable to the termination of the
Hedging Contract and the transition to a fully merchant plant, which has
affected gross margin as follows:
7
o Our average selling price (total revenues divided by total volume of
electricity sold) decreased by 46.8% for the second quarter of 2003,
compared to the same period in 2002. This takes into account the
overall reduction in UK market prices to which we are now exposed.
o Our fuel costs increased by 34.2% in the second quarter of 2003
compared to the same period in 2002, which reflects the increased
generation levels, as mentioned above.
Administrative expenses for the quarter ended June 30, 2003 were (pound)46.0
million, compared to (pound)44.7 million for the same period in 2002.
Administrative expenses for the six months to June 30, 2003 were (pound)86.7
million, compared to (pound)89.3 million for the same period in 2002. These
expenses consist primarily of fixed operations, maintenance and other variable
costs. The expenditure was broadly in line with our expectations and with last
year's results. There was a decreased level of expenditure in the first quarter
of 2003 but the second quarter of 2003 saw an increase in expenditure due to the
net effects of the following:
o The decrease in our insurance premiums following renewal in November
2002, when our premiums decreased from approximately (pound)10.9
million per annum to (pound)6.0 million per annum. This decrease in
the premiums payable during the second quarter of 2003 was due in part
to the fact that 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)5 million each and every event deductible and $1 billion
((pound)600 million) maximum loss cover, and does not include business
interruption insurance. This reduced our insurance expense for the
quarter ended June 30, 2003 by approximately (pound)1.0 million
compared to the same period in 2002.
Our insurance premiums had significantly increased in 2002 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 in November 2001.
o AES Drax's claims history during the first year of such
policy.
o The increased level of professional and legal fees incurred in the
second quarter of 2003 associated with ongoing discussions with our
senior creditors. Such fees added approximately (pound)7.7 million of
costs for the quarter ended June 30, 2003 compared to the same period
in 2002.
o The increase in total salary payments by approximately (pound)1.0
million for the second quarter of 2003 compared to the second quarter
of 2002, mainly due to pay increases year on year and changes in
staffing levels between years.
o The effects of foreign exchange rate movements on foreign currency
balances, mainly intercompany balances denominated in dollars, which
have increased significantly from June 2002 to June 2003. The results
for the quarter ended June 30, 2003 include a foreign exchange gain
of(pound)2.8 million, whereas those for the quarter ended June 30,
2002 include a foreign exchange gain of(pound)0.4 million. Foreign
exchange gains for the quarter ended June 30, 2003 are principally
attributable to the dollar depreciating relative to the pound sterling
to a greater extent during the second quarter of 2003 as compared to
the second quarter of 2002. In 2003, the pound to dollar exchange rate
increased from(pound)1: $1.5749 in March to(pound)1: $1.6503 in June,
reflecting a $0.08 increase, whereas in 2002, the pound to dollar
exchange rate increased from(pound)1: $1.4262 in March to(pound)1:
$1.5328 in June, reflecting a $0.11 increase.
o The timing and extent of outage work performed. The outage work for
2002 was mostly incurred during the third quarter due to the deferral
of a major outage into 2003, thus the outage work for 2003 has been
more substantial and costs, therefore, have already been incurred in
the second quarter totalling approximately (pound)5.2 million.
8
o No amortisation of goodwill has been charged in 2003 following the
impairment of fixed assets at the year-end 2002. Such charges for the
second quarter of 2002 totalled (pound)8.7 million, compared to
(pound)nil for the same period in 2003, thus reducing administrative
costs by (pound)8.7 million.
o Other reductions and savings in administrative expenses generated a
further reduction of (pound)0.4 million for the second quarter of 2003
as compared to the same period in 2002.
Operating loss from continuing operations was (pound)18.8 million for the
quarter ended June 30, 2003, compared to an operating profit of (pound)35.4
million for the same period in 2002. For the six months ended June 30, 2003, the
operating loss was (pound)0.3 million, compared to an operating profit of
(pound)75.1 million for the same period in 2002.
Interest payable and similar charges were (pound)44.7 million for the
second quarter of 2003, compared to (pound)44.3 million for the same period in
2002. Interest payable for the six months period to June 30, 2003 totalled
(pound)90.8 million, compared to (pound)88.4 million for the same period in
2002. The interest expense comprises two major components:
(i) Fixed coupons on the (pound)1,725 million Eurobonds due 2015 which
provide for semi-annual coupon payments at a rate of 8.86% per annum
and are used by InPower Limited to make payments under the Bank
Facility. As of June 30, 2003, the aggregate principal amount
outstanding under the Bank Facility was (pound)842.6 million. No
capital repayments have been made since June 30, 2002.
(ii) The senior bonds, which have an aggregate principal amount outstanding
(sterling equivalent) of approximately (pound)400 million at June 30,
2003, of which half accrues interest at 10.41% and the other half at
9.07%.
The additional interest expense charged 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 Bank
Facility. The interest rate swaps, in particular, are currently increasing our
interest expense as interest rates (GBP 6 month LIBOR) have continued to decline
to 3.995% as at December 31, 2002, which applied for the period January 1, 2003
to June 30, 2003. Subsequently the interest rates have been reset for the next
six month period ended December 31, 2003 and have declined further to 3.566% as
at June 30, 2003.
The level of interest expense reflects the significant borrowings we made
to finance the acquisition of the Drax Power Station.
Interest receivable and other income was (pound)7.3 million for the second
quarter of 2003, compared to (pound)6.8 million for the same period in 2002,
representing an increase of approximately 6.8% over the same period in 2002. For
the six months to June 30, 2003, interest receivable was (pound)11.5 million,
compared to (pound)12.8 million for the same period in 2002, representing a
decrease of 10.3%. 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.
Due to the decreased gross margin during the quarter ended June 30, 2003,
we incurred a loss on ordinary activities before taxation of (pound)56.2
million, compared to (pound)2.1 million for the same period in 2002, and a loss
before taxation of (pound)79.6 million for the six months ended June 30, 2003,
compared to (pound)0.5 million for the same period in 2002 . We incurred
corporation tax on this of (pound)1.3 million for the three months to June 30,
2003, compared to (pound)3.3 million for the same period in 2002, and (pound)2.5
million for the six months to June 30, 2003, compared to (pound)9.3 million for
the same period in 2002. This equates to an effective tax rate of 2.3% for the
three months to June 30, 2003, compared to 155.6% for the same period in 2002,
and an effective tax rate of 3.1% for the six months to June 30, 2003, compared
to 1,821.6% for the same period in 2002, even though UK corporation tax rate is
currently 30%. The reason for the difference in tax rates is primarily due to
the greater trading loss generated in the six months ended June 30, 2003,
compared to the smaller losses made in the same period in 2002, and the change
in the deferred tax provision for the six months to June 30, 2003.
9
LIQUIDITY AND CAPITAL RESOURCES
Following the termination of the Hedging Contract and the appointment of
administrators for TXU Europe and TXU Europe Group plc ("TXU Group") 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 Europe in October 2002 and the first-half of 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 Europe and TXU Group. In addition to
adopting a fully merchant strategy since termination, AES Drax immediately
following termination entered into an agreement with National Grid Company plc
to supply power for the first five days post-termination. AES Drax initially
took steps to restrict cash outflows by consuming stocks of coal and hence
reducing coal purchases, agreeing rescheduled payments with UK Coal Mining
Limited, 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 electricity trading term contracts
is dependent on the availability of additional credit support. Under the terms
of the Standstill Arrangements, AES Drax has utilized (pound)30 million of funds
under the group account agreement entered into pursuant to the terms of the
Eurobonds, the Bank Facility and the bonds ("the GROUP ACCOUNT AGREEMENT") to
create a new account called the "COLLATERAL FINANCING ACCOUNT". This account has
been used to provide the cash collateral required by one of the Senior Lenders,
National Westminster Bank, to issue letters of credit necessary to provide the
credit support required by both our trading counterparties and Elexon who
administer NETA.
The issuance of such letters of credit by National Westminster Bank is made
pursuant to a (pound)30 million letter of credit facility, dated December 12,
2002. AES Drax Power Limited has sought a (pound)10 million increase to this
letter of credit facility (as set out in a Form 6-K filed on August 14, 2003)
for the purpose of providing credit support as set out above or for any other
purpose approved by the Senior Creditor Committees. The letter of credit
facility is 100% cash collateralized from funds from the Collateral Financing
Account and the use of such funds for such cash collateral remains subject to
the prior approval of the Senior Creditor Committees.
At present, we have entered into firm sales for approximately 55% of our
available capacity for the period from April 15, 2003 to September 30, 2003. We
are hoping to achieve a load factor of approximately 60% through the third
quarter of 2003 and an average of approximately 75% for the whole of 2003. We
expect our firm sales for Summer 2003 to provide an average capture price of
approximately (pound)16 per MWh.
As part of the Standstill Arrangements, the Group Account Agreement was
amended to create two new bank accounts:
o COLLATERAL FINANCING ACCOUNT - this account contained the (pound)30 million
of funds intended to provide collateral for credit support and to meet any
working capital requirements. Approximately (pound)27.9 million as at July
31, 2003 has been transferred into the Cash Cover Account, to provide
collateral for the letters of credit issued to our trading counterparties
for credit support.
In addition, there is a further requirement within the revised Group
Account Agreement whereby, any excess cash above a minimum balance of
(pound)25 million for any continuous period of 30 days is swept from the
Proceeds Account into the Collateral Financing Account. At July 31, 2003
approximately (pound)31.4 million has been transferred into the Collateral
Financing Account. The balance on the Collateral Financing Account as at
July 31, 2003 was approximately (pound)34.0 million.
o CASH COVER ACCOUNT - this account holds the funds which provide cash
collateral for the issuance of letters of credit by the National
Westminster Bank.
Under the Group Account Agreement, there are other key accounts that
contain the cash utilised for the operation of the business, or are held for the
purposes of debt service. As at July 31, 2003 the balances on the following
accounts were:
10
o SENIOR DEBT SERVICE RESERVE ACCOUNT (pound)45.9 million
o INSURANCE RESERVE ACCOUNT (pound)0.02 million
o PROCEEDS ACCOUNT (pound)9.5 million
On August 20, 2003, AES Drax received a significant corporation tax rebate
for previous overpayments for the tax years ended December 31, 1999, 2000 and
2001. This has increased the cash balance by approximately (pound)14.0 million.
AES Drax expects to incur approximately (pound)6.8 million in capital
expenditures in the year 2003. Future capital commitments are expected to be met
from the working capital of AES Drax. In addition to capital requirements
associated with the ownership and operation of the Drax Power Station, AES Drax
anticipates that it will have significant fixed charge obligations in the
future, principally relating to the fixed operating expenses incurred in
connection with operating the station.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Neither we, nor any of our subsidiaries, other than AES Drax Power Limited,
have any operations or any management or employees.
DIRECTORS
As a result of the withdrawal by The AES Corporation from the Restructuring
process, the following directors, appointed by The AES Corporation, resigned
from AES Drax Holdings Limited and AES Drax Power Limited on August 5, 2003 and
from AES Drax Limited, AES Drax Electric Limited and AES Drax Acquistion Limited
on August 8, 2003: Garry Levesley, John Turner, Neil Hopkins and Naveed Ismail.
Before their resignations, Gordon Horsfield and Gerald Wingrove were appointed
as directors to the above companies on the same dates.
GORDON HORSFIELD retired from PricewaterhouseCoopers (UK firm) in January
2003 after thirty-four years with the firm. During his career at the firm he
held a number of senior positions. He was appointed Director of Operations
following the merger of the two predecessor firms and later he led the firm's UK
team dealing with the sale of its management consulting business to IBM. Prior
to the merger in 1998 he had been Head of the Corporate Finance and Recovery
division of Price Waterhouse in the UK.
GERALD WINGROVE joined London Electricity in 1998 as Group Finance Director
with responsibility for finance, corporate development and regulation. At the
beginning of 2001, in addition to his existing group finance roles, he took over
responsibility on London Electricity's board for the retail and trading
businesses and in 2002, became an EDF-nominated director of the Swedish utility
company, Graninge AB. Mr Wingrove left London Electricity in December 2002.
Before joining London Electricity, he worked for Enron Corp for eight years in
London and Houston, Texas, USA.
DIRECTOR
NAME AGE POSITION SINCE
----------------------------- --- --------------------------- -------------
Gordon Horsfield 56 Chairman July 30, 2003
Gerald Wingrove 48 Finance Director July 30, 2003
Lord Taylor of Blackburn 73 Non-Executive Director May 18, 2001
Angela Padbury 26 Company Secretary N/A
SENIOR MANAGEMENT
Following The AES Corporation's withdrawal from the Restructuring process
on August 5, 2003, changes to the senior management at AES Drax Power Limited
were as follows: Garry Levesley resigned as Plant Manager and Cassim Mangerah
stepped down as Head of Commodity Risk Management.
11
ITEM 3. MARKET RISKS
AES Drax is exposed to market risks associated with interest rates, foreign
exchange rates and commodity prices. We have utilized 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.
We previously disclosed the mark-to-market ("MTM") value of certain
derivative transactions used to hedge against interest rate and currency
exposure in a 6-K filing dated April 11, 2003. The fair value of the MTM
position on the foreign exchange swaps has moved adversely from a favourable
position at March 31, 2003 of approximately (pound)8 million to an adverse
position of approximately (pound)(12) million at July 31, 2003, the latest
valuation date. However, the fair value of the MTM position on the interest rate
swaps has moved favourably, from an adverse position of approximately
(pound)(88) million at March 31, 2003 to an adverse position of approximately
(pound)(73) million at July 31, 2003.
The fair value of the currency swaps and interest rate swaps disclosed
above are unaudited and have been determined by reference to prices available
from the markets on which these instruments or similar instruments are traded.
Valuations based upon other models or assumptions may yield different results.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings
with the SEC is recorded, processed, summarized, and reported on a timely basis,
our management, including our Chairman and Finance Director, have reviewed and
evaluated the effectiveness of our "disclosure controls and procedures" (as such
term is defined in the 1934 Act Rules 13a-15(e) and 15d-15(e)), as of June 30,
2003. Based on such evaluation, our Chairman and Finance Director have concluded
that, as of June 30, 2003, our disclosure controls and procedures were effective
in timely alerting them to material information relating to us (and our
consolidated subsidiaries) required to be included in our periodic SEC filings.
There has been no change in our internal control over financial reporting during
the quarter ended June 30, 2003, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL AND REGULATORY DEVELOPMENTS
AES Drax Holdings 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 Holdings Limited or the other AES Drax companies.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In accordance with the Standstill Arrangements, certain defaults and events
of default on the bonds were permanently waived and certain defaults and events
of default were temporarily waived. The standstill period under the Fourth
Standstill Agreement expires on September 30, 2003, unless terminated earlier or
extended in accordance with its terms. A conformed copy of the Fourth Standstill
Agreement was furnished to the SEC on a Form 6-K, dated August 22, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorised.
AES DRAX HOLDINGS LIMITED
Date: September 11, 2003 By: /s/ Gordon Horsfield
--------------------------
Gordon Horsfield
Director
Date: September 11, 2003 By: /s/ Gerald Wingrove
--------------------------
Gerald Wingrove
Director
14
APPENDIX
15
AES DRAX HOLDINGS LIMITED
FINANCIAL STATEMENTS
30 JUNE 2003
A-1
AES DRAX HOLDINGS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 June 2003
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
TURNOVER - CONTINUING OPERATIONS 92,960 129,035 229,347 274,879
Cost of sales (65,741) (48,972) (142,962) (110,437)
-------- -------- --------- ---------
GROSS PROFIT 27,219 80,063 86,385 164,442
Administrative expenses (46,012) (44,683) (86,706) (89,322)
-------- -------- --------- ---------
OPERATING (LOSS) / PROFIT - CONTINUING OPERATIONS (18,793) 35,380 (321) 75,120
Interest receivable and other income 7,299 6,833 11,464 12,774
Interest payable and similar charges (44,665) (44,319) (90,778) (88,403)
-------- -------- --------- ---------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (56,159) (2,106) (79,635) (509)
Tax on loss on ordinary activities (1,305) (3,277) (2,467) (9,272)
-------- -------- --------- ---------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION TRANSFERRED (57,464) (5,383) (82,102) (9,781)
FROM RESERVES ======== ======== ========= ==========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
A-2
AES DRAX HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
30 June 2003
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
NOTE (POUND)'000 (POUND)'000
FIXED ASSETS
Tangible assets 1,072,619 1,083,118
----------- ----------
CURRENT ASSETS
Stocks 30,764 31,327
Debtors 435,331 514,391
Cash at bank and in hand 67,929 85,020
----------- ----------
534,024 630,738
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 3 (42,129) (70,101)
----------- ----------
NET CURRENT ASSETS 491,895 560,637
----------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,564,514 1,643,755
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (2,125,110) (2,125,368)
PROVISIONS FOR LIABILITIES AND CHARGES (19,997) (16,878)
----------- ----------
NET LIABILITIES (580,593) (498,491)
=========== ==========
CAPITAL AND RESERVES
Called up share capital 20,051 20,051
Capital reserve 3 52,250 52,250
Profit and loss account (652,894) (570,792)
----------- ----------
TOTAL EQUITY SHAREHOLDERS' FUNDS (580,593) (498,491)
=========== ==========
A-3
AES DRAX HOLDINGS LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Six months ended 30 June 2003
AS RESTATED
SIX MONTHS SIX MONTHS
ENDED ENDED
30 JUNE 30 JUNE
2003 2002
NOTE (POUND)'000 (POUND)'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 3 75,243 146,555
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3 2,317 2,213
Interest paid (89,133) (61,854)
--------- --------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (86,816) (59,641)
--------- --------
TAXATION 102 (1)
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (5,620) (2,816)
--------- --------
CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES (17,091) 84,097
MANAGEMENT OF LIQUID RESOURCES
Decrease/(increase) in restricted cash deposits 44,790 (184)
--------- --------
INCREASE IN CASH IN THE PERIOD 27,699 83,913
========= =======
A-4
AES DRAX HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Holdings Limited and its subsidiaries (the "COMPANY"). Intercompany
transactions and balances have been eliminated.
In the opinion of the Company's directors, all adjustments necessary for
a fair presentation of the unaudited results of operations for the six
months ended June 30, 2003 and 2002, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results of
operations for the period ended June 30, 2003 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 AES Drax Holdings Limited's Annual Report on Form
20-F for the year ended December 31, 2002.
Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Group and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power Limited was not permitted to make
distributions to AES Drax Energy Limited to permit interest due on the
high yield notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy Limited which together
with amounts then held in the high yield note debt service reserve
account 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. Any improvement in the forward
looking ratios were dependent on a favourable change in the forward curve
for electricity prices during the period from June 30 to December 31,
2002. Such improvements did not occur and the ratios were below 1.19:1 at
December 31, 2002.
Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the
end of February 2003. Such failure constitutes an event of default under
the notes, although any enforcement rights are subject to a 90-day grace
period as well as the terms and conditions of certain intercreditor
arrangements.
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002. The purpose of the
Standstill Arrangements is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The bank lenders and the senior
bondholders have agreed 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 during the
standstill period. Although the standstill period under the Original
Standstill Agreement terminated on May 31, 2003, AES Drax had reached
agreement on two further standstill agreements, which have now expired,
and is currently operating under the Fourth Standstill Agreement, agreed
with the Steering Committee and the Ad Hoc Committee. This agreement
expires on September 30, 2003, unless terminated earlier or extended in
accordance with its terms.
Under the Standstill Arrangements, AES Drax's bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to
at least (pound)30,000,000 of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the Steering Committee and the Ad Hoc Committee, are available to
provide credit support to electricity counterparties and for working
capital needs.
Failure to effect a satisfactory restructuring of AES Drax could lead to
an event of default under the senior financing documents and the
withdrawal of support by the Company's lenders.
A-5
AES DRAX HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION (CONTINUED)
The directors of the Company believe that the Standstill Arrangements
will facilitate an agreed restructuring of AES Drax. On this basis, the
directors of the Company consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not
include any adjustments that would result from a withdrawal of support by
the Company's lenders.
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the financial statements.
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 FRS 19. 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.
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP resulted 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. Under US GAAP, FAS 87
requires the recording of an additional minimum pension obligation under
certain circumstances. No such obligation is required under UK GAAP.
INTEREST
Under UK GAAP, interest is charged on the (pound)1.725 billion Guaranteed
Secured Bonds. Under US GAAP, (pound)425 million of the (pound)1.725
billion Guaranteed Secured bond is treated as an equity contribution.
Therefore, interest under US GAAP is charged on the net (pound)1.300
billion.
The (pound)1.300 billion represents a senior secured bank facility.
Repayment of the bank facility is secured by a security interest in the
(pound)1.725 billion 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 June 30, 2000.
Principal repayments of (pound)25.0 million, (pound)370.0 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on June 30, 2000, August 2, 2000, December
31, 2000, June 30, 2001, December 31, 2001 and June 30, 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. Under UK
GAAP, the Company has recorded an impairment loss measured by reference
to the value in use of the assets.
Under US GAAP, an impairment loss on the tangible fixed assets is
recorded only if the assets are not recoverable from their undiscounted
cash flows. No impairment has been recognised under US GAAP.
A-6
AES DRAX HOLDINGS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (CONTINUED)
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 SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
Net loss under UK GAAP (57,464) (5,383) (82,102) (9,781)
US GAAP adjustments:
Goodwill - 8,469 - 16,938
Additional depreciation (4,838) (4,838) (9,675) (9,675)
Deferred tax 4,954 4,994 10,047 18,631
Additional depreciation due to (5,081) (5,081) (10,163) (10,163)
deferred tax
Interest 13,794 10,995 27,588 22,636
Derivative gain / (loss) (666) (8,625) 6,062 1,588
--------- -------- --------- ---------
Net (loss) / income under US GAAP (49,301) 531 (58,243) 30,174
========= ======== ========= =========
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
(POUND)'000 (POUND)'000
Shareholders' deficit under UK GAAP (580,593) (498,491)
US GAAP adjustments:
Cumulative effect of previous adjustments 1,136,432 497,579
Goodwill - 33,876
Additional depreciation (9,675) (19,350)
Deferred tax 10,047 22,952
Additional depreciation due to deferred tax (10,163) (20,326)
Interest 27,588 48,370
Derivatives (17,899) (5,669)
Impairment of fixed assets - 579,000
---------- ---------
Shareholders' equity under US GAAP 555,737 637,941
========== =========
3. PRIOR PERIOD ADJUSTMENTS
The restatement of the cashflow for the six months ended June 30, 2002
relates to a reclassification of amounts generated under a finance
hedging swap of (pound)10.4 million from interest received to net cash
inflow from operating activities.
The restatement of the balance sheet as at December 31, 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of (pound)52.25 million. This has been released into a Capital
Reserve, since The AES Corporation has confirmed that it has no claim for
repayment against the Company for such an amount. This restatement has no
effect on the consolidated loss of the Company in either the current
or prior periods. This restatement increases the net assets of the
Company by (pound)52.25 million. This restatement reflects the true
nature of the transaction that occurred during 2002.
A-7
AES DRAX POWER LIMITED
FINANCIAL STATEMENTS
30 JUNE 2003
B-1
AES DRAX POWER LIMITED
PROFIT AND LOSS ACCOUNT
Periods ended 30 June 2003
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
TURNOVER - CONTINUING OPERATIONS 92,960 129,035 229,347 274,879
Cost of sales (65,741) (48,972) (142,962) (110,437)
------- ------- -------- --------
GROSS PROFIT 27,219 80,063 86,385 164,442
Administrative expenses (43,365) (35,082) (82,963) (70,110)
------- ------- -------- --------
OPERATING (LOSS) / PROFIT - CONTINUING OPERATIONS (16,146) 44,981 3,422 94,332
Interest receivable and other income 7,302 6,833 11,465 12,849
Interest payable and similar charges (941) (224) (1,783) (1,632)
------- ------- -------- --------
(LOSS) / PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (9,785) 51,590 13,104 105,549
Tax on (loss) / profit on ordinary activities 957 (17,703) (8,005) (35,986)
------- ------- -------- --------
RETAINED (LOSS) / PROFIT FOR THE FINANCIAL PERIOD
TRANSFERRED (FROM) / TO RESERVES (8,828) 33,887 5,099 69,563
======= ======= ======== ========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
B-2
AES DRAX POWER LIMITED
BALANCE SHEET
30 June 2003
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
NOTE (POUND)'000 (POUND)'000
FIXED ASSETS
Tangible assets 1,072,619 1,083,118
---------- ----------
CURRENT ASSETS
Stocks 30,764 31,327
Debtors 200,703 157,687
Cash at bank and in hand 67,831 84,916
---------- ----------
299,298 273,930
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 3 (57,346) (50,437)
---------- ----------
NET CURRENT ASSETS 241,952 223,493
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,314,571 1,306,611
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (78,290) (78,548)
PROVISIONS FOR LIABILITIES AND CHARGES (19,997) (16,878)
---------- ----------
NET ASSETS 1,216,284 1,211,185
========== ==========
CAPITAL AND RESERVES
Called up share capital 1,000 1,000
Share premium 1,204,542 1,204,542
Capital reserve 3 52,250 52,250
Profit and loss account (41,508) (46,607)
---------- ----------
TOTAL EQUITY SHAREHOLDERS' FUNDS 1,216,284 1,211,185
========== ==========
B-3
AES DRAX POWER LIMITED
CASH FLOW STATEMENT
Six months ended 30 June 2003
AS RESTATED
SIX MONTHS SIX MONTHS
ENDED ENDED
30 JUNE 30 JUNE
2003 2002
NOTE (POUND)'000 (POUND)'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES 3 (13,735) 61,748
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3 2,318 2,289
Interest paid (150) (1,632)
-------- -------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 2,168 657
-------- -------
TAXATION 102 -
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (5,620) (2,816)
-------- -------
CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES (17,085) 59,589
MANAGEMENT OF LIQUID RESOURCES
Decrease/(increase) in restricted cash deposits 44,790 (184)
-------- -------
INCREASE IN CASH IN THE PERIOD 27,705 59,405
======== =======
B-4
AES DRAX POWER LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION
In the opinion of the directors of AES Drax Power Limited (the
"COMPANY"), all adjustments necessary for a fair presentation of the
unaudited results of operations for the six months ended June 30, 2003
and 2002, respectively, are included. All such adjustments are accruals
of a normal and recurring nature. The results of operations for the
period ended June 30, 2003 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 AES Drax Holdings Limited's Annual Report on Form 20-F for the year
ended December 31, 2002.
Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Group and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power Limited was not permitted to make
distributions to AES Drax Energy Limited to permit interest due on the
high yield notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy Limited which together
with amounts then held in the high yield note debt service reserve
account 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. Any improvement in the forward
looking ratios were dependent on a favourable change in the forward curve
for electricity prices during the period from June 30 to December 31,
2002. Such improvements did not occur and the ratios were below 1.19:1 at
December 31, 2002.
Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the
end of February 2003. Such failure constitutes an event of default under
the notes, although any enforcement rights are subject to a 90-day grace
period as well as the terms and conditions of certain intercreditor
arrangements.
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002. The purpose of the
Standstill Arrangements is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The bank lenders and the senior
bondholders have agreed 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 during the
standstill period. Although the standstill period under the Original
Standstill Agreement terminated on May 31, 2003, AES Drax had reached
agreement on two further standstill agreements, which have now expired,
and is currently operating under the Fourth Standstill Agreement, agreed
with the Steering Committee and the Ad Hoc Committee. This agreement
expires on September 30, 2003, unless terminated earlier or extended in
accordance with its terms.
Under the Standstill Arrangements, AES Drax's bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to
at least (pound)30,000,000 of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the Steering Committee and the Ad Hoc Committee, are available to
provide credit support to electricity counterparties and for working
capital needs.
Failure to effect a satisfactory restructuring of AES Drax could lead to
an event of default under the senior financing documents and the
withdrawal of support by the Company's lenders.
B-5
AES DRAX POWER LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION (CONTINUED)
The directors of the Company believe that the Standstill Arrangements
will facilitate an agreed restructuring of AES Drax. On this basis, the
directors of the Company consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not
include any adjustments that would result from a withdrawal of support by
the Company's lenders.
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the financial statements.
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 FRS 19. 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.
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP resulted 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. Under US GAAP, FAS 87
requires the recording of an additional minimum pension obligation under
certain circumstances. No such obligation is required under UK GAAP.
PUSH DOWN OF ACQUISITION DEBT
Under US GAAP the (pound)1.300 billion senior secured bank facility used
to finance the acquisition of AES Drax Power Limited would be pushed down
to the company acquired and the related interest expense would be
recorded.
Repayment of the bank facility is secured by a security interest in the
(pound)1.725 billion 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 June 30, 2000.
Principal repayments of (pound)25.0 million, (pound)370.0 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on June 30, 2000, August 2, 2000, December
31, 2000, June 30, 2001, December 31, 2001 and June 30, 2002,
respectively.
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.
B-6
AES DRAX POWER LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (CONTINUED)
PUSH DOWN OF ACQUISITION ADJUSTMENTS
Under US GAAP certain adjustments made in the holding company to record the
acquisition of AES Drax Power Limited would be pushed down to the company.
These include:
(1) Adjustment to the carrying value of the plant to reflect the
purchase price for the asset
(2) Record a deferred tax liability for the difference between the
purchase price of the plant and its tax basis
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
Net (loss)/income under UK GAAP (8,828) 33,887 5,099 69,563
US GAAP adjustments:
Additional depreciation (4,838) (4,838) (9,675) (9,675)
Deferred tax 4,954 4,994 10,047 18,631
Additional depreciation due to
deferred tax (5,081) (5,081) (10,163) (10,163)
Push down interest (14,473) (18,699) (30,066) (31,955)
Derivative gain/(loss) 1,208 (7,304) 5,767 173
---------- --------- --------- --------
Net (loss)/income under US GAAP (27,058) 2,959 (28,991) 36,574
========== ========= ========= ========
AS RESTATED
31 DECEMBER
30 JUNE 2002
2003 (POUND)'000
(POUND)'000
Shareholders' equity under UK GAAP 1,216,284 1,211,185
US GAAP adjustments:
Cumulative effect of previous adjustments (279,071) (299,832)
Additional depreciation (9,675) (19,350)
Deferred tax 10,047 22,952
Additional depreciation due to deferred tax (10,163) (20,326)
Push down loan adjustment - 28,055
Derivatives (10,209) (20,042)
Impairment of fixed assets - 29,472
----------- ----------
Shareholders' equity under US GAAP 917,213 932,114
=========== ==========
3. PRIOR PERIOD ADJUSTMENTS
The restatement of the cashflow for the six months ended June 30, 2002
relates to a reclassification of amounts generated under a finance hedging
swap of (pound)10.4 million from interest received to net cash inflow from
operating activities.
The restatement of the balance sheet as at December 31, 2002 relates to the
reclassification of an amount previously included within intercompany
creditors of (pound)52.25 million. This has been released into a Capital
Reserve, since The AES Corporation has confirmed that it has no claim for
repayment against the Company for such an amount. This restatement has no
effect on the consolidated profit of the Company in either the current or
prior periods. This restatement increases the net assets of the Company by
(pound)52.25 million. This restatement reflects the true nature of the
transaction that occurred during 2002.
B-7
AES DRAX LIMITED
FINANCIAL STATEMENTS
30 JUNE 2003
C-1
AES DRAX LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 June 2003
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
TURNOVER - CONTINUING OPERATIONS 92,960 129,035 229,347 274,879
Cost of sales (65,741) (48,972) (142,962) (110,437)
--------- --------- ---------- ---------
GROSS PROFIT 27,219 80,063 86,385 164,442
Administrative expenses (43,365) (43,551) (82,963) (87,048)
--------- --------- ---------- ---------
OPERATING (LOSS)/INCOME - CONTINUING OPERATIONS (16,146) 36,512 3,422 77,394
Interest receivable and other income 7,303 6,833 11,466 12,849
Interest payable and similar charges (941) (224) (1,783) (1,632)
--------- --------- ---------- ---------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (9,784) 43,121 13,105 88,611
Tax on (loss)/profit on ordinary activities 957 (17,703) (8,005) (35,986)
--------- --------- ---------- ---------
RETAINED (LOSS)/PROFIT FOR THE FINANCIAL PERIOD
TRANSFERRED (FROM)/TO RESERVES (8,827) 25,418 5,100 52,625
========= ========= ========== =========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
C-2
AES DRAX LIMITED
CONSOLIDATED BALANCE SHEET
30 June 2003
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
NOTE (POUND)'000 (POUND)'000
FIXED ASSETS
Tangible assets 1,072,619 1,083,118
---------- ----------
CURRENT ASSETS
Stocks 30,764 31,327
Debtors 200,703 157,687
Cash at bank and in hand 67,858 84,943
---------- ----------
299,325 273,957
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 3 (52,011) (45,103)
---------- ----------
NET CURRENT ASSETS 247,314 228,854
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,319,933 1,311,972
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (110) (368)
PROVISIONS FOR LIABILITIES AND CHARGES (19,997) (16,878)
---------- ----------
NET ASSETS 1,299,826 1,294,726
========== ==========
CAPITAL AND RESERVES
Called up share capital 2 2
Share premium 1,893,999 1,893,999
Capital reserve 3 52,250 52,250
Profit and loss account (646,425) (651,525)
---------- ----------
TOTAL EQUITY SHAREHOLDERS' FUNDS 1,299,826 1,294,726
========== ==========
C-3
AES DRAX LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Six months ended 30 June 2003
AS RESTATED
SIX MONTHS SIX MONTHS
ENDED ENDED
30 JUNE 30 JUNE
2003 2002
NOTE (POUND)'000 (POUND)'000
NET CASH (OUTFLOW) / INFLOW FROM OPERATING ACTIVITIES 3 (13,735) 61,751
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3 2,318 2,289
Interest paid (150) (1,632)
--------- --------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 2,168 657
--------- --------
TAXATION 102 (2)
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (5,620) (2,816)
--------- --------
CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES (17,085) 59,590
MANAGEMENT OF LIQUID RESOURCES
Decrease/(increase) in restricted cash deposits 44,790 (184)
--------- --------
INCREASE IN CASH IN THE PERIOD 27,705 59,406
========= ========
C-4
AES DRAX LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Limited and its subsidiaries (the "COMPANY"). Intercompany transactions
and balances have been eliminated.
In the opinion of the Company's directors, all adjustments necessary for
a fair presentation of the unaudited results of operations for the six
months ended June 30, 2003 and 2002, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results of
operations for the period ended June 30, 2003 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 AES Drax Holdings Limited's Annual Report on Form
20-F for the year ended December 31, 2002.
Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Group and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power Limited was not permitted to make
distributions to AES Drax Energy Limited to permit interest due on the
high yield notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy Limited which together
with amounts then held in the high yield note debt service reserve
account 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. Any improvement in the forward
looking ratios were dependent on a favourable change in the forward curve
for electricity prices during the period from June 30 to December 31,
2002. Such improvements did not occur and the ratios were below 1.19:1 at
December 31, 2002.
Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the
end of February 2003. Such failure constitutes an event of default under
the notes, although any enforcement rights are subject to a 90-day grace
period as well as the terms and conditions of certain intercreditor
arrangements.
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002. The purpose of the
Standstill Arrangements is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The bank lenders and the senior
bondholders have agreed 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 during the
standstill period. Although the standstill period under the Original
Standstill Agreement terminated on May 31, 2003, AES Drax had reached
agreement on two further standstill agreements, which have now expired,
and is currently operating under the Fourth Standstill Agreement, agreed
with the Steering Committee and the Ad Hoc Committee. This agreement
expires on September 30, 2003, unless terminated earlier or extended in
accordance with its terms.
Under the Standstill Arrangements, AES Drax's bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to
at least (pound)30,000,000 of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the Steering Committee and the Ad Hoc Committee, are available to
provide credit support to electricity counterparties and for working
capital needs.
Failure to effect a satisfactory restructuring of AES Drax could lead to
an event of default under the senior financing documents and the
withdrawal of support by the Company's lenders.
C-5
AES DRAX LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION (CONTINUED)
The directors of the Company believe that the Standstill Arrangements
will facilitate an agreed restructuring of AES Drax. On this basis, the
directors of the Company consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not
include any adjustments that would result from a withdrawal of support by
the Company's lenders.
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the financial statements.
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 FRS 19. 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.
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP resulted 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. Under US GAAP, FAS 87
requires the recording of an additional minimum pension obligation under
certain circumstances. No such obligation is required under UK GAAP.
PUSH DOWN OF ACQUISITION DEBT
Under US GAAP the (pound)1.300 billion senior secured bank facility used
to finance the acquisition of AES Drax Power Limited would be pushed down
to the company acquired and the related interest expense would be
recorded.
Repayment of the bank facility is secured by a security interest in the
(pound)1.725 billion 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 June 30, 2000.
Principal repayments of (pound)25.0 million, (pound)370.0 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on June 30, 2000, August 2, 2000, December
31, 2000, June 30, 2001, December 31, 2001 and June 30, 2002,
respectively.
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.
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. Under UK
GAAP, the Company has recorded an impairment loss measured by reference
to the value in use of the assets.
C-6
AES DRAX LIMITED
NOTES TO FINANCIAL STATEMENTS
Six months ended 30 June 2003
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (CONTINUED)
Under US GAAP, an impairment loss on the tangible fixed assets is recorded only
if the assets are not recoverable from their undiscounted cash flows. No
impairment has been recognised under US GAAP.
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
Net (loss)/income under UK GAAP (8,827) 25,418 5,100 52,625
US GAAP adjustments:
Goodwill - 8,469 - 16,938
Additional depreciation (4,838) (4,838) (9,675) (9,675)
Deferred tax 4,954 4,994 10,047 18,631
Additional depreciation due to
deferred tax (5,081) (5,081) (10,163) (10,163)
Push down interest (14,473) (18,699) (30,066) (31,955)
Derivative gain/(loss) 1,208 (7,304) 5,767 173
--------- -------- --------- --------
Net (loss)/income under US GAAP (27,057) 2,959 (28,990) 36,574
========= ======== ========= ========
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
(POUND)'000 (POUND)'000
Shareholders' equity under UK GAAP 1,299,826 1,294,726
US GAAP adjustments:
Cumulative effect of previous adjustments (284,404) (888,569)
Goodwill - 33,876
Additional depreciation (9,675) (19,350)
Deferred tax 10,047 22,952
Additional depreciation due to deferred tax (10,163) (20,326)
Push down loan adjustment - 28,055
Derivatives (10,209) (20,042)
Impairment of fixed assets - 579,000
--------- ---------
Shareholders' equity under US GAAP 995,422 1,010,322
========= =========
3. PRIOR PERIOD ADJUSTMENTS
The restatement of the cashflow for the six months ended June 30, 2002
relates to a reclassification of amounts generated under a finance hedging
swap of (pound)10.4 million from interest received to net cash inflow from
operating activities.
The restatement of the balance sheet as at December 31, 2002 relates to the
reclassification of an amount previously included within intercompany
creditors of (pound)52.25 million. This has been released into a Capital
Reserve, since The AES Corporation has confirmed that it has no claim for
repayment against the Company for such an amount. This restatement has no
effect on the consolidated profit of the Company in either the current or
prior periods. This restatement increases the net assets of the Company by
(pound)52.25 million. This restatement reflects the true nature of the
transaction that occurred during 2002.
C-7
AES DRAX ELECTRIC LIMITED
FINANCIAL STATEMENTS
30 JUNE 2003
D-1
AES DRAX ELECTRIC LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 June 2003
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
TURNOVER - CONTINUING OPERATIONS 92,960 129,035 229,347 274,879
Cost of sales (65,741) (48,972) (142,962) (110,437)
--------- --------- --------- ---------
GROSS PROFIT 27,219 80,063 86,385 164,442
Administrative expenses (43,365) (43,551) (82,963) (87,048)
--------- --------- --------- ---------
OPERATING (LOSS)/PROFIT - CONTINUING OPERATIONS (16,146) 36,512 3,422 77,394
Interest receivable and other income 7,303 6,833 11,466 12,849
Interest paid and similar charges (941) (224) (1,783) (1,632)
--------- --------- --------- ---------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (9,784) 43,121 13,105 88,611
Tax on (loss)/profit on ordinary activities 957 (17,703) (8,005) (35,986)
--------- --------- --------- ---------
RETAINED (LOSS)/PROFIT FOR THE FINANCIAL PERIOD
TRANSFERRED (FROM)/TO RESERVES (8,827) 25,418 5,100 52,625
========= ========= ========= =========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
D-2
AES DRAX ELECTRIC LIMITED
CONSOLIDATED BALANCE SHEET
30 June 2003
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
NOTE (POUND)'000 (POUND)'000
FIXED ASSETS
Tangible assets 1,072,619 1,083,118
----------- ----------
CURRENT ASSETS
Stocks 30,764 31,327
Debtors 200,705 157,687
Cash at bank and in hand 67,858 84,943
----------- ----------
299,327 273,957
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 3 (52,013) (45,103)
----------- ----------
NET CURRENT ASSETS 247,314 228,854
----------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,319,933 1,311,972
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (1,200,111) (1,200,369)
PROVISIONS FOR LIABILITIES AND CHARGES (19,997) (16,878)
----------- ----------
NET ASSETS 99,825 94,725
=========== ==========
CAPITAL AND RESERVES
Called up share capital 505,000 505,000
Capital reserve 3 52,250 52,250
Profit and loss account (457,425) (462,525)
----------- ----------
TOTAL EQUITY SHAREHOLDERS' FUNDS 99,825 94,725
=========== ==========
D-3
AES DRAX ELECTRIC LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Six months ended 30 June 2003
AS RESTATED
SIX MONTHS SIX MONTHS
ENDED ENDED
30 JUNE 30 JUNE
2003 2002
NOTE (POUND)'000 (POUND)'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES 3 (13,735) 61,749
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3 2,318 2,289
Interest paid (150) (1,632)
---------- --------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 2,168 657
---------- --------
TAXATION 102 -
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (5,620) (2,816)
---------- --------
CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES (17,085) 59,590
MANAGEMENT OF LIQUID RESOURCES
Decrease/(increase) in restricted cash deposits 44,790 (184)
---------- --------
INCREASE IN CASH IN THE PERIOD 27,705 59,406
========== ========
D-4
AES DRAX ELECTRIC LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Electric Limited and its subsidiaries (the "COMPANY"). Intercompany
transactions and balances have been eliminated.
In the opinion of the Company's directors, all adjustments necessary for
a fair presentation of the unaudited results of operations for the six
months ended June 30, 2003 and 2002, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results of
operations for the period ended June 30, 2003 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 AES Drax Holdings Limited's Annual Report on Form
20-F for the year ended December 31, 2002.
Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Group and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power Limited was not permitted to make
distributions to AES Drax Energy Limited to permit interest due on the
high yield notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy Limited which together
with amounts then held in the high yield note debt service reserve
account 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. Any improvement in the forward
looking ratios were dependent on a favourable change in the forward curve
for electricity prices during the period from June 30 to December 31,
2002. Such improvements did not occur and the ratios were below 1.19:1 at
December 31, 2002.
Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the
end of February 2003. Such failure constitutes an event of default under
the notes, although any enforcement rights are subject to a 90-day grace
period as well as the terms and conditions of certain intercreditor
arrangements.
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002. The purpose of the
Standstill Arrangements is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The bank lenders and the senior
bondholders have agreed 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 during the
standstill period. Although the standstill period under the Original
Standstill Agreement terminated on May 31, 2003, AES Drax had reached
agreement on two further standstill agreements, which have now expired,
and is currently operating under the Fourth Standstill Agreement, agreed
with the Steering Committee and the Ad Hoc Committee. This agreement
expires on September 30, 2003, unless terminated earlier or extended in
accordance with its terms.
Under the Standstill Arrangements, AES Drax's bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to
at least (pound)30,000,000 of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the Steering Committee and the Ad Hoc Committee, are available to
provide credit support to electricity counterparties and for working
capital needs.
Failure to effect a satisfactory restructuring of AES Drax could lead to
an event of default under the senior financing documents and the
withdrawal of support by the Company's lenders.
D-5
AES DRAX ELECTRIC LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION (CONTINUED)
The directors of the Company believe that the Standstill Arrangements
will facilitate an agreed restructuring of AES Drax. On this basis, the
directors of the Company consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not
include any adjustments that would result from a withdrawal of support by
the Company's lenders.
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the financial statements.
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 FRS 19. 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.
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP resulted 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. Under US GAAP, FAS 87
requires the recording of an additional minimum pension obligation under
certain circumstances. No such obligation is required under UK GAAP.
PUSH DOWN OF ACQUISITION DEBT
Under US GAAP the (pound)1.300 billion senior secured bank facility used
to finance the acquisition of AES Drax Power Limited would be pushed down
to the company acquired and the related interest expense would be
recorded.
Repayment of the bank facility is secured by a security interest in the
(pound)1.725 billion 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 June 30, 2000.
Principal repayments of (pound)25.0 million, (pound)370.0 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on June 30, 2000, August 2, 2000, December
31, 2000, June 30, 2001, December 31, 2001 and June 30, 2002,
respectively.
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.
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. Under UK
GAAP, the Company has recorded an impairment loss measured by reference
to the value in use of the assets.
D-6
AES DRAX ELECTRIC LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (CONTINUED)
Under US GAAP, an impairment loss on the tangible fixed assets is recorded only
if the assets are not recoverable from their undiscounted cash flows. No
impairment has been recognised under US GAAP.
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
Net (loss)/income under UK GAAP (8,827) 25,418 5,100 52,625
US GAAP adjustments:
Goodwill - 8,469 - 16,938
Additional depreciation (4,838) (4,838) (9,675) (9,675)
Deferred tax 4,954 4,994 10,047 18,631
Additional depreciation due to (5,081) (5,081) (10,163) (10,163)
deferred tax
Push down interest (14,473) (18,699) (30,066) (31,955)
Derivative gain/(loss) 1,208 (7,304) 5,767 173
--------- ---------- --------- ---------
Net (loss)/income under US GAAP (27,057) 2,959 (28,990) 36,574
========= ========== ========= =========
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
(POUND)'000 (POUND)'000
Shareholders' equity under UK GAAP 99,825 94,725
US GAAP adjustments:
Cumulative effect of previous adjustments 586,206 (17,959)
Goodwill - 33,876
Additional depreciation (9,675) (19,350)
Deferred tax 10,047 22,952
Additional depreciation due to deferred tax (10,163) (20,326)
Push down loan adjustment - 28,055
Derivatives (10,209) (20,042)
Impairment of fixed assets - 579,000
-------- --------
Shareholders' equity under US GAAP 666,031 680,931
======== ========
3. PRIOR PERIOD ADJUSTMENTS
The restatement of the cashflow for the six months ended June 30, 2002
relates to a reclassification of amounts generated under a finance hedging
swap of (pound)10.4 million from interest received to net cash inflow from
operating activities.
The restatement of the balance sheet as at December 31, 2002 relates to the
reclassification of an amount previously included within intercompany
creditors of (pound)52.25 million. This has been released into a Capital
Reserve, since The AES Corporation has confirmed that it has no claim for
repayment against the Company for such an amount. This restatement has no
effect on the consolidated profit of the Company in either the current or
prior periods. This restatement increases the net assets of the Company by
(pound)52.25 million. This restatement reflects the true nature of the
transaction that occurred during 2002.
D-7
AES DRAX ACQUISITION LIMITED
FINANCIAL STATEMENTS
30 JUNE 2003
E-1
AES DRAX ACQUISITION LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 30 June 2003
THREE MONTHS ENDED SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
TURNOVER - CONTINUING OPERATIONS 92,960 129,035 229,347 274,879
Cost of sales (65,741) (48,972) (142,962) (110,437)
-------- -------- -------- --------
GROSS PROFIT 27,219 80,063 86,385 164,442
Administrative expenses (46,012) (44,683) (86,706) (89,322)
-------- -------- -------- --------
OPERATING (LOSS)/PROFIT - CONTINUING OPERATIONS (18,793) 35,380 (321) 75,120
Interest receivable and other income 7,299 6,833 11,464 12,774
Interest payable and similar charges (44,665) (44,319) (90,778) (88,403)
-------- -------- -------- --------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (56,159) (2,106) (79,635) (509)
Tax on loss on ordinary activities (1,305) (3,277) (2,467) (9,272)
-------- -------- -------- --------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION FOR THE
FINANCIAL PERIOD TRANSFERRED FROM RESERVES (57,464) (5,383) (82,102) (9,781)
======== ======== ======== =========
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
E-2
AES DRAX ACQUISITION LIMITED
CONSOLIDATED BALANCE SHEET
30 June 2003
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
NOTE (POUND)'000 (POUND)'000
FIXED ASSETS
Tangible assets 1,072,619 1,083,118
CURRENT ASSETS
Stocks 30,764 31,327
Debtors 860,331 939,391
Cash at bank and in hand 67,929 85,020
--------- ----------
959,024 1,055,738
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 3 (42,130) (70,102)
--------- ----------
NET CURRENT ASSETS 916,894 985,636
--------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,989,513 2,068,754
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (2,125,110) (2,125,368)
PROVISIONS FOR LIABILITIES AND CHARGES (19,997) (16,878)
--------- ----------
NET LIABILITIES (155,594) (73,492)
========= ==========
CAPITAL AND RESERVES
Called up share capital 445,050 445,050
Capital reserve 3 52,250 52,250
Profit and loss account (652,894) (570,792)
--------- ----------
TOTAL EQUITY SHAREHOLDERS' FUNDS (155,594) (73,492)
========= ==========
E-3
AES DRAX ACQUISITION LIMITED
CONSOLIDATED CASH FLOW STATEMENT
Six months ended 30 June 2003
AS RESTATED
SIX MONTHS SIX MONTHS
ENDED ENDED
30 JUNE 30 JUNE
2003 2002
NOTE (POUND)'000 (POUND)'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 3 75,243 146,555
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3 2,317 2,213
Interest paid (89,133) (61,854)
-------- --------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (86,816) (59,641)
-------- --------
TAXATION 102 (1)
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (5,620) (2,816)
-------- --------
CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES (17,091) 84,097
MANAGEMENT OF LIQUID RESOURCES
Decrease/(increase) in restricted cash deposits 44,790 (184)
-------- --------
INCREASE IN CASH IN THE PERIOD 27,699 83,913
======== =========
E-4
AES DRAX ACQUISITION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AES Drax
Acquisition Limited, its subsidiaries and controlled affiliates (the
"COMPANY"). Intercompany transactions and balances have been eliminated.
In the opinion of the Company's directors, all adjustments necessary for
a fair presentation of the unaudited results of operations for the six
months ended June 30, 2003 and 2002, respectively, are included. All such
adjustments are accruals of a normal and recurring nature. The results of
operations for the period ended June 30, 2003 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 Holdings Limited's Annual Report on Form 20-F
for the year ended December 31, 2002.
Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Group and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power Limited was not permitted to make
distributions to AES Drax Energy Limited to permit interest due on the
high yield notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy Limited which together
with amounts then held in the high yield note debt service reserve
account 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. Any improvement in the forward
looking ratios were dependent on a favourable change in the forward curve
for electricity prices during the period from June 30 to December 31,
2002. Such improvements did not occur and the ratios were below 1.19:1 at
December 31, 2002.
Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the
end of February 2003. Such failure constitutes an event of default under
the notes, although any enforcement rights are subject to a 90-day grace
period as well as the terms and conditions of certain intercreditor
arrangements.
AES Drax has been operating under Standstill Arrangements with certain of
its senior creditors since December 12, 2002. The purpose of the
Standstill Arrangements is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The bank lenders and the senior
bondholders have agreed 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 during the
standstill period. Although the standstill period under the Original
Standstill Agreement terminated on May 31, 2003, AES Drax had reached
agreement on two further standstill agreements, which have now expired,
and is currently operating under the Fourth Standstill Agreement, agreed
with the Steering Committee and the Ad Hoc Committee. This agreement
expires on September 30, 2003, unless terminated earlier or extended in
accordance with its terms.
Under the Standstill Arrangements, AES Drax's bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to
at least (pound)30,000,000 of funds currently unavailable under the
financing documentation. These funds, subject to certain consent rights
of the Steering Committee and the Ad Hoc Committee, are available to
provide credit support to electricity counterparties and for working
capital needs.
Failure to effect a satisfactory restructuring of AES Drax could lead to
an event of default under the senior financing documents and the
withdrawal of support by the Company's lenders.
E-5
AES DRAX ACQUISITION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
1. BASIS OF PRESENTATION (CONTINUED)
The directors of the Company believe that the Standstill Arrangements
will facilitate an agreed restructuring of AES Drax. On this basis, the
directors of the Company consider it appropriate to prepare the financial
statements on the going concern basis. The financial statements do not
include any adjustments that would result from a withdrawal of support by
the Company's lenders.
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
This note is provided in addition to the previous financial information
for US users of the financial statements.
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 FRS 19. 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.
Additional net deferred tax liabilities recorded at the acquisition date
under US GAAP resulted 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. Under US GAAP, FAS 87
requires the recording of an additional minimum pension obligation under
certain circumstances. No such obligation is required under UK GAAP.
INTEREST
Under UK GAAP, interest is charged on the (pound)1.725 billion Guaranteed
Secured Bonds. Under US GAAP, (pound)425 million of the (pound)1.725
billion Guaranteed Secured bond is treated as an equity contribution.
Therefore, interest under US GAAP is charged on the net (pound)1.300
billion.
The (pound)1.300 billion represents a senior secured bank facility.
Repayment of the bank facility is secured by a security interest in the
(pound)1.725 billion 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 June 30, 2000.
Principal repayments of (pound)25.0 million, (pound)370.0 million,
(pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
(pound)28.1 million were made on June 30, 2000, August 2, 2000, December
31, 2000, June 30, 2001, December 31, 2001 and June 30, 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. Under UK
GAAP, the Company has recorded an impairment loss measured by reference
to the value in use of the assets.
Under US GAAP, an impairment loss on the tangible fixed assets is
recorded only if the assets are not recoverable from their undiscounted
cash flows. No impairment has been recognised under US GAAP.
E-6
AES DRAX ACQUISITION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Six months ended 30 June 2003
2. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (CONTINUED)
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 SIX MONTHS ENDED
30 JUNE 30 JUNE 30 JUNE 30 JUNE
2003 2002 2003 2002
(POUND)'000 (POUND)'000 (POUND)'000 (POUND)'000
Net loss under UK GAAP (57,464) (5,383) (82,102) (9,781)
US GAAP adjustments:
Goodwill - 8,469 - 16,938
Additional depreciation (4,838) (4,838) (9,675) (9,675)
Deferred tax 4,954 4,994 10,047 18,631
Additional depreciation due to (5,081) (5,081) (10,163) (10,163)
deferred tax
Interest 13,794 10,995 27,588 22,636
Derivative gain/(loss) (666) (8,625) 6,062 1,588
------- ------- -------- -------
Net (loss)/income under US GAAP (49,301) 531 (58,243) 30,174
======== ======= ======== =======
AS RESTATED
30 JUNE 31 DECEMBER
2003 2002
(POUND)'000 (POUND)'000
Shareholders' deficit under UK GAAP (155,594) (73,492)
US GAAP adjustments:
Cumulative effect of previous adjustments 711,432 72,579
Goodwill - 33,876
Additional depreciation (9,675) (19,350)
Deferred tax 10,047 22,952
Additional depreciation due to deferred tax (10,163) (20,326)
Interest 27,588 48,370
Derivatives (17,899) (5,669)
Impairment of fixed assets - 579,000
---------- ---------
Shareholders' equity under US GAAP 555,736 637,940
========== =========
3. PRIOR PERIOD ADJUSTMENTS
The restatement of the cashflow for the six months ended June 30, 2002
relates to a reclassification of amounts generated under a finance
hedging swap of (pound)10.4 million from interest received to net cash
inflow from operating activities.
The restatement of the balance sheet as at December 31, 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of (pound)52.25 million. This has been released into a Capital
Reserve, since The AES Corporation has confirmed that it has no claim for
repayment against the Company for such an amount. This restatement has
no effect on the consolidated loss of the Company in either the
current or prior periods. This restatement increases the net assets of
the Company by (pound)52.25 million. This restatement reflects the
true nature of the transaction that occurred during 2002.
E-7