FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
September 21, 2009
BRITISH ENERGY GROUP PLC
(Registrant's name)
Systems House
Alba Campus
Livingston
EH54 7EG
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F..X.. Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ..... No ..X..
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b):
Exhibit Index
The following document (bearing the exhibit number listed below) is furnished
herewith and is made a part of this Report pursuant to the General Instructions
for Form 6-K:
Exhibit Description
No. 01 RNS Announcement, re: IFRS Statement dated 21st September 2005
21 September 2005
BRITISH ENERGY GROUP PLC
RESTATEMENT OF RESULTS FOR TRANSITION TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Introduction
British Energy Group plc ('the Group' or 'BEG plc') has adopted International
Financial Reporting Standards ('IFRS') with effect from 1 April 2005 for
reporting its group consolidated financial results and financial position.
Accordingly, the Group will discontinue financial reporting in accordance with
United Kingdom Generally Accepted Accounting Principles ('UK GAAP') with effect
from that date. The first financial results to be published under IFRS will be
for the quarter ended 3 July 2005, which is intended to be published on 28
September 2005.
As permitted by IFRS 1 'First time Adoption of International Financial Reporting
Standards' the restatement of results for the period ended 31 March 2005 under
IFRS does not incorporate the impact of IAS 32 'Financial Instruments:
Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and
Measurement'. These standards will be applied prospectively with effect from 1
April 2005 and details of the Group's IAS 32 and IAS 39 opening position as at 1
April 2005 is presented within this restatement.
BEG plc acquired British Energy plc ('BE plc') and its subsidiaries on the
Restructuring Effective Date ('RED') 14 January 2005. BEG plc was incorporated
on 2 July 2004 and the results presented in the accompanying restatement cover
the period from that date to 31 March 2005. The BEG plc incorporation date was
the date of transition to IFRS, however, BEG plc did not trade from 2 July 2004
until RED. The consolidated results for BEG plc are therefore for a two and a
half month trading period from RED to 31 March 2005.
The transition to IFRS at 2 July 2004 had no effect on the equity recorded by
BEG plc at that date. The restatement includes an analysis of the impact of
IFRS restatements on the net assets acquired at RED to explain the impact of
IFRS on the recognition, measurement and presentation of the assets and
liabilities which were acquired at that date.
The Group has today issued the accompanying restatement to present its
consolidated results for the period ended 31 March 2005 restated from UK GAAP to
IFRS, on an unaudited basis, for IFRS comparative purposes.
Highlight
The restatement explains how the change from UK GAAP to IFRS affects the Group's
reported results and financial position. It is important to note that the
transition to IFRS represents a change in accounting basis only and has no
impact on the Group's underlying cash flows, commercial decision making or
management of commodity and treasury risks, including hedging strategies.
The change of basis of accounting to IFRS had the following impact on the
Group's previously reported UK GAAP results for the period ended 31 March 2005:
- No change to earnings before interest, income taxes, depreciation and
amortisation (EBITDA);
- Profit before taxation was restated at GBP60m, an increase of GBP6m;
- Basic earnings per share increased by 1.1 pence per share;
- Net assets increased by GBP6m to GBP1,621m at 31 March 2005; and
- Net debt under IFRS was unchanged.
The financial information on Sections 1 to 9 of the restatement has not been
audited. The principal accounting changes arising for the period ended 31 March
2005, following introduction of IFRS, were in the following areas:
- IFRS 3 Business Combinations - goodwill is no longer amortised but is
subject to annual impairment testing;
- IAS 19 Employee Benefits - defined benefit scheme assets held in securities
are measured at bid prices and scheme liabilities include a death in service
reserve calculated on a different basis to UK GAAP; and
- IAS 12 Income Taxes - change in basis of measurement of deferred taxation.
A number of items have been reclassified within the balance sheet, income
statement and cash flow statement for presentation purposes only and have had no
impact on the Group's reported net assets position, details are set out in
Sections 2, 3 and 5.
The Group applied acquisition accounting rules at RED and recognised a net
provision for commodity contracts which amounted to GBP250m at 31 March 2005
under both UK GAAP and IFRS. IAS 32 and IAS 39 rules for accounting for
financial instruments were adopted with effect from 1 April 2005. Implementation
of these standards increased the net commodity provisions by GBP22m, bringing
the total to GBP272m of which GBP238m is outside the scope of IAS 39 as it
relates to 'own use' contracts and will continue to be unwound over the lives of
the related contracts. After deferred tax adjustments, Group net assets
decreased by GBP15m following implementation of IAS 32 and IAS 39.
Management Presentation and Conference Call
A presentation will be hosted at Financial Dynamics, Holborn Gate, 26
Southampton Buildings, London WC2A 1PB for analysts, institutional investors and
bondholders at 4.30 p.m. (UK time) today, 21 September 2005. The presentation
will be webcast (www.british-energy.com) and dial in facilities can be accessed
by dialling:
UK dial in: 0845 113 0049
International dial in: +44 (0) 1452 542 303
US dial in: 1866 389 9778
Replay facility - 7 days, UK dial in: 0845 245 5205
UK International no: +44 (0) 1452 550 000
UK PIN (access) no: 9732348 #
For further information, please contact:
John Searles, Investor Relations: +44 (0) 1506 408715
Andrew Dowler, Media +44 (0) 20 7831 3113
A copy of this release and a copy of the presentation in pdf file format can be
found on the Group's website at www.british-energy.com.
Disclaimers:
This document contains certain "forward-looking" statements as defined in
Section 21E of the US Securities Exchange Act of 1934, including statements with
respect to British Energy Group plc's business plans, the performance of its
stations, electricity prices and other matters that are not historical facts
concerning the business operations, financial conditions and results of
operations of British Energy Group plc. These forward-looking statements
typically contain words such as "intends", "expects", "anticipates", "estimates
", "aim", "believe", "assume", "should", and words of similar import, which are
predictions of or indicate future events or trends. These forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which are in some cases beyond the control of British Energy Group plc and may
cause actual results or performance to differ materially from those expressed or
implied from such forward-looking statements.
EBITDA is defined by the Group as operating income before interest expense,
income taxes, depreciation and amortisation. The Group has included information
concerning EBITDA because it believes that it is used by certain investors as
one measure of the Group's financial performance. EBITDA is not a defined
measure of financial performance under IFRS accounting standards and is not
necessarily comparable to similarly titled measures used by other companies.
EBITDA should not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with IFRS) as a
measure of liquidity.
This statement includes the information required under IFRS 1 'First-time
Adoption of IFRS' for the group consolidated results of British Energy Group plc
for the period from 2 July 2004 the date on which the parent company was
incorporated. Due to the seasonality of its business, the results for the
Group for the period from the Restructuring Effective Date of 14 January 2005
until 31 March 2005 should not be taken as giving an accurate indication of what
the Group's results for future years might be under IFRS. The IFRS financial
information presented is unaudited.
The Group's IFRS accounting policies as they are applied for the period ended 31
March 2005 have been adopted on the basis of all IFRSs issued by the
International Accounting Standards Board ('IASB') as of the date of this report
and which have either been endorsed by the European Union ('EU') or where there
is a reasonable expectation of endorsement by the EU by the time the Group
prepares its first financial statements in accordance with IFRS for the year
ended 31 March 2006. The basis of preparation under IFRS is described in more
detail in Section 1.
Further standards, amendments and interpretations could be applicable for the
Group's financial results for the year ended 31 March 2006 due to the continuing
work of the IASB and IFRIC and as practice is continuing to evolve.
Consequently, the Group's accounting policies may change prior to the
publication of those financial results.
BRITISH ENERGY GROUP PLC
RESTATEMENT OF RESULTS FOR TRANSITION TO
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Contents Section
Explanation of changes in accounting policy 1
Restatement of Group Income Statement for the period ended 31 March 2005 2
Restatement of Group Balance Sheet as at 31 March 2005 3
Restatement of Net Asset Position as at 14 January 2005 4
Restatement of Group Cash Flow for the period ended 31 March 2005 5
Proposed IFRS accounting policies for the period ended 31 March 2005 6
Accounting for financial instruments 7
Summary of proposed IAS 32 & IAS 39 accounting policies for the year ended
31 March 2006 8
Glossary of financial terms and IFRS equivalents 9
Section 1: Explanation of changes in accounting policy
Introduction
British Energy Group plc ('the Group' or 'BEG plc') has adopted International
Financial Reporting Standards ('IFRS') with effect from 1 April 2005 for
reporting its group consolidated financial results and financial position.
Accordingly, the Group will discontinue reporting in accordance with United
Kingdom Generally Accepted Accounting Principles ('UK GAAP') with effect from
that date. The first financial results to be published under IFRS will be for
the quarter ended 3 July 2005, which will be published on 28 September 2005.
BEG plc acquired British Energy plc ('BE plc') and its subsidiaries on the
Restructuring Effective Date ('RED') 14 January 2005. BEG plc was incorporated
on 2 July 2004 and the results presented in these financial statements cover the
period from that date to 31 March 2005. The BEG plc incorporation date was the
date of transition to IFRS in accordance with IFRS 1 'First-time Adoption of
IFRS', however BEG plc did not trade from 2 July 2004 until RED. The
consolidated results for BEG plc are therefore for a two and a half month
trading period from RED to 31 March 2005. The transition to IFRS at 2 July 2004
had no effect on the equity recorded by BEG plc at that date. This restatement
includes an analysis, in Section 4, of the impact of IFRS restatements on the
net assets acquired at RED to explain the impact of IFRS on the recognition,
measurement and presentation of the assets and liabilities which were acquired
at that date.
Due to the seasonality of its business, the results for the Group for the period
from RED to 31 March 2005 should not be taken as giving an accurate indication
of what the Group's results for future years might be under IFRS. The IFRS
financial information presented is unaudited.
Basis of preparation
The requirements for first-time adoption of IFRS are set out within IFRS 1, and
require that the Group should use the same accounting policies in its opening
IFRS balance sheet and throughout all periods presented in its first IFRS
financial statements. These policies are required to comply with each IFRS
effective at the reporting date of BEG plc's first annual published financial
statements under IFRS as at 31 March 2006.
The Group's IFRS accounting policies as they are applied for the period ended 31
March 2005 have been adopted on the basis of all IFRSs issued by the
International Accounting Standards Board ('IASB') as of the date of this report
and which have either been endorsed by the European Union ('EU') or where there
is a reasonable expectation of endorsement by the EU by the time the Group
publishes its first annual financial statements in accordance with IFRS for the
year ended 31 March 2006.
The Group's IFRS accounting policies as they have applied for the period ended
31 March 2005 are set out in Section 6 of this restatement. Further standards,
amendments and interpretations could be applicable for the Group's financial
results for the year ended 31 March 2006 due to the continuing work of the IASB
and IFRIC and as practice is continuing to evolve. Consequently, the Group's
accounting policies may change prior to the publication of those financial
results.
The financial statements set out in Sections 2, 3 and 5 are presented in
accordance with IAS 1, 'Presentation of Financial Statements'. However, where
no definitive guidance exists in respect of presentation, a UK GAAP approach has
been followed in order to maintain consistency with prior reporting. This
format and presentation may require modification in the event that further
guidance is issued and as best practice develops.
IAS 1 does not provide definitive guidance on the format of the income
statement, but states key lines that should be disclosed. It also requires
additional line items and headings to be presented on the face of the income
statement when such presentation is relevant to an understanding of the entity's
financial performance. IAS 1 explains that due to the effects of an entity's
various activities, transactions and other events differing in frequency,
potential for gain or loss and predictability, disclosing components of
financial performance assists in an understanding of the financial performance
achieved and in making projections of future results. Factors to be considered
include materiality and the nature and function of the components of income and
expense. The Directors of BEG plc believe that items that were previously
referred to as 'exceptional items' under UK GAAP should continue to be
separately identified to assist in understanding the financial performance of
the Group.
IFRS 1 exemptions
The restatement of results for the period ended 31 March 2005 under IFRS does
not incorporate the impact of IAS 32 'Financial Instruments: Disclosure and
Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' as
permitted by IFRS 1. These standards will be applied prospectively with effect
from 1 April 2005 and details of the Group's IAS 32 and IAS 39 opening position
as at 1 April 2005 are presented within Section 7 of this restatement together
with a summary of the proposed IAS 32 and IAS 39 accounting policies in Section
8.
Impact of IFRS on performance measures
Detailed reconciliations are set out in Sections 2 and 3 of this restatement to
explain the impact of IFRS changes to the Group's income statement for the
period ended 31 March 2005, and balance sheet as at 31 March 2005. The Group's
cash flow statement under IFRS for the period ended 31 March 2005 is set out in
Section 5 of this restatement.
The effect of moving from UK GAAP to IFRS on key performance measures and net
assets for the period ended 31 March 2005 was as follows:
EBITDA Profit Basic Net Assets
before tax
EPS
GBPm GBPm Pence/share GBPm
UK GAAP result for the period 110 54 6.2 1,615
Differences - increases/(decreases):
- Amortisation of goodwill reversed - 6 1.1 6
- Increased goodwill recognition - - - 23
- Increased pension scheme deficit - - - (33)
- Reduction in deferred tax asset - - - (21)
- Increase in property, plant & equipment - - - 31
Total impact of restatements - 6 1.1 6
IFRS restated result for the period 110 60 7.3 1,621
Analysis of key accounting changes for the period ended 31 March 2005
Goodwill
Principal differences
The Group recorded goodwill arising upon the acquisition of BE plc which
represented the excess of the fair value of the consideration at acquisition
compared to the fair value of the net identifiable assets acquired. The goodwill
was capitalised on the BEG plc group balance sheet.
Under UK GAAP the Directors assessed the useful life of the goodwill to be 20
years and the goodwill was being amortised in line with the remaining operating
lives of the stations over that period. UK GAAP requires goodwill to be
reviewed for impairment at the end of the first full financial year following
acquisition and in other periods if events or changes in circumstances indicate
that the carrying value may not be recoverable.
Under IFRS, the Group is not permitted to amortise goodwill, and there is a
mandatory requirement to test it for impairment at least annually and at other
balance sheet dates if there is any indication of impairment.
Impact
The goodwill arising at RED under UK GAAP amounted to GBP322m. This has been
increased by GBP23m upon conversion to IFRS to reflect the changes in fair
values assessed for the defined benefit pension scheme liabilities and deferred
tax assets. The GBP6m amortisation of goodwill which was recognised in the UK
GAAP income statement for the period has also been reversed, resulting in a
goodwill balance of GBP345m being recorded on the balance sheet under IFRS as at
31 March 2005.
Taxation
Principal differences
Under UK GAAP, deferred tax was provided based on timing differences between the
accounting and taxable profits. IFRS has a wider scope and requires deferred tax
to be provided on all temporary differences between the book carrying values of
assets and liabilities in the financial statements and their related tax bases.
Under IFRS deferred tax balances are required to be shown separately on the face
of the balance sheet within non-current assets or non-current liabilities as
appropriate.
Impact
The Group's deferred tax asset decreased by GBP20m at RED. The reduction
comprised an additional GBP31m of deferred tax liability arising from
revaluation of the Eggborough Power Station, partially offset by an increase of
GBP11m for the deferred tax asset attributable to the change in pension scheme
deficit on transition to IFRS.
The reduction in the deferred tax asset attributable to Eggborough at RED
resulted in reallocation of the fair values recorded at RED and increased the
value allocated to property, plant and equipment by GBP31m.
At 31 March 2005, the deferred tax asset decreased by GBP21m in net terms when
compared to the UK GAAP balance sheet at that date.
The income tax expense for the period ended 31 March 2005 was unchanged.
Intangible assets
Principal differences
Under IAS 38 'Intangible Assets' and IFRS 3 'Business Combinations' a wider
range of intangible assets are required to be recognised than under UK GAAP.
The definition of an intangible asset is similar under both GAAPs, however,
unlike IFRS, UK GAAP requires that intangible assets are separable from the
business.
In BEG plc's UK GAAP results all capitalised computer software was classified
within tangible fixed assets. In addition all research and development costs
were written off to the income statement as incurred. IFRS requires all
capitalised software to be classified as an intangible asset unless it is an
integral part of a related item of property, plant and equipment. In some
instances, if it can be demonstrated that development expenditure will generate
probable future economic benefits, then such development expenditure is recorded
as an intangible asset under IFRS.
Electricity suppliers are required to ensure that a proportion of their sales to
customers is derived from renewable sources, in order to satisfy the requirement
under the Renewable Obligation which came in to force following the Utilities
Act (2000). Eligible renewable generators receive Renewable Obligation
Certificates (ROCs) for each MWh of electricity which they generate. These
certificates may then be sold to suppliers in order to fulfil their obligation.
ROCs may either be bought as part of an electricity purchase transaction or may
be bought separately.
The Climate Change Levy is imposed on commercial sales of electricity.
Electricity generated from renewable sources is exempt from this charge and is
granted a Levy Exemption Certificate (LEC). The base energy unit and the LEC
must be traded together.
ROCs and LECs held at each balance sheet date have been re-categorised from
trade receivables under UK GAAP to intangible assets under IAS 38.
Impact
The conversion to IFRS has resulted in GBP22m of software being reclassified as
intangible assets at RED, increasing to GBP23m at 31 March 2005. An income
statement reclassification of GBP1m was required to transfer the amount
previously included within depreciation to amortisation of intangible assets for
the period to 31 March 2005. No development expenditure has been capitalised at
either RED or at 31 March 2005 as the conditions specified by IAS 38 had not
been satisfied. The ROCs and LECs re-categorised from trade receivables to
intangible assets under IAS 38 resulted in a GBP4m adjustment at RED and GBP8m
at 31 March 2005.
Employee benefits - defined benefit pension schemes
Principal differences
Under UK GAAP, the Group fully implemented FRS 17 'Retirement Benefits' in
accounting for pension and other post-retirement benefits at RED and for the
period to 31 March 2005. The measurement of pension scheme assets is based on
mid-market valuations. Defined benefit scheme liabilities are required to be
presented net of the related deferred tax.
Under IFRS, the Group has decided to early adopt the revised IAS 19 (2004) '
Employee Benefits' issued by the IASB in December 2004 and measures commitments
and other related benefits in accordance with its requirements. The valuation of
pension scheme assets is based on bid price valuations. Under IAS 19, the
required reserve to cover the cost of paying out death in service benefits is
accrued over the period to the actuarially estimated date of death in service
rather than to normal retirement date, resulting in a higher reserve than the
FRS 17 equivalent.
IAS 19 is similar to FRS 17 in that it adopts a balance sheet approach and
records the deficit or surplus of the defined benefit schemes on the balance
sheet. However, whereas FRS 17 requires that all actuarial gains and losses be
immediately recognised directly in reserves, IAS 19 permits an alternative
approach which allows actuarial gains and losses to be held off the balance
sheet and subsequently released to the income statement over a defined period.
BEG plc has decided not to adopt this alternative, known as the "corridor"
approach, and therefore actuarial gains and losses will continue to be
recognised directly through reserves, in the Statement of Recognised Income and
Expense. Defined benefit scheme liabilities are required to be shown on the face
of the balance sheet and under IFRS are exclusive of any deferred tax impact.
Other aspects of accounting for the Group's defined benefit scheme will continue
in a manner similar to those required under FRS 17.
Impact
The effect of adopting revised IAS 19 (2004) as part of the IFRS conversion was
to increase the deficit at RED by GBP34m. The increase comprised a GBP9m
reduction in the value of investments following valuation at bid price and a
GBP25m increase in liabilities for death in service benefits. The GBP128m
reclassification adjustment resulted from the requirement to show the pension
deficit gross of deferred tax.
The scheme deficit increased by GBP33m under IAS 19 at 31 March 2005. The
increase comprised a GBP8m reduction in the value of investments following
valuation at bid price, and a GBP25m increase in liabilities for death in
service benefits. The GBP104m reclassification adjustment resulted from the
requirement to show the pension deficit gross of deferred tax.
The total charges recorded in the Group's income statement for the period were
unchanged following implementation of IAS19, and a GBP1m increase in actuarial
gains was recorded in reserves.
Cash
Principal differences
IFRS replaces the term "cash" with "cash and cash equivalents", where cash
equivalents are defined as short term highly liquid investments that are readily
convertible to known amounts of cash and which are subject to insignificant
changes in value. They usually have a maturity date less than three months.
Under IFRS, overdrafts are also shown within cash and cash equivalents whereas
they are included within short-term borrowings under UK GAAP.
Impact
This has resulted in a cash and cash equivalents balance of GBP113m being
reported at RED, under IFRS, an increase of GBP4m versus UK GAAP following
reclassification from liquid investments. The amount reported at year end was
unchanged.
At RED, GBP290m of liquid investments was reclassified as restricted cash. A
similar reclassification amounting to GBP221m was recorded at 31 March 2005.
Other Impacts
Income statement reclassifications
The restated income statement for the period ended 31 March 2005 as set out in
Section 2 has been presented in a format consistent with IAS 1 requirements and
included the following reclassifications:
- Purchase of power to obtain ROCs and LECs, and certain other energy
purchase contracts have been transferred from revenue to energy purchases, a
total reclassification of GBP17m.
- Depreciation of GBP1m related to capitalised software has been
transferred to amortisation of intangible assets.
Balance sheet reclassifications
The restated balance sheet at 31 March 2005 as set out in Section 3 has been
presented in a format consistent with IAS 1 requirements.
The principal changes to balance sheet classifications were as follows:
- Software transfer from property, plant and equipment to intangible
assets as explained above.
- The NLF Receivable, Nuclear Liabilities Receivable and deferred tax
asset are shown on the face of the balance sheet within non-current assets. In
the UK GAAP balance sheet they were included within current assets as required
by the Companies Act 1985 and were described as 'Debtors: amounts falling due
after more than on year'.
- Changes in classification of cash and liquid investment balances as
described above.
- Provisions expected to be settled within one year of the balance sheet
date are classified as current liabilities in line with IAS 1 requirements.
Employee share schemes (to be adopted from 1 April 2005 onwards)
Principal differences
Under UK GAAP, the Group accounts for its share compensation schemes based on an
intrinsic value basis being the difference if any between the market price on
the date of grant and the exercise price payable by the employee. Inland Revenue
approved "save as you earn" schemes are excluded from these UK GAAP accounting
requirements.
Under IFRS 2 'Share-based Payment', the cost of employee share schemes,
including save as you earn schemes, is recognised based on the fair value of the
shares awarded and measured using an options pricing model. The fair value of
the award is charged to the income statement over the period during which the
service is rendered. Adjustments are made subsequent to the grant date for
changes in the estimate of non-market based vesting conditions and forfeiture of
awards.
Impact
Share based payments had no impact on BEG plc results for the period ended 31
March 2005. However, two employee share incentive schemes will feature in the
results for 2005/06 as highlighted within the Group's Report and Accounts for
2004/05.
Section 2: Restatement of Group Income Statement for the period ended 31 March
2005 (unaudited)
Reversal of
goodwill
IFRS amortisation
reclassification
UK GAAP IFRS
GBPm GBPm GBPm GBPm
Revenue 482 17 - 499
Energy purchases - (17) - (17)
Fuel costs (127) - - (127)
Materials and services (82) - - (82)
Staff costs (82) - - (82)
Energy supply costs (73) - - (73)
Other operating costs (8) - - (8)
Operating profit before depreciation and amortisation 110 - - 110
(EBITDA)
Depreciation (41) 1 - (40)
Amortisation of intangible assets (6) (1) 6 (1)
Operating profit 63 - 6 69
Financing (charges)/credits
Net revalorisation charges (5) - - (5)
Interest payable (10) - - (10)
Interest receivable 5 - - 5
Net credit to finance charges for pension liabilities 1 - - 1
Profit before tax 54 - 6 60
Taxation (19) - - (19)
Net profit for the period attributable to equity 35 - 6 41
shareholders
Earnings per share (p):
Basic 6.2 7.3
Diluted 6.0 7.0
The Group Income Statement represents the results from 15 January 2005 to 31
March 2005.
Section 3: Restatement of Group Balance Sheet as at 31 March 2005 (unaudited)
IFRS Employee
reclassification benefits
UK GAAP Goodwill Deferred IFRS
tax
GBPm GBPm GBPm GBPm GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 1,678 (23) - - 31 1,686
Nuclear liabilities receivable - 2,131 - - - 2,131
NLF receivable - 1,863 - - - 1,863
Receivables due after more than one - 4 - - - 4
year
Deferred tax - 450 - - (21) 429
Goodwill and intangible assets 316 31 29 - - 376
1,994 4,456 29 - 10 6,489
Current assets
Inventories 331 - - - - 331
Receivables due within one year 288 39 - - - 327
Receivables due after more than one 346 (346) - - - -
year
NLF receivable 1,863 (1,863) - - - -
Nuclear liabilities receivable 2,312 (2,131) - - - 181
Liquid investments 221 (221) - - - -
Cash and cash equivalents 235 - - - - 235
Restricted cash - 221 - - - 221
5,596 (4,301) - - - 1,295
Total assets 7,590 155 29 - 10 7,784
LIABILITIES
Current liabilities
Borrowings (50) - - - - (50)
Trade and other payables (559) - - - - (559)
Provisions for liabilities and - (230) - - - (230)
charges
(609) (230) - - - (839)
Non-current liabilities
Borrowings (626) - - - - (626)
Pension fund liability (244) (104) - (33) - (381)
Provisions for other liabilities (2,150) 179 - - - (1,971)
and charges
Nuclear liabilities (2,131) - - - - (2,131)
NLF liabilities (210) - - - - (210)
Deferred income (5) - - - - (5)
(5,366) 75 - (33) - (5,324)
Total liabilities (5,975) (155) - (33) - (6,163)
Net assets 1,615 - 29 (33) 10 1,621
EQUITY
Called up equity share capital 56 - - - - 56
Capital reserves 767 - - - - 767
Warrant reserve 51 - - - - 51
Retained earnings 741 - 29 (33) 10 747
Total shareholders' funds
(including non-equity shareholders'
interest) 1,615 - 29 (33) 10 1,621
Section 4: Restatement of Net Asset Position as at 14 January 2005 (unaudited)
IFRS Goodwill Employee Deferred
reclassification Benefits Tax
UK GAAP IFRS
GBPm GBPm GBPm GBPm GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 1,691 (22) - - 31 1,700
Nuclear liabilities receivable - 2,282 - - - 2,282
NLF receivable - 1,842 - - - 1,842
Receivables due after more than one - 8 - - - 8
year
Deferred tax asset - 493 - - (20) 473
Intangible assets - 26 - - - 26
1,691 4,629 - - 11 6,331
Current assets
Inventories 354 - - - - 354
Own shares 6 - - - - 6
Receivables due within one year 353 81 - - - 434
Receivables due after more than one 365 (365) - - - -
year
NLF receivable 1,842 (1,842) - - - -
Nuclear liabilities receivable 2,467 (2,282) - - - 185
Liquid investments 294 (294) - - - -
Cash and cash equivalents 109 4 - - - 113
Restricted Cash - 290 - - - 290
5,790 (4,408) - - - 1,382
Total assets 7,481 221 - - 11 7,713
LIABILITIES
Current liabilities
Borrowings (28) - - - - (28)
Trade and other payables (656) - - - - (656)
Provisions for liabilities and - (209) - - - (209)
other charges
(684) (209) - - - (893)
Non-current liabilities
Borrowings (676) - - - - (676)
Pension fund liability (300) (128) - (34) - (462)
Provisions for other liabilities (2,108) 116 - - - (1,992)
and charges
Nuclear liabilities (2,282) - - - - (2,282)
NLF liabilities (212) - - - - (212)
Deferred income (5) - - - - (5)
(5,583) (12) - (34) - (5,629)
Total liabilities (6,267) (221) - (34) - (6,522)
Net assets acquired 1,214 - - (34) 11 1,191
Goodwill arising on acquisition 322 - 23 - - 345
Consideration paid 1,536 - 23 (34) 11 1,536
Note: The classifications of assets and liabilities in this net assets analysis
do not equate to a balance sheet presentation.
The fair values shown in the Net Assets Position above are provisional as BEG
plc is aware of changes that may arise. The quinquennial review of nuclear
liabilities is underway and the results of this review will be finalised towards
the end of 2005. The review may result in a change in value of the nuclear
liabilities due to changes in strategy and cost estimates, but as a result of
the arrangements with the NLF and Government any change in value of the nuclear
liabilities will be offset by an equal and opposite change to the NLF
receivable. The fair values shown above were based on the best information
available to the Directors on 27 July 2005 when the UK GAAP results were
published.
Section 5: Restatement of Group Cash Flow for the period ended 31 March 2005
(unaudited)
Under UK GAAP the consolidated statement of cash flows prepared in accordance
with FRS 1 'Cash Flow Statements' (Revised) presents substantially the same
information as that required under IFRS. Under IFRS, however, there are certain
differences from UK GAAP with regard to the classification of items within the
cash flow statement and with regard to the definition of cash and cash
equivalents.
Under UK GAAP, cash flows are presented separately for operating activities,
dividends received from joint ventures, returns on investments and servicing of
finance, taxation, capital expenditure and financial investment, acquisition and
disposals, equity dividends paid, management of liquid resources and financing.
Under IFRS, cash flow is reported in three required categories: operating
activities, investing activities and financing activities.
Under IFRS, items which under UK GAAP would be included within management of
liquid resources fall within the definition of cash and cash equivalents.
The consolidated statement of cash flows under IFRS is set out below.
Group Cash Flow Statement under IFRS for the period ended 31 March 2005
(unaudited)
GBPm
Operating profit for the period 69
- Amortisation charges 1
- Depreciation 40
- Other provisions discharged 19
- Interest paid (12)
- Interest received 3
- Regular contribution to NLF (5)
- Decrease in trade and other receivables 65
- Decrease in inventories 23
- Decrease in restricted cash 69
- (Decrease) in trade payables and other (84)
payables
Net cash inflow generated from operations 188
Cash flows from investing activities
Net cash acquired with subsidiary undertaking 113
Purchases of property, plant and equipment (35)
Proceeds from disposal of property 7
Net cash used in investing activities 85
Cash flows from financing activities
Repayments of amounts borrowed (28)
Costs associated with acquisition (10)
Proceeds from sale of own shares 3
Costs associated with sale of investments (3)
Net cash used in financing activities (38)
Net change in cash and cash equivalents 235
Cash and cash equivalents at beginning of the -
period
Cash and cash equivalents at the end of the 235
period
The Group Cash Flow Statement represents the cash flows for the period from 15
January 2005 to 31 March 2005, except the financing category which, prior to the
date of the acquisition of BE plc, also reflects the cash flow from the issue of
equity by BEG plc following its incorporation.
Section 6: Proposed IFRS Accounting Policies for the period ended 31 March 2005
The principal accounting policies as set out below have been applied in
preparing the Group's restated results for the period ended 31 March 2005. These
policies will be used for BEG plc's future financial statements reported under
IFRS. The revised policies to comply with IAS 32 and IAS 39 are set out in
Section 8.
Basis of preparation
The Group's consolidated reconciliation to restate UK GAAP results to IFRS for
the period ended 31 March 2005 has been prepared to describe the changes that
arose on transition from 2 July 2004. It does not comprise a full set of
financial statements that have been prepared to present fairly the results and
financial position of the Group in accordance with IFRS. The consolidated
financial results have been prepared under the historical cost convention,
except where certain IFRS standards require or permit certain items to be
recorded at fair value.
Commodity trading contracts, where there is no associated physical delivery, are
marked to market using externally derived market prices. This is a departure
from the general provisions of Schedule 4 of the Companies Act 1985.
The Group's IFRS accounting policies as they have been applied for the period
ended 31 March 2005 have been adopted on the basis of all IFRSs issued by the
IASB as of the date of this report and which have either been endorsed by the EU
or where there is a reasonable expectation of endorsement by the EU by the time
the Group publishes its first annual financial statements in accordance with
IFRS for the year ended 31 March 2006.
Further standards, amendments and interpretations could be applicable for the
Group's financial results for the year ended 31 March 2006 due to the continuing
work of the IASB and IFRIC and as practice is continuing to evolve.
Consequently, the Group's accounting policies may change prior to the
publication of those financial results.
As permitted by IFRS 1, the standards relating to financial instruments, IAS 32
and IAS 39 are to be applied with effect from 1 April 2005. The impact of these
standards has not been included in the IFRS financial information set out in
Sections 1 to 4. The Group has retained its previous UK GAAP accounting policies
for financial instruments, as set out below, in preparing the IFRS financial
information for the period ended 31 March 2005. The Group has early adopted IAS
19 (2004) 'Employee Benefits'.
The preparation of financial statements in conformity with IFRS requires
management to make certain critical accounting estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. It
also requires management to exercise its judgement in the process of applying
the Group's accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements, are disclosed below.
Actual results can differ from those estimates.
The information for the period ended 31 March 2005 does not constitute statutory
accounts as defined in section 240 of the Companies Act 1985. A copy of the UK
GAAP statutory accounts for that period has been delivered to the Registrar of
Companies. The auditors' report on the UK GAAP financial statements was
unqualified and did not include a statement under section 237 (2) or (3) of the
Companies Act 1985.
Basis of consolidation
The Group financial statements consolidate the financial statements of BEG plc
and all of its subsidiary undertakings. BEG plc was incorporated on 2 July
2004. As a consequence of the restructuring, under a Scheme of Arrangement under
section 425 of the Companies Act 1985, the Company acquired BE plc on 14 January
2005. The restructuring has been accounted for under the principles of
acquisition accounting. The application of acquisition accounting principles
means that all the separate assets and liabilities of BE plc have been recorded
at fair value at the date of acquisition with goodwill arising on the difference
between the value of net assets of BE plc and the acquisition consideration
paid. Only the post acquisition results are included in the Group income
statement, statement of changes in equity and cash flow statement.
Inter-company profits, transactions and balances are eliminated on
consolidation.
Significant estimates used in applying accounting policies
The principal accounting polices adopted by BEG plc in the consolidated
financial statements are as set out below. The application of a number of these
policies required the Group to use a variety of estimation techniques and
applying judgement to best reflect the substance of underlying transactions.
Significant factors considered when assessing the carrying value of assets
include future electricity prices, expected annual output, expected station
operating costs, remaining station lives and discount rates. BEG plc has
determined that a number of its accounting policies can be considered
significant, in terms of the management judgement that has been required to
determine the various assumptions underpinning their application in the
financial statements presented, which, under different conditions, could lead to
material difference in these statements. The policies where significant
judgements and estimates have been made are:
- Application of business combination accounting rules;
- Accounting for property, plant and equipment;
- Estimation of liabilities for spent nuclear fuel and decommissioning
costs; and
- Estimation of defined benefit pension scheme liabilities.
Revenue
Revenue is recognised by the Group when persuasive evidence of a sales
arrangement exists, delivery of goods or services has occurred, the amount of
revenue can be measured reliably, collectibility of the related receivable
amount is probable and the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Revenue represents the fair value of the consideration receivable for sales of
electricity and sales of other related goods and services. It is shown net of
value added tax, electricity purchases relating to short term balancing and
hedging activities, and climate change levy. Revenue is also shown after
elimination of sales within the Group.
Wholesale generation and direct supply sales are recognised on an accruals basis
with reference to meter readings of electricity supplied. Where required, a
management estimate is included of the value of units supplied to customers
between the date of their last meter reading and the accounting period end.
Fuel Costs - Nuclear Front End
Advanced Gas-cooled Reactors (AGR)
Front end fuel costs consist of the costs of procurement of uranium, conversion
and enrichment services and fuel element fabrication. Fabrication costs comprise
fixed and variable elements. All costs are capitalised into inventory and
charged to the income statement in proportion to the amount of fuel burnt.
Pressurised Water Reactor (PWR)
All front end fuel costs are variable and are capitalised into inventory and
subsequently charged to the income statement in proportion to the amount of fuel
burnt.
Fuel Costs - Nuclear Back End
AGR
Spent fuel extracted from the reactors is sent for reprocessing and/or long-term
storage and eventual disposal of resulting waste products. Back end fuel costs
comprise:-
a) a cost per tonne of uranium in AGR fuel, in respect of amounts payable
on loading of fuel into any one of the AGR reactors and
b) a rebate/surcharge against the cost mentioned in (a) above that is
dependent on the out-turn electricity price in the year and the amount of
electricity generated.
The loading related cost and the rebate/surcharge is capitalised into inventory
and charged to the income statement in proportion to the amount of fuel burnt.
PWR
Back end fuel costs are based on wet storage in station ponds followed by dry
storage and subsequent direct disposal of fuel. Back end fuel costs comprise the
estimated cost of this process at current prices discounted back to current
value. Back end fuel costs are capitalised into inventory on loading and charged
to the income statement in proportion to the amount of fuel burnt.
Unburnt Fuel at Shutdown
Due to the nature of the nuclear fuel process there will be some unburnt fuel in
the reactors at station closure. The costs of this unburnt fuel (final core) is
fully provided at the balance sheet date and any changes in the carrying value
of nuclear fuel attributed to the final core are charged to the income statement
in the accounting period.
Fuel Costs - Coal (including Emission Rights)
Fuel costs for coal are determined on a weighted average cost basis. Fuel costs
for coal also include costs of emission allowances. The Group recognises
liabilities in respect of its obligations to deliver emission allowances to the
extent that the allowances to be delivered exceed those previously acquired by
the Group, either by allocation from the Government or a similar body or through
purchase. Any liabilities recognised are measured based on the period end
estimates of the amounts that will be required to satisfy the net obligation.
Inventory - Stores
Inventory held in stores is recorded at the lower of cost and net realisable
value.
Employee Benefits - Post Retirement Benefit Obligations
The Group provides for pension costs in accordance with IAS 19 (2004) 'Employee
Benefits'. Contributions to the Group's defined benefit pension schemes are
assessed by qualified actuaries. BEG plc operates two separate pension
arrangements in the UK within the Electricity Supply Pension Scheme, which is a
defined benefit scheme. Pension scheme assets are measured using market values,
which for securities is based on bid price values. Pension costs are assessed
using the projected unit method so that the cost of providing pensions is
charged to the income statement in a manner which spreads the service cost over
the expected service lives of employees. The pension obligation is measured as
the present value of the estimated future cash outflows, discounted using the
interest rates on UK government securities of appropriate maturity. The
expected return on the schemes' assets and the increase during the period in the
present value of the schemes' liabilities arising from the passage of time are
included in other finance income. Actuarial gains and losses are recognised
immediately within the Statement of Recognised Income and Expense.
The capital cost of ex-gratia and supplementary pensions is charged to the
income statement, to the extent that the arrangements are not covered by the
surplus in schemes, in the accounting period in which they are granted.
Certain additional unfunded retirement benefits are provided to eligible
employees. The cost of providing such benefits is charged to the income
statement as they accrue.
NLF Funding Arrangements
Under the arrangements with the Secretary of State the Nuclear Liabilities Fund
(NLF) will fund, subject to certain exceptions, the Group's qualifying
uncontracted nuclear liabilities and qualifying decommissioning costs. To the
extent there is any surplus remaining in the NLF after all obligations have been
discharged, this amount will be paid to the Secretary of State. The Group is
responsible for funding certain excluded or disqualified liabilities and will,
in certain circumstances, be required to compensate or indemnify the NLF and the
Secretary of State in relation to such liabilities. The Group's obligations
under these arrangements with the Secretary of State are guaranteed by certain
companies within the Group.
In consideration for the assumption of these liabilities by the Secretary of
State and the NLF, British Energy Holdings plc (a subsidiary of BEG plc) issued
GBP275m in New Bonds to the NLF at RED. The Group will also make the following
payments to the NLF (i) an annual contribution (Cash Sweep Payment) initially
equal to 65% of the British Energy Group's adjusted net cash flow, adjusted for
certain corporate actions but never to exceed 65% (Cash Sweep Percentage) (ii)
fixed decommissioning contributions equal to GBP20m per annum (indexed to RPI
but tapering off as the nuclear power stations are currently scheduled to
close); and (iii) GBP150,000 (indexed to RPI) for every tonne of uranium in PWR
fuel loaded into the Sizewell B reactor after RED.
The NLF has the right from time to time to convert all or part of the Cash Sweep
Payment into convertible shares of the Company (the NLF Conversion Right). On a
full conversion, the NLF would hold up to 65% of the thereby enlarged equity
share capital of the Company. However, the terms of the Convertible Shares
include a limit on the voting rights of such shares equal to a maximum of 29.9%
whilst held by the NLF.
The annual Cash Sweep Payment can only be determined after the end of the
financial year and is contingent based on cash generation in the year.
Therefore, it is only recognised and provided for when it becomes determinable
and not in any interim financial periods. It will be recorded as an operating
cost of the applicable financial year. The annual Cash Sweep Payment becomes
payable twenty business days after publication of the annual report and
accounts.
The fixed decommissioning obligations of annum have been recorded as a liability
on the balance sheet at their discounted value and disclosed as the NLF
liability. The NLF liability is reduced as payments are made to the NLF. Each
year the financing charges in the income statement include the revalorisation of
NLF liabilities required to discharge one year's discount from the liability.
PWR fuel loaded after RED will increase the qualifying nuclear liability
recognised for back end PWR fuel costs as set out above and will increase the
NLF Receivable by a corresponding amount. The difference between the payment of
GBP150,000 (indexed to RPI) per tonne made to the NLF on the loading of PWR fuel
and the increase in the liability recognised, and therefore the increase in NLF
Receivable, is recorded as a back end fuel cost or credit as appropriate in the
year of loading.
Goodwill
Goodwill arising on acquisitions represents the excess of the fair value of the
consideration at acquisition compared to the fair value of the identifiable net
assets acquired. Goodwill is capitalised as an intangible asset on the balance
sheet. Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill balances are assessed for impairment at
least annually and at other balance sheet dates if there is any indication of
impairment.
Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income and expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for tax currently payable is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date.
The tax expense relating to items recognised directly in equity are recognised
in equity and not in the income statement.
Deferred tax is provided in full, using the liability method, on temporary
differences, carry-forward of unused tax assets and unused tax losses, arising
between the tax bases of assets and liabilities and their carrying amounts in
the consolidated financial statements.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilised. The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilised.
Property, Plant & Equipment and Depreciation, including Decommissioning Costs
Property, plant & equipment comprises assets acquired or constructed by the
Group. Property, plant & equipment (other than assets in the course of
construction) are stated in the balance sheet at cost less accumulated
depreciation. The fair value of property, plant & equipment acquired as a result
of the restructuring has been deemed to be the cost amount recognised at that
date. Cost includes expenditure that is directly attributable to the
acquisition of the items. Accumulated depreciation includes additional charges
made where necessary to reflect impairment in value.
Assets in the course of construction are stated at cost and not depreciated
until brought into commission.
The charge for depreciation of property, plant & equipment is based on the
straight line method so as to write off the costs of assets, after taking into
account provisions for diminution in value, over their estimated useful lives.
The asset lives adopted are reviewed annually and for the period ended 31 March
2005 were:
AGR power stations 6 - 18 years
PWR power station 30 years
Coal power station 11 years
Other buildings 30 years
Other plant and equipment 18 months - 5 years
Expenditure incurred to replace a component of an item of property, plant &
equipment that is accounted for separately, or to improve its operational
performance is included in the asset's carrying amount or recognised as a
separate asset as appropriate when it is probable that future economic benefits
in excess of the originally assessed standard of performance of the existing
asset will flow to the Group and the cost of the item can be measured reliably.
Expenditure to improve safety or in order to meet increased regulatory standards
is also capitalised. Expenditure on major inspection and overhauls of production
plant is capitalised, within other plant and equipment, when it meets the asset
recognition criteria and is depreciated over the period until the next outage.
Interest on major capital projects is included in the cost of the fixed asset
from the date of cash settlement until the date of commissioning. Asset
additions are depreciated over the remaining useful life of the related asset.
The estimated costs for decommissioning the Group's nuclear power stations and
restoring the sites on which they are located are capitalised as part of the
cost of construction and are depreciated over the same lives as the stations.
These estimated costs are discounted having regard to the time scale whereby
work will take place over many years after station closure. The estimated costs
include the demolition and site clearance of the stations' radioactive
facilities and the management of waste.
Major spare parts are classified as property, plant & equipment and assigned to
individual stations when they are expected to be utilised over more than one
period. They are depreciated using the applicable station lifetime estimate.
Other expenditure, including that incurred on preliminary studies and on the
initiation of new technologies not yet adopted, is charged to the income
statement as incurred. All other maintenance, repairs and renewals are charged
to the income statement during the financial period in which they are incurred.
Gains and losses on the disposal of fixed assts are included in operating profit
/loss.
Intangible assets (excluding goodwill)
The costs of acquired computer software costs are capitalised on the basis of
the costs incurred to acquire and bring the specific software in to use, and are
amortised over their estimated operational lives for a maximum of five years.
Costs directly associated with the development of computer software programmes
that are expected to generate economic benefits over a period in excess of one
year are also capitalised and amortised over their estimated operational lives.
ROCs and LECs are classified as intangible assets and are valued at cost.
Impairment of tangible and intangible assets (excluding goodwill)
At each balance sheet date, the Group reviews its tangible and intangible assets
(excluding goodwill) to determine whether there is any indication that those
assets may have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated to determine the extent of any
impairment loss.
NLF Receivable and Nuclear Liabilities Receivable
The Government indemnity is provided to indemnify any future shortfall on NLF
funding of qualifying uncontracted nuclear liabilities (including PWR back-end
fuel services) and qualifying nuclear decommissioning costs.
The NLF Receivable asset recognised represents the aggregate value of the
Nuclear Liabilities Fund and the Government indemnity such that the receivable
equals the present value of the associated qualifying nuclear liabilities.
The Government indemnity is also provided to cover services for spent AGR fuel
loaded pre- restructuring. The Nuclear Liabilities Receivable is recognised in
respect of the indemnity such that the receivable equals the present value of
the associated qualifying nuclear liabilities.
The NLF Receivable and the Nuclear Liabilities Receivable are stated in the
balance sheet at current price levels, discounted at a long-term real rate of
interest of 3% per annum to take account of the timing of payments. Each year
the financing charges in the income statement include the revalorisation of
these receivables required to match the revalorisation of the nuclear
liabilities.
Nuclear Liabilities
Nuclear liabilities represent provision for the Group's liabilities in respect
of the costs of waste management of spent fuel and nuclear decommissioning. The
provisions represent the Directors' best estimates of the costs expected to be
incurred. They are calculated based on the latest technical evaluation of the
processes and methods likely to be used, and reflect current engineering
knowledge. The provisions are based on such commercial agreements as are
currently in place, and reflect the Directors' understanding of the current
Government policy and regulatory framework. Given that Government policy and the
regulatory framework on which our assumptions have been based may be expected to
develop and that the Directors' plans will be influenced by improvements in
technology and experience gained from decommissioning activities, liabilities
and the resulting provisions are likely to be adjusted.
In matching the costs of generating electricity against the income from sales,
accruals are made in respect of the following:
a) Fuel costs - back end
The treatment of back end fuel costs in the income statement has been dealt with
under the accounting policies for fuel costs above. These nuclear liabilities
cover reprocessing and storage of spent nuclear fuel and the long-term storage,
treatment and eventual disposal of nuclear waste. They are based, as
appropriate, on contractual arrangements or the latest technical assessments of
the processes and methods likely to be used to deal with these obligations under
the current regulatory regime. Where accruals are based on contractual
arrangements they are included within creditors. Other accruals are based on
long-term cost forecasts which are reviewed regularly and adjusted where
necessary, and are included within provisions.
b) Decommissioning of nuclear power stations
The financial statements include provision for the full cost of decommissioning
the Group's nuclear power stations. Provision is made on the basis of the latest
technical assessments of the processes and methods likely to be used for
decommissioning under the current regulatory regime.
Accruals and provisions for back end fuel costs and decommissioning are stated
in the balance sheet at current price levels, discounted at a long-term real
rate of interest of 3% per annum to take account of the timing of payments. Each
year the financing charges in the income statement include the revalorisation of
liabilities required to discharge one year's discount from provisions made in
prior years and restate these provisions to current price levels.
Cash, cash equivalents and restricted cash
Cash and cash equivalents include cash on hand, with banks and short-term
deposits with a maturity of three months or less. Restricted cash primarily
consists of cash pledged as collateral.
Financial instruments - applied in the preparation of the consolidated IFRS
financial information for the period ended 31 March 2005
Debt instruments
All borrowings are stated at cost with issue costs being charged to the income
statement over the duration of the facility. The interest payable on debt is
charged to the income statement over the life of the borrowing. Premiums and
discounts arising on early repayment of borrowings are recognised in the income
statement as incurred and received.
Commodity contracts
On 14 January 2005, as part of the acquisition accounting, all power and coal
contracts were recorded at fair value on the balance sheet. As the contracts in
existence at 14 January 2005 are satisfied, the fair value recorded on
restructuring is reflected through the income statement as other operating
expense or income.
For contracts entered into since 14 January 2005, where there is physical
delivery associated with power and coal commodity contracts they are accounted
for on an accruals basis following delivery of the commodity. Amounts payable
or receivable in respect of these contracts are recorded within payables and
receivables respectively and recognised as revenue or cost of sales as
appropriate.
For contracts entered into since 14 January 2005, where there is no physical
delivery associated with these contracts, they are recorded at fair value on the
balance sheet. Where the instrument is for proprietary trading purposes, the
change in fair value is reflected through the profit and loss account as other
operating expense. This is not in accordance with the general provisions of
Schedule 4 of the Companies Act 1985, which requires that these contracts are
stated at the lower of cost and net realisable value or that, if revalued, any
revaluation difference be taken to a revaluation reserve. However, the Directors
consider that this departure is necessary in order that the financial statements
give a fair representation of the results of the Group's trading activities.
Futures and power options
Power futures and options are undertaken for hedging and proprietary trading
purposes. Initial margins paid on entering power exchange contracts are recorded
on the balance sheet within restricted cash in 'Liquid investments' throughout
the term of the contract. Where the instrument is a hedge, the daily margin
calls are reflected on the balance sheet. Premiums received and paid on
wholesale option contracts are amortised over the period of the contracts and
included within revenue. Financial options are marked to market through the
income statement.
Share-based payments (To be adopted from 1 April 2005)
British Energy Group plc has two share compensation schemes, a Long Term
Deferred Bonus Plan, and a Short Term Incentive Plan. BEG plc accounts for its
share compensation schemes in accordance with IFRS 2 'Share-based Payments'
using the Black-Scholes option pricing model under which fair value is
calculated for the share compensation schemes and updated at subsequent balance
sheet dates.
The fair value of the share compensation schemes is charged to the income
statement over the period from the date the schemes were granted to the date at
which the compensation is expected to vest on the employees. The corresponding
credit is included in Shareholders' Equity. The Group issues equity-settled
share-based payments to certain employees under the terms of the Group's various
employee share compensation schemes. Equity-settled share-based payments are
measured at fair value at the date of grant. The fair value determined at the
grant date of equity-settled share-based payments is expensed on a straight-line
basis over the vesting period, based on an estimate of the shares that will
ultimately vest.
Section 7: Accounting for financial instruments
Overview
The IFRS accounting standards which cover financial instruments, IAS 32 and IAS
39, will be applied by BEG plc with effect from 1 April 2005 and have not been
included in the reconciliations in Sections 2 to 4 of this restatement.
The UK GAAP framework applicable for BEG plc's financial statements to 31 March
2005 had no equivalent accounting requirements for financial instruments. Whilst
BEG plc has been accounting for derivative financial instruments within its US
GAAP reported results in accordance with FAS 133 'Accounting for Derivative
Instruments and Hedging Activities', which has many similarities to IAS 39.
However, the past results reported in the US GAAP Form 20-F are not indicative
of the future results which may be reported under IAS 39.
The scope of IAS 39 includes all financial instruments i.e. loans, trade
receivables, payables investments, cash and derivatives, as well as certain
commodity contracts. The standard requires that all derivatives, including
certain commodity contracts, are fair valued on the balance sheet, with changes
from re-measurement being recorded in the income statement unless cash flow
hedge accounting is applied.
The Group follows a trading strategy of selling forward a proportion of the
company's output at fixed prices. Therefore, calculation of fair values for
electricity trading contracts in a rising market results in the recording of a
net negative fair value position, and in a falling market results in a net
positive fair value position.
The Group has adopted the full IASB versions of IAS 32 and IAS 39 in line with
the recommendations of the UK Accounting Standards Board. The sections of IAS 39
which were carved out by the EU have no impact on the Group.
Implementation of IAS 39 only affects the reporting of financial results and
will not alter the Group's operational hedging strategy or underlying contract
cash flow position.
Commodity contracts outside the scope of IAS 39
All commodity contracts which do not satisfy the definition of being for the
Group's 'own use', are required to be accounted for as derivatives and are fair
valued. The 'own use' scope exemption is only available if it can be
demonstrated that the contracts were entered into and continue to be held in
accordance with BEG plc's expected sale, purchase or usage requirements.
Fair value accounting requirements for commodity contracts
All derivatives and commodity contracts within scope of IAS 39 are required to
be fair valued on the balance sheet with movements in the fair value recognised
in the income statement, except in circumstances where cash flow hedge
accounting is put in place.
In general, hedge accounting works by matching an item containing a risk to be
hedged with a hedging instrument that mitigates that risk. In BEG plc's case, an
example of an item with a risk to be hedged would be the variability of cash
flows arising from a highly probable forecast sale of electricity under an
existing variable priced own use sales contract.
For a derivative to qualify for use as a hedging instrument for cash flow hedge
accounting purposes, its fair value must have an inverse relationship to the
expected cash flows of the hedged item both at inception of the derivative and
throughout the duration of the hedge being in place. Prospective and
retrospective testing is required to demonstrate hedge effectiveness, by using
either statistical or ratio measurement to confirm that the gains or losses on
the derivative offset the losses or gains on the hedged item are within a range
of 80% to 125%. Movements in the fair value of contracts which qualify for hedge
accounting on this basis are recognised within the hedge reserve as long as the
hedges continue to satisfy the effectiveness requirements of IAS 39. Any
amounts of financial ineffectivess of hedges are recorded immediately in the
income statement.
The gain or loss arising from fair value movements on derivative instruments
that form part of a cash flow hedging relationship are recognised on the balance
sheet as a separate component of equity and subsequently released into earnings
to match the settlement of the hedged item.
Accounting for BEG plc's commodity trading activities
As BEG plc is an electricity generator it has a naturally long power position.
The electricity generated is used to supply retail customers through the Direct
Supply Business, now operated through British Energy Direct Limited ('BEDL'),
and to meet supply commitments under long-term structured contracts.
Electricity is also sold in the wholesale market using standard Grid Trade
Master Agreement ('GTMA') contracts, including options. The GTMA market is a
bilateral traded market where electricity is bought and sold ahead for delivery
in a future time period. A proportion of Eggborough generation and purchases of
electricity may be used to balance the physical position.
Commodity contracts are also entered into for the purchase of coal for
Eggborough Power Station.
The requirements of IAS 39 have been applied to BEG plc's commodity trading
activities at 1 April 2005, as follows:
- All contracts for the sale of electricity through BEDL, some
long-term structured sales contracts and all coal procurement contracts are
categorised as being "own use" and will therefore continue to be accounted for
on an accruals basis. However, the contracts that were in existence at RED were
fair valued at that date and are included within the commodity contracts
provision as detailed below.
- GTMA contracts are within the scope of IAS 39 as the Group has a
practice of net settling these contracts. As a result, all changes in fair
value impact the income statement for those contracts which do not qualify for
hedge accounting.
- Hedge accounting has been utilised wherever possible, to ensure that
earnings continue to be recognised in line with BEG plc's operational
strategies, i.e. to reflect the earnings effects of derivative instruments in
the same period as the hedged item affects earnings. Fair value changes of those
GTMA contracts which meet the requirements for cash flow hedge accounting are
deferred in equity until settlement of the hedging instrument or hedged item.
- The highly probable forecast of electricity generated to satisfy
certain contracts has been designated as the hedged item for cash flow hedge
accounting purposes.
- The variability of cash flows arising from a highly probable forecast
sale of electricity under an existing variable priced own use sales contract has
been designated as a hedged item for cash flow hedge accounting purposes.
- Options contracts are recognised at fair value, with changes going
through the income statement.
The Group's portfolio of commodity contracts and derivatives was fair valued at
RED, prior to implementation of IAS 32 and IAS 39, as part of the application of
acquisition accounting, resulting in a net commodity contracts provision. At 31
March 2005 the value of the net commodity contracts provision was GBP250m. At 1
April 2005, GBP238m of the commodity contracts provision was outside the scope
of IAS 39 and will therefore continue to be released over the duration of the
underlying contracts. The remaining net provision balance of GBP12m, which
relates to contracts which are within the scope of IAS 39, was derecognised at 1
April 2005 and replaced by a fair valued net liability of GBP34m.
Table 1 below shows the effect of implementing IAS 39 as it relates to energy
commodity contracts on the Group's IFRS balance sheet at 1 April 2005. These
adjustments reflect the incremental adjustment required to the UK GAAP balance
sheet at 31 March 2005 as described above.
Table 1: Changes to commodity contract provision at 1 April 2005 following IAS
39 implementation
Contracts Other commodity Total
within scope of contracts fair
IAS 39 valued at
acquisition date
*
GBPm GBPm GBPm
Mark to market provision at 31 March 2005 as reported under (12) (238) (250)
UK GAAP (A)
Reversal of UK GAAP provision 12
Recognition of fair value of contracts and hedging (34)
instruments within scope of IAS 39 as at 1 April 2005
Fair value of contracts and hedging instruments within scope (34)
of IAS 39 as at 1 April 2005 (B)
Analysed as follows:-
Financial Financial Total
assets liabilities
Cash flow hedging instruments 2 (32) (30)
Non-hedging instruments which are fair valued through income 17 (21) (4)
statement
Total balance sheet values 19 (53) (34)
Totals reserves movement (A-B)
Analysed as follows:-
Increase in retained earnings reserves 8
Creation of cash flow hedge reserve (30)
Total net reduction of reserves at 1 April 2005 due to IAS39 (22)
(before tax)
* The net provision balance recorded for "other commodity contracts fair valued
at acquisition date" principally relates to 'own use' contracts which are
excluded from the scope of IAS 39 but were required to be marked to market under
IFRS 3 at RED when BEG plc acquired BE plc. The provision will continue be
released over the duration of the applicable contracts.
On implementation of IAS 39, the Group's net assets under IFRS decreased by
GBP22m, prior to deferred tax adjustment, and resulted in an increase to pre-tax
retained earnings of GBP8m and the creation of a negative hedge reserve of
GBP30m.
Treasury
At 1 April 2005, BEG plc had no Treasury derivatives which were within the scope
of IAS 39.
Section 8: Summary of proposed IAS 32 & IAS 39 accounting policies for year
ended 31 March 2006
Implementation of IAS 32 and IAS 39
The Group has applied IAS 32 and the full version of IAS 39 in the financial
year ending 31 March 2006 rather than the European Union ('EU') adopted
regulation of November 2004 which endorsed IAS 39 with the exception of certain
provisions relating to (i) the use of the full fair value option for liabilities
and (ii) hedge accounting. Applying the full version of the standard has no
impact on the group's financial statements.
In accordance with the transitional arrangements set out in IFRS 1, the Group
has not restated the prior period's comparative figures to show the effect of
IAS 32 and IAS 39. For the period ended 31 March 2005, financial instruments
continue to be accounted for in accordance with the Group's previous policies
for financial instruments under UK GAAP.
Recognition, classification and subsequent measurement of financial assets and
liabilities
IAS 39 requires that all financial assets be initially recognised at fair value
in the balance sheet with changes in fair value reported through the income
statement. Exceptions apply to assets classified as loans and receivables and
held-to-maturity investments, which are measured at amortised cost using the
effective interest method, and also to equity investments in instruments whose
fair value can not be reliably measured, which are recognised and measured at
cost.
Financial liabilities are measured at amortised cost using the effective
interest method. The Group measures all debt instruments initially at fair
value, and this is taken to be the fair value of the consideration received.
Transaction costs (any such costs incremental to and directly attributable to
the issue of the financial instruments) are included in the calculation of the
effective interest rate and are, in effect, amortised through the income
statement over the life of the instrument. Derivative instruments, and
commodity contracts that fall within the scope of IAS 39, are carried at fair
value with special rules applying to all financial instruments which form part
of a hedging relationship.
Accounting for derivatives and commodity contracts
The Group's activities expose it primarily to risks associated with electricity
generation, the purchase of fuel for use in the generation process, and the
supply of electricity to end customers in both the wholesale and retail markets.
The Group follows a trading strategy of selling forward a proportion of the
Company's output to reduce the Group's exposure to potential falls in the market
price of electricity. The use of derivative financial instruments occurs
primarily within the Group's electricity trading and coal procurement
activities.
The Group's accounting objective is to report earnings results that are
consistent with its operational strategies. As such, the Group aims to
recognise the earnings effects of derivative transactions executed to hedge
economic business risks in the income statement in the period in which the
economically hedged operational activity affects earnings. The Board has
endorsed the use of derivative financial instruments as hedging tools and the
Group uses derivative and non-derivative financial instruments to manage its
exposures. Physical and financially settled instruments are held by the Group to
match offsetting physical positions and are not held for financial trading
purposes.
Where commodity contracts, such as electricity and fuel, are entered into in
accordance with the Group's own purchase, sale or usage requirements they are
accounted for on an accruals basis following delivery of the commodity and are
thereby excluded from the scope of IAS 39. Amounts payable or receivable in
respect of these contracts are recorded within trade creditors and trade
receivables respectively. Where a commodity contract is not entered in to or
does not continue to be held to meet the Group's own purchase, sale or usage
requirements the recognition and measurement requirements of IAS 39 are applied.
Derivative financial instruments are initially recognised at fair value and all
changes in fair value are subsequently accounted for through the income
statement unless the derivative qualifies as a hedging instrument.
Changes in the fair value of derivative financial instruments that are
designated and are effective as hedges of future cash flows are recognised
directly in equity, in the cash flow hedge reserve, and the ineffective portion
of the hedge is recognised immediately in the income statement.
The Group designates derivatives as hedging instruments when it is expected that
there will be a high inverse correlation between the changes in fair value of
the hedging instrument and the changes in the fair value of the cash flows of
the hedged item. This is measured primarily using the dollar offset method. Such
correlation is required to be within the limits of 80% to 125% for hedge
accounting to be permitted. Prospective and retrospective testing is carried out
on a regular basis, at least on each reporting date, to establish whether the
assumptions and application criteria for hedge accounting going forward continue
to be supported. The Group discontinues hedge accounting where the hedging
relationship correlation is outside the required parameters.
Derivative instruments are de-designated from a hedge relationship when:
- The hedging instrument or item expires or is settled;
- The forecast transaction is no longer considered to be highly probable;
and
- The hedging instrument no longer qualifies for hedge accounting under
IAS 39 rules.
At that time, any cumulative gain or loss on the hedging instrument recognised
in equity is retained in equity until the forecast transaction is settled. If a
hedged transaction is no longer expected to occur, the net cumulative gain or
loss recognised within equity is transferred to the income statement of the
period.
Valuation of commodity contracts and derivatives
The group's valuation policy for derivative and other financial instruments is
to maximise the use of quoted prices from active trading markets.
Futures, swaps, and forward agreements are valued against the appropriate
market-based curves. Three types of curves (price, volatility and correlation)
may be required depending upon the liquidity of the market and type of product
traded forward price curves are developed using market prices from
independent sources for liquid commodities, markets and products and
modelled for illiquid commodities, markets and products. Volatility curves are
modelled for open positions in illiquid markets and implied volatility curves
are developed from actively traded options. Correlation curves are developed
using either implied correlations or using historical forward correlations and
other relevant market data.
Where necessary, structured transactions are disaggregated into their traded
core components, and each component is valued against the appropriate
market-based curves. The fair value of a structured deal is the summation of
the fair value of its core components.
Purchase contracts are valued against the quoted bid price and sales contracts
are valued against the quoted offer prices, with no provisions made for
liquidity. Valuation adjustments are made for the time value of money, which is
applied to all contracts, and credit risk, which will be applied where
applicable.
Embedded derivatives
The Group also evaluates contracts for embedded derivatives, and considers
whether any embedded derivatives have to be separated from the underlying host
contract and accounted for separately in accordance with IAS 39 requirements.
Where embedded derivatives have terms that are not closely related to the terms
of the host contract in which they are included, they are accounted for
separately from the host contract as derivatives, with changes in the fair value
recorded in the income statement, to the extent that the hybrid instrument is
not already accounted for at fair value.
Embedded derivatives are valued either by directly valuing the derivative
element in line with the processes described above or by valuing the embedded
derivative as the difference between the value of the hybrid instrument and the
host contract (excluding the derivative element).
Offsetting of derivative assets and liabilities
The Group offsets a financial asset and a financial liability and reports the
net amount only when the Group has a legally enforceable right to set off the
amounts and intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously.
Impact on Effective Tax Rate
Income tax for interim reporting periods is calculated by applying an estimate
of the annual effective tax rate to the interim result excluding IAS 39
adjustments, and by calculating tax at the standard rate for the IAS 39
adjustments arising within the period.
Section 9: Glossary of financial terms and IFRS equivalents
UK Financial Terms used in Annual Report & Accounts IFRS equivalent or definition
Creditors: amounts falling due within one year Current liabilities
Creditors: amounts falling due after more than one year Non-current liabilities
Debtors Receivables
Other creditors Trade and other payables
Profit and loss account (statement) Income statement
Profit and loss account (in the balance sheet) Retained earnings
Shareholders' funds Shareholders' equity
Short-term bank and other deposits Cash and cash equivalents
Stocks Inventories
Tangible fixed assets Property, plant and equipment
Turnover Revenue
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 21, 2005 BRITISH ENERGY GROUP PLC
By:____John Searles____
Name: John Searles
Title: Director - Investor Relations