Eurotunnel PLC/Eurotunnel S.A. 04 May 2005 Further to the 2004 preliminary results announcement of 26 April 2005 and following the statutory publication of the Group Combined Accounts in France, Eurotunnel now releases the Summary Group Combined Accounts and full Financial Analysis. SUMMARY EUROTUNNEL GROUP COMBINED ACCOUNTS Balance Sheet 31 DECEMBER 2004 31 DECEMBER 2003 £'000 £'000 ASSETS TANGIBLE FIXED ASSETS Concession fixed assets 6,933,599 7,424,826 Other fixed assets - 2,032 Total tangible fixed assets 6,933,599 7,426,858 FINANCIAL FIXED ASSETS Shares 2,224 1,165 Others 16,686 16,040 Total fixed assets 6,952,509 7,444,063 Stocks 7,185 8,830 Trade debtors 41,014 46,062 Other debtors 26,246 14,258 Other financial debtors 167,437 541,666 Investments and liquid funds 181,224 212,206 Total current assets 423,106 823,022 Prepaid expenses 36,545 52,592 Total assets 7,412,160 8,319,677 SHAREHOLDERS' FUNDS AND LIABILITIES Issued share capital 285,400 285,398 Share premium account 2,368,389 2,368,387 Other reserve 3,483 3,483 Profit and loss account reserve (1,635,097) (300,872) Loss for the year (569,733) (1,334,225) Exchange adjustment reserve 75,799 77,016 Total shareholders' funds 528,241 1,099,187 Provisions 144,752 99,508 Loan notes 1,035,464 950,646 Loans 5,220,057 5,289,297 Accrued interest 98,094 124,922 Other financial creditors 167,437 541,666 Other creditors 204,404 191,767 Total creditors 6,725,456 7,098,298 Deferred income 13,711 22,684 Total shareholders' funds and liabilities 7,412,160 8,319,677 Profit and Loss Account YEAR ENDED YEAR ENDED 31 DECEMBER 2004 31 DECEMBER 2003 £'000 £'000 TURNOVER Operating revenue 538,123 566,376 Other income 17,050 17,568 Total turnover 555,173 583,944 OPERATING EXPENDITURE Materials and services (net) 157,394 162,329 Staff costs 103,678 104,720 Depreciation 100,258 124,173 Provisions 22,003 21,616 Other operating charges 550 1,322 Total operating expenditure 383,883 414,160 Operating profit 171,290 169,784 FINANCIAL INCOME Interest receivable and similar income 31,641 41,327 Profit on disposal of investments 286 408 Exchange differences 1,037 1,270 Total financial income 32,964 43,005 FINANCIAL CHARGES Interest payable and similar charges 330,087 359,490 Exchange differences 1,071 2,653 Total financial charges 331,158 362,143 Financial result (298,194) (319,138) Exceptional result * (442,806) (1,184,847) Taxation 23 24 RESULT Loss for the year (569,733) (1,334,225) Loss per Unit (22.4p) (56.5p) Units (millions) ** 2,546 2,363 Fully diluted loss per Unit *** (19.1p) (53.3p) * Including an exceptional impairment of tangible fixed assets of £395 million (2003: £1,300 million). ** Weighted average number of units in the year. *** Assuming conversion of Stabilisation Advances and Notes into Units and the exercise of share options, and excluding consequences of future refinancing. Cash Flow Statement YEAR ENDED YEAR ENDED 31 DECEMBER 2004 31 DECEMBER 2003 £'000 £'000 Net cash inflow from operating activities 283,312 314,304 Taxation (24) (24) Returns on investments and servicing of finance (281,241) (277,878) Capital expenditure (18,934) (24,717) Other non-operating cash flows (13,835) 20,391 Cash (outflow)/inflow before financing (30,722) 32,076 Financing (724) (68,100) Decrease in cash in the period (31,446) (36,024) Notes 1. The summary balance sheet, profit and loss account and cash flow statement are extracted from the Annual Report and Accounts of Eurotunnel which were approved by the Board on 25 April 2005. 2. The Group balance sheet, profit and loss account and cash flow statement consist of the combination of the consolidated accounts of Eurotunnel plc together with Eurotunnel SA and its subsidiaries, applying exchange rates as described in the Annual Report and Accounts. The accounts have been prepared in accordance with the accounting principles applicable in France, under the historical cost convention and on the going concern basis (see Note 6 below). 3. The Eurotunnel Group includes leasing companies in the UK which had total outstanding debt at 31 December 2004 of £167 million. This debt is fully secured on lease receivables due to the companies. During the year, the interest receivable and similar income arising in to the leasing companies amounts to £27 million. This is matched by an equivalent amount in interest payable. 4. Loss per Unit 2004 2003 (p) (p) Basic (22.4) (56.5) Pre-exceptional result (5.0) (6.3) Fully diluted * (19.1) (53.3) * Assuming conversion of Stabilisation Advances and Notes into Units and the exercise of share options, and excluding consequences of future refinancing. The basic loss per Unit for the year is calculated using the weighted average number of Units in issue during the year of 2,546,110,015 (2003: 2,363,089,041) and the loss for the year of £569,733,000 (2003 loss: £1,334,225,000). The pre-exceptional loss per Unit is calculated using the above weighted average number of Units in issue, but using the loss of £126,927,000 (2003 loss: £149,378,000) before crediting the exceptional loss of £442,806,000 (2003 loss: £1,184,847,000). The fully diluted loss per Unit, excluding the consequences of any future refinancing, is calculated using the fully diluted number of Units of 2,990,433,422 (2003: 2,503,070,356) which includes the conversion of Stabilisation Notes, Stabilisation Advances and the exercise of share options based on market conditions at the balance sheet date. 5. The Eurotunnel Group accounts comply with French generally accepted accounting principles ("GAAP") which differ in certain aspects from UK GAAP. The significant differences, which affect the loss before taxation and shareholders' funds and are described in detail in Note 23 of the Group's full accounts for the year ended 31 December 2004, arise in the treatment of the consolidation of quasi-subsidiaries and of equity issue costs. Had the Combined Accounts been prepared under UK GAAP, loss before tax would have increased by £3 million (2003: decrease of £170 million) and shareholders' funds at 31 December 2004 would have increased by £247 million (2003: increase of £250 million). 6. As indicated in the financial analysis, the going concern basis is dependent on the Group's ability to put in place a refinancing plan or if not to obtain an agreement from the Lenders within the existing arrangements in the second half of 2006 at the latest. If such plans were not successful and the Group's ability to trade as a going concern was not assured, certain adjustments would need to be made to the accounts. Those adjustments would relate to the impairment of assets to their net realisable value and the recognition of contingent liabilities. Such amounts cannot be measured at present. Within the French and British legal frameworks, the Lenders may seek to exercise the right to substitution included in the Concession Agreement and the securities over assets set out in the Credit Agreements. 7. An impairment charge on the fixed assets has been recorded in the accounts at 31 December 2004. This is described in detail in the financial analysis. 8. The auditors and commissaires aux comptes have reported on the Combined Accounts. Their report contained two matters of emphasis, one on going concern in the absence of a refinancing plan in the second half of 2006 at the latest (see Note 6 above) and one on asset valuation (see Note 7 above and the financial analysis). FINANCIAL ANALYSIS Intense competition in the short straits markets and continued contraction of the passenger market in 2004, have led to shuttle revenues 7% below 2003 at constant exchange rates. Operating revenue was 4% below 2003, whilst overall operating costs excluding cost of sales increased slightly. Depreciation charges decreased significantly following the impairment charge at the end of 2003, resulting in an operating profit 2% above 2003. Net interest charges decreased by 5%, resulting in a 14% improvement in the underlying result at constant exchange rates. The underlying loss in 2004 was £127 million compared to £148 million in 2003 at constant exchange rates. After an impairment charge of £395 million and other net exceptional losses of £48 million in 2004, the net result for the year was a loss of £570 million compared to a net loss of £1,334 million after an impairment charge of £1,300 million and exceptional profits of £115 million in 2003. To make a valid comparison between 2004 and 2003 in both sterling and euros, the underlying loss for 2003 has been restated at the exchange rate used for the 2004 results (£1=€1.466) as set out in the table below. Analysis of result 2004 2003 2004/2003 2003 £ million Actual Restated % change Reported Exchange rate •/£ 1.466 1.466 1.435 Shuttle services 285 306 -7% 309 Railways 234 230 +2% 232 Transport activities 519 536 -3% 541 Non-transport activities 19 24 -23% 25 Operating revenue 538 560 -4% 566 Other income 17 18 18 Total turnover 555 578 -4% 584 Cost of sales ( 3) ( 9) ( 9) Operating costs ( 258) ( 256) +1% ( 259) Operating margin 294 313 -6% 316 Depreciation and provisions ( 123) ( 146) ( 146) Operating profit 171 167 +2% 170 Net interest ( 298) ( 315) -5% ( 318) Underlying loss ( 127) ( 148) -14% ( 148) Exchange gains/(losses) - ( 1) Exceptional (loss)/profit ( 48) 115 Net loss before impairment charge ( 175) ( 34) Impairment charge ( 395) ( 1 300) Net loss after impairment charge ( 570) ( 1 334) Turnover Shuttle Services revenue decreased by 7% at constant exchange rates to £285 million, principally due to the intense competition in the truck market putting continued pressure on prices and to the further decline in the passenger market reducing Eurotunnel's passenger shuttle volumes. Railways revenue increased slightly to £234 million as a result of inflation, and remains protected until the end of November 2006 by payments under the provisions of the Minimum Usage Charge (MUC) in the Railway Usage Contract, which amounted to £67 million in 2004. Revenue of £19 million from non-transport activities in 2004 included revenues from retail, telecoms activities and land sales. Other income of £17 million largely comprises the release of provisions for large scale maintenance. Total turnover for 2004 was 4% lower than 2003, at £555 million. Operating profit The decrease in cost of sales reflects the value of land stocks disposed of in 2004 compared to 2003. Operating costs excluding cost of sales increased slightly compared to 2003 with increased annual general meeting costs, higher electricity costs and maintenance costs for rolling stock (acceleration of mid-life refit of shuttle fleet) and infrastructure, more than offsetting reductions in other areas. Depreciation decreased by £24 million largely due to the impairment charge of £1,300 million at the end of 2003. The operating profit improved by 2% at constant exchange rates to £171 million. Net interest charges At £298 million in 2004, net interest charges were 5% below 2003 at constant exchange rates. During January 2004 more than £4 billion of debt passed from fixed to variable rates of interest. After taking into account charges of £59 million for the hedging contracts, the interest charge for the year reduced by £4 million at constant exchange rates. Following their conversion at the end of 2003, no interest was incurred in 2004 on the Equity Notes compared to £12 million incurred in 2003, and several small debt repurchases in the second half of 2003 and at the beginning of 2004 also served to reduce net interest charges by £2 million. The underlying loss of £127 million in 2004 reduced by 14% compared to 2003 at constant exchange rates. Net result The exceptional result excluding impairment charge in 2004 was a loss of £48 million. Costs related to the operational restructuring (£6 million), refinancing (£14 million), and a charge of £36 million to cover the consequences of the implementation of the DARE plan. A net profit of £7 million was generated by the sale of fixed assets, and a profit of £2 million was generated by the repurchase of debt at a discount to its face value. The net result before impairment in 2004 was a loss of £175 million compared to a net loss before impairment of £34 million in 2003. Impairment charge The Group applies the methodology of IAS36 which is equivalent to UK Accounting Standard FRS11 which requires the net book value of assets to be compared to discounted future operating cash flows. The application of this method in 2004 gave rise to an exceptional impairment of £395 million. A charge of £1,300 million was made in 2003. This impairment charge has no impact on the Group's liquidity position or its loan covenants. The net result for 2004 was a loss of £570 million compared to a net loss of £1,334 million in 2003. Cash flow 2004 2003 £ million Actual Reported Exchange rate •/£ 1.418 1.419 Net cash flow from operations 283 315 Capital expenditure (net) (19) (25) Cash flow after capital expenditure 264 290 Net interest paid in cash (281) (278) Other non-operating cash flows & taxation (13) 20 Financing (1) (68) Decrease in cash balances (31) (36) Cash flow Cash flow from operating activities in 2004 was £283 million. The majority of the reduction compared to 2003 was due to lower shuttle revenues. Net capital expenditure fell from £25 million in 2003 to £19 million in 2004 resulting in net cash flow from operating activities after capital expenditure of £264 million. Interest cover after capital expenditure (which measures cash flow after capital expenditure as a proportion of the net interest charge due and payable) was 96%. The £13 million net payment in respect of other non-operating cash flows in 2004 relates to expenditure on refinancing and operational restructuring. FINANCING Eurotunnel's funding falls into three main components - Core Debt, a Buffer Zone, and Shareholders' Funds. The Core Debt totalling £4.9 billion comprises £0.4 billion of Senior and 4th Tranche Debt, £3.3 billion of Junior Debt, £0.7 billion of Tier 1A Debt, and £0.5 billion of Resettable Advances. No debt repayments under the Credit Agreement are due before 2006. In the absence of any significant modification to the debt covenants, total debt repayments over the period 2006 to 2009 will total £274 million, starting with £4 million in 2006, increasing to £163 million in 2009. The Buffer Zone of £1.5 billion includes £0.5 billion drawings under the Stabilisation Facility. The Stabilisation Advances carry 0% interest until 2006. Under the Credit Agreement, Eurotunnel, subject to the agreement of its shareholders, is able to convert the Stabilisation Advances and Notes(1) outstanding at the end of 2005 into Units. In order to convert the Stabilisation Advances and Notes into Units in accordance with the provisions of the 1998 restructuring, Eurotunnel will have to propose that its shareholders vote on the conversion at an extraordinary general meeting to be held before the end of 2005. This Buffer Zone also includes £0.9 billion of Participating Loan Notes which carry 1% fixed interest until 2006. The third component of the financing structure is represented by Shareholders' Funds, which at 31 December 2004 totalled £0.5 billion. (1) Based on the £530 million Stabilisation Advances and Notes that were outstanding on 31 December 2004, such conversion would lead to the creation of 444 million new Units at a fixed conversion rate of £1.19 (at a euro/sterling exchange of €1.418). This conversion of the Stabilisation Advances and Notes would represent 15% of the total number of Units in circulation. Fully diluted share capital on this basis would be 2,990 million Units (including the exercise of stock options). In the absence of conversion and on the basis of current interest rates, an additional financial charge of approximately £27 million a year would be payable by the Group from 1 January 2006. Financing at 31 December 2004 £ billion Senior Debt 0.4 CORE DEBT Junior Debt 4.5 Tier 1A Resettable Advances Stabilisation Facility 1.5 BUFFER ZONE Participating Loan Notes Accrued interest TOTAL DEBT 6.4 Shareholders' funds 0.5 EQUITY FINANCIAL SITUATION Operational restructuring - project DARE In June 2004, Eurotunnel commenced an in-depth review of the financial and operational aspects of each of the Group's activities. Project DARE will contribute to the recovery of the company. A key element of this project is to increase margins from the core shuttle businesses by better aligning capacity to demand. The reduction in surplus capacity, additional reductions in administrative costs and a complete review of subcontractor and supplier contracts, will give rise to cost savings. The implementation of project DARE commenced in November 2004; the full benefit of this plan is anticipated to impact from 2006. A provision of £36 million has been made in the 2004 accounts for the consequences of this on staffing levels and for the early termination of certain subcontracts. Forecast cash position The financial consequences of the forecasts prepared in the light of the 2004 results and the current outlook for the Group, taking into account the consequences of project DARE, are as follows: >> During 2005 the cash flow position remains protected by the mechanism by which interest that cannot be paid in cash can be settled by way of Stabilisation Advances up to a limit of £60 million. Taking into account the risks, especially those associated with the implementation of DARE, either financial or operational, the cash flow position remains subject to certain uncertainties. On the basis of the latest operating forecasts available at the date of the accounts, the amount of un-used Stabilisation Advances should allow sufficient cash up until the end of 2005, on which date the level of available cash is projected to be equal to the Permitted Float of £25 million (this is the maximum amount of cash that may be held by the Group as defined in the Credit Agreements). >> In 2006 the Group will no longer benefit from the Stabilisation Advances, rendering the cash flow position more vulnerable particularly at the end of January and July 2006 because of the interest payments due under the current Credit Agreements. >> From the first half of 2007 Eurotunnel will not be able to meet its contractual debt repayments. >> The cash flow forecasts are based on assumptions that the Group considers to be both reasonable and realistic. The forecasts assume the conversion of the Stabilisation Advances and Notes into Units by 1 January 2006. In the absence of this conversion and on the basis of current interest rates and the Stabilisation Advances and Notes as at 31 December 2004, an additional financial charge of approximately £27 million a year would be payable by the Group. Furthermore, significant disruptions to the operations of the Group or events that are unforeseeable or unquantifiable at the date of the accounts in conjunction with, amongst other issues, the Railways dispute, could accelerate the date at which the Group would be unable to meet its financial obligations. Financial restructuring Eurotunnel has obtained a waiver from the Lenders which is valid up to 31 January 2006 and which defines the conditions under which the Group can start debt restructuring negotiations with its creditors. In particular, the waiver requires a proposal of a restructuring plan by no later than 15 July 2005, as well as the establishment of a structured means of communication between Eurotunnel and its creditors. The waiver can be terminated at any time should either party not meet its respective responsibilities. In order to convert the Stabilisation Advances and Notes into Units in accordance with the provisions of the 1998 restructuring, Eurotunnel will have to propose that its shareholders vote on the conversion at an extraordinary general meeting to be held before the end of 2005. The conditions and consequences of the potential conversion are described in notes 11c and 14c of the full Combined Accounts. Finally, in the context of the proposed financial restructuring, Eurotunnel could look into, amongst other options and within the terms and conditions of the existing Credit Agreements, the putting into place of an additional line of credit up to a maximum of £50 million. Initial enquiries have confirmed the feasibility of putting this into place should the necessity arise. Going concern The going concern basis is dependent on the Group's ability to put in place a refinancing plan or, if not, to obtain an agreement from the Lenders within the existing arrangements in the second half of 2006 at the latest. The Group believes that these measures described above, which are intended to provide a satisfactory solution to the financing requirements of the Group, can be put in place before the date at which the Group will be unable to meet its financial obligations. The application of the going concern assumption in the 31 December 2004 annual accounts has been based on the assumptions described above. Impairment The valuation of the Group's assets has been carried out in accordance with IAS36, which compares the net book value of the assets to the value of the discounted forecast future operating cash flows, and by using the Adjusted Present Value (APV) methodology. The application of this standard at 31 December 2003 gave rise to a value in use £1.3 billion lower than the net book value of the assets, and led to an impairment charge for this amount in the 2003 accounts. At 31 December 2004, Eurotunnel updated its impairment calculation, using an implicit discount rate of 7.2% (2003: 7%), which led to an additional impairment charge of £395 million. Taking into account the increasing uncertainties that the Group is facing, Eurotunnel considered it appropriate at this date to use values in the upper ranges for the market risk premium and the asset "beta" ratios. The implicit discount rate was determined in accordance with the standard on the basis of the Group constituting a single income generating unit and using the APV methodology. This methodology requires assumptions to be made for both the forecast cash flows and the future level of the Group's debt over the life of the Concession, as well as for the market interest rate. The value in use was calculated in the context of the going concern uncertainty and on the basis of operating cash flows which assume no changes to existing operational and financing contracts. In addition, and only for the purposes of this valuation, the Group has assumed, as in the previous year, an interest saving based on a level of debt £1.3 billion lower than the current level of debt. Within the assumption of no changes to existing contracts, all other things being equal, other foreseeable levels of debt would not lead to an implicit discount rate of greater than 7.7%. Relatively small changes in the assumptions used would lead to material changes in the value in use. By way of example, a variation of 0.10% in the implicit discount rate would correspond to a change in the value in use of the fixed assets of approximately £150 million. Railways dispute Under the Railways Usage Contract dated 29 July 1987 (the "RUC") between the Railways and Eurotunnel, the Railways are required to bear a proportion of the operating costs of Eurotunnel in each year. The Railways commenced arbitration proceedings under the auspices of the International Chamber of Commerce in respect of the amount of their contribution, firstly for financial years ended 31 December 1997 and 1998, and secondly for financial years ended 31 December 1999 to 31 December 2002. The total amount claimed by the Railways is estimated to be a maximum of £100 million. The Arbitration Tribunal, in an award made on 30 January 2003, rejected the Railways' claim for 1997 and 1998 on the basis that it was time barred. The Tribunal's decision is final. The Arbitration Tribunal will decide on the admissibility and validity of the claim for 1999 to 2002 in a separate phase of proceedings; its decision is expected to follow in 2005. Eurotunnel remains confident in the outcome of these proceedings and has therefore not changed its position from previous years; consequently a provision has not been made in these accounts or in the Group's financial projections. Media enquiries: Eurotunnel Press Office, tel: + 44 (0) 1303 288728 or + 44 (0) 1303 288737 Investor enquiries: Xavier Clement, tel: + 33 1 55 27 36 27 News release no. 936 Eurotunnel manages the infrastructure of the Channel Tunnel and operates accompanied truck shuttle and passenger shuttle (car and coach) services between Folkestone, UK and Calais, France. Eurotunnel also earns toll revenue from other train operators (Eurostar for rail passengers, and EWS and SNCF for rail freight) which use the Tunnel. Eurotunnel is quoted in London, Paris and Brussels. This information is provided by RNS The company news service from the London Stock Exchange