Eurotunnel PLC/Eurotunnel S.A. 16 September 2005 Further to the 2005 interim results announcement of 15 September 2005, Eurotunnel now releases the full Interim Report and Group Combined Accounts. EUROTUNNEL GROUP'S INTERIM REPORT AND COMBINED ACCOUNTS FOR THE SIX MONTHS TO 30 JUNE 2005 FINANCIAL RESULT FOR THE SIX MONTHS TO 30 JUNE 2005 With effect from 1 January 2005, Eurotunnel is required to apply International Financial Reporting Standards (IFRSs) when preparing its accounts. The accounting principles now being applied by Eurotunnel, and certain departures from full compliance with IFRSs, are described in note 2 to the interim combined accounts, and the impact of new accounting principles is illustrated in note 8. For the half year ended 30 June 2005, Eurotunnel is applying the recommendation of the CNC 2004-R02 dated 27 October 2004 for the presentational format for the combined income statement and cash flow: this presentation may differ to reflect standards in force at the time of preparing the financial statements for the year ending 31 December 2005. The comparative figures for 30 June 2004 in the table below have been restated to reflect the adoption of the new accounting principles, and are also recalculated using the exchange rate applicable for the preparation of the 2005 combined interim income statement of £1=€1.468 in order to assist comparison with the 2005 figures. The commentary following the table below discusses 2005 performance in comparison with 2004 equivalents translated at the constant exchange rate. The combined interim accounts have been prepared in the context of two uncertainties relating to the validity of the going concern principle and the value of assets as described in note 1, and according to the accounting principles described in note 2 of the combined interim accounts. The table and commentary below should be read in conjunction with the full combined interim accounts. Analysis of result 2005 2004 2005/2004 2004 £ million Actual Restated(1) % change(2) Restated(1) & recalculated @ Exchange rate •/£ 1.468 1.468 1.496 Shuttle services 146 138 +6 % 137 Railways 117 116 +0 % 115 Transport activities 263 254 +3 % 252 Non-transport activities 5 9 -42 % 9 Operating revenue 268 263 +2 % 261 Operating costs ( 127) ( 131) -3 % ( 130) Operating margin 141 132 +7 % 131 Depreciation and provisions ( 56) ( 62) ( 62) Trading profit 85 70 +21 % 69 Non-trading charges ( 11) ( 8) +40 % ( 8) Operating profit 74 62 +19 % 61 Net interest charges(3) ( 161) ( 167) -4 % ( 166) Net loss ( 87) ( 105) -18 % ( 105) (1) Prepared on the basis of the accounting principles described in note 2.1 of the interim accounts at 30 June 2005. (2) Variances are calculated using underlying figures. (3) Includes net cost of financing and debt service, other financial income and charges and taxation. Operating revenue Shuttle services revenues were up 6% to £146 million mainly due to higher truck shuttle volumes and yields. Railways revenue remained stable at £117 million 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 £36 million in the first half of 2005. Non-transport activities revenues amounted to £5 million during the period, down £4 million compared to the same period in 2004, partly as a result of a reduction in land sales. Operating revenue for the first half of 2005 was £268 million, an improvement of 2% compared to the first half of 2004 at constant exchange rates. Operating profit Operating costs reduced by 3% compared to the same period in 2004, despite marked increases in electricity and maintenance costs, due to reductions in staff costs, marketing and advertising and insurance premiums. The full benefit of the cost reductions arising from the DARE project is not expected before the first half of 2006. The cost of security to the Group was approximately £5 million. Depreciation charges and provisions have reduced by £6 million compared to the same period in 2004, mainly due to the impairment charge made at the end of 2004. Non-trading charges amounted to £11 million in the first half of 2005, an increase of £3 million compared to the same period in 2004, and related to external costs associated with refinancing and to costs relating to the termination of certain contracts. Operating profit improved by £12 million (19%) to £74 million for the period due to increased revenues (£5 million), reduced operating costs (£4 million) and reduced depreciation and provision charges (£6 million) despite the increase in non-trading charges (£3 million). Net result Net interest charges, including other financial income and charges, were £161 million for the first half of 2005, a decrease of 4% compared to the same period in 2004. Hedging charges included within net interest charges significantly offset the benefit of lower interest rates. The net loss improved by £18 million to £87 million for the first half of 2005. Cash flow £ million 30 June 2005 30 June 2004 Exchange rate •/£ 1.483 1.491 Net cash flow from trading 140 124 Net cash flow from investing activities (3) (16) Net cash flow after investing activities(1) 137 108 (1) Cash flow before non trading cash flows, taxation and financing activities. Net cash flow from trading for the first half of 2005 was £140 million, compared to £124 million for the same period in 2004. This £16 million increase compared to the same period in 2004 is in part due to an improved operating margin, and in part to a reduction in working capital. Net cash flow from investing activities decreased significantly to £3 million due to reduced expenditure and to cash generated by sales of land. Net cash flow after investing activities amounted to £137 million in the first half of 2005, an increase of £29 million compared to the same period in 2004. Cover of contractual interest after investing activities was 97% for the first half of 2005. FINANCING Financing at 30 June 2005 nominal value (in £ billion) Senior Debt 0.4 CORE DEBT £4.8 billion Junior Debt 3.2 FLF2 (Tier 1A) 0.7 Resettable Advances 0.5 Stabilisation Facility 0.4 BUFFER ZONE Participating Loan Notes 0.9 £1.3 billion TOTAL DEBT 6.1 Issued capital and reserves attributable to equity 0.5 EQUITY Eurotunnel's funding falls into three main components - Core Debt, a Buffer Zone, and issued capital and reserves attributable to equity. The Core Debt totalling £4.8 billion comprises £0.4 billion of Senior and 4th Tranche Debt, £3.2 billion of Junior Debt, £0.7 billion of FLF2 debt (Tier 1A), and £0.5 billion of Resettable Advances. No debt repayments under the Credit Agreements are due before mid-2006. In the absence of any significant modification to the debt covenants, total debt repayments over the period 2006 to 2009 would total approximately £267 million, starting with £4 million in 2006, increasing to £159 million in 2009. The Buffer Zone of £1.3 billion includes £0.4 billion drawings under the Stabilisation Facility. The Stabilisation Advances carry 0% interest until December 2005. In order to convert the Stabilisation Advances and Notes into Units in accordance with the provisions of the 1998 restructuring, Eurotunnel has the possibility to propose to its shareholders to vote on the conversion before the end of 2005(1). This 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 issued capital and reserves attributable to equity, which at 30 June 2005 totalled £0.5 billion under IFRS (as described in note 2 of the combined interim accounts). (1) Based on the £526 million Stabilisation Advances and Notes that were outstanding on 30 June 2005 and the current Credit Agreements, an additional financial charge of approximately £24 million a year would be incurred by the Group from 1 January 2006 on the basis of current interest rates in the event that the Stabilisation Advances and Notes are not converted into Units. The conversion of the Stabilisation Advances and Notes would lead to the creation of 451 million new Units at a fixed conversion rate of £1.17 (at a euro/sterling exchange of €1.483). This conversion of the Stabilisation Advances and Notes would represent approximately 15% of the total number of Units in circulation. Fully diluted share capital on this basis would be 2,997 million Units (including the exercise of stock options). REVIEW OF ACTIVITY IN THE FIRST HALF OF 2005 Changes to senior management On 18 February 2005, Eurotunnel's Joint Board appointed Jacques Gounon as its Chairman, in replacement of Jacques Maillot. Over 82,000 shareholders voted at the AGM on 17 June 2005, which confirmed the appointments of Jacques Gounon and Henri Rouanet as directors. Jacques Gounon was appointed Chairman and Chief Executive of the Group following the resignation of Jean-Louis Raymond as Chief Executive. On 17 August, Jean-Pierre Trotignon was appointed Chief Operating Officer. Shuttle Services Truck shuttles Eurotunnel transported 703,363 trucks in the first half of 2005, an increase of 9% compared with the first half of 2004, aided by the disruptions to operations at the Port of Calais. The average yield per vehicle transported also increased during the first half of 2005 contributing to an increase in revenue from the truck shuttle business. Passenger shuttles Eurotunnel transported 951,561 cars in the first half of 2005, an increase of 1% compared to the first half of 2004. The progression recorded in the first quarter of 2005 did not continue into the second quarter; first quarter traffic benefited from the operational difficulties at the Port of Calais, and the fact that Easter fell in the first quarter of 2005. Eurotunnel also transported 39,831 coaches in the first half of 2005, a 34% increase on the corresponding period in 2004. Coach operators continue to be attracted to the efficiency and frequency of the service offered by Eurotunnel. H1 2005 H1 2004 % change Truck shuttles 703,363 trucks 646,468 trucks + 9% Passenger shuttles 951,561 cars* 944,832 cars* + 1% 39,831 coaches 29,834 coaches + 34% * including motorcycles, cars, vehicles with trailers, caravans and campervans Railways The Channel Tunnel is also used by rail services not operated by Eurotunnel: Eurostar for high-speed passenger services on London-Paris/Brussels, and EWS and SNCF for international rail freight services. Eurostar The number of passengers carried through the Channel Tunnel by Eurostar increased by 8% in the first half of 2005, confirming the upward trend following the opening of the first section of the UK's high-speed line in September 2003. Rail freight The volume of rail freight transported through the Channel Tunnel fell by 13% to 847,716 tonnes in the first half of 2005. The level of through-rail traffic using the Channel Tunnel currently has no impact on Eurotunnel's revenues due to the Minimum Usage Charge arrangements, which continue until November 2006. H1 2005 H1 2004 % change Eurostar 3,675,508 passengers* 3,406,698 passengers* + 8% Rail freight 847,716 tonnes 978,717 tonnes - 13% (EWS/SNCF) * The passenger number given is for Eurostar passengers who travelled through the Channel Tunnel, and excludes passengers between Paris-Calais and Brussels-Lille. INTERIM COMBINED FINANCIAL STATEMENTS(1) (1) Prepared on the basis of accounting principles described in note 2.1. Income statement 6 months to *6 months to *Year to £000 30 June 2005 30 June 2004 31 December 2004 Operating revenue 267,986 260,530 538,123 Materials and services 74,232 76,756 141,245 Employee benefit expense 52,730 52,571 104,719 Depreciation 45,026 50,805 100,258 Provisions 10,714 10,760 22,192 Trading profit 85,284 69,638 169,709 Impairment - - 395,000 Non trading charges 11,007 8,042 47,806 Operating profit / (loss) 74,277 61,596 (273,097) Income from cash and cash equivalents 2,734 2,579 5,359 Cost of servicing debt (gross) 169,061 168,409 341,620 Net cost of financing and debt service 166,327 165,830 336,261 Other financial income and (charges) 4,969 (642) 4,343 Taxation 31 23 23 Result Loss for the period (87,112) (104,899) (605,038) Loss per Unit (3.4p) (4.1p) (23.8p) Fully diluted loss per Unit (3.4p) (4.1p) (23.8p) Exchange rate •/£ for the period 1.468 1.496 1.466 * Reconciliations between the 2004 income statements published under French GAAP and the income statements restated under IFRS according to the principles described in note 2.1, are shown in note 8. Balance Sheet 30 June 2005 30 June 2004 31 December 2004 £000 * * ASSETS Property, plant and equipment Concession fixed assets 6,895,625 7,381,924 6,933,599 Other fixed assets - 1,964 - Non-current financial assets Shares 2,127 2,115 2,224 Other financial assets 125,156 485,412 162,061 Other non-current assets - - 2,645 Total non-current assets 7,022,908 7,871,415 7,100,529 Inventories 6,977 7,118 7,185 Trade receivables 40,149 40,876 41,014 Other receivables 22,097 23,003 21,915 Current financial debtors 18,409 43,755 22,062 Interest rate derivatives - - - Cash and cash equivalents 174,149 175,471 181,224 Total current assets 261,781 290,223 273,400 Total assets 7,284,689 8,161,638 7,373,929 ISSUED CAPITAL, RESERVES ATTRIBUTABLE TO EQUITY, AND LIABILITIES Issued share capital 285,400 285,400 285,400 Share premium account 2,368,389 2,368,389 2,368,389 IFRS restatement reserves (124,456) (81,140) (109,933) Other reserves 3,483 3,483 3,483 Retained earnings (2 200 119) (1 595 081) (1 595 081) Loss for the period ( 87 112) ( 104 899) ( 605 038) Cumulative translation reserve 212,640 227,639 75,607 Total issued capital and reserves 458,225 1,103,791 422,827 attributable to equity Provisions > 1 year 127,504 118,470 126,837 Financial liabilities 6,078,258 6,005,269 6,185,945 Other financial liabilities 108,155 469,040 145,375 Trade and other payables 97,333 97,556 99,416 Total non-current liabilities 6,411,250 6,690,335 6,557,573 Provisions < 1 year 39,347 1,101 36,615 Financial liabilities 102,458 94,539 98,094 Other financial liabilities 18,409 43,755 22,062 Interest rate derivatives 152,357 121,828 140,358 Trade payables 79,517 71,859 76,456 Other payables 23,126 34,430 19,944 Total current liabilities 415,214 367,512 393,529 Total issued capital, reserves attributable 7,284,689 8,161,638 7,373,929 to equity, and liabilities Exchange rate •/£ 1.483 1.491 1.418 * Reconciliations between the 2004 balance sheets published under French GAAP and the balance sheets restated under IFRS according to the principles described in note 2.1, are shown in note 8. Cash flow statement 6 months to (1)6 months to (1)Year to £000 30 June 2005 30 June 2004 31 December 2004 Trading profit before depreciation and 141,024 131,203 292,159 provisions Exchange adjustment (2) (546) 167 3,834 Decrease in inventories 37 1,522 1,648 (Increase) / decrease in trading debtors (6,285) (6,096) 6,467 Increase / (decrease) in trading creditors 12,285 3,666 (7,984) Release of provisions (6,933) (6,423) (12,812) Net cash inflow from trading 139,582 124,039 283,312 Non-trading cash flows (7,759) (4,355) (13,835) Taxation (23) (23) (24) Net cash inflow from operating activities 131,800 119,661 269,453 Payments to acquire fixed assets (10,329) (17,180) (23,784) Sale of property, plant and equipment 7,626 1,191 4,850 Net cash outflow from investing activities (2,703) (15,989) (18,934) Interest received on cash and cash 2,867 2,463 4,395 equivalents Interest paid on bank debt (109,569) (130,441) (249,011) Net interest paid on hedging instruments (23,196) (6,843) (36,044) Other interest paid (85) (243) (581) Debt repayments (2,750) (774) (724) Net cash outflow from financing activities (132,733) (135,838) (281,965) Decrease in cash in period (3,636) (32,166) (31,446) Exchange rate •/£ 1.483 1.491 1.418 (1) Reconciliations between the 2004 cash flow statements published under French GAAP and the cash flow statements restated under IFRS according to the principles described in note 2.1, are shown in note 8. (2) The adjustment relates to the restatement of the elements of the profit and loss account at the exchange rate ruling at the period end. NOTES 1 Key events The two main elements of the Group's strategy are: - the implementation of project DARE, both for the truck and passenger services, and for the cost reductions, and - the negotiations with creditors in accordance within the framework of the waiver obtained in order to renegotiate the Credit Agreements. 1.1 Continued implementation of project DARE The implementation of project DARE began in November 2004, and a provision of £36 million was made in the 2004 accounts for the consequences of this plan on staffing levels and for the early termination of certain subcontracts. The new Truck Shuttle strategy was introduced at the beginning of January 2005, whereby priority access is given to customers under contract who provide in advance a daily forecast of traffic. This enables Eurotunnel to better align capacity to customers' requirements, and the reduction of capacity has consequently substantially improved load factors for the truck shuttles. In addition to this, Eurotunnel has taken back direct control over the commercial activity previously sub-contracted to Transferry in order to give Eurotunnel the opportunity to offer an even better quality of service to all its customers across the whole of Europe. With effect from 16 August 2005, the contract with its agent for the commercial operation of the brand and services of EurotunnelPlus was terminated. For the Passenger Shuttle service, a new pricing policy was introduced at the beginning of June 2005 for the car business. This included the introduction of a more transparent booking module incorporating fares based on one-way crossings, standard fares which are not based on length of stay, and the introduction of FlexiPlus fares with free amendments, dedicated check-in and priority boarding. Passenger shuttle capacity is progressively being reduced during the course of 2005 in order to reduce surplus capacity and improve load factors and thus reduce costs. In relation to the impact on staffing levels that results from project DARE, negotiations with UK and French staff representatives have resulted in agreements based on negotiated voluntary departures. Currently it is thought that the departures that will result from these agreements will be approximately in line with the objectives contained within the DARE plan. In practice the voluntary departures which began in June, will continue until April 2006. 1.2 Forecast cash position The financial consequences of the forecasts updated in the light of the latest results and the current outlook for the Group including 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 either financial or operational risks, especially those associated with the implementation of DARE, the cash flow position remains subject to a number of uncertainties. On the basis of the latest operating forecasts available, the amount of un-used Stabilisation Advances should provide sufficient cash to the end of 2005, at which time 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 July and October 2006 because of the interest payments due under the current Credit Agreements. Furthermore, Railways revenue will no longer be protected after November 2006; payments under the provisions of the Minimum Usage Charge (MUC) in the Railway Usage Contract for the first 11 months of 2006 will have an estimated effect on cash flow amounting to approximately £65 million. - 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 effect of the conversion of the Stabilisation Advances and Notes existing at 30 June 2005 would be to reduce annual interest charges by approximately £24 million from January 2006, based on current interest rates. Furthermore, significant disruptions to the operations of the Group or events that are unforeseeable or unquantifiable at the date of the accounts (for example relating to on-going disputes) could accelerate the date at which the Group would be unable to meet its financial obligations. 1.3 Financial restructuring Eurotunnel has obtained a waiver from its Lenders, valid up to 31 January 2006, which defines the conditions under which the Group can undertake debt restructuring negotiations with its creditors. In particular, the waiver required 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 accordance with the timetable, Eurotunnel presented a business plan during June, and on the 13 July, presented its initial reflections for restructuring its debt to the Ad Hoc Committee which represents the majority of Eurotunnel's creditors. In order to convert the Stabilisation Advances and Notes into Units in accordance with the provisions of the 1998 restructuring, Eurotunnel has the possibility to propose to its shareholders to vote on the conversion before the end of 2005. The consequences of such a conversion, which are being examined as part of the current debt restructuring, are described in the Group's interim report. Within the Credit Agreements there is an option available for putting into place an additional line of credit as described in the 2004 annual accounts. In addition, should an Event of Default occur, the finance agreements also provide, under certain conditions, for a standstill period during which time the negotiation of a restructuring plan can take place whilst enabling the Group to continue to conduct its business normally. 1.4 Uncertainties The Group is subject to two uncertainties: the ability to continue as a going concern and the carrying value at which the Group's assets are recorded in the accounts. a) 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 the measures described under 1.3 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 30 June 2005 interim Combined Accounts has been based on the assumptions described above. b) Impairment An impairment charge of £1.3 billion was accounted for in the 2003 accounts, which was based on assumptions for forecast operating cash flows, the future level of the Group's debt over the life of the Concession as well as for market interest rates; this corresponded to an implicit discount rate of 7%. Eurotunnel updated its impairment calculation as at 31 December 2004, which led to an additional impairment charge of £395 million; this corresponded to an implicit discount rate of 7.2%. 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 assuming, for the purposes of these valuations only, the validity of the going concern principle. In addition, these valuations are based on a reduction of the level of debt by £1.3 billion and an equivalent increase in capital. Taking into account the increasing uncertainties that the Group is facing, Eurotunnel considered it appropriate, at 31 December 2004, to use values in the upper ranges for the market risk premium and the asset "beta" ratios. The operational performance of the Group in the first half of 2005 and the level of interest rates would not require a modification to the value in use of assets. The Group is currently working on a refinancing plan the consequences of which on the level of indebtedness may differ from the underlying assumptions used at 31 December 2004. The Group has not revised its financial projections, which is normally carried out during the second half of the year as a part of the preparation of its medium term plan. 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. 1.5 Railways dispute Under the Railways Usage Contract dated 29 July 1987 between the Railways (SNCF and BRB) and Eurotunnel, the Railways are required to pay a contribution to the operating costs of Eurotunnel in each year. On 21 November 2001, the Railways initiated arbitration proceedings under the auspices of the International Chamber of Commerce, aimed at reducing the amount of this contribution, firstly for the years 1997 and 1998, and secondly for the years 1999 to 2002. The amount claimed by the Railways for all of these years together is estimated to be a maximum of £100 million. In a first award made on 26 April 2002, the Arbitration Tribunal ordered the Railways to pay to Eurotunnel the full amount of the provisional contribution to its 2002 operating costs. The Arbitration Tribunal, in a second partial award made on 30 January 2003, rejected the Railways' claim regarding the operating costs contribution for 1997 and 1998 on the basis that it was time barred. The Arbitration Tribunal, in a third partial award rendered on 4 May 2005: - rejected the Railways' claim regarding the operating costs contribution for 2000 on the basis that it was time barred; - rejected the Railways' claims on allegations of breach of contract by Eurotunnel; - set out a number of clarifications on the interpretation of Usage Contract provisions regarding cost allocations, and on the practice of the parties in this respect. The determination of the final amount of the operating costs contribution for non time barred years 1999, 2001 and 2002 will be carried out within the scope of the expert's mission as set out in the Usage Contract. The Arbitration Tribunal will remain constituted and will render a final award upon completion of the expertise, in which it will pronounce any potential condemnations against Eurotunnel and/or SNCF and BRB. Eurotunnel remains confident in the outcome of these proceedings and has therefore not changed its position from previous years; consequently no provision has been made in these interim Combined Accounts or in the Group's financial projections. 1.6 Other disputes The termination of the contract between Eurotunnel and Transferry has resulted in a contractual dispute. 2 Basis of preparation and presentation, and accounting policies Basis of preparation and presentation 2.1 The Eurotunnel Group complies with the European Union regulation 1606/2002 of 19 July 2002 relating to the application from 1 January 2005 of the set of accounting standards issued by the IASB (International Accounting Standards Board), which is applicable to all European Union listed companies. The international accounting standards incorporate IFRS (International Financial Reporting Standards), IAS (International Accounting Standards), as well as interpretations thereof. With the exception of certain aspects of IFRS applicable to concession fixed assets and provisions related to these assets (see note 8.1), the combined interim financial statement have been prepared under existing IFRS accounting and valuation principles which are expected to be applicable at 31 December 2005 and in accordance with the recommendations of the AMF (Autorite des Marches Financiers, the French securities regulator) dated 10 February 2004 as well as with the additional information they published during January and June 2005. In the absence of the adoption by the IFRIC of the three studies into the interpretation and application of concession contracts, Eurotunnel has continued to apply its existing accounting policies in accordance with French GAAP for depreciation of concession fixed assets and for provisions for renewals and large scale maintenance (see note 8.1), for the purposes of its interim accounts. As such, it is too early to consider that the accounting principles currently applied will be compatible with IFRS applicable at 31 December 2005. Furthermore, when publishing its first IFRS accounts for the year ended 31 December 2005, Eurotunnel may be required to adjust its opening balance sheet to take account of existing standards on fixed assets and provisions, and of any new interpretations. In addition, the Eurotunnel Group has adopted the option for first application of IAS32 and 39 relating to financial instruments at 1 January 2004. However, the Group has not applied IAS34 at 30 June 2005 and as a consequence has applied the recommendation of the CNC 99-R01 relating to the principles of preparation for interim accounts. Nevertheless, the Group has applied the recommendation CNC 2004-R02 dated 27 October 2004 for the presentational format for the income statement, the cash flow and the table of movements in issued capital and reserves attributable to equity. This presentation may differ to reflect standards in force at the time of preparing the financial statement for the year ending 31 December 2005. The combined accounts, which up until 31 December 2004 were prepared under French GAAP as described in the 2004 annual accounts, constituted the Eurotunnel SA Group (ESA) consolidated accounts according to French law. The interim combined accounts at 30 June 2005, prepared in accordance with the principles described below, also constitute the consolidated interim accounts of ESA according to the same French law. The standard IAS27 on consolidated accounts does not deal specifically with combined accounts. The Group has decided to continue to publish its consolidated accounts as combined accounts. These interim accounts do not constitute statutory accounts within the meaning of Section 240 of the UK Companies Act 1985. The combined income statement for the first half of 2005 has been prepared in accordance with IFRS presented in this document is compared with the income statements for the first half of 2004 and for the year to 31 December 2004 which have been restated. The balance sheet at 30 June 2005 is compared to the balance sheets at 30 June 2004 and 31 December 2004, also restated. In order to allow both shareholders and the wider financial community to understand the consequences of this significant transition, and to follow the recommendations of the CESR (Committee of European Securities Regulators) and the AMF, this document also contains: - Reconciliations between French GAAP and the principles described below for the combined income statements and cash flows for the 6 months to 30 June 2004 and the year to 31 December 2004, for the balance sheet at 30 June 2004 and 31 December 2004, and for the issued capital and reserves attributable to equity at 1 January 2004, 30 June 2004 and 31 December 2004. - Notes explaining the changes in accounting standards which affect Eurotunnel's financial statements and the restatements that have been made. As indicated in note 1, 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 their securities over assets set out in the Credit Agreements. The transition to IFRS is taking place in the context of an urgent need to restructure the debt before 2007 and the uncertainty surrounding the changes that will be made to the amount, nature and characteristics of this debt. The main consequence of this is that there is no immediate recognition of future gains, as they cannot be recognised due to the significant contractual modifications that are expected to occur in the accounting periods after 2006. 2.2 The Eurotunnel Group's interim accounts are prepared as at 30 June. Companies acquired or formed during the period are consolidated as from their date of acquisition or formation. Four subsidiaries of ESA were not consolidated as they remained dormant or were not material during the period. These companies had no off balance sheet liabilities. 2.3 Transactions between the members of the Eurotunnel Group have been eliminated. 2.4 The accounts of the ESA Group have been converted into £ as follows: - share capital, share premium account, retained reserves brought forward, Concession fixed assets and depreciation at historical rates; - other assets and liabilities at the rate ruling at the balance sheet date; and - profit and loss account items, with the exception of depreciation, at an average rate for the period. Exchange differences arising from the application of the above are included in the exchange adjustment reserve in the balance sheet. The closing and average •/£ exchange rates used to prepare the Combined Accounts are as follows: •/£ 30 June 30 June 31 December 2005 2004 2004 Closing rate 1.483 1.491 1.418 Average rate 1.468 1.496 1.466 Accounting policies 2.5 Cost and revenue sharing The Concession requires that the Eurotunnel Group shall share equally the cost price of the Project and all revenues and costs relating to the operation of the Fixed Link between the UK and French companies. - Concession fixed assets: all costs and revenues arising either directly or indirectly from the design, financing and construction of the Project are capitalised and shared between CTG and FM, and shown as fixed assets. Adjustments are made within fixed assets to equalise the cost between the Concessionaires. - Operating revenues and costs: all revenues and costs arising from the operation of the Concession are accounted for in the profit and loss account of the Partnership and shared equally between the Concessionaires. Revenues and costs arising in Eurotunnel Group companies which do not relate to the operation of the Concession are not subject to these sharing arrangements. 2.6 Equity issue costs Equity issue costs arising from the increase in share capital have been deducted from the share premium account, with the exception of those which occurred during the construction phase, which were capitalised in accordance with the principles set out above. 2.7 Fixed assets and depreciation Since 2003 the Group has applied the methodology of IAS36 which requires the net book value of assets to be compared to discounted future operating cash flows. Tangible assets are depreciated on a systematic basis in order to write down the costs of assets over their expected useful lives as follows: Tunnels Life of Concession Terminals and related land 10 years - life of Concession Fixed equipment and machinery 5 years - life of Concession Rolling stock 5-60 years Freehold land not depreciated Office equipment 3-10 years The expected useful lives of the assets are kept under review and revised when necessary, according to experience. Non-renewable Concession fixed assets depreciated over the life of the Concession are depreciated using a unit of throughput method based on revenue. The annual depreciation is calculated on the net book value and is a function of the proportion of the actual revenue for the year to the total estimated revenue from the commencement of the year to the end of the Concession, adjusted for inflation. As an indication, if the Group were to adopt a straight line basis for non-renewable assets, it would increase the 2005 annual depreciation charges by approximately £24 million. Renewable depreciation is calculated on a straight line basis. The initial purchase cost of certain fixed assets (for example track), which require regular renewal during the course of the Concession, is depreciated using the method applied to non-renewable Concession fixed assets. Renewal expenditure on these assets is charged to the income statement as incurred. As all fixed assets will be written down to £nil at the end of the Concession, depreciation of the final renewal cost of renewable assets will be based on the residual duration of the Concession. 2.8 Provisions Provision for renewal of fixed assets - Provisions for renewals are based upon the present value of the difference between the purchase or production cost and the estimated cost of the assets at the time of their renewal. Provision for large scale maintenance - The provision for large scale maintenance, which covers the major expected maintenance costs other than regular maintenance and repairs expenditure, is based upon a specific maintenance programme by asset categories. Provision for retirement liabilities - The Group provides for its contractual obligations for retirement indemnities of employees under French contracts, and for the defined benefit retirement schemes of employees under UK contracts operated by the Eurotunnel PLC Group, the assets of which are held separately from those of the Group. The current service cost of the period, determined by the projected unit of credit method, is accounted for in operating costs. Actuarial differences are dealt with using the "corridor" approach, with any excess outside the corridor being amortised over the average remaining working lives of the beneficiaries, and are shown in financial charges. Provision for restructuring and similar costs - The Group provides for costs of restructuring, when detailed restructuring plans are approved, the features of the plans have been announced and implementation has commenced. 2.9 Financial instruments Financial assets include cash and cash equivalents, trade receivables and the positive valuation of derivatives. Financial liabilities include borrowings, trade payables and the negative valuation of derivatives. Financial assets and liabilities are classified within current assets or liabilities in the situation where the residual maturity is less than 12 months. a) Trade receivables and payables Trade receivables and payables are measured at amortised cost. b) Borrowings Borrowings are measured at amortised cost. The amortised cost at the initial recognition date of the financial liability is equal to the consideration in cash received less transaction costs. Subsequently, the amortised cost is adjusted for the amortisation of the difference between the initial amount and the maturity amount according to the effective interest method. The interest expense is recognised at a constant interest rate over the expected maturity of financial liabilities according to the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the borrowing. The effective interest rate is calculated according to the forecast cash flows to be paid on each series of the financial debt. The calculation includes transaction costs and all other premiums or discounts. c) Derivatives Under IAS39, all derivatives should be recognised on the balance sheet and measured at fair value. Hedge accounting is permitted only when strict documentation and effectiveness testing requirements are met. For the purpose of interest rate risk hedges, Eurotunnel carries the following derivative instruments: purchased collars, purchased caps and a swap transaction. All options entered into by Eurotunnel are designed to partially hedge Eurotunnel against the increase in interest to be paid on the Junior Debt during the floating rate period from 2004 to 2008. Hedging options that meet the hedging criteria set forth by IAS39 are accounted for according to the cash flow hedge model. Gains and losses on qualifying hedging options are recorded in a separate component of equity, excluding the ineffective portion and the time value of options which are recorded in the income statement for the reporting period. The outstanding swap transaction is designed to convert a portion of the interest expense from fixed to floating during 2004 and 2005. The swap transaction is designated as a fair value hedge of financial liabilities. Changes in market-value of the hedging swap are recorded in the income statement for the reporting period. Equal and opposite changes in the fair value of the hedged risk adjust the carrying amount of the hedged financial liability through the income statement for the reporting period. 2.10 Foreign exchange Transactions in foreign currencies are converted into the reporting currency of each individual company at the rate of exchange ruling at the date of the transaction. Assets and liabilities denominated in foreign currencies other than those mentioned in notes 2.4 are translated at the rate ruling at the balance sheet date. Exchange differences are dealt with in the income statement. 2.11 Inventories In respect of properties, cost comprises the purchase price of property, development costs, and, where appropriate, a proportion of attributable financing costs during the development period. Stocks are stated at the lower of cost and net realisable value and include non repairable spares. Repairable spare parts are included in the fixed asset category to which they relate. Slow moving stock items are subject to a provision for obsolescence. 2.12 Stock options Share options are accounted for by the Group to its staff members in accordance with IFRS2. The options are valued at the date on which they are granted using the Binomial model. Any variations in value occurring after the grant date are not taken into account. The value is charged to employee benefit expenses on a linear basis between the date of the grant and the maturity date (the vesting period), with an equal and opposite entry directly to issued capital and reserves attributable to equity. 3 Loss per Unit Pence 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 December 2004 Basic (3.4) (4.1) (23.8) Fully diluted (3.4) (4.1) (23.8) The basic loss per Unit for the six months is calculated using the weighted average number of Units in issue during the period of 2,546,114,213 (30 June 2004: 2,546,110,049) and the loss for the period of £87,112,000 (30 June 2004: loss of £104,899,000). The fully diluted loss per Unit is calculated in accordance with IAS33, whereby the potential conversion of Stabilisation Notes and Advances into Units and the exercise of share options are not to be taken into account. 4 Movements in issued capital and reserves attributable to equity Reserves Retained Results earnings directly input attributable and to £000 Capital to capital combined results equity Total At 1 January 2004 285,398 2,371,870 (1,595,081) (38,616) 1,023,571 Increase in capital 2 2 4 Result for the period (104,899) (104,899) Valuation of hedging contracts 421 421 Share options 34,071 34,071 Translation adjustments 150,623 150,623 At 30 June 2004 285,400 2,371,872 (1,699,980) 146,499 1,103,791 Increase in capital 0 Result for the period (500,139) (500,139) Valuation of hedging contracts (29,495) (29,495) Share options 702 702 Translation adjustments (152,032) (152,032) At 31 December 2004 285,400 2,371,872 (2,200,119) (34,326) 422,827 Increase in capital 0 Result for the period (87,112) (87,112) Valuation of hedging contracts (14,916) (14,916) Share options 0 0 Translation adjustments 137,426 137,426 At 30 June 2004 285,400 2,371,872 (2,287,231) 88,184 458,225 During the first half of 2005 no share options were granted, and no share options were exercised. 5 Financial liabilities 31 31 December 30 June 30 June December 2004 2005 2004 2004 restated & Repayment Settlement Loans due Effective as restated £000 restated recalculated of debt of interest 2006 rate reported for IFRS for IFRS * ** adjustment Participating Loan Notes 874,078 854,332 854,332 852,021 EDL, Senior and 4th Tranche 374,123 366,042 (2,750) (1,910) 361,382 365,096 Debt FLF 2 (Tier 1A) 716,700 716,700 5,850 722,550 710,850 Junior Debt 3,247,008 3,166,093 4,169 3,170,262 3,152,464 Resettable Advances 467,615 453,932 1,338 455,270 450,993 Stabilisation Advances and 506,421 494,825 7,917 11,720 514,462 473,845 Notes Total non-current financial 6,185,945 6,051,924 (2,750) 7,917 (1,910) 23,077 6,078,258 6,005,269 liabilities Accrued interest: Loan Notes 1,481 1,448 4,272 5,720 5,704 Loans 96,613 95,198 (370) 1,910 96,738 88,827 Overdrafts - - 8 Total current financial 98,094 96,646 0 3,902 1,910 0 102,458 94,539 liabilities Total 6,284,039 6,148,570 (2,750) 11,819 0 23,077 6,180,716 6,099,808 * The debt at 31 December 2004 has been recalculated at the exchange rate of 30 June 2005 in order to facilitate comparison. **Interest includes accrued interest during the period less interest paid in cash or settled using the Stabilisation Facility. In January 2005, £4.0 million plus €5.8 million of Stabilisation Advances were created in respect of interest due on Resettable Advances which could not be paid from available cash flow. All interest due on the Junior Debt at 25 January 2005 (£44.9million plus €46.1 million) was paid in cash. £2.2 million and €30.2 million was paid in respect of the floor hedging contracts. In July 2005, £4.0 million plus €5.8 million of Stabilisation Advances were created in respect of interest due on Resettable Advances which could not be paid from free cash flow. All interest due on the Junior Debt at 25 July 2005 (£43.3 million plus €45.4 million) was paid in cash. £3.2 million and €30.0 million was paid in respect of the floor hedging contracts. 6 Other financial debtors and creditors The Eurotunnel Group includes leasing companies in the UK, which had debt outstanding at 30 June 2005 of £127 million (30 June 2004: £513 million). This debt is fully secured on an equivalent amount of lease receivables due to the companies. Through these transactions Eurotunnel has been able to obtain immediate value in cash for a proportion of its tax losses in the UK by the future surrendering of such losses by way of group relief to the leasing companies. Included in interest receivable for the 6 months to 30 June 2005 is an amount of £4 million (30 June 2004: £14 million) arising in the leasing companies. This is matched by an equivalent amount in interest payable. The significant reduction since 30 June 2004 in other financial debtors and creditors and associated interest results from lease terminations and the putting of receivables on leasing transactions completed in previous years. 7 Non trading revenues and (charges) A cost of £11 million was incurred in the first half of 2005 relating principally to external costs associated with refinancing and to the termination of certain contracts. 8 TRANSITION TO IFRS(1) Reconciliation table for income statements for 6 months to 30 June 2004 and year to 31 December 2004 Notes 1st half of 2004 full 2004 year £000 £000 Net loss for 2004 under French GAAP (82,185) (569,733) Effect of restatements 8.7 Adjustment of interest rate hedging contracts to market value 8.7 725 13,269 Accounting for financial charges at their effective rate of interest 8.5 (23,018) (46,993) Stock options 8.4 (421) (1,123) Retirement liabilities - (458) Net loss for 2004 restated(1) (104,899) (605,038) (1) Prepared on the basis of the accounting principles described in note 2.1. Reconciliation table for issued capital and reserves attributable to 1 January 30 June 31 December equity at £000s Notes 2004 2004 2004 Issued capital and reserves attributable to equity under French GAAP 1,099,187 1,167,894 528,241 Effect of restatements Adjustment of interest rate hedging contracts to market value: effect 8.7 (58,094) (57,369) (44,825) on retained earnings Adjustment of interest rate hedging contracts to market value: effect 8.7 (116,313) (82,242) (111,737) on issued capital and reserves attributable to equity Accounting for financial charges at their effective rate of interest 8.7 117,033 94,015 70,040 Retirement liabilities 8.4 (18,242) (18,242) (18,700) Exchange adjustment reserve - (265) (192) Issued capital and reserves attributable to equity restated(1) 1,023,571 1,103,791 422,827 (1) Prepared on the basis of the accounting principles described in note 2.1. MAIN IFRS STANDARDS THAT AFFECT THE EUROTUNNEL GROUP'S COMBINED ACCOUNTS 8.1 Concession fixed assets Until IFRIC issues definitive guidance for concession fixed assets, the implementation of which would not be possible before 1 January 2006, Eurotunnel has decided for its Combined Accounts in IFRS at 30 June 2005, to continue with the accounting principles previously applied in accordance with French standards. Therefore, the following principles have been maintained: - the unit of throughput method for depreciating concession fixed assets, - the provision for renewal of fixed assets, - the provision for large scale maintenance. 8.2 Property, plant and equipment (IAS16) For its opening IFRS balance sheet at 1 January 2004, Eurotunnel has elected to apply the "deemed cost" option under IFRS1 for its valuation of property, plant and equipment. This "deemed cost" is the "economic value in use" which corresponds to the net book value after depreciation at the 31 December 2003 as previously published, calculated in accordance with IAS36. Equity issue costs and their depreciation that were capitalised during the construction period have not been retreated. Fixed asset and component lives which were reviewed in 2004, are unaffected by the transition to IFRS. 8.3 Depreciation of assets (IAS36) Eurotunnel has applied the principles of IAS36 since 2003 and has made impairment charges in the 2003 and 2004 accounts. 8.4 Retirement benefits (IAS19 & IFRS1) In accordance with the option under IFRS1, Eurotunnel has accounted in its opening IFRS balance sheet for the whole of the actuarial differences as at 1 January 2004, with a corresponding reduction in issued capital and reserves attributable to equity. The net deficit accounted for at this date is £18,242,000. Actuarial differences arising since 1 January 2004 are dealt with according to the "corridor" method over the average remaining working lives of the beneficiaries. The effect of any such amortisation would be shown in financial charges rather than in operating charges, in accordance with the option in IAS19. In 2004 an additional charge of £458,000 was accounted for in respect of current service costs for the period. No adjustments for actuarial differences were made. 8.5 Stock options (IFRS2) In accordance with the provisions of IFRS2, only plans agreed after 7 November 2002 for which the rights are not yet vested at 1 January 2005 have been valued and accounted for in employee benefit expenses. The application of this standard has no effect on the Group's total issued capital and reserves attributable to equity. 8.6 Basis of consolidation (SIC12) The special purpose vehicles Fixed-Link Finance BV (FLF) and Tunnel Junior Debt Holdings Limited, set up in connection with the repackaging of £1.1 billion of Junior Debt completed in 2001, were not previously consolidated in the Group accounts in accordance with French GAAP. The consolidation of these two entities in accordance with IFRS would increase the Group's issued capital and reserves attributable to equity by approximately £120 million at 1 January 2004 and decrease the Junior Debt by the same amount. However, as this benefit could only be realised after the complete reimbursement of the FLF debt from the bond holders, Eurotunnel, with the prospect of a significant restructuring, has not modified the amount of its Junior Debt as it does not consider itself to have control over these entities. Therefore, the Eurotunnel Group has not consolidated FLF and TJDH. In EPLC these entities have been consolidated since 2001 in accordance with UK GAAP, and the profit from the operation has been recognised. The special purpose vehicles Fixed-Link Finance 2 BV (FLF2) and Tunnel Stabilisation and Resettable Advances Limited, set up in connection with the debt buyback and refinancing in 2002, have been consolidated, but have no impact on the opening balance sheet at 1 January 2004. 8.7 Derivatives and financial instruments (IAS32 & IAS39) a) Accounting for the 1997 financial restructuring In accordance with the transition provisions as at 1 January 2004 as detailed in IFRS1, Eurotunnel applies prospectively the derecognition rules of IAS39 for transactions occurring on or after 1 January 2004. Consequently, the 1997 financial restructuring is carried over in the IFRS financial statement according to the derecognition principles that were adopted under French GAAP. b) Effective interest rate The effective interest rate on the restructured Junior Debt has been calculated specifically in the context of the need to refinance the debt before the end of 2006. Consequently, debt issue costs have been amortised so as to be fully depreciated at 31 December 2006. The effective interest rate has been calculated using a fixed coupon rate of 1% for the Participating Loan Notes, and for the Stabilisation Advances and Notes, using an estimated market rate up to the end of the Stabilisation Period. c) Derivative instruments Rate instruments at 1 January 2004 have been treated as hedging instruments, and have been valued at their fair value. The effect of this valuation has been accounted for in issued capital and reserves attributable to equity. The effective element will be recognised in the income statement at the same rate as the interest payments on the hedged debt. EFFECT OF THE TRANSITION TO IFRS ON THE FINANCIAL STATEMENTS Income statement for the 6 months to June 2004 Presentation under French French Reclassifications Revaluations Presentation under IFRS GAAP £000s GAAP Notes IFRS(1) £000s Turnover Operating revenue 260,530 260,530 Operating revenue Other income 8,525 (8,525) 0 Other operating income Total turnover 269,055 (8,525) Operating expenditure Materials and services 84,883 (8,127) 76,756 Materials and services (net) Staff costs 52,231 (81) 8.5 421 52,571 Employee benefit expense Depreciation 50,805 50,805 Depreciation Provisions 10,848 (88) 10,760 Provisions Other operating charges 229 (229) 0 Other net operating income and (expenses) Total operating 198,996 (8,525) expenditure Operating profit 70,059 0 69,638 Trading profit Impairment 8,042 8,042 Other non trading charges 61,596 Operating profit Financial income Interest receivable and 16,553 (13,974) 2,579 Income from cash and cash similar income equivalents Profit on disposal of 244 (244) investments Exchange differences 2,151 (2,151) Total financial income 18,948 (16,369) Financial charges Interest payable and 162,776 (16,031) 8.7 23,018 168,409 Cost of servicing debt (gross) similar charges (1,354) Exchange differences 351 (351) Total financial charges 163,127 (16,382) 165,830 Net cost of financing and debt service Financial result (144,179) 13 (13) 8.7 (629) (642) Other financial income and (charges) Exceptional result (8,042) 8,042 Taxation 23 23 Taxation Result Result Loss for the period (82,185) 0 (104,899) Loss for the period Loss per Unit (3.2p) (4.1p) Loss per Unit Full diluted loss per Unit (2.8p) (4.1p) Full diluted loss per Unit •/£ exchange rate for the 1.496 1.496 •/£ exchange rate for the period period (1) Prepared on the basis of the accounting principles described in note 2.1. Combined balance sheet at 30 June 2004 Presentation under French French Reclassifications Revaluations Presentation under IFRS GAAP £000s GAAP Notes IFRS(1) £000s ASSETS ASSETS Tangible fixed assets Property, plant and equipment Concession fixed assets 7,381,924 7,381,924 Concession fixed assets Other fixed assets 1,964 1,964 Other fixed assets Total tangible fixed 7,383,888 assets Financial fixed assets Non-current financial assets Shares 2,115 2,115 Shares Others 16,372 469,040 485,412 Other financial assets Other non-current assets Total fixed assets 7,402,375 7,871,415 Total non-current assets Stocks 7,118 7,118 Inventories Trade debtors 40,876 40,876 Trade receivables Other debtors 15,569 11,146 8.7 (3,712) 23,003 Other receivables Other financial debtors 512,795 (469,040) 43,755 Current financial debtors 38,182 8.7 (38,182) Interest rate derivatives Investments and liquid 175,471 175,471 Cash and cash equivalents funds Total current assets 751,829 290,223 Total current assets Prepaid expenses 49,328 (49,328) Total assets 8,203,532 0 (41,894) 8,161,638 Total assets SHAREHOLDERS' FUNDS AND ISSUED CAPITAL, RESERVES LIABILITIES ATTRIBUTABLE TO EQUITY, AND LIABILITIES Issued share capital 285,400 285,400 Issued share capital Share premium account 2,368,389 2,368,389 Share premium account 8.5 1,102 (81,140) IFRS restatement reserves 8.7 (82,242) Other reserve 3,483 3,483 Other reserves Profit and loss account (1,635,097) 8.5 (681) (1,595,081) Retained earnings reserve 8.4 (18,242) 8.7 117,033 8.7 (58,094) Loss for the year (82,185) 8.5 (421) (104,899) Loss for the year 8.7 (23,018) 8.7 725 Exchange adjustment 227,904 (265) 227,639 Cumulative translation reserve reserve Total shareholders' funds 1,167,894 1,103,791 Total issued capital and reserves attributable to equity Provisions 101,329 (1,101) 8.4 18,242 118,470 Provisions > 1 year Loan notes 1,009,324 (1,009,324) Loans 5,088,328 1,009,324 8.7 (92,383) 6,005,269 Financial liabilities Accrued interest 94,531 (94,531) 469,040 469,040 Other financial liabilities 97,556 97,556 Trade and other payables 6,690,335 Total non-current liabilities 1,101 1,101 Provisions < 1 year Overdrafts 8 94,531 94,539 Financial liabilities Other financial creditors 512,795 (469,040) 43,755 Other financial liabilities 25,478 8.7 96,350 121,828 Interest rate derivatives Other creditors 200,885 (129,026) 71,859 Trade payables 34,430 34,430 Other payables Total creditors 6,905,871 367,512 Total current liabilities Deferred income 28,438 (28,438) Total shareholders' funds 8,203,532 0 8,161,638 Total issued capital, reserves and liabilities attributable to equity and liabilities •/£ exchange rate 1.491 1.491 •/£ exchange rate (1) Prepared on the basis of the accounting principles described in note 2.1. Cash flow statement for the 6 months to June 2004 Presentation under French French Reclassifications Presentation under IFRS GAAP £000s GAAP IFRS(1) £000s Profit before depreciation, 131,712 121 provisions, interest and tax (421) (209) 131,203 Trading profit before depreciation and provisions Exchange adjustment(2) 167 0 167 Exchange adjustment(2) Decrease / (increase) in 1,522 0 1,522 Decrease in inventories stocks (Increase) / decrease in (5,975) (121) (6,096) (Increase) / decrease in trading debtors debtors (Decrease) / increase in 3,245 421 3,666 Increase / (decrease) in trading creditors creditors Release of provisions ( 6 632) 209 (6,423) Release of provisions 124,039 Net cash inflow from trading (4,355) (4,355) Non-trading cash flows (23) (23) Taxation Net cash inflow from 124,039 (4,378) 119,661 Net cash inflow from operating operating activities activities Taxation (23) 23 0 (17,180) (17,180) Payments to acquire fixed assets Capital Expenditure (15,989) 17,180 1,191 Sale of property, plant and equipment 0 (15,989) Net cash outflow from investing activities Other non-operating cash (4,355) 4,355 flows Returns on investments and (135,064) 135,064 0 servicing of finance 2,463 2,463 Interest received on cash and cash equivalents (130,441) (130,441) Interest paid on bank debt (6,843) (6,843) Net interest paid on hedging instruments (243) (243) Other interest paid (774) (774) Debt repayments (135,838) (135,838) Net cash outflow from financing activities Cash (outflow) / inflow (31,392) before financing Financing (774) 774 0 Decrease in cash in period (32,166) 0 (32,166) Decrease in cash in period Exchange rate •/£ 1.491 1.491 (1) Prepared on the basis of the accounting principles described in note 2.1. (2) The adjustment relates to the restatement of the elements of the profit and loss account at the exchange rate ruling at the period end. Income statement for the 6 months to December 2004 Presentation under French French Reclassifications Revaluations Presentation under IFRS GAAP £000s GAAP Notes IFRS(1) £000s Turnover Operating revenue 538,123 538,123 Operating revenue Other income 17,050 (17,050) 0 Other operating income Total turnover 555,173 (17,050) Operating expenditure Materials and services 157,394 (16,149) 141,245 Materials and services (net) Staff costs 103,678 (82) 8.5 1,123 104,719 Employee benefit expense Depreciation 100,258 100,258 Depreciation Provisions 22,003 (269) 8.4 458 22,192 Provisions Other operating charges 550 (550) 0 Other net operating income and (expenses) Total operating 383,883 (17,050) expenditure Operating profit 171,290 0 169,709 Trading profit 395,000 395,000 Impairment 47,806 47,806 Other non trading charges (273,097) Operating profit Financial income Interest receivable and 31,641 (26,282) 5,359 Income from cash and cash similar income equivalents Profit on disposal of 286 (286) investments Exchange differences 1,037 (1,037) Total financial income 32,964 (27,605) Financial charges Interest payable and 330,087 (29,414) 8.7 46,993 341,620 Cost of servicing debt (gross) similar charges 8.7 (6,046) Exchange differences 1,071 (1,071) Total financial charges 331,158 (30,485) 336,261 Net cost of financing and debt service Financial result (298,194) 2,880 (2,880) 8.7 7,223 4,343 Other financial income and (charges) Exceptional result (442,806) 442,806 Taxation 23 23 Taxation Result Result Loss for the period (569,733) 0 (35,305) (605,038) Loss for the period Loss per Unit (22.4p) (23.8p) Loss per Unit Full diluted loss per Unit (19.1p) (23.8p) Full diluted loss per Unit •/£ exchange rate for the 1.466 1.466 •/£ exchange rate for the period period (1) Prepared on the basis of the accounting principles described in note 2.1. Combined balance sheet at 30 December 2004 Presentation under French French Reclassifications Revaluations Presentation under IFRS GAAP £000s GAAP Notes IFRS(1) £000s ASSETS ASSETS Tangible fixed assets Property, plant and equipment Concession fixed assets 6,933,599 6,933,599 Concession fixed assets Other fixed assets Other fixed assets Total tangible fixed 6,933,599 assets Financial fixed assets Non-current financial assets Shares 2,224 2,224 Shares Others 16,686 145,375 162,061 Other financial assets 2,645 2,645 Other non-current assets Total fixed assets 6,952,509 7,100,529 Total non-current assets Stocks 7,185 7,185 Inventories Trade debtors 41,014 41,014 Trade receivables Other debtors 26,246 (572) 8.7 (3,759) 21,915 Other receivables Other financial debtors 167,437 (145,375) 22,062 Current financial debtors 34,472 8.7 (34,472) Interest rate derivatives Investments and liquid 181,224 181,224 Cash and cash equivalents funds Total current assets 423,106 273,400 Total current assets Prepaid expenses 36,545 (36,545) Total assets 7,412,160 0 (38,231) 7,373,929 Total assets SHAREHOLDERS' FUNDS AND ISSUED CAPITAL, RESERVES LIABILITIES ATTRIBUTABLE TO EQUITY, AND LIABILITIES Issued share capital 285,400 285,400 Issued share capital Share premium account 2,368,389 2,368,389 Share premium account 8.5 1,804 (109,933) IFRS restatement reserves 8.7 (111,737) Other reserve 3,483 3,483 Other reserves Profit and loss account (1,635,097) 8.5 (681) (1,595,081) Retained earnings reserve 8.4 (18,242) 8.7 117,033 8.7 (58,094) Loss for the year (569,733) 8.5 (1,123) (605,038) Loss for the year 8.4 (458) 8.7 (46,993) 8.7 13,269 Exchange adjustment 75,799 (192) 75,607 Cumulative translation reserve reserve Total shareholders' funds 528,241 422,827 Total issued capital and reserves attributable to equity Provisions 144,752 (36,615) 8.4 18,700 126,837 Provisions > 1 year Loan notes 1,035,464 (1,035,464) Loans 5,220,057 1,035,464 8.7 (69,576) 6,185,945 Financial liabilities Accrued interest 98,094 (98,094) 145,375 145,375 Other financial liabilities 99,416 99,416 Trade and other payables 6,557,573 Total non-current liabilities 36,615 36,615 Provisions < 1 year Overdrafts 98,094 98,094 Financial liabilities Other financial creditors 167,437 (145,375) 22,062 Other financial liabilities 22,299 8.7 118,059 140,358 Interest rate derivatives Other creditors 204,404 (127,948) 76,456 Trade payables 19,944 19,944 Other payables Total creditors 6,725,456 393,529 Total current liabilities Deferred income 13,711 (13,711) Total shareholders' funds 7,412,160 0 (38,231) 7,373,929 Total issued capital, reserves and liabilities attributable to equity and liabilities •/£ exchange rate 1.418 1.418 •/£ exchange rate (1) Prepared on the basis of the accounting principles described in note 2.1. Cash flow statement for the 6 months to December 2004 Presentation under French French Reclassifications Presentation under IFRS GAAP £000s GAAP IFRS(1) £000s Profit before depreciation, 293,551 31 provisions, interest and tax 559 (1,139) (843) 292,159 Trading profit before depreciation and provisions Exchange adjustment(2) 3,865 (31) 3,834 Exchange adjustment(2) Decrease / (increase) in 1,648 0 1,648 Decrease in inventories stocks (Increase) / decrease in 7,026 (559) 6,467 (Increase) / decrease in trading debtors debtors (Decrease) / increase in (9,123) 1,139 (7,984) Increase / (decrease) in trading creditors creditors Release of provisions (13,655) 843 (12,812) Release of provisions 283,312 Net cash inflow from trading (13,835) (13,835) Non-trading cash flows (24) (24) Taxation Net cash inflow from 283,312 (13,859) 269,453 Net cash inflow from operating operating activities activities Taxation (24) 24 0 (23,784) (23,784) Payments to acquire fixed assets Capital Expenditure (18,934) 23,784 4,850 Sale of property, plant and equipment 0 (18,934) Net cash outflow from investing activities Other non-operating cash (13,835) 13,835 0 flows Returns on investments and (281,241) 281,241 0 servicing of finance 4,395 4,395 Interest received on cash and cash equivalents (249,011) (249,011) Interest paid on bank debt (36,044) (36,044) Net interest paid on hedging instruments (581) (581) Other interest paid (724) (724) Debt repayments (281,965) (281,965) Net cash outflow from financing activities Cash (outflow) / inflow (30,722) before financing Financing (724) 724 0 Decrease in cash in period (31,446) 0 (31,446) Decrease in cash in period Exchange rate •/£ 1.418 1.418 (1) Prepared on the basis of the accounting principles described in note 2.1. (2) The adjustment relates to the restatement of the elements of the profit and loss account at the exchange rate ruling at the period end. Commissaires aux Comptes' Report In our capacity as "commissaires aux comptes" of Eurotunnel SA, and in accordance with Article L.232-7 of French Company Law (Code de Commerce), we have performed the following procedures: - a review of the accompanying summary of operations and income statement as they appear in the half year combined financial statements of the Eurotunnel Group, for the six month period ended 30 June 2005. - a verification of the information provided in the Company's interim report. The half year combined financial statements are the responsibility of the Joint Board of Eurotunnel Group. Our responsibility is to issue a report on these financial statements based on our review. In the process of application of IFRS, as adopted in the European Union, for the preparation of the 2005 consolidated accounts, the Eurotunnel Group interim combined accounts have been prepared for the first time, with the exception of standards affecting the accounting treatment for concessions, using IFRS accounting and measurement methods adopted in the European Union, using a half year presentation format as defined by the general rules of the AMF. They include, for the purpose of comparison, information related to the year ended 31 December 2004 and the six months ended 30 June 2004 restated using the same rules. We conducted our review in accordance with professional standards applicable in France; these standards require that we plan and perform limited review procedures, substantially less in scope than an audit, to obtain reasonable assurance as to whether the half year combined financial statements are free from material misstatements. A review is limited primarily to inquiries of management and analytical procedures applied to financial data and thus provides less assurance than an audit. Based on our review, nothing has come to our attention that causes us to believe that, in all material respects, the accompanying interim combined financial statements do not conform, with either the rules on presentation and disclosure of information applicable in France, or the accounting and measurement principles described in note 2.1 which result from the application of IFRS standards adopted in the European Union or the specific policies described in that note concerning the accounting treatment of concessions. Whilst giving the conclusion given above, we draw your attention to the following: - Note 1 which highlights that, based on the projections updated in the light of the latest results and the current outlook, the Group is facing: (i) A first uncertainty, relating to going concern, which is dependent upon the Group's ability to put in place a refinancing plan or, if not, to obtain an agreement from the Lenders under the existing Credit Agreement in the second half of 2006 at the latest. (ii) The second uncertainty, in part related to the first one, relating to the valuation of the Group's fixed assets which must be calculated, in accordance with accounting principles, using financial projections over the life of the Concession. These projections, which have been prepared in the context of the going concern uncertainty, assume the continuation of existing operational and financial contracts and a level of debt €1.9 billion (£1.3 billion) lower than the current level of debt. Based on these assumptions, the Group recorded in its 31 December 2004 accounts an impairment of its fixed assets of €560 million (£395 million) representing an implicit discount rate of 7.2%. In this respect and in the context of increasing uncertainties, the Group used values in the upper ranges for the market risk premium and the asset beta ratios. At 30 June 2005, in the context of the operational performance of the Group during the first semester and the level of interest rates, the Group has not modified its financial projections underlying the valuation of fixed assets. Relatively small changes in the assumptions used would lead to material changes in the value in use of the assets. As an illustration, an increase of 0.1% in the implicit discount rate corresponds to a reduction in the value in use of the assets of approximately €210 million (£160 million). It is our duty to draw to your attention to the fact that these financial projections over the remainder of the Concession, are by their very nature, uncertain. - Note 2.1 which states that: (i) In the absence of the adoption by the IFRIC of the three studies into the interpretation and application of concession contracts, Eurotunnel has continued to apply its existing accounting policies in accordance with French GAAP for depreciation of concession fixed assets and for provisions for renewals and large scale maintenance for the preparation of its interim combined accounts. As such, it is too early to consider that the accounting principles currently applied are compatible with IFRS. Furthermore, when publishing its first IFRS accounts for the year ended 31 December 2005, Eurotunnel may be required to adjust its opening balance sheet to take account of existing standards on fixed assets and provisions, and of any new interpretations. - Note 8.6 which states that: (i) The special purpose vehicles Fixed-Link Finance BV (FLF) and Tunnel Junior Debt Holdings Limited (TJDH), set up in connection with the repackaging of €1.8 billion (£1.1 billion) of Junior Debt completed in 2001, were not previously consolidated in the Group accounts in accordance with French GAAP, but that the consolidation of these two entities in accordance with IFRS would increase the Group's issued capital and reserves attributable by approximately €180 million (£120 million) at 1 January 2004, and a decrease of Junior Debt by the same amount. Nevertheless, as the benefit could only be realised after the complete reimbursement of the FLF debt from the bond lenders, Eurotunnel, with the prospect of a significant refinancing, has not modified the Junior Debt as it does not consider itself to have control over these entities. Therefore, the Eurotunnel Group has not consolidated FLF and TJDH. - Note 2.1 which sets out that: (i) In the absence of specific guidance on combined accounts in the IAS27 standard on consolidated accounts, the Group has decided to continue to publish its consolidated accounts as combined accounts; (ii) The options used for disclosure of these interim combined financial statements which do no include all the information required in the notes by IFRS as adopted in the European Union that would give, based on IFRS standards, a true and fair view of the financial position and the result of the entities comprised under the scope of these combined accounts; (iii) The reasons why the comparative information which will be presented in the combined accounts at 31 December 2005 and in the interim combined accounts at 30 June 2006 may be different from the accounts as attached to this report. We have carried out our limited review of the information contained in the Eurotunnel Group's half year combined interim report in accordance with professional standards applicable in France. We have nothing to report with respect to the fairness of such information and its consistency with the half year consolidated financial statements. Paris, 14 September 2005. KPMG Audit Mazars & Guerard Departement de KPMG SA T. de Bailliencourt F. Odent Commissaires aux Comptes This information is provided by RNS The company news service from the London Stock Exchange