26th Apr 2005 07:30
Eurotunnel PLC/Eurotunnel S.A.26 April 2005 EMBARGO: Not for release before 07.30 hours (UK time) on Tuesday 26 April 2005 EUROTUNNEL 2004 RESULTS DISAPPOINTING RESULTS, BUT STILL HOPE FOR RECOVERY • Reduction in turnover of 4% due to reduced shuttle activity (- 7%), in declining passenger market and in the context of a price war • Operating margin reduced (- 6%) • Operating profit slightly higher (+2%) • Financial charges lower by 5%, adding to an improvement in the underlying loss of 14% • Net loss of £570 million, following an impairment charge of £395 million (£1.334 billion last year after an impairment charge of £1.3 billion) Jacques Gounon, Chairman of the Joint Board of Eurotunnel, said: "The 2004 results are the continuation of previous years. The further reductionin total and in Shuttle Services revenue is the consequence of insufficientreaction to major evolutions in the cross-Channel market over the past fewyears. "Project DARE was launched at the end of October 2004, as a commercial andoperational response to this situation. I anticipate that this reorientationwill start to bear fruit during 2005 and that we will see its full impact from2006 onwards. "We have satisfactorily obtained the waiver to the Credit Agreements, allowingus at last to begin negotiations with our creditors. "I am determined to protect the interests of this company and to reduce theburden of financial charges on Eurotunnel to a level that the company cansupport, thus ensuring its future growth and development." The full text, including all of the financial tables can be viewed by pasting the following link into your web browser to download the PDF document related tothis announcement: http://www.rns-pdf.londonstockexchange.com/rns/5064l_-2005-4-26.pdf END FINANCIAL ANALYSIS - Extract Intense competition in the short straits markets and continued contraction ofthe passenger market in 2004, have led to shuttle revenues 7% below 2003 atconstant exchange rates. Operating revenue was 4% below 2003, whilst overalloperating costs excluding cost of sales increased slightly. Depreciation chargesdecreased significantly following the impairment charge at the end of 2003,resulting in an operating profit 2% above 2003. Net interest charges decreasedby 5%, resulting in a 14% improvement in the underlying result at constantexchange rates. The underlying loss in 2004 was £127 million compared to £148million in 2003 at constant exchange rates. After an impairment charge of £395million and other net exceptional losses of £48 million in 2004, the net resultfor the year was a loss of £570 million compared to a net loss of £1,334 millionafter an impairment charge of £1,300 million and exceptional profits of £115million in 2003. To make a valid comparison between 2004 and 2003 in both sterling and euros, theunderlying loss for 2003 has been restated at the exchange rate used for the2004 results (£1=€1.466) as set out in the table below. Turnover Shuttle Services revenue decreased by 7% at constant exchange rates to £285million, principally due to the intense competition in the truck market puttingcontinued pressure on prices and to the further decline in the passenger marketreducing 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 theprovisions 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 revenuesfrom retail, telecoms activities and land sales. Other income of £17 million largely comprises the release of provisions forlarge 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 in2004 compared to 2003. Operating costs excluding cost of sales increasedslightly compared to 2003 with increased annual general meeting costs, higherelectricity costs and maintenance costs for rolling stock (acceleration ofmid-life refit of shuttle fleet) and infrastructure, more than offsettingreductions 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 constantexchange rates. During January 2004 more than £4 billion of debt passed fromfixed to variable rates of interest. After taking into account charges of £59million for the hedging contracts, the interest charge for the year reduced by£4 million at constant exchange rates. Following their conversion at the end of2003, no interest was incurred in 2004 on the Equity Notes compared to £12million incurred in 2003, and several small debt repurchases in the second halfof 2003 and at the beginning of 2004 also served to reduce net interest chargesby £2 million. The underlying loss of £127 million in 2004 reduced by 14% compared to 2003 atconstant exchange rates. Net result The exceptional result excluding impairment charge in 2004 was a loss of £48million. Costs related to the operational restructuring (£6 million),refinancing (£14 million), and a charge of £36 million to cover the consequencesof the implementation of the DARE plan. A net profit of £7 million was generatedby the sale of fixed assets, and a profit of £2 million was generated by therepurchase of debt at a discount to its face value. The net result before impairment in 2004 was a loss of £175 million compared toa net loss before impairment of £34 million in 2003. Impairment charge The Group applies the methodology of IAS36 which is equivalent to UK AccountingStandard FRS11 which requires the net book value of assets to be compared todiscounted projected future operating cash flows. The application of this methodin 2004 gave rise to an exceptional impairment charge of £395 million. A chargeof £1,300 million was made in 2003. This impairment charge has no impact on theGroup'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 Cash flow from operating activities in 2004 was £283 million. The majority ofthe reduction compared to 2003 was due to lower shuttle revenues. Net capital expenditure fell from £25 million in 2003 to £19 million in 2004resulting in net cash flow from operating activities after capital expenditureof £264 million. Interest cover after capital expenditure (which measures cashflow after capital expenditure as a proportion of the net interest charge dueand payable) was 96%. The £13 million net payment in respect of other non-operating cash flows in 2004relates to expenditure on refinancing and operational restructuring. FINANCING Eurotunnel's funding falls into three main components - Core Debt, a BufferZone, and Shareholders' Funds. The Core Debt totalling £4.9 billion comprises £0.4 billion of Senior and 4thTranche 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 theabsence of any significant modification to the debt covenants, total debtrepayments 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 theStabilisation Facility. The Stabilisation Advances carry 0% interest until 2006.Under the Credit Agreement, Eurotunnel, subject to the agreement of itsshareholders, is able to convert the Stabilisation Advances and Notes(1)outstanding at the end of 2005 into Units. Eurotunnel will propose that itsshareholders vote on this conversion at an extraordinary general meeting to beheld before the end of 2005. This Buffer Zone also includes £0.9 million of Participating Loan Notes whichcarry 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. FINANCIAL SITUATION Operational restructuring - project DARE In June 2004, Eurotunnel commenced an in-depth review of the financial andoperational aspects of each of the Group's activities. Project DARE willcontribute to the recovery of the company. A key element of this project is toincrease margins from the core shuttle businesses by better aligning capacity todemand. The reduction in surplus capacity, additional reductions inadministrative costs and a complete review of subcontractor and suppliercontracts, will give rise to cost savings. The implementation of project DAREcommenced in November 2004; the full benefit of this plan is anticipated toimpact from 2006. A provision of £36 million has been made in the 2004 accountsfor the consequences of this on staffing levels and for the early termination ofcertain subcontracts. Forecast cash position The financial consequences of the forecasts prepared in the light of the 2004results and the current outlook for the Group, taking into account theconsequences of project DARE, are as follows: • During 2005 the cash flow position remains protected by the mechanismby which interest that cannot be paid in cash can be settled by way ofStabilisation Advances up to a limit of £60 million. Taking into account therisks, especially those associated with the implementation of DARE, eitherfinancial or operational, the cash flow position remains subject to certainuncertainties. On the basis of the latest operating forecasts available at thedate of the accounts, the amount of un-used Stabilisation Advances should allowsufficient cash up until the end of 2005, on which date the level of availablecash is projected to be equal to the Permitted Float of £25 million (this is themaximum amount of cash that may be held by the Group as defined in the CreditAgreements). • In 2006 the Group will no longer benefit from the StabilisationAdvances, rendering the cash flow position more vulnerable particularly at theend of January and July 2006 because of the interest payments due under thecurrent Credit Agreements. • From the first half of 2007 Eurotunnel will not be able to meet itscontractual debt repayments. • The cash flow forecasts are based on assumptions that the Groupconsiders to be both reasonable and realistic. The forecasts assume theconversion 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 andthe Stabilisation Advances and Notes as at 31 December 2004, an additionalfinancial charge of approximately £27 million a year would be payable by theGroup. Furthermore, significant disruptions to the operations of the Group orevents that are unforeseeable or unquantifiable at the date of the accounts inconjunction with amongst other issues, the Railways dispute, could acceleratethe 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 31January 2006 and which defines the conditions under which the Group can startdebt restructuring negotiations with its creditors. In particular, the waiverrequires a proposal of a restructuring plan by no later than 15 July 2005, aswell as the establishment of a structured means of communication betweenEurotunnel and its creditors. The waiver can be terminated at any time shouldeither party not meet its respective responsibilities. Eurotunnel will propose that its shareholders vote on the conversion of theStabilisation Advances and Notes into Units at an extraordinary general meetingto be held before the end of 2005 in accordance with the provisions of the 1998restructuring. The conditions and consequences of the conversion are describedin notes 11c and 14c of the full Combined Accounts. Finally, in the context of the proposed financial restructuring, Eurotunnelcould look into, amongst other options and within the terms and conditions ofthe existing Credit Agreements, the putting into place of an additional line ofcredit up to a maximum of £50 million. Initial enquiries have confirmed thefeasibility of putting this into place should the necessity arise. Going concern The Group believes that these measures, which are intended to provide asatisfactory solution to the financing requirements of the Group, can be put inplace before the date at which the Group will be unable to meet its financialobligations. The application of the going concern assumption in the 31 December2004 annual accounts has been based on the assumptions described above. Impairment The valuation of the Group's assets has been carried out in accordance withIAS36, which compares the net book value of the assets to the value of thediscounted 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 animpairment charge for this amount in the 2003 accounts. At 31 December 2004, Eurotunnel updated its impairment calculation, using animplicit discount rate of 7.2% (2003: 7%), which led to an additional impairmentcharge of £395 million. The implicit discount rate was determined in accordance with the standard on thebasis of the Group constituting a single income generating unit and using theAPV methodology. This methodology requires assumptions to be made for both theforecast cash flows and the future level of the Group's debt over the life ofthe Concession, as well as for the market interest rate. Taking into account the increasing uncertainties that the Group is facing,Eurotunnel considered it appropriate to use values in the upper-ranges for themarket risk premium and the asset "Beta" ratio. The value in use was calculated in the context of the going concern uncertaintyand on the basis of operating cash flows which assume no changes to existingoperational and financing contracts. In addition, and only for the purposes ofthis valuation, the Group has assumed, as in the previous year, an interestsaving based on a level of debt £1.3 billion lower than the current level ofdebt. Within the assumption of no changes to existing contracts, all other thingsbeing equal, other foreseeable levels of debt would not lead to an implicitdiscount rate of greater than 7.7%. Relatively small changes in the assumptionsused would lead to material changes in the value in use. By way of example, avariation of 0.10% in the implicit discount rate would correspond to a change inthe 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 theRailways and Eurotunnel, the Railways are required to bear a proportion of theoperating costs of Eurotunnel in each year. The Railways commenced arbitration proceedings under the auspices of theInternational Chamber of Commerce in respect of the amount of theircontribution, firstly for financial years ended 31 December 1997 and 1998, andsecondly for financial years ended 31 December 1999 to 31 December 2002. Thetotal amount claimed by the Railways is estimated to be a maximum of £100million. The Arbitration Tribunal, in an award made on 30 January 2003, rejected theRailways' claim for 1997 and 1998 on the basis that it was time barred. TheTribunal's decision is final. The Arbitration Tribunal will decide on theadmissibility and validity of the claim for 1999 to 2002 in a separate phase ofproceedings; its decision is expected to follow in 2005. Eurotunnel remains confident in the outcome of these proceedings and hastherefore not changed its position from previous years; consequently a provisionhas not been made in these accounts or in the Group's financial projection. 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. 935 Eurotunnel manages the infrastructure of the Channel Tunnel and operatesaccompanied truck shuttle and passenger shuttle (car and coach) services betweenFolkestone, UK and Calais, France. Eurotunnel also earns toll revenue fromother train operators (Eurostar for rail passengers, and EWS and SNCF for railfreight) which use the Tunnel. Eurotunnel is quoted in London, Paris andBrussels. -------------------------- (1) Based on the £530 million Stabilisation Advances and Notes that wereoutstanding on 31 December 2004, such conversion would lead to the creation of444 million new Units at a fixed conversion rate of £1.19 (at a euro/sterlingexchange of €1.418). This conversion of the Stabilisation Advances and Noteswould represent 15% of the total number of Units in circulation. Fully dilutedshare capital on this basis would be 2,990 million Units (including the exerciseof stock options). In the absence of conversion and on the basis of currentinterest rates, an additional financial charge of approximately £27 million ayear would be payable by the Group from 1 January 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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