16th Sep 2005 16:55
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 30JUNE 2005 FINANCIAL RESULT FOR THE SIX MONTHS TO 30 JUNE 2005 With effect from 1 January 2005, Eurotunnel is required to apply InternationalFinancial Reporting Standards (IFRSs) when preparing its accounts. Theaccounting principles now being applied by Eurotunnel, and certain departuresfrom full compliance with IFRSs, are described in note 2 to the interim combinedaccounts, and the impact of new accounting principles is illustrated in note 8.For the half year ended 30 June 2005, Eurotunnel is applying the recommendationof the CNC 2004-R02 dated 27 October 2004 for the presentational format for thecombined income statement and cash flow: this presentation may differ to reflectstandards in force at the time of preparing the financial statements for theyear ending 31 December 2005. The comparative figures for 30 June 2004 in the table below have been restatedto reflect the adoption of the new accounting principles, and are alsorecalculated using the exchange rate applicable for the preparation of the 2005combined interim income statement of £1=€1.468 in order to assist comparisonwith the 2005 figures. The commentary following the table below discusses 2005performance in comparison with 2004 equivalents translated at the constantexchange rate. The combined interim accounts have been prepared in the context of twouncertainties relating to the validity of the going concern principle and thevalue of assets as described in note 1, and according to the accountingprinciples described in note 2 of the combined interim accounts. The table and commentary below should be read in conjunction with the fullcombined 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 % 137Railways 117 116 +0 % 115Transport activities 263 254 +3 % 252Non-transport activities 5 9 -42 % 9Operating revenue 268 263 +2 % 261Operating costs ( 127) ( 131) -3 % ( 130)Operating margin 141 132 +7 % 131Depreciation and provisions ( 56) ( 62) ( 62)Trading profit 85 70 +21 % 69Non-trading charges ( 11) ( 8) +40 % ( 8)Operating profit 74 62 +19 % 61Net 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 truckshuttle volumes and yields. Railways revenue remained stable at £117 million and remains protected until theend of November 2006 by payments under the provisions of the Minimum UsageCharge (MUC) in the Railway Usage Contract, which amounted to £36 million in thefirst 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 areduction in land sales. Operating revenue for the first half of 2005 was £268 million, an improvement of2% 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, despitemarked increases in electricity and maintenance costs, due to reductions instaff costs, marketing and advertising and insurance premiums. The full benefitof the cost reductions arising from the DARE project is not expected before thefirst 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 thesame period in 2004, mainly due to the impairment charge made at the end of2004. Non-trading charges amounted to £11 million in the first half of 2005, anincrease of £3 million compared to the same period in 2004, and related toexternal costs associated with refinancing and to costs relating to thetermination of certain contracts. Operating profit improved by £12 million (19%) to £74 million for the period dueto increased revenues (£5 million), reduced operating costs (£4 million) andreduced depreciation and provision charges (£6 million) despite the increase innon-trading charges (£3 million). Net result Net interest charges, including other financial income and charges, were £161million for the first half of 2005, a decrease of 4% compared to the same periodin 2004. Hedging charges included within net interest charges significantlyoffset 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 1.491Net cash flow from trading 140 124Net 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, comparedto £124 million for the same period in 2004. This £16 million increase comparedto the same period in 2004 is in part due to an improved operating margin, andin part to a reduction in working capital. Net cash flow from investing activities decreased significantly to £3 milliondue to reduced expenditure and to cash generated by sales of land. Net cash flowafter 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 firsthalf of 2005. FINANCING Financing at 30 June 2005 nominal value (in £ billion) Senior Debt 0.4 CORE DEBT £4.8 billionJunior Debt 3.2FLF2 (Tier 1A) 0.7Resettable Advances 0.5 Stabilisation Facility 0.4 BUFFER ZONEParticipating Loan Notes 0.9 £1.3 billion TOTAL DEBT 6.1Issued capital and reserves attributable to equity 0.5 EQUITY Eurotunnel's funding falls into three main components - Core Debt, a BufferZone, and issued capital and reserves attributable to equity. The Core Debt totalling £4.8 billion comprises £0.4 billion of Senior and 4thTranche 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 theabsence of any significant modification to the debt covenants, total debtrepayments 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 theStabilisation Facility. The Stabilisation Advances carry 0% interest untilDecember 2005. In order to convert the Stabilisation Advances and Notes intoUnits in accordance with the provisions of the 1998 restructuring, Eurotunnelhas the possibility to propose to its shareholders to vote on the conversionbefore the end of 2005(1). This zone also includes £0.9 billion of ParticipatingLoan Notes which carry 1% fixed interest until 2006. The third component of the financing structure is represented by issued capitaland reserves attributable to equity, which at 30 June 2005 totalled £0.5 billionunder IFRS (as described in note 2 of the combined interim accounts). (1) Based on the £526 million Stabilisation Advances and Notes that wereoutstanding on 30 June 2005 and the current Credit Agreements, an additionalfinancial charge of approximately £24 million a year would be incurred by theGroup from 1 January 2006 on the basis of current interest rates in the eventthat the Stabilisation Advances and Notes are not converted into Units. Theconversion of the Stabilisation Advances and Notes would lead to the creation of451 million new Units at a fixed conversion rate of £1.17 (at a euro/sterlingexchange of €1.483). This conversion of the Stabilisation Advances and Noteswould 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 itsChairman, in replacement of Jacques Maillot. Over 82,000 shareholders voted atthe AGM on 17 June 2005, which confirmed the appointments of Jacques Gounon andHenri Rouanet as directors. Jacques Gounon was appointed Chairman and ChiefExecutive of the Group following the resignation of Jean-Louis Raymond as ChiefExecutive. On 17 August, Jean-Pierre Trotignon was appointed Chief OperatingOfficer. Shuttle Services Truck shuttles Eurotunnel transported 703,363 trucks in the first half of 2005, an increase of9% compared with the first half of 2004, aided by the disruptions to operationsat the Port of Calais. The average yield per vehicle transported also increasedduring the first half of 2005 contributing to an increase in revenue from thetruck 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 firstquarter of 2005 did not continue into the second quarter; first quarter trafficbenefited from the operational difficulties at the Port of Calais, and the factthat 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 beattracted to the efficiency and frequency of the service offered by Eurotunnel. H1 2005 H1 2004 % changeTruck 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 andSNCF for international rail freight services. Eurostar The number of passengers carried through the Channel Tunnel by Eurostarincreased by 8% in the first half of 2005, confirming the upward trend followingthe 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% to847,716 tonnes in the first half of 2005. The level of through-rail traffic using the Channel Tunnel currently has noimpact on Eurotunnel's revenues due to the Minimum Usage Charge arrangements,which continue until November 2006. H1 2005 H1 2004 % changeEurostar 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, andexcludes 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 267,986 260,530 538,123Materials and services 74,232 76,756 141,245Employee benefit expense 52,730 52,571 104,719Depreciation 45,026 50,805 100,258Provisions 10,714 10,760 22,192Trading profit 85,284 69,638 169,709Impairment - - 395,000Non trading charges 11,007 8,042 47,806Operating profit / (loss) 74,277 61,596 (273,097)Income from cash and cash equivalents 2,734 2,579 5,359Cost of servicing debt (gross) 169,061 168,409 341,620Net cost of financing and debt service 166,327 165,830 336,261Other financial income and (charges) 4,969 (642) 4,343Taxation 31 23 23ResultLoss 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 GAAPand the income statements restated under IFRS according to the principlesdescribed in note 2.1, are shown in note 8. Balance Sheet 30 June 2005 30 June 2004 31 December 2004£000 * *ASSETSProperty, plant and equipmentConcession fixed assets 6,895,625 7,381,924 6,933,599Other fixed assets - 1,964 -Non-current financial assetsShares 2,127 2,115 2,224Other financial assets 125,156 485,412 162,061Other non-current assets - - 2,645Total non-current assets 7,022,908 7,871,415 7,100,529Inventories 6,977 7,118 7,185Trade receivables 40,149 40,876 41,014Other receivables 22,097 23,003 21,915Current financial debtors 18,409 43,755 22,062Interest rate derivatives - - -Cash and cash equivalents 174,149 175,471 181,224Total current assets 261,781 290,223 273,400Total assets 7,284,689 8,161,638 7,373,929 ISSUED CAPITAL, RESERVES ATTRIBUTABLE TOEQUITY, AND LIABILITIESIssued share capital 285,400 285,400 285,400Share premium account 2,368,389 2,368,389 2,368,389IFRS restatement reserves (124,456) (81,140) (109,933)Other reserves 3,483 3,483 3,483Retained 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 75,607Total issued capital and reserves 458,225 1,103,791 422,827attributable to equityProvisions > 1 year 127,504 118,470 126,837Financial liabilities 6,078,258 6,005,269 6,185,945Other financial liabilities 108,155 469,040 145,375Trade and other payables 97,333 97,556 99,416Total non-current liabilities 6,411,250 6,690,335 6,557,573Provisions < 1 year 39,347 1,101 36,615Financial liabilities 102,458 94,539 98,094Other financial liabilities 18,409 43,755 22,062Interest rate derivatives 152,357 121,828 140,358Trade payables 79,517 71,859 76,456Other payables 23,126 34,430 19,944Total current liabilities 415,214 367,512 393,529Total issued capital, reserves attributable 7,284,689 8,161,638 7,373,929to equity, and liabilitiesExchange rate •/£ 1.483 1.491 1.418 * Reconciliations between the 2004 balance sheets published under French GAAPand the balance sheets restated under IFRS according to the principles describedin 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 2004Trading profit before depreciation and 141,024 131,203 292,159provisionsExchange adjustment (2) (546) 167 3,834Decrease in inventories 37 1,522 1,648(Increase) / decrease in trading debtors (6,285) (6,096) 6,467Increase / (decrease) in trading creditors 12,285 3,666 (7,984)Release of provisions (6,933) (6,423) (12,812)Net cash inflow from trading 139,582 124,039 283,312Non-trading cash flows (7,759) (4,355) (13,835)Taxation (23) (23) (24)Net cash inflow from operating activities 131,800 119,661 269,453Payments to acquire fixed assets (10,329) (17,180) (23,784)Sale of property, plant and equipment 7,626 1,191 4,850Net cash outflow from investing activities (2,703) (15,989) (18,934)Interest received on cash and cash 2,867 2,463 4,395equivalentsInterest 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 FrenchGAAP and the cash flow statements restated under IFRS according to theprinciples described in note 2.1, are shown in note 8.(2) The adjustment relates to the restatement of the elements of the profit andloss 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 passengerservices, and for the cost reductions, and - the negotiations with creditors in accordance within the framework of thewaiver 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 onstaffing 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 inadvance a daily forecast of traffic. This enables Eurotunnel to better aligncapacity to customers' requirements, and the reduction of capacity hasconsequently substantially improved load factors for the truck shuttles. Inaddition to this, Eurotunnel has taken back direct control over the commercialactivity previously sub-contracted to Transferry in order to give Eurotunnel theopportunity to offer an even better quality of service to all its customersacross the whole of Europe. With effect from 16 August 2005, the contract withits agent for the commercial operation of the brand and services ofEurotunnelPlus was terminated. For the Passenger Shuttle service, a new pricing policy was introduced at thebeginning of June 2005 for the car business. This included the introduction of amore transparent booking module incorporating fares based on one-way crossings,standard fares which are not based on length of stay, and the introduction ofFlexiPlus fares with free amendments, dedicated check-in and priority boarding.Passenger shuttle capacity is progressively being reduced during the course of2005 in order to reduce surplus capacity and improve load factors and thusreduce costs. In relation to the impact on staffing levels that results from project DARE,negotiations with UK and French staff representatives have resulted inagreements based on negotiated voluntary departures. Currently it is thoughtthat the departures that will result from these agreements will be approximatelyin line with the objectives contained within the DARE plan. In practice thevoluntary 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 latestresults and the current outlook for the Group including the consequences ofproject DARE, are as follows: - During 2005 the cash flow position remains protected by the mechanism bywhich interest that cannot be paid in cash can be settled by way ofStabilisation Advances up to a limit of £60 million. Taking into account eitherfinancial or operational risks, especially those associated with theimplementation of DARE, the cash flow position remains subject to a number ofuncertainties. On the basis of the latest operating forecasts available, theamount of un-used Stabilisation Advances should provide sufficient cash to theend of 2005, at which time the level of available cash is projected to be equalto the Permitted Float of £25 million (this is the maximum amount of cash thatmay 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 Julyand October 2006 because of the interest payments due under the current CreditAgreements. Furthermore, Railways revenue will no longer be protected afterNovember 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 anestimated effect on cash flow amounting to approximately £65 million. - 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 Group considersto be both reasonable and realistic. The effect of the conversion of theStabilisation Advances and Notes existing at 30 June 2005 would be to reduceannual interest charges by approximately £24 million from January 2006, based oncurrent interest rates. Furthermore, significant disruptions to the operationsof the Group or events that are unforeseeable or unquantifiable at the date ofthe accounts (for example relating to on-going disputes) could accelerate thedate 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 debtrestructuring negotiations with its creditors. In particular, the waiverrequired 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. In accordance with thetimetable, Eurotunnel presented a business plan during June, and on the 13 July,presented its initial reflections for restructuring its debt to the Ad HocCommittee which represents the majority of Eurotunnel's creditors. In order to convert the Stabilisation Advances and Notes into Units inaccordance with the provisions of the 1998 restructuring, Eurotunnel has thepossibility to propose to its shareholders to vote on the conversion before theend of 2005. The consequences of such a conversion, which are being examined aspart of the current debt restructuring, are described in the Group's interimreport. Within the Credit Agreements there is an option available for putting into placean additional line of credit as described in the 2004 annual accounts. Inaddition, should an Event of Default occur, the finance agreements also provide,under certain conditions, for a standstill period during which time thenegotiation of a restructuring plan can take place whilst enabling the Group tocontinue to conduct its business normally. 1.4 Uncertainties The Group is subject to two uncertainties: the ability to continue as a goingconcern and the carrying value at which the Group's assets are recorded in theaccounts. a) Going concern The going concern basis is dependent on the Group's ability to put in place arefinancing plan or, if not, to obtain an agreement from the Lenders within theexisting arrangements in the second half of 2006 at the latest. The Group believes that the measures described under 1.3 above, which areintended to provide a satisfactory solution to the financing requirements of theGroup, can be put in place before the date at which the Group will be unable tomeet its financial obligations. The application of the going concern assumption in the 30 June 2005 interimCombined 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 futurelevel of the Group's debt over the life of the Concession as well as for marketinterest rates; this corresponded to an implicit discount rate of 7%. Eurotunnel updated its impairment calculation as at 31 December 2004, which ledto an additional impairment charge of £395 million; this corresponded to animplicit discount rate of 7.2%. 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 assuming, for the purposes of thesevaluations only, the validity of the going concern principle. In addition, thesevaluations are based on a reduction of the level of debt by £1.3 billion and anequivalent increase in capital. Taking into account the increasing uncertaintiesthat the Group is facing, Eurotunnel considered it appropriate, at 31 December2004, to use values in the upper ranges for the market risk premium and theasset "beta" ratios. The operational performance of the Group in the first half of 2005 and the levelof interest rates would not require a modification to the value in use ofassets. The Group is currently working on a refinancing plan the consequences of whichon the level of indebtedness may differ from the underlying assumptions used at31 December 2004. The Group has not revised its financial projections, which is normally carriedout during the second half of the year as a part of the preparation of itsmedium term plan. Relatively small changes in the assumptions used would lead to material changesin the value in use. By way of example, a variation of 0.10% in the implicitdiscount rate would correspond to a change in the value in use of the fixedassets of approximately £150 million. 1.5 Railways dispute Under the Railways Usage Contract dated 29 July 1987 between the Railways (SNCFand BRB) and Eurotunnel, the Railways are required to pay a contribution to theoperating costs of Eurotunnel in each year. On 21 November 2001, the Railways initiated arbitration proceedings under theauspices of the International Chamber of Commerce, aimed at reducing the amountof this contribution, firstly for the years 1997 and 1998, and secondly for theyears 1999 to 2002. The amount claimed by the Railways for all of these yearstogether is estimated to be a maximum of £100 million. In a first award made on 26 April 2002, the Arbitration Tribunal ordered theRailways to pay to Eurotunnel the full amount of the provisional contribution toits 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 1997and 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 for2000 on the basis that it was time barred; - rejected the Railways' claims on allegations of breach of contract byEurotunnel; - set out a number of clarifications on the interpretation of Usage Contractprovisions regarding cost allocations, and on the practice of the parties inthis respect. The determination of the final amount of the operating costs contribution fornon time barred years 1999, 2001 and 2002 will be carried out within the scopeof the expert's mission as set out in the Usage Contract. The ArbitrationTribunal will remain constituted and will render a final award upon completionof the expertise, in which it will pronounce any potential condemnations againstEurotunnel and/or SNCF and BRB. Eurotunnel remains confident in the outcome of these proceedings and hastherefore not changed its position from previous years; consequently noprovision has been made in these interim Combined Accounts or in the Group'sfinancial projections. 1.6 Other disputes The termination of the contract between Eurotunnel and Transferry has resultedin 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 1606/2002of 19 July 2002 relating to the application from 1 January 2005 of the set ofaccounting standards issued by the IASB (International Accounting StandardsBoard), which is applicable to all European Union listed companies. Theinternational accounting standards incorporate IFRS (International FinancialReporting Standards), IAS (International Accounting Standards), as well asinterpretations thereof. With the exception of certain aspects of IFRSapplicable to concession fixed assets and provisions related to these assets(see note 8.1), the combined interim financial statement have been preparedunder existing IFRS accounting and valuation principles which are expected to beapplicable at 31 December 2005 and in accordance with the recommendations of theAMF (Autorite des Marches Financiers, the French securities regulator) dated 10February 2004 as well as with the additional information they published duringJanuary and June 2005. In the absence of the adoption by the IFRIC of the three studies into theinterpretation and application of concession contracts, Eurotunnel has continuedto apply its existing accounting policies in accordance with French GAAP fordepreciation of concession fixed assets and for provisions for renewals andlarge scale maintenance (see note 8.1), for the purposes of its interimaccounts. As such, it is too early to consider that the accounting principlescurrently applied will be compatible with IFRS applicable at 31 December 2005.Furthermore, when publishing its first IFRS accounts for the year ended 31December 2005, Eurotunnel may be required to adjust its opening balance sheet totake account of existing standards on fixed assets and provisions, and of anynew interpretations. In addition, the Eurotunnel Group has adopted the option for first applicationof 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 appliedthe recommendation of the CNC 99-R01 relating to the principles of preparationfor interim accounts. Nevertheless, the Group has applied the recommendation CNC2004-R02 dated 27 October 2004 for the presentational format for the incomestatement, the cash flow and the table of movements in issued capital andreserves attributable to equity. This presentation may differ to reflectstandards in force at the time of preparing the financial statement for the yearending 31 December 2005. The combined accounts, which up until 31 December 2004 were prepared underFrench GAAP as described in the 2004 annual accounts, constituted the EurotunnelSA Group (ESA) consolidated accounts according to French law. The interimcombined accounts at 30 June 2005, prepared in accordance with the principlesdescribed below, also constitute the consolidated interim accounts of ESAaccording to the same French law. The standard IAS27 on consolidated accountsdoes not deal specifically with combined accounts. The Group has decided tocontinue to publish its consolidated accounts as combined accounts. Theseinterim accounts do not constitute statutory accounts within the meaning ofSection 240 of the UK Companies Act 1985. The combined income statement for the first half of 2005 has been prepared inaccordance with IFRS presented in this document is compared with the incomestatements for the first half of 2004 and for the year to 31 December 2004 whichhave been restated. The balance sheet at 30 June 2005 is compared to the balancesheets at 30 June 2004 and 31 December 2004, also restated. In order to allow both shareholders and the wider financial community tounderstand the consequences of this significant transition, and to follow therecommendations of the CESR (Committee of European Securities Regulators) andthe AMF, this document also contains: - Reconciliations between French GAAP and the principles described below forthe combined income statements and cash flows for the 6 months to 30 June 2004and the year to 31 December 2004, for the balance sheet at 30 June 2004 and 31December 2004, and for the issued capital and reserves attributable to equity at1 January 2004, 30 June 2004 and 31 December 2004. - Notes explaining the changes in accounting standards which affectEurotunnel's financial statements and the restatements that have been made. As indicated in note 1, the going concern basis is dependent on the Group'sability to put in place a refinancing plan or if not to obtain an agreement fromthe Lenders within the existing arrangements in the second half of 2006 at thelatest. If such plans were not successful and the Group's ability to trade as agoing concern was not assured, certain adjustments would need to be made to theaccounts. Those adjustments would relate to the impairment of assets to theirnet realisable value and the recognition of contingent liabilities. Such amountscannot be measured at present. Within the French and British legal frameworks,the Lenders may seek to exercise the right to substitution included in theConcession Agreement and their securities over assets set out in the CreditAgreements. The transition to IFRS is taking place in the context of an urgent need torestructure the debt before 2007 and the uncertainty surrounding the changesthat will be made to the amount, nature and characteristics of this debt. Themain consequence of this is that there is no immediate recognition of futuregains, as they cannot be recognised due to the significant contractualmodifications 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 theirdate of acquisition or formation. Four subsidiaries of ESA were not consolidatedas they remained dormant or were not material during the period. These companieshad no off balance sheet liabilities. 2.3 Transactions between the members of the Eurotunnel Group have beeneliminated. 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 anaverage rate for the period. Exchange differences arising from the application of the above are included inthe exchange adjustment reserve in the balance sheet. The closing and average •/£ exchange rates used to prepare the Combined Accountsare as follows: •/£ 30 June 30 June 31 December 2005 2004 2004 Closing rate 1.483 1.491 1.418Average 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 costprice of the Project and all revenues and costs relating to the operation of theFixed Link between the UK and French companies. - Concession fixed assets: all costs and revenues arising either directly orindirectly from the design, financing and construction of the Project arecapitalised and shared between CTG and FM, and shown as fixed assets.Adjustments are made within fixed assets to equalise the cost between theConcessionaires. - Operating revenues and costs: all revenues and costs arising from theoperation of the Concession are accounted for in the profit and loss account ofthe Partnership and shared equally between the Concessionaires. Revenues andcosts arising in Eurotunnel Group companies which do not relate to the operationof 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 deductedfrom the share premium account, with the exception of those which occurredduring the construction phase, which were capitalised in accordance with theprinciples set out above. 2.7 Fixed assets and depreciation Since 2003 the Group has applied the methodology of IAS36 which requires the netbook 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 thecosts of assets over their expected useful lives as follows: Tunnels Life of ConcessionTerminals and related land 10 years - life of ConcessionFixed equipment and machinery 5 years - life of ConcessionRolling stock 5-60 yearsFreehold land not depreciatedOffice equipment 3-10 years The expected useful lives of the assets are kept under review and revised whennecessary, according to experience. Non-renewable Concession fixed assets depreciated over the life of theConcession 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 ofthe proportion of the actual revenue for the year to the total estimated revenuefrom the commencement of the year to the end of the Concession, adjusted forinflation. As an indication, if the Group were to adopt a straight line basisfor non-renewable assets, it would increase the 2005 annual depreciation chargesby approximately £24 million. Renewable depreciation is calculated on a straight line basis. The initial purchase cost of certain fixed assets (for example track), whichrequire regular renewal during the course of the Concession, is depreciatedusing the method applied to non-renewable Concession fixed assets. Renewalexpenditure 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 theresidual duration of the Concession. 2.8 Provisions Provision for renewal of fixed assets - Provisions for renewals are based uponthe present value of the difference between the purchase or production cost andthe estimated cost of the assets at the time of their renewal. Provision for large scale maintenance - The provision for large scalemaintenance, which covers the major expected maintenance costs other thanregular maintenance and repairs expenditure, is based upon a specificmaintenance programme by asset categories. Provision for retirement liabilities - The Group provides for its contractualobligations for retirement indemnities of employees under French contracts, andfor the defined benefit retirement schemes of employees under UK contractsoperated by the Eurotunnel PLC Group, the assets of which are held separatelyfrom those of the Group. The current service cost of the period, determined bythe projected unit of credit method, is accounted for in operating costs.Actuarial differences are dealt with using the "corridor" approach, with anyexcess outside the corridor being amortised over the average remaining workinglives of the beneficiaries, and are shown in financial charges. Provision for restructuring and similar costs - The Group provides for costs ofrestructuring, when detailed restructuring plans are approved, the features ofthe plans have been announced and implementation has commenced. 2.9 Financial instruments Financial assets include cash and cash equivalents, trade receivables and thepositive valuation of derivatives. Financial liabilities include borrowings,trade payables and the negative valuation of derivatives. Financial assets andliabilities are classified within current assets or liabilities in the situationwhere 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 initialrecognition date of the financial liability is equal to the consideration incash received less transaction costs. Subsequently, the amortised cost isadjusted for the amortisation of the difference between the initial amount andthe maturity amount according to the effective interest method. The interest expense is recognised at a constant interest rate over the expectedmaturity of financial liabilities according to the effective interest method. The effective interest rate is the rate that exactly discounts estimated futurecash payments through the expected life of the borrowing. The effective interestrate is calculated according to the forecast cash flows to be paid on eachseries of the financial debt. The calculation includes transaction costs andall other premiums or discounts. c) Derivatives Under IAS39, all derivatives should be recognised on the balance sheet andmeasured at fair value. Hedge accounting is permitted only when strictdocumentation and effectiveness testing requirements are met. For the purpose of interest rate risk hedges, Eurotunnel carries the followingderivative instruments: purchased collars, purchased caps and a swaptransaction. All options entered into by Eurotunnel are designed to partially hedgeEurotunnel against the increase in interest to be paid on the Junior Debt duringthe floating rate period from 2004 to 2008. Hedging options that meet the hedging criteria set forth by IAS39 are accountedfor according to the cash flow hedge model. Gains and losses on qualifyinghedging options are recorded in a separate component of equity, excluding theineffective portion and the time value of options which are recorded in theincome statement for the reporting period. The outstanding swap transaction is designed to convert a portion of theinterest expense from fixed to floating during 2004 and 2005. The swaptransaction is designated as a fair value hedge of financial liabilities.Changes in market-value of the hedging swap are recorded in the income statementfor the reporting period. Equal and opposite changes in the fair value of thehedged risk adjust the carrying amount of the hedged financial liability throughthe income statement for the reporting period. 2.10 Foreign exchange Transactions in foreign currencies are converted into the reporting currency ofeach individual company at the rate of exchange ruling at the date of thetransaction. Assets and liabilities denominated in foreign currencies other thanthose mentioned in notes 2.4 are translated at the rate ruling at the balancesheet 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 attributablefinancing costs during the development period. Stocks are stated at the lower ofcost and net realisable value and include non repairable spares. Repairablespare parts are included in the fixed asset category to which they relate. Slowmoving 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 accordancewith IFRS2. The options are valued at the date on which they are granted usingthe Binomial model. Any variations in value occurring after the grant date arenot taken into account. The value is charged to employee benefit expenses on alinear basis between the date of the grant and the maturity date (the vestingperiod), with an equal and opposite entry directly to issued capital andreserves 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 weightedaverage number of Units in issue during the period of 2,546,114,213 (30 June2004: 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, wherebythe potential conversion of Stabilisation Notes and Advances into Units and theexercise 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) 1,023,571Increase in capital 2 2 4Result for the period (104,899) (104,899)Valuation of hedging contracts 421 421Share options 34,071 34,071Translation adjustments 150,623 150,623At 30 June 2004 285,400 2,371,872 (1,699,980) 146,499 1,103,791Increase in capital 0Result for the period (500,139) (500,139)Valuation of hedging contracts (29,495) (29,495)Share options 702 702Translation adjustments (152,032) (152,032)At 31 December 2004 285,400 2,371,872 (2,200,119) (34,326) 422,827Increase in capital 0Result for the period (87,112) (87,112)Valuation of hedging contracts (14,916) (14,916)Share options 0 0Translation adjustments 137,426 137,426At 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 shareoptions 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 874,078 854,332 854,332 852,021EDL, Senior and 4th Tranche 374,123 366,042 (2,750) (1,910) 361,382 365,096DebtFLF 2 (Tier 1A) 716,700 716,700 5,850 722,550 710,850Junior Debt 3,247,008 3,166,093 4,169 3,170,262 3,152,464Resettable Advances 467,615 453,932 1,338 455,270 450,993Stabilisation Advances and 506,421 494,825 7,917 11,720 514,462 473,845NotesTotal non-current financial 6,185,945 6,051,924 (2,750) 7,917 (1,910) 23,077 6,078,258 6,005,269liabilitiesAccrued interest: Loan Notes 1,481 1,448 4,272 5,720 5,704 Loans 96,613 95,198 (370) 1,910 96,738 88,827Overdrafts - - 8Total current financial 98,094 96,646 0 3,902 1,910 0 102,458 94,539liabilities 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 30June 2005 in order to facilitate comparison. **Interest includes accrued interest during the period less interest paid incash or settled using the Stabilisation Facility. In January 2005, £4.0 million plus €5.8 million of Stabilisation Advances werecreated in respect of interest due on Resettable Advances which could not bepaid from available cash flow. All interest due on the Junior Debt at 25 January2005 (£44.9million plus €46.1 million) was paid in cash. £2.2 million and €30.2million was paid in respect of the floor hedging contracts. In July 2005, £4.0 million plus €5.8 million of Stabilisation Advances werecreated in respect of interest due on Resettable Advances which could not bepaid 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 €30.0million 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 debtoutstanding at 30 June 2005 of £127 million (30 June 2004: £513 million). Thisdebt is fully secured on an equivalent amount of lease receivables due to thecompanies. Through these transactions Eurotunnel has been able to obtainimmediate value in cash for a proportion of its tax losses in the UK by thefuture surrendering of such losses by way of group relief to the leasingcompanies. Included in interest receivable for the 6 months to 30 June 2005 isan amount of £4 million (30 June 2004: £14 million) arising in the leasingcompanies. This is matched by an equivalent amount in interest payable. Thesignificant reduction since 30 June 2004 in other financial debtors andcreditors and associated interest results from lease terminations and theputting 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 relatingprincipally to external costs associated with refinancing and to the terminationof 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 8.7Adjustment of interest rate hedging contracts to market value 8.7 725 13,269Accounting 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 Decemberequity 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 restatementsAdjustment of interest rate hedging contracts to market value: effect 8.7 (58,094) (57,369) (44,825)on retained earningsAdjustment of interest rate hedging contracts to market value: effect 8.7 (116,313) (82,242) (111,737)on issued capital and reserves attributable to equityAccounting for financial charges at their effective rate of interest 8.7 117,033 94,015 70,040Retirement 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 innote 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, theimplementation of which would not be possible before 1 January 2006, Eurotunnelhas decided for its Combined Accounts in IFRS at 30 June 2005, to continue withthe accounting principles previously applied in accordance with Frenchstandards. 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 toapply the "deemed cost" option under IFRS1 for its valuation of property, plantand equipment. This "deemed cost" is the "economic value in use" which corresponds to the netbook value after depreciation at the 31 December 2003 as previously published,calculated in accordance with IAS36. Equity issue costs and their depreciationthat were capitalised during the construction period have not been retreated. Fixed asset and component lives which were reviewed in 2004, are unaffected bythe transition to IFRS. 8.3 Depreciation of assets (IAS36) Eurotunnel has applied the principles of IAS36 since 2003 and has madeimpairment charges in the 2003 and 2004 accounts. 8.4 Retirement benefits (IAS19 & IFRS1) In accordance with the option under IFRS1, Eurotunnel has accounted in itsopening IFRS balance sheet for the whole of the actuarial differences as at 1January 2004, with a corresponding reduction in issued capital and reservesattributable 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 tothe "corridor" method over the average remaining working lives of thebeneficiaries. The effect of any such amortisation would be shown in financialcharges rather than in operating charges, in accordance with the option inIAS19. In 2004 an additional charge of £458,000 was accounted for in respect of currentservice costs for the period. No adjustments for actuarial differences weremade. 8.5 Stock options (IFRS2) In accordance with the provisions of IFRS2, only plans agreed after 7 November2002 for which the rights are not yet vested at 1 January 2005 have been valuedand accounted for in employee benefit expenses. The application of this standardhas no effect on the Group's total issued capital and reserves attributable toequity. 8.6 Basis of consolidation (SIC12) The special purpose vehicles Fixed-Link Finance BV (FLF) and Tunnel Junior DebtHoldings Limited, set up in connection with the repackaging of £1.1 billion ofJunior Debt completed in 2001, were not previously consolidated in the Groupaccounts in accordance with French GAAP. The consolidation of these two entitiesin accordance with IFRS would increase the Group's issued capital and reservesattributable to equity by approximately £120 million at 1 January 2004 anddecrease the Junior Debt by the same amount. However, as this benefit could onlybe realised after the complete reimbursement of the FLF debt from the bondholders, Eurotunnel, with the prospect of a significant restructuring, has notmodified the amount of its Junior Debt as it does not consider itself to havecontrol over these entities. Therefore, the Eurotunnel Group has not consolidated FLF and TJDH. In EPLC theseentities have been consolidated since 2001 in accordance with UK GAAP, and theprofit from the operation has been recognised. The special purpose vehicles Fixed-Link Finance 2 BV (FLF2) and TunnelStabilisation and Resettable Advances Limited, set up in connection with thedebt buyback and refinancing in 2002, have been consolidated, but have no impacton 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 inIFRS1, Eurotunnel applies prospectively the derecognition rules of IAS39 fortransactions occurring on or after 1 January 2004. Consequently, the 1997 financial restructuring is carried over in the IFRSfinancial statement according to the derecognition principles that were adoptedunder French GAAP. b) Effective interest rate The effective interest rate on the restructured Junior Debt has been calculatedspecifically in the context of the need to refinance the debt before the end of2006. Consequently, debt issue costs have been amortised so as to be fullydepreciated 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, andhave been valued at their fair value. The effect of this valuation has beenaccounted for in issued capital and reserves attributable to equity. Theeffective element will be recognised in the income statement at the same rate asthe interest payments on the hedged debt. EFFECT OF THE TRANSITION TO IFRS ON THE FINANCIAL STATEMENTS Income statement for the 6 months to June 2004Presentation under French French Reclassifications Revaluations Presentation under IFRSGAAP£000s GAAP Notes IFRS(1) £000s TurnoverOperating revenue 260,530 260,530 Operating revenueOther income 8,525 (8,525) 0 Other operating incomeTotal turnover 269,055 (8,525)Operating expenditureMaterials and services 84,883 (8,127) 76,756 Materials and services(net)Staff costs 52,231 (81) 8.5 421 52,571 Employee benefit expenseDepreciation 50,805 50,805 DepreciationProvisions 10,848 (88) 10,760 ProvisionsOther operating charges 229 (229) 0 Other net operating income and (expenses)Total operating 198,996 (8,525)expenditureOperating profit 70,059 0 69,638 Trading profit Impairment 8,042 8,042 Other non trading charges 61,596 Operating profitFinancial incomeInterest receivable and 16,553 (13,974) 2,579 Income from cash and cashsimilar income equivalentsProfit on disposal of 244 (244)investmentsExchange differences 2,151 (2,151)Total financial income 18,948 (16,369)Financial chargesInterest 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 serviceFinancial result (144,179) 13 (13) 8.7 (629) (642) Other financial income and (charges)Exceptional result (8,042) 8,042Taxation 23 23 TaxationResult ResultLoss for the period (82,185) 0 (104,899) Loss for the period Loss per Unit (3.2p) (4.1p) Loss per UnitFull 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 periodperiod(1) Prepared on the basis of the accounting principles described in note 2.1. Combined balance sheet at 30 June 2004Presentation under French French Reclassifications Revaluations Presentation under IFRSGAAP£000s GAAP Notes IFRS(1) £000s ASSETS ASSETS Tangible fixed assets Property, plant and equipmentConcession fixed assets 7,381,924 7,381,924 Concession fixed assetsOther fixed assets 1,964 1,964 Other fixed assetsTotal tangible fixed 7,383,888assets Financial fixed assets Non-current financial assetsShares 2,115 2,115 SharesOthers 16,372 469,040 485,412 Other financial assets Other non-current assetsTotal fixed assets 7,402,375 7,871,415 Total non-current assetsStocks 7,118 7,118 InventoriesTrade debtors 40,876 40,876 Trade receivablesOther debtors 15,569 11,146 8.7 (3,712) 23,003 Other receivablesOther financial debtors 512,795 (469,040) 43,755 Current financial debtors 38,182 8.7 (38,182) Interest rate derivativesInvestments and liquid 175,471 175,471 Cash and cash equivalentsfundsTotal current assets 751,829 290,223 Total current assetsPrepaid expenses 49,328 (49,328)Total assets 8,203,532 0 (41,894) 8,161,638 Total assets SHAREHOLDERS' FUNDS AND ISSUED CAPITAL, RESERVESLIABILITIES ATTRIBUTABLE TO EQUITY, AND LIABILITIESIssued share capital 285,400 285,400 Issued share capitalShare 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 reservesProfit and loss account (1,635,097) 8.5 (681) (1,595,081) Retained earningsreserve 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 725Exchange adjustment 227,904 (265) 227,639 Cumulative translation reservereserveTotal 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 yearLoan notes 1,009,324 (1,009,324)Loans 5,088,328 1,009,324 8.7 (92,383) 6,005,269 Financial liabilitiesAccrued 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 yearOverdrafts 8 94,531 94,539 Financial liabilitiesOther financial creditors 512,795 (469,040) 43,755 Other financial liabilities 25,478 8.7 96,350 121,828 Interest rate derivativesOther creditors 200,885 (129,026) 71,859 Trade payables 34,430 34,430 Other payablesTotal creditors 6,905,871 367,512 Total current liabilitiesDeferred income 28,438 (28,438)Total shareholders' funds 8,203,532 0 8,161,638 Total issued capital, reservesand 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 2004Presentation under French French Reclassifications Presentation under IFRSGAAP£000s GAAP IFRS(1) £000s Profit before depreciation, 131,712 121provisions, interest and tax (421) (209) 131,203 Trading profit before depreciation and provisionsExchange adjustment(2) 167 0 167 Exchange adjustment(2)Decrease / (increase) in 1,522 0 1,522 Decrease in inventoriesstocks(Increase) / decrease in (5,975) (121) (6,096) (Increase) / decrease in tradingdebtors debtors(Decrease) / increase in 3,245 421 3,666 Increase / (decrease) in tradingcreditors creditorsRelease 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) TaxationNet cash inflow from 124,039 (4,378) 119,661 Net cash inflow from operatingoperating activities activitiesTaxation (23) 23 0 (17,180) (17,180) Payments to acquire fixed assetsCapital Expenditure (15,989) 17,180 1,191 Sale of property, plant and equipment 0 (15,989) Net cash outflow from investing activitiesOther non-operating cash (4,355) 4,355flows Returns on investments and (135,064) 135,064 0servicing 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 activitiesCash (outflow) / inflow (31,392)before financingFinancing (774) 774 0Decrease in cash in period (32,166) 0 (32,166) Decrease in cash in periodExchange 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 rateruling at the period end. Income statement for the 6 months to December 2004Presentation under French French Reclassifications Revaluations Presentation under IFRSGAAP£000s GAAP Notes IFRS(1) £000s TurnoverOperating revenue 538,123 538,123 Operating revenueOther income 17,050 (17,050) 0 Other operating incomeTotal turnover 555,173 (17,050)Operating expenditureMaterials 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 expenseDepreciation 100,258 100,258 DepreciationProvisions 22,003 (269) 8.4 458 22,192 ProvisionsOther operating charges 550 (550) 0 Other net operating income and (expenses)Total operating 383,883 (17,050)expenditureOperating profit 171,290 0 169,709 Trading profit 395,000 395,000 Impairment 47,806 47,806 Other non trading charges (273,097) Operating profitFinancial incomeInterest receivable and 31,641 (26,282) 5,359 Income from cash and cashsimilar income equivalentsProfit on disposal of 286 (286)investmentsExchange differences 1,037 (1,037)Total financial income 32,964 (27,605)Financial chargesInterest 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 serviceFinancial result (298,194) 2,880 (2,880) 8.7 7,223 4,343 Other financial income and (charges)Exceptional result (442,806) 442,806Taxation 23 23 TaxationResult ResultLoss for the period (569,733) 0 (35,305) (605,038) Loss for the period Loss per Unit (22.4p) (23.8p) Loss per UnitFull 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 periodperiod(1) Prepared on the basis of the accounting principles described in note 2.1. Combined balance sheet at 30 December 2004Presentation under French French Reclassifications Revaluations Presentation under IFRSGAAP£000s GAAP Notes IFRS(1) £000s ASSETS ASSETS Tangible fixed assets Property, plant and equipmentConcession fixed assets 6,933,599 6,933,599 Concession fixed assetsOther fixed assets Other fixed assetsTotal tangible fixed 6,933,599assets Financial fixed assets Non-current financial assetsShares 2,224 2,224 SharesOthers 16,686 145,375 162,061 Other financial assets 2,645 2,645 Other non-current assetsTotal fixed assets 6,952,509 7,100,529 Total non-current assetsStocks 7,185 7,185 InventoriesTrade debtors 41,014 41,014 Trade receivablesOther debtors 26,246 (572) 8.7 (3,759) 21,915 Other receivablesOther financial debtors 167,437 (145,375) 22,062 Current financial debtors 34,472 8.7 (34,472) Interest rate derivativesInvestments and liquid 181,224 181,224 Cash and cash equivalentsfundsTotal current assets 423,106 273,400 Total current assetsPrepaid expenses 36,545 (36,545)Total assets 7,412,160 0 (38,231) 7,373,929 Total assets SHAREHOLDERS' FUNDS AND ISSUED CAPITAL, RESERVESLIABILITIES ATTRIBUTABLE TO EQUITY, AND LIABILITIESIssued share capital 285,400 285,400 Issued share capitalShare 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 reservesProfit and loss account (1,635,097) 8.5 (681) (1,595,081) Retained earningsreserve 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 13,269Exchange adjustment 75,799 (192) 75,607 Cumulative translation reservereserveTotal 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 yearLoan notes 1,035,464 (1,035,464)Loans 5,220,057 1,035,464 8.7 (69,576) 6,185,945 Financial liabilitiesAccrued 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 yearOverdrafts 98,094 98,094 Financial liabilitiesOther financial creditors 167,437 (145,375) 22,062 Other financial liabilities 22,299 8.7 118,059 140,358 Interest rate derivativesOther creditors 204,404 (127,948) 76,456 Trade payables 19,944 19,944 Other payablesTotal creditors 6,725,456 393,529 Total current liabilitiesDeferred income 13,711 (13,711)Total shareholders' funds 7,412,160 0 (38,231) 7,373,929 Total issued capital, reservesand 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 2004Presentation under French French Reclassifications Presentation under IFRSGAAP£000s GAAP IFRS(1) £000s Profit before depreciation, 293,551 31provisions, interest and tax 559 (1,139) (843) 292,159 Trading profit before depreciation and provisionsExchange adjustment(2) 3,865 (31) 3,834 Exchange adjustment(2)Decrease / (increase) in 1,648 0 1,648 Decrease in inventoriesstocks(Increase) / decrease in 7,026 (559) 6,467 (Increase) / decrease in tradingdebtors debtors(Decrease) / increase in (9,123) 1,139 (7,984) Increase / (decrease) in tradingcreditors creditorsRelease 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) TaxationNet cash inflow from 283,312 (13,859) 269,453 Net cash inflow from operatingoperating activities activitiesTaxation (24) 24 0 (23,784) (23,784) Payments to acquire fixed assetsCapital Expenditure (18,934) 23,784 4,850 Sale of property, plant and equipment 0 (18,934) Net cash outflow from investing activitiesOther non-operating cash (13,835) 13,835 0flows Returns on investments and (281,241) 281,241 0servicing 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 activitiesCash (outflow) / inflow (30,722)before financingFinancing (724) 724 0Decrease in cash in period (31,446) 0 (31,446) Decrease in cash in periodExchange 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 andloss 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 inaccordance with Article L.232-7 of French Company Law (Code de Commerce), wehave performed the following procedures: - a review of the accompanying summary of operations and income statement asthey appear in the half year combined financial statements of the EurotunnelGroup, 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 JointBoard of Eurotunnel Group. Our responsibility is to issue a report on thesefinancial statements based on our review. In the process of application of IFRS, as adopted in the European Union, for thepreparation of the 2005 consolidated accounts, the Eurotunnel Group interimcombined accounts have been prepared for the first time, with the exception ofstandards affecting the accounting treatment for concessions, using IFRSaccounting and measurement methods adopted in the European Union, using a halfyear presentation format as defined by the general rules of the AMF. Theyinclude, for the purpose of comparison, information related to the year ended 31December 2004 and the six months ended 30 June 2004 restated using the samerules. We conducted our review in accordance with professional standards applicable inFrance; these standards require that we plan and perform limited reviewprocedures, substantially less in scope than an audit, to obtain reasonableassurance as to whether the half year combined financial statements are freefrom material misstatements. A review is limited primarily to inquiries ofmanagement and analytical procedures applied to financial data and thus providesless assurance than an audit. Based on our review, nothing has come to our attention that causes us to believethat, in all material respects, the accompanying interim combined financialstatements do not conform, with either the rules on presentation and disclosureof information applicable in France, or the accounting and measurementprinciples described in note 2.1 which result from the application of IFRSstandards adopted in the European Union or the specific policies described inthat note concerning the accounting treatment of concessions. Whilst giving the conclusion given above, we draw your attention to thefollowing: - Note 1 which highlights that, based on the projections updated in the lightof the latest results and the current outlook, the Group is facing: (i) A first uncertainty, relating to going concern, which is dependentupon the Group's ability to put in place a refinancing plan or, if not, toobtain an agreement from the Lenders under the existing Credit Agreement in thesecond half of 2006 at the latest. (ii) The second uncertainty, in part related to the first one, relating tothe valuation of the Group's fixed assets which must be calculated, inaccordance with accounting principles, using financial projections over the lifeof the Concession. These projections, which have been prepared in the context ofthe going concern uncertainty, assume the continuation of existing operationaland financial contracts and a level of debt €1.9 billion (£1.3 billion) lowerthan the current level of debt. Based on these assumptions, the Group recorded in its 31 December 2004 accountsan impairment of its fixed assets of €560 million (£395 million) representing animplicit discount rate of 7.2%. In this respect and in the context of increasinguncertainties, the Group used values in the upper ranges for the market riskpremium and the asset beta ratios. At 30 June 2005, in the context of the operational performance of the Groupduring the first semester and the level of interest rates, the Group has notmodified its financial projections underlying the valuation of fixed assets. Relatively small changes in the assumptions used would lead to material changesin the value in use of the assets. As an illustration, an increase of 0.1% inthe implicit discount rate corresponds to a reduction in the value in use of theassets of approximately €210 million (£160 million). It is our duty to draw to your attention to the fact that these financialprojections 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 intothe interpretation and application of concession contracts, Eurotunnel hascontinued to apply its existing accounting policies in accordance with FrenchGAAP for depreciation of concession fixed assets and for provisions for renewalsand large scale maintenance for the preparation of its interim combinedaccounts. As such, it is too early to consider that the accounting principlescurrently applied are compatible with IFRS. Furthermore, when publishing itsfirst IFRS accounts for the year ended 31 December 2005, Eurotunnel may berequired to adjust its opening balance sheet to take account of existingstandards 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 TunnelJunior Debt Holdings Limited (TJDH), set up in connection with the repackagingof €1.8 billion (£1.1 billion) of Junior Debt completed in 2001, were notpreviously consolidated in the Group accounts in accordance with French GAAP,but that the consolidation of these two entities in accordance with IFRS wouldincrease the Group's issued capital and reserves attributable by approximately€180 million (£120 million) at 1 January 2004, and a decrease of Junior Debt bythe same amount. Nevertheless, as the benefit could only be realised after thecomplete reimbursement of the FLF debt from the bond lenders, Eurotunnel, withthe prospect of a significant refinancing, has not modified the Junior Debt asit does not consider itself to have control over these entities. Therefore, theEurotunnel 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 IAS27standard on consolidated accounts, the Group has decided to continue to publishits consolidated accounts as combined accounts; (ii) The options used for disclosure of these interim combined financialstatements which do no include all the information required in the notes by IFRSas adopted in the European Union that would give, based on IFRS standards, atrue and fair view of the financial position and the result of the entitiescomprised under the scope of these combined accounts; (iii) The reasons why the comparative information which will be presentedin the combined accounts at 31 December 2005 and in the interim combinedaccounts at 30 June 2006 may be different from the accounts as attached to thisreport. We have carried out our limited review of the information contained in theEurotunnel Group's half year combined interim report in accordance withprofessional standards applicable in France. We have nothing to report with respect to the fairness of such information andits 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 ExchangeRelated Shares:
Eutelsat Com