15th Sep 2005 07:30
Eurotunnel PLC/Eurotunnel S.A.15 September 2005 NEWS Press release Embargo until 0730 (UKT) on 15 September 2005 EUROTUNNEL: IMPROVED RESULTS IN THE FIRST HALF OF 2005 Accounts prepared under IFRS -> 2% growth in revenue - Shuttle service revenue up 6% to £146 million in a favourable local context - Railways revenue stable at £117 million, including payments of £36 million under the Minimum Usage Charge (MUC) -> Improved operational results from first phase of reorganisation - Operating margin up 7% due partly to a 3% fall in operating costs - Operating profit up 19% to £74 million -> Financial results - Net loss reduced by 18% to £87 million - interest cover after investment activities: 97% -> Financial restructuring - Negotiations with creditors continue in line with timetable Jacques Gounon, Chairman and Chief Executive of the Eurotunnel Group, said: "Eurotunnel has accelerated improvements in its operational performance.Increased revenue in our core shuttle business has been achieved within theframework of a new marketing strategy based on our key benefits: frequency,speed, and reliability. "We expect to consolidate the 3% reduction in operating costs in the secondhalf. This will be achieved by more closely aligning capacity with demand, andby further reductions in staff costs as the first voluntary redundancies takeeffect. "I would like to acknowledge the hard work and commitment of our staff and thesense of responsibility shown by the unions, all of whom are taking on thisphase of reconstruction with the firm intention of saving Eurotunnel. "In accordance with our timetable for the planned financial restructuring, wepresented a business plan to our creditors in advance of the 30 June deadline,and our initial reflections on the debt restructuring on 13 July. " "Negotiations with the Ad-hoc Committee and two other creditor committeescontinued throughout the summer. These negotiations remain confidential,although we hope to be able to issue a progress by the end of October at thelatest." 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, and the impact of newaccounting principles is illustrated in note 8 to the interim combined accountswhich are available on the internet site www.eurotunnel.com. Included in annexe 1 of this press release is a summary of the principal changesto Eurotunnel's combined accounts resulting from the introduction of IFRS. 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 30June 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 2004Exchange 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 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 _________ _______________________________________________________________________________________________ |Financing at 30 June 2005 nominal value (in £ billion) |_______________________________________________________________________________________________| |_______________________________________________________________________________________________| | | |Senior Debt | 0.4 | |_______________________________________________________________|_______| | | | | | | |Junior Debt | 3.2 | | | | |FLF2 (Tier 1A) | 0.7 | CORE DEBT | | | |Resettable Advances | 0.5 | £4.8 billion | | | |_______________________________________________________________|_______|_______________________| | | | | | | | | |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 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(2). 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). 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 % 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 throughthe Channel Tunnel, and excludes passengers between Paris-Calais andBrussels-Lille. 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. 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. 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. 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. 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. 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 contributionfor 2000 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 UsageContract provisions regarding cost allocations, and on the practice of theparties in this 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. Other disputes The termination of the contract between Eurotunnel and Transferry has resultedin a contractual dispute. Annexe 1 Principal impacts of the introduction of IFRS Explanations of the changes in accounting standards and their effects onEurotunnel's financial statements are included in the interim combined accounts. Below are the main impacts on Eurotunnel's combined accounts: -> Opening issued capital and reserves attributable to equity as at 1January 2004 • Derivative instruments relating to interest rate hedging on loans have been valued at their fair value: this has reduced issued capital and reserves attributable to equity by £174m. • Accounting for debt at an effective rate of interest has increased issued capital and reserves attributable to equity by £117m. • The effect of accounting for retirement liabilities is to reduce issued capital and reserves attributable to equity by £18m. -> The net effect on the income statement for the year to 31 December 2004 is to increase the loss by £35 million -> Treatment of Fixed Assets • In the absence of definitive interpretations from IFRIC relating to concessions, the French GAAP accounting principles relating to fixed assets have been maintained. -> Treatment of part of the debt • The consolidation of the special purpose vehicles FLF and TJDH would increase issued capital and reserves attributable to equity by £175m and decrease the Junior Debt by the same amount. As this benefit could only be realised after the complete reimbursement of the FLF and TJDH debt, Eurotunnel, with the prospect of a significant restructuring, has not consolidated these entities. Media enquiries: Press Office (24 hours) tel: + 44 (0) 1303 288728 or + 44 (0) 1303 288737 Investor enquiries: Investor Relations tel: + 33 1 55 27 36 27 Note to editors: The full interim accounts will be posted on the website atwww.eurotunnel.com News release no. (951/2005 ) Eurotunnel manages the infrastructure of the Channel Tunnel and operatesaccompanied truck shuttle and passenger shuttle (car and coach) services betweenFolkestone, UK and Calais/Coquelles, France. Eurotunnel also earns toll revenuefrom train operators (Eurostar for rail passengers, and EWS and SNCF for railfreight) which use the Tunnel. Eurotunnel is quoted in London, Paris andBrussels. -------------------------- (1) Cash flow before non trading cash flows, taxation and financing activities. (2) 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). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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