Dear Shareholder,
I am pleased to report earnings per share (before
exceptional items) in line with our earnings guidance for
2003, but I recognise that 2003 was the difficult year we
anticipated, with profits down on last year - principally
due to low prices for wholesale power in two of our key
markets, namely the US and the UK. The fact that we did
deliver on our earnings guidance is a testament to the
strength of our global portfolio. The Operating and financial review that follows in this
report will give you a full explanation of our regional
performance. There were many success stories. Our
European assets (outside the UK) had another excellent
year, with EOP in the Czech Republic delivering a record
performance and our contracted assets in Portugal and
Turkey achieving high levels of availability that resulted
in good financial results. This was balanced against our
performance in the UK, where trading conditions remain
difficult, with low margins for wholesale power generators.
Our Middle East business, which is underpinned by longterm
off-take contracts, continues to grow profitably, with
the acquisition of the Umm Al Nar power and desalination
plant in Abu Dhabi. In Australia, the strength of our
contracted position has maintained financial performance
in a year when underlying market prices were somewhat
weaker. Our assets in the Rest of the World, namely in
Malaysia and Thailand, had excellent years. In Pakistan
the agreements reached in 2000 have stood firm, and
we continue to be paid in full and on time.
We have also taken steps to strengthen our capital
structure by issuing a new convertible bond, and by
renegotiating and renewing our Corporate bank facility.
These steps provide additional security and flexibility to
our capital structure.
Looking forward, we have many opportunities and some
challenges, all of which I believe we are well equipped
to deal with. Our principal challenge is the US business,
where the clear objective is to preserve value for our
shareholders. A wide range of options are currently
under review. The fundamental issue is oversupply, and
it will probably take some time for the supply/demand
imbalance in our US markets to be corrected. We are
taking active steps to manage this position, including a
reduction in our cost base, selective mothballing of plant
that is uneconomic to run, and the renegotiation of our
non-recourse project debt. At this stage, we cannot
predict with certainty the outcome of these negotiations,
but we remain focused on minimising the financial
demands on the Group, whilst recognising the upside
value from future market recovery. We have also taken
a prudent view on the balance sheet value of our US
merchant assets, and have written down their value by
£404 million at the year end, based on our view of their
long-term cash flows. Weak market conditions in the
US is the sole reason our earnings guidance for 2004
is lower, with an EPS range of 7p to 9p.
We continue to be very active in reviewing growth
opportunities, both in our existing merchant markets
and in those that provide secure long-term contracts.
Let me give you two examples. The low wholesale price
environment means that selected merchant assets in
both the UK and the US are potentially available at a
discount to original cost, providing an opportunity to
add value, scale and complementary assets in our core
markets. Secondly, as an investment that will significantly
increase our long-term contracted position, we announced
in December 2003 that we will build four power stations
in Saudi Arabia with a total capacity of 1,074 MW, all of
which are fully contracted to Saudi Aramco, one of the
largest oil and gas companies in the world. These plants
will start operating during 2006. We continue to review
further opportunities in the Middle East. Our investment
criteria remain stringent and we will use your capital
carefully.
We take our environmental and community
responsibilities very seriously, and the corporate
social responsibility section of this report will give you
some practical examples of our commitment. We also
announced in early 2004 our first wind farm development
in Australia, and we continue to develop the capability to
use more environmentally-friendly fuels in our UK
coal-fired plant.
The senior management team and I have a clear vision
of the future for your Company. Our strategy remains to
create value through wholesale power generation in our
core regions, and we have the people, the resources and
the determination to ensure we deliver for the benefit
of all our shareholders and stakeholders.
Philip Cox
Chief Executive Officer |
