Certain energy-based futures contracts used for proprietary trading purposes are marked to market using externally derived market prices. This is a departure from the general provisions of Schedule 4 of the Companies Act 1985. An explanation of this departure is given in note xv.
An associate is an undertaking in which the Group has a long-term participating interest, usually from 20% to 50% of the equity voting rights, and over which it exercises significant influence. A joint venture is an undertaking in which the Group has a long-term participating interest and over which it exercises joint control. The Group's share of the profits less losses of associates and of joint ventures is included in the consolidated profit and loss account and its interest in their net assets is included in fixed asset investments in the consolidated balance sheet.
Purchased goodwill (both positive and negative) arising on consolidation in respect of acquisitions before 1 April 1998, when FRS 10 (Goodwill and Intangible Assets) was adopted, was set off against reserves in the year of acquisition. When a subsequent disposal occurs any related goodwill previously set off to reserves is taken back through the profit and loss account as part of the profit or loss on disposal.
Purchased goodwill (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) arising on consolidation in respect of acquisitions since 1 April 1998 is capitalised. Positive goodwill is fully amortised by equal annual instalments over its estimated useful life, currently not more than 20 years.
Negative goodwill arising on consolidation in respect of acquisitions since 1 April 1998 is included within fixed assets and released to the profit and loss account in the periods in which the fair values of the non–monetary assets purchased on the same acquisition are recovered, whether through amortisation or sale.
On the subsequent disposal or termination of a business acquired since 1 April 1998, the profit or loss on disposal or termination is calculated after charging/(crediting) the unamortised amount of any related goodwill/(negative goodwill).
In the Company's financial statements, investments in subsidiary undertakings, associates and joint ventures are stated at cost less amounts written off.
Certain power plants sell their output in merchant markets. In these situations, the electricity is sold at market prices through existing power exchanges, pool arrangements or through bilateral contracts with third parties. In these situations, turnover for energy sales is recognised as output is delivered in accordance with the terms of any related hedging or forward contracts or through pool or spot mechanisms.
Other power plants sell their output under longterm power purchase agreements (PPAs). Under such arrangements it is usual for the Group to receive payment for the provision of electrical capacity whether or not the off-taker requests the electrical output (capacity payments) and for the variable costs of production (energy payments). In such situations, turnover is recognised in respect of capacity payments either as finance income in accordance with note x (where the PPA is considered to contain a finance lease) and/or as energy sales in accordance with the contractual terms, to the extent that the capacity has been made available to the contracted off-taker during the period. Energy payments are recognised in turnover as energy sales in all cases as the contracted power is delivered.
Where the PPAs extend over more than one accounting period, turnover for energy sales is recognised in each accounting period at the fair value of the Group's performance under the contract in each period.
Liquidated damages (LDs), in respect of late commissioning, are included in other operating income. Proprietary trading income is recognised on the basis of completed contracts and the mark–to–market value of outstanding contracts at the period end.
For defined contribution arrangements, contributions are charged to the profit and loss account as they fall due.
Individual company Transactions in foreign currencies are translated into local currencies of individual entities at the exchange rate ruling at the date of transaction unless related or matching forward foreign exchange contracts have been entered into when the rate specified in the contract is used. At the year end, monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date or, where appropriate, at the hedged contracted rate. Any gain or loss arising on the restatement of such balances is taken to the profit and loss account.
Depreciation is calculated so as to write–down the cost of tangible fixed assets to their residual value evenly over their estimated useful lives. Estimated useful lives are reviewed periodically, taking into account commercial and technological obsolescence as well as normal wear and tear, provision being made where the carrying value may not be recoverable.
Tangible fixed assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future cash flows of the relevant income generating unit or disposal value, if higher. If an asset is impaired, a provision is made to reduce its carrying amount to the estimated recoverable amount. The discount rate applied is based upon the Group's weighted average cost of capital with appropriate adjustment for risks associated with the relevant unit.
The depreciation charge is based on the following estimates of useful lives| Years | |
| Power plants | 20–60 |
| Fixtures, fittings, tools and equipment | 3–10 |
| Computer equipment and software | 3–5 |
| Civil works | 25–80 |
| Combined cycle gas turbine (CCGT) hot gas path parts, on average | 2–4 |
| Leasehold improvements | Life of lease |
Project development costs are principally incurred in identifying and developing investment opportunities and typically include feasibility studies, pre–bid costs, legal, professional and other related advisory costs. These costs (including appropriate direct internal costs) are recognised as expenses as incurred, except that directly attributable costs are capitalised from the point that it is both virtually certain that a project will proceed to completion and the net cash inflows will recover the costs capitalised. Such capitalised costs are amortised over the life of the related property or contract.
Where the Group has access to the benefits of the power plant and exposure to the risks inherent in those benefits the power plant is capitalised and depreciated over its useful economic life.
Where the off-taker has the principal risks and rewards of ownership of the power plant, through its contractual arrangements with the Group, the power plant is classified as a long-term financial asset. As discussed in note iii, capacity payments are apportioned between capacity repayments relating to the provision of the property, finance income and energy sales. The finance income element of the capacity payment is recognised as turnover, using a rate of return specific to the property to give a constant periodic rate of return on the net investment in each period. The energy sales element of the capacity payment is recognised as turnover as it is earned.
The amounts due from lessees under finance leases are recorded in the balance sheet as financial assets, classified as debtors, at the amount of the net investment in the lease after making provision for bad and doubtful debts receivable.
As lessee Assets leased under finance leases are capitalised and depreciated over the shorter of the lease periods and the estimated operational lives of the assets. The interest element of the finance lease repayments is charged to the profit and loss account in proportion to the balance of the capital repayments outstanding. Rentals payable under operating leases are charged to the profit and loss account on a straight–line basis.
Energy-based futures contracts used for proprietary trading purposes are marked to market using externally derived market prices and subsequent movements in the fair value reflected through the profit and loss account. This is not in accordance with the general provisions of Schedule 4 of the Companies Act 1985, which requires that these contracts be stated at the lower of cost and net realisable value or that, if revalued, any revaluation difference be taken to a revaluation reserve. However, the Directors consider that these requirements would fail to provide a true and fair view of the results for the year since the marketability of energy trading contracts enables decisions to be taken continually on whether to hold or sell them. Accordingly the measurement of profit in any period is properly made by reference to market values. The effect of the departure on the financial statements is to increase the profit for the year by £1 million (2003: reduce the loss for the year by £1 million) and increase the net assets at 31 December 2004 by £3 million (2003: decrease net assets by £4 million).
Compliance with UITF 38 has reduced the 2003 investments and shareholders' funds by £2 million (2002: nil). The net profit for 2004 and 2003 was not materially affected.