TIDM10FX TIDM88BX
RNS Number : 1116Q
Heathrow
24 February 2021
HEATHROW (SP) LIMITED
RESULTS FOR THE YEARED 31ST DECEMBER 2020
24(TH) FEBRUARY 2021
Keeping passengers and colleagues safe - We have only been able
to remain open throughout the pandemic by maintaining high safety
levels. We helped to develop international standards for safe
travel through airports and invested in cutting-edge COVID-secure
technologies and testing facilities for up to 25,000 passengers a
day to help restore international travel safely.
Annual loss of GBP2bn underlines the devastating impact of
COVID-19 on aviation - Passenger numbers collapsed to 22.1m, more
than half of whom travelled in January and February. Overall
revenue fell 62% to GBP1.2bn and adjusted EBITDA fell to
GBP270m. Government policies over recent months have effectively
closed borders. We have had no government support, other than
furlough, and have not been given relief from business rates,
unlike other airports, retail and hospitality businesses. The March
Budget is the key opportunity for the Chancellor to support the
sector by providing 100% business rates relief, extending the
furlough scheme and reversing the tourist tax.
Decisive action to weather the storm - Airports have very high
fixed costs. We acted quickly to cut gross operating costs by
nearly
GBP400m, reduced capital expenditure by GBP700m and raised
GBP2.5bn in funding including a GBP600m capital injection. We ended
the year with GBP3.9bn of liquidity, enough to see us through until
2023.
CAA must act now to unlock lower charges and more investment for
consumers - If the CAA acts to approve a RAB adjustment, to recover
regulatory depreciation and provide a fair balance of risk and
reward, they can unlock lower airport charges and higher investment
in passenger service and resilience.
28% decline in cargo volumes shows the cost to the economy of
shutting down aviation . Passenger planes from Heathrow are the
UK's global trading network, carrying British exports and inbound
supply chain. Economic recovery will be held back until long haul
passenger flights are restarted, especially to key markets such as
the US.
We support the Prime Minister's plan to restart travel and the
economy - We will work with the Global Travel Taskforce, so that
Britain can become the first country in the world to safely restart
international travel and trade at scale, saving thousands of jobs
and reinvigorating the UK economy. The Prime Minister has a unique
opportunity to agree a common international standard for safe
travel with other world leaders when he hosts the G7 in June.
Building Back Better - We remain focused on decarbonising
aviation. We became carbon neutral in 2020 and have been working to
make decarbonizing aviation a flagship goal for COP26 ahead of a
global agreement for net zero emissions by 2050 at the ICAO general
Assembly in September 2022.
Heathrow expansion is mission critical to delivering "Global
Britain" - With the Supreme Court reinstating the Airports National
Policy Statement, we will consult with investors, Government,
airline customers and regulators on our next steps.
At year ended 31 December 2019 2020 Change (%)
============================================================ ======= ======== ===========
(GBPm unless otherwise stated)
Revenue 3,070 1,175 (61.7)
Cash generated from operations 1,942 (95) --
Profit / (loss) before tax 546 (2,012) --
------------------------------------------------------------ ------- -------- -----------
Adjusted EBITDA(1) (4) 1,921 270 (85.9)
Adjusted profit / (loss) before tax(2) (4) 375 (1,214) --
============================================================ ======= ======== ===========
Heathrow (SP) Limited consolidated nominal net debt(3) (4) 12,412 13,131 5.8
Heathrow Finance plc consolidated net debt(3) (4) 14,361 15,120 5.3
Regulatory Asset Base(5) 16,598 16,492 (0.6)
------------------------------------------------------------ ------- -------- -----------
Passengers (million)(6) 80.9 22.1 (72.7)
============================================================ ======= ======== ===========
"2020 has been one of our most challenging years - but despite
GBP2bn of losses and shrinking to passenger levels we haven't seen
since the 70s, I am hugely proud of the way that our colleagues
have kept our passengers safe and the UK's hub airport open for
vital supplies throughout. We can be hopeful for 2021, with Britain
on the cusp of becoming the first country in the world to safely
resume international travel and trade at scale. Getting aviation
moving again will save thousands of jobs and reinvigorate the
economy, and Heathrow will be working with the Global Travel
Taskforce to develop a robust plan underpinned by science and
backed by industry. The Prime Minister will then have the unique
opportunity to secure global agreement on a common international
standard for travel when he hosts the G7 in June. In the meantime,
we need next week's Budget to support aviation's recovery by
extending furlough and providing 100% business rates relief."
John Holland-Kaye , HEATHROW CEO
Notes
(1) Adjusted EBITDA is profit before interest, taxation,
depreciation, amortisation, fair value adjustments on investment
properties and exceptional items
(2) Adjusted profit before tax excludes fair value adjustments
on investment properties and financial instruments and exceptional
items
(3) Consolidated nominal net debt is short and long-term debt
less cash and cash equivalents and term deposits, it includes
index-linked swap accretion and the hedging impact of cross
currency interest rate swaps. It excludes pre-existing lease
liabilities recognised upon transition to IFRS 16, accrued
interest, bond issue costs and intra-group loans.
(4) A reconciliation of our Alternative Performance Measures ('APMs') can be found in note 14
(5) The Regulated Asset Base is a regulatory construct, based on
predetermined principles not based on IFRS. It effectively
represents the invested capital on which we are authorised to earn
a cash return.
(6) Changes in passengers are calculated using unrounded passenger numbers
Heathrow (SP) Limited is the holding company of a group of
companies that fully own Heathrow airport and together with its
subsidiaries is referred to as the Group. Heathrow Finance plc,
also referred to as Heathrow Finance, is the parent company of
Heathrow (SP) Limited.
Creditors and credit analysts conference call hosted by
John Holland-Kaye, CEO and Javier Echave, CFO
Wednesday February 24(th) 2021
3.00pm (UK time), 4.00pm (Central European Time), 10.00am (Eastern Standard Time)
======================================================================================================================
Investor enquiries Media enquiries
Christelle Lubin Weston Macklem
+44 7764 805761 +44 7525 825 516
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Participant PIN code: 64099089#
UK: +44 (0)33 3300 0804 The presentation can be accessed online or through the
North America: +1 631 9131 422 webcast
Dial in access list
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Disclaimer
These materials contain certain statements regarding the
financial condition, results of operations, business and future
prospects of Heathrow. All statements, other than statements of
historical fact are, or may be deemed to be, "forward-looking
statements". These forward-looking statements are statements of
future expectations and include, among other things, projections,
forecasts, estimates of income, yield and return, pricing, industry
growth, other trend projections and future performance targets.
These forward-looking statements are based upon management's
current assumptions (not all of which are stated), expectations and
beliefs and, by their nature are subject to a number of known and
unknown risks and uncertainties which may cause the actual results,
prospects, events and developments of Heathrow to differ materially
from those assumed, expressed or implied by these forward-looking
statements. Future events are difficult to predict and are beyond
Heathrow's control, accordingly, these forward-looking statements
are not guarantees of future performance. Therefore, there can be
no assurance that estimated returns or projections will be
realised, that forward-looking statements will materialise or that
actual returns or results will not be materially lower than those
presented.
All forward-looking statements are based on information
available at the date of this document. Accordingly, except as
required by any applicable law or regulation, Heathrow and its
advisers expressly disclaim any obligation or undertaking to update
or revise any forward-looking statements contained in these
materials to reflect any changes in events, conditions or
circumstances on which any such statement is based and any changes
in Heathrow's assumptions, expectations and beliefs.
These materials contain certain information which has been
prepared in reliance on publicly available information (the "Public
Information"). Numerous assumptions may have been used in preparing
the Public Information, which may or may not be reflected herein.
Actual events may differ from those assumed and changes to any
assumptions may have a material impact on the position or results
shown by the Public Information. As such, no assurance can be given
as to the Public Information's accuracy, appropriateness or
completeness in any particular context, or as to whether the Public
Information and/or the assumptions upon which it is based reflect
present market conditions or future market performance. The Public
Information should not be construed as either projections or
predictions nor should any information herein be relied upon as
legal, tax, financial, investment or accounting advice. Heathrow
does not make any representation or warranty as to the accuracy or
completeness of the Public Information.
All information in these materials is the property of Heathrow
and may not be reproduced or recorded without the prior written
permission of Heathrow. Nothing in these materials constitutes or
shall be deemed to constitute an offer or solicitation to buy or
sell or to otherwise deal in any securities, or any interest in any
securities, and nothing herein should be construed as a
recommendation or advice to invest in any securities.
This document has been sent to you in electronic form. You are
reminded that documents transmitted via this medium may be altered
or changed during the process of electronic transmission and
consequently neither Heathrow nor any person who controls it (nor
any director, officer, employee nor agent of it or affiliate or
adviser of such person) accepts any liability or responsibility
whatsoever in respect of the difference between the document sent
to you in electronic format and the hard copy version available to
you upon request from Heathrow.
Any reference to "Heathrow" means Heathrow (SP) Limited (a
company registered in England and Wales, with company number
6458621) and will include its parent company, subsidiaries and
subsidiary undertakings from time to time, and their respective
directors, representatives or employees and/or any persons
connected with them.
These materials must be read in conjunction with the Heathrow
(SP) Limited Annual Report and Accounts for the year ended 31
December 2020.
Review of the year
2020 has been the toughest year by far in Heathrow's 75-year
history. The year started strongly, with record passenger numbers
in January, building on a record 80.9m passengers served in 2019.
We were gearing up for further growth as we prepared the planning
application for Heathrow Expansion, in line with the Airports
National Policy Statement ('ANPS'), which was given overwhelming
and cross-party parliamentary approval in 2018. In January our
airport operation became carbon neutral, and in early February, we
helped to launch the UK's Sustainable Aviation roadmap, the first
time that an entire national aviation industry had committed to net
zero emissions by 2050 and laid out a plan to get there.
In mid-February, the Court of Appeal suspended the ANPS, (a
ruling which was reversed in December by the Supreme Court), and
the first cases of COVID-19 started to appear in Europe. Through
March, passenger numbers collapsed completely as COVID-19 became a
global pandemic, countries closed their borders and the UK went
into the first lockdown. In April passengers had fallen to only 3
percent of 2019 levels.
Our first concern was the safety of colleagues and passengers.
We worked quickly with other airports and airlines around the world
to set consistent high standards of COVID safety in the end to end
passenger journey, and to implement them at Heathrow.
We acted quickly and decisively in March to conserve cash,
stopping capital expenditure and implementing a c.GBP400m gross
operating cost reduction programme and suspended all work on
expansion while retaining key talent. This change process was made
more difficult through being managed remotely by people working
from home.
At the same time, we worked hard to protect revenues and bring
in new airlines, including dedicated cargo freighters. We supported
the UK Government in developing a risk-based approach to reopening
borders safely, which resulted in the introduction of travel
corridors in June.
While this allowed travel to restart, it became clear in
mid-August that the recovery had stalled so we started making plans
for further cost reduction and begun implementing in October. These
included cutting all our costs to the lowest level we safely could,
including further management reductions, closing our main office
and suspending our free travel zone. We also changed our pricing to
link it more to aircraft movement and cargo, and slightly less
dependent on passenger numbers. By acting early, we have been able
to get the maximum cash benefits for 2021.
The change programme has resulted in very difficult choices: a
reduction of around a third of our management team and around a
quarter of our frontline team choosing to leave under voluntary
severance. As a significant local employer, we are very conscious
that job losses in front line roles have a devastating impact on
the community around Heathrow. We have therefore chosen to cut our
payroll cost by reducing legacy terms and conditions to above
market levels and the London Living Wage, which has allowed us to
avoid front line compulsory redundancies. We are very grateful that
100% of our front line colleagues have accepted these new
terms.
After a second lockdown in November, the market started to
recover, only for further restrictions to be put in place in
mid-December as new variants of COVID-19 emerged around the world.
We are currently in a third lockdown and under tight border
controls to protect against new variants, but the rapid roll out of
vaccinations gives the prospect of bringing the COVID-19 crisis to
an end and the return to a more normal life.
The result of acting quickly on revenues and capex and beating
our GBP300m net cost reduction target has been that we have ended
the year with only a slightly lower EBITDA than forecast in June
despite lower traffic - which is a great credit to the hard work of
our team in delivering the plan. We have been well supported by
shareholders and creditors and have successfully raised GBP2.5
billion of debt including a GBP600 million of capital into the
regulated business. The market remains extremely uncertain, but we
have GBP3.9 billion of cash, which would be sufficient to take us
well into 2023 under our current traffic forecast or through 15
months even without any revenue. This is as strong a position as we
could have hoped for. We have had no support from Government, other
than the national furlough scheme, and no action as yet from the
CAA to enforce protections assumed in our license, though they have
recently recognised that they need to take action in these
exceptional circumstances.
Now, after 12 months with very few passengers, we are only just
starting to see daylight at the end of a very long tunnel. While so
much has changed, we still retain some of the strengths from
February 2020. Heathrow, the UK's only hub airport and biggest
port, has a critical role to play in rebuilding the national
economy and connecting all of Britain to global growth.
Despite the pandemic, we have achieved record levels of customer
service and resilience, which reflects the strength of our service
culture. We have done this by working closely with our Team
Heathrow partners to a common plan to help us all come through this
crisis with a more efficient and agile operation which is designed
around the needs of our passengers.
We have continued to work on a plan for net zero carbon aviation
and to build a "coalition of the willing" across the world; during
2020, airlines in the US, Middle East, Hong Kong and Russia have
signed up, and the entire European aviation sector has announced a
plan for net zero aviation.
Most important of all, we have been able to retain a talented
team at Heathrow who have demonstrated great versatility,
resilience and teamwork in coming through 2020 and have grown in
capability. They are the best reason for confidence in our
future.
John Holland-Kaye
CEO
HEATHROW'S 3-PHASE PLAN
COVID-19 continues to represent a seismic challenge for the
aviation industry, including Heathrow. Despite this, our vision
remains to give passengers the best airport service in the world.
This vision has both helped to guide our COVID-19 response and make
key changes to our business to secure future success.
Responding to an industry in crisis
Heathrow's market saw dramatic, sudden shifts through multiple
national lockdowns and worldwide quarantines. Uncertainty continues
as to when stability and growth will return.
In response, our strategy has focused on what we can control and
what will maximise opportunities with recovery. We have
reprioritised around controlling costs and ensuring financial
stability. We have continued to listen to our passengers. They
still want direct flights to destinations they want, from a choice
of airlines, at a price they are willing to pay. COVID-19 has
heightened their expectations especially around ease of new
processes, cleanliness and reassurance. It has accelerated the need
for digital interactions and created new needs such as testing
services. We have taken a lead in developing responses to this in
the global aviation industry.
We reoriented the immediate business plan as the impacts of
COVID-19 and the suspension of the Airports National Policy
Statement hit in spring 2020. We have focused on Protecting the
Business, Winning the Recovery and Building Back Better as phases.
These continue to pursue our strategic priorities but with a focus
balanced across the stage of recovery we find ourselves in.
Protect the business
Safety and security remain our first and non-negotiable
priorities. COVID-19 continues to have a significant impact on our
business and recovery is expected to be much more gradual than
previously thought. We have therefore implemented several steps to
reduce our costs, preserve liquidity, and protect our financial
covenants.
Extending our cost reduction programme - Like most
infrastructure businesses our cost base is largely 'fixed', while
this has been a very efficient model when we have had stable
demand, it is not suited to major changes in demand. In 2020 we
have significantly reduced our cost base and started to make it
more variable. By the end of 2020 we reduced our gross operating
costs by circa GBP400 million compared to our December 2019
Investor Report forecast. Alongside organisational changes as
detailed below, we also consolidated our operations into two
terminals and one runway. We will continue to balance our
infrastructure and terminal occupancy with demand. We have also
renegotiated most of our supplier contracts and are reviewing all
contracts to find opportunities for cost reduction. The only major
area where we have not been able to reduce cost is in governmental
costs such as Business Rates.
We also significantly reduced our capital expenditure, by GBP700
million, to preserve cash with investment focused on the safety and
resilience of the airport. For instance, we invested in resurfacing
the southern runway, which is typically challenging to do in busier
operational periods.
Reorganising the business - We made immediate changes to
implement temporary pay cuts, bonus cancellations, recruitment
freezes and to maximise the use of the Government furlough scheme.
We have made significant changes to our organisational design. We
have also undertaken work to ensure all salaries are aligned to
market rate to ensure savings become sustainable through the
recovery. Our focus has been to protect jobs through this crisis
and to offer every frontline colleague a job at a market rate
salary above the London Living Wage. Through 2020 our management
team reduced by around a third while around a quarter of our front
line colleagues chose to leave under voluntary severance as a
result of implementing new market aligned terms and conditions.
Focusing on efficiency - We are undertaking a significant
corporate transformation to drive efficiency in key business
processes and systems. We seek to improve the efficiency of the
airport through standardisation of processes, particularly at known
pinch points including security.
Preserving liquidity and protecting our financial covenants - We
took the proactive step to raise GBP1.7 billion from global debt
capital markets to strengthen our liquidity in response to the
crisis. In addition, we also secured a new GBP750 million facility
at ADI Finance 2. The facility's net proceeds were injected into
the Heathrow Finance Group to provide further headroom to our group
gearing covenant level including GBP600 million pushed into the
Heathrow SP Group that was used to optimise our working capital
position.
Win the recovery
Creating an environment where passengers feel safe and confident
to fly is fundamental to winning the recovery. We have worked with
the Government to implement the necessary standards and procedures
as the pandemic has evolved. We have put in significant measures to
keep passengers and colleagues safe, including UK robots, UV
handrail technology, Perspex screens and hygiene technicians. Since
April 2020, we have encouraged the introduction of a Common
International Standard for pre-departure testing which will allow
international travel and trade to get back to normal as soon as
possible. We support all measures that will bring the COVID-19
crisis to an end, but blanket hotel quarantine is effectively the
closure of our borders which carries huge ramifications for Britain
and the aviation sector.
Testing regimes and vaccine development - We trialled
pre-departure testing with four of our transatlantic carriers -
American Airlines, British Airways, United Airlines and Virgin
Atlantic. This helped the industry and Government to evaluate which
pre-departure testing approach is practical and safe enough to
replace quarantine and other travel restrictions. We have also
developed a testing pilot for airport colleagues, where around
2,000 Heathrow colleagues will regularly take part in rapid lateral
flow tests to help identify those who may unknowingly be carrying
the virus.
Working to attract as much traffic as possible - To offer as
many flights to as many destinations as possible, our work
includes;
-- Incumbent airline build-back - supporting 80% of incumbent
airlines flying, although on reduced schedules;
-- Airlines consolidation of London operations - British
Airways, Virgin Atlantic and numerous other airlines have chosen to
fly from Heathrow rather than other London airports, albeit this
will unlikely be a permanent move;
-- Targeting new entrants - working closely with airline
partners to encourage hand backs of unused slots because of the
suspension of the slot usage rule to provide new entrants with an
opportunity to fly from Heathrow for the first time.
-- Supporting our cargo business - the best performer during the
pandemic with a c.8x growth in cargo-only movements. We will
develop a more ambitious cargo strategy which could help to
diversify our future revenue and rebalance our strategic exposure
to passenger demand.
Responding to passenger needs - We are working to mitigate the
impact that the Government policy on VAT will have on our airport
and retailers, which is in essence a tourist tax. In similar scenes
to the devastation on the high street, a number of our retailers
have also exited the airport. Where possible, we are seeking to
replace these retailers with new and fresh options for our
passengers. Our passengers have also expressed a desire for digital
options to support them throughout their airport experience,
meaning they can have a wider selection of products with a
touch-free experience.
Build back better
While the immediate focus remains on beating the pandemic, we
also stand ready to support the Government's efforts to build back
better and deliver a cleaner, greener and more resilient
economy.
Sustainable growth - Taking the carbon emissions out of flying
remains both an ethical and business imperative for Heathrow. After
achieving the goal of our airport operation becoming carbon
neutral, we are playing a leadership role to create momentum to
solve the problem across our scope 3 greenhouse emissions. The
Committee on Climate Change (CCC) has recommended no airport
expansion unless the industry proves Sustainable Aviation Fuel
(SAF) works. We are working on advocating action by the UK
Government. The UK will host COP26 this year which provides an
important forum. We were involved in developing the Terra Carta, a
green recovery charter for business led by HRH, The Prince of
Wales. We look forward to contributing to the newly created Build
Back Better Council which brings together 30 business leaders from
a wide range of sectors of the British economy. The Council will
work with the Government to unlock investment, boost job creation
and support the delivery of Global Britain. We played a leading
role in developing the sustainable aviation roadmap, launched in
February 2020, and have been working to get it established in
Government policy. We will continue working on reducing our own
emissions further through using renewable electricity, road user
charging and more EV charge capacity.
Heathrow Expansion - In December, the Supreme Court unanimously
ruled the ANPS as lawful and legal Government Policy. Their verdict
concluded the Government had considered the Paris Climate Change
Agreement as part of the policy and reversed the decision taken by
the Court of Appeal in February 2020. Heathrow has already
committed to net zero and this ruling recognises the robust
planning process that will require us to prove expansion is
compliant with the UK's climate change obligations, including the
Paris Climate Agreement, before construction can begin. As
passenger numbers recover, our immediate focus will be to continue
to ensure their safety and to maintain our service levels while we
consult with investors, Government, airline customers and
regulators on our next steps. As explained below, we continue to be
confident that expansion will proceed successfully in support of
Global Britain.
Policy and regulatory matters - In December we submitted our
Revised Business Plan to the CAA, setting our proposed approach to
the next price control period (H7) due to start in 2022. We
recognise the uncertainties ahead and that major demands of our
plan will be outside of our control including the recovery of
passenger demand, the implementation of our proposed RAB adjustment
and the length of the regulatory period. We have requested the CAA
to enforce protections included in our current license to recover
regulatory depreciation with immediate effect and limit losses in
the same way upside is capped. Timely action by the CAA will secure
private investment to maintain current levels of service and lower
charges to consumers from H7.
Strategic priorities
While we navigate the COVID-19 crisis, our strategic priorities
remain:
- Mojo : to be great place to work, we will help our colleagues
fulfil their potential and work together to lead change across
Heathrow with energy and pride;
- Transforming customer service : to deliver the world's best
passenger experience, we will work with the Heathrow community to
transform the service we give to passengers and airlines, improving
punctuality and resilience;
- Beating the plan : to secure future investment, we will 'beat
the plan' and deliver a competitive return to shareholders by
growing revenue, reducing costs and delivering investments
efficiently;
- Sustainable growth : to grow and operate our airport sustainably, now and in the future.
The following performance metrics were set for each of the four
strategic priorities prior to the COVID-19 outbreak and provide a
picture for the 12 months ended 31 December 2020. All indicator
definitions are available in the glossary section of this
report.
MOJO
Mojo performance indicators 2019 2020
(1)
----------------------------- ------ -----
Colleague promotions 210 129
Managerial training 1,648 348
Lost time injuries 0.34 0.14
----------------------------- ------ -----
(1) For the year ended 31 December
TRANSFORM CUSTOMER SERVICE
Service standard performance 2019 2020
indicators (1)
------------------------------ ----- -------
ASQ 4.19 4.24
Experience as "excellent"
or "very good" % 81.9 ---(2)
Baggage connection % 99.0 99.2
Departure punctuality
% 78.5 85.7
Security queuing % 96.3 95.2
Connections satisfaction 4.14 ---(2)
------------------------------ ----- -------
(1) For the year ended 31 December except ASQ presented for the
three months ended 31 December
(2 ) Passenger satisfaction and research have been temporarily suspended
BEAT THE PLAN
Passenger traffic
(Millions) (1) 2019 2020 Var
% (2)
------------------ ----- ----- --------
UK 4.8 1.5 (69.8)
Europe 33.2 9.8 (70.3)
North America 18.8 3.9 (79.5)
Asia Pacific 11.4 2.9 (74.5)
Middle East 7.8 2.5 (68.2)
Africa 3.5 1.1 (67.3)
Latin America 1.4 0.4 (68.8)
------------------ ----- ----- --------
Total passengers 80.9 22.1 (72.7)
------------------ ----- ----- --------
(1) For the 12 months ended 31 December
(2) Calculated using unrounded passenger figures
Other traffic 2019 2020 Var
performance indicators % (2)
(1)
------------------------- -------- -------- -------
Passenger ATM 473,233 177,285 (62.5)
Load factors
(%) 80.0 57.7 (27.9)
Seats per ATM 213.7 216.2 1.2
Cargo tonnage
('000) 1,587 1,141 (28.1)
------------------------- -------- -------- -------
(1) For the 12 months ended 31 December
(2) Calculated using unrounded passenger figures
SUSTAINABLE GROWTH
COVID-19 has had a considerable impact on communities worldwide,
including those local to Heathrow. Our local communities economic
and employment needs have increased while the understanding of the
strategic risk of climate change has continued to grow. These
changes in context reinforce our commitment to sustainability. We
want to capitalise on our successes and lessons over the last years
since Heathrow 2.0 was launched so that sustainability remains at
the heart of our business.
Heathrow 2.0 is our plan for sustainable operation and growth.
It sets out how we will improve life for colleagues and
communities, contribute to a thriving economy, and help to tackle
global challenges including climate change. Our plan has four
pillars through which we aim to deliver the big outcomes that
reflect the material colleague, community and environmental issues
for Heathrow: Great Place to Work, Great Place to Live, Thriving
Sustainable Economy and a World Worth Travelling. We remain
committed to taking action across these pillars to protect and
support people, economy and environment. Heathrow 2.0 supports the
ambitions set out in our Revised Business Plan and will help us
meet the expectations of our stakeholders and retain our licence to
operate, while reducing environmental and social risks to our
business. We will share the detail of a revised and updated
Heathrow 2.0 sustainability strategy later in 2021. During 2020 we
have made some early adaptations to our plan.
We have created a Heathrow Local Recovery Plan together with
local boroughs and stakeholders under the leadership of Lord David
Blunkett. The Plan channels several ongoing activities to support
local communities in the crisis, e.g. building on Heathrow's
donation of laptops to local schools with a quality online /
virtual work experience programme for young people in education. We
have also continued supporting our local communities through the
Heathrow Community Trust, an independently run grant-making
charity. The Trust's grant programme funds projects that improve
quality of life for communities near the airport. Although
donations were reduced during 2020 to reflect the challenging
environment we operated in, overall we gave GBP425,000 (2019:
GBP725,000) and a further GBP10,900 (2019: GBP107,000) was
leveraged from airline noise fines. In February 2021, for the first
time, we were also able to donate GBP41,000 to the Trust after we
outperformed ESG metrics built into our revolving credit
facilities.
We have enhanced our diversity and inclusion strategy,
underlining our commitment to creating a welcoming and inclusive
workplace. Our goal is for Heathrow to reflect the diversity of the
local community at every level by 2025. This is a challenging
target, and we have significant work to do on some aspects if we
are to meet it, but it is the right thing to do for our business
and for our local communities.
Building upon our carbon-neutral status, achieved in January
2020, carbon has also explicitly become part of an executive
director's portfolio - the Chief Carbon and Strategy Officer now
leads a Carbon team, thus placing climate change at the centre of
the company's strategic planning.
Over the next decade, lower carbon sustainable aviation fuel
('SAF') represents the best way to accelerate a reduction in
carbon. SAF can be utilised by existing aircraft without waiting
for a 25-year asset replacement cycle. The challenge is an economic
one - the small volumes of SAF currently produced are also
expensive. A Government package of supply side regulations, demand
incentives and financial support is needed, pursued with urgency
and purpose.
The two key steps we are advocating for in the UK are a fuel
blending mandate to drive supply, and a restructuring of Air
Passenger Duty ('APD') to cut the price of SAF for airlines who use
it. These asks build on those of UK air industry coalition,
Sustainable Aviation, which is also calling for loan guarantees
from Government, matched by private investment, to open the first
two to three UK's SAF production plants by 2025. Through the global
"Clean Skies for Tomorrow Coalition" run by the World Economic
Forum, we are advocating for a similar package of measures in the
UK and globally and building support for ICAO to set a net-zero
goal at its next Assembly in 2022.
Key regulatory developments
COVID-19 related RAB adjustment
In July 2020, Heathrow applied to the CAA for an adjustment to
the Regulatory Asset Base (RAB) for an appropriate amount of the
unexpected losses which occurred due to the impact of COVID-19. The
adjustment is designed to secure the recovery of historic
investment efficiently incurred as well as losses in return as per
economic parameters used to set our allowed cost of capital. This
proposal seeks the enforcement of the protection included in our
settlement against unlimited downside triggered by exceptional
circumstances. In October, the CAA published a consultation
requesting further evidence that this action was required. In
response to the CAA's consultation we set out the need for the
urgent adjustment as prescribed in our license and how our proposed
mechanism would ensure that Heathrow could continue to operate in
the interests of users while smoothing the impact of this change on
passengers over future years.
In February, the CAA published a further consultation,
recognising the existence of exceptional circumstances as defined
in our license and accepting that doing nothing was not an option
as well as laying out its two preferred solutions. We have proposed
a reasonable adjustment that allows the CAA to act now in order to
lower future charges and maintain investment in the airport -
protecting jobs and avoiding rapid degradation of service. The CAA
must ultimately take a decision - but failure to act in the right
way and in a timely manner will see confidence in effective
regulation evaporate. This would not just affect Heathrow but will
undermine the perception of investing in the UK and the
Government's Global Britain agenda.
H7 and Regulatory timetable
The H7 period is due to start on 1 January 2022. In December we
submitted our Revised Business Plan (RBP) to the CAA. This set out
our plans for the H7 period following consultation with airlines
and the publication of further policy views from the CAA through
2020. Our plan seeks to maximise passenger growth and minimise
airport charges to support airlines in the recovery. The plan
assumes our proposed RAB adjustment is fully implemented, which is
a critical factor for our plan to be debt financeable and equity
investable and also unlocks our capacity to use financial levers to
keep prices as low as possible. Our RBP will form the basis of the
CAA's decision making for the H7 period. Our RBP proposes a minimum
five-year regulatory period from 2022-2026 as the basis of our H7
framework. We have proposed evolutions to the regulatory framework
following the impact of COVID-19 to ensure that the framework is
robust to future uncertainty and appropriately balances risk and
reward in the H7 period and beyond. These evolutions include a
proposed price control adjustment mechanism which automatically
adjusts if revenues deviate from forecast by over 8% by making an
adjustment to Heathrow's RAB. Additionally, we are proposing
changes to ensure we can mitigate any unforeseeable future costs
caused by the pandemic and changes in relevant Health and Safety
legislation.
The CAA is continuing to consult on its proposals for the
regulatory framework which will be in place for the H7 period. We
are expecting further consultations from the CAA in early 2021
focusing on policy development in areas such as capital efficiency
and the recovery of early expansion costs. We are expecting the
CAA's Initial Proposals, which will provide its preliminary view on
the price cap and conditions for the H7 period in Summer 2021.
Expansion developments
In February, the Court of Appeal suspended the ANPS. In October,
we submitted an appeal to the Supreme Court and in December, the
Supreme Court unanimously ruled the ANPS as lawful and legal
Government policy. The verdict confirmed the Government had taken
into account the Paris Climate Change Agreement as part of the
policy, and that this would be considered as part of the robust
planning processes in the UK. We have already committed to net zero
and this ruling recognises the robust planning process that will
require us to prove expansion is compliant with the UK's climate
change obligations, including the Paris Climate Agreement, before
construction can begin. The Government has made decarbonising
aviation a central part of its green growth agenda, through wider
use of Sustainable Aviation Fuel as well as new technology. This is
the right outcome for the country, which will allow Global Britain
to become a reality and Heathrow remains committed to a long-term
sustainable expansion and considers it a probable outcome based on
experience to date. As passenger numbers recover, the immediate
focus will be to continue to ensure their safety and to maintain
our service levels while we consult with investors, Government,
airline customers and regulators on our next steps. These include
the continued validation of the underlying business case (traffic
demand and pricing proposition); ensuring a fair and stable
economic regulatory framework; and the confirmation or a review of
the ANPS by the Secretary of State for Transport.
With the support of the Government, the CAA and the airlines,
Heathrow will be able to deliver an Expansion project that would
benefit the airport's local communities as well as the whole of the
UK, delivering tens of thousands of jobs and resulting in an
unrivalled network of international connections that would help
Global Britain succeed.
Brexit
In December, the UK and EU agreed a Comprehensive Trade
Agreement (the 'Deal') that came into force on 1 January 2021. The
Agreement outlines new rules for living, working and trading
between the two parties.
Aviation was identified at early stages as a priority for both
sides. The Agreement includes an aviation chapter, providing the
rights for flights to continue between the EU and UK without
disruption. All other air services between the UK and rest of the
world countries have been rolled over or renegotiated, meaning that
flights can continue to all markets with certainty. The aviation
chapter also outlines ambitions for cooperation on future air
traffic management, aviation security and consumer protection,
while rules on airline ownership and control will be reviewed after
12 months.
From a border perspective, the UK's Border Operating Model (BOM)
outlines a phased approach for cargo to limit immediate changes at
the UK border, with full checks beginning from 1 July 2021. The UK
Government also confirmed that EU citizens can continue to use
electronic gates at immigration upon arrival into the UK. Heathrow
is working closely with Government and industry to support Global
Britain post-Brexit and ensure any longer-term disruption is
minimised and adequately managed.
From a retail perspective and ahead of the end of the transition
period, the Government announced changes to airside tax-free sales
of all non-excise goods and the withdrawal of the VAT Refund scheme
from January 2021. The existing tax-free status is a key purchase
driver among passengers, particularly in high-spend categories such
as luxury and technology. The VAT Refund scheme incentivises
international residents to visit the UK and spend in the UK retail
sector which benefits the wider economy and 'UK PLC'. It is also a
material source of revenue subsidising passenger charges.
These changes will impact our pricing proposition materially and
are therefore a significant and credible threat to our income of
circa GBP200 million annually. Removing tax free shopping would
lead to a c.15% increase in passenger charges from 2022, due to
increased difficulty to remain price competitive versus foreign
airports and destinations, as well as the knock-on impact of
passengers using the VAT refund scheme at the airport. Heathrow,
World Duty Free, and Global Blue, have launched a Judicial Review
on the Government's decision for which a hearing took place in late
February.
Financial Review
Basis of presentation of financial results
Heathrow (SP) Limited ('Heathrow SP') is the holding company of
a group of companies (the 'Group'), which includes Heathrow Airport
Limited ('HAL') which owns and operates Heathrow airport, and
Heathrow Express Operating Company Limited ('Hex Opco') which
operates the Heathrow Express rail service. Heathrow SP's
consolidated accounts are prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006.
The financial information presented within these financial
statements has been prepared on a going concern basis. We have a
strong liquidity position and do not forecast any covenant breach
during 2021 under our current traffic scenario, while acknowledging
that the impact of COVID-19 continues to create considerable
uncertainty for the aviation industry. Under certain severe but
plausible scenarios, the Group may need to take additional action
within our control to mitigate against any debt default covenant
breach. More detail can be found in the going concern statement on
page 20.
Management uses Alternative Performance Measures ('APMs') to
monitor performance of the segments as it believes this more
appropriately reflects the underlying financial performance of the
Group's operations. These remain consistent with those included and
defined in the Annual Report and Accounts for the year ended 31
December 2019.
The Group has separately presented certain items on the income
statement as exceptional as it believes it assists investors to
understand underlying performance and aids comparability of the
Group's result between periods. The exceptional items are material
items of expense that are considered to merit separate presentation
because of their size or incidence. They are not expected to be
incurred on a recurring basis.
Summary performance
In the year ended 31 December 2020, the Group's revenue declined
by 61.7% to GBP1,175 million (2019: GBP3,070 million). Adjusted
EBITDA declined 85.9% to GBP270 million (2019: GBP1,921 million).
The Group recorded a GBP1,782 million loss after tax (2019: GBP413
million profit).
Year ended 31 December 2019 2020
GBPm GBPm
Revenue 3,070 1,175
Adjusted operating
costs (1) (1,149) (905)
----------------------------------- -------- ---------
Adjusted EBITDA(2) 1,921 270
Depreciation and amortisation (771) (812)
----------------------------------- -------- ---------
Adjusted operating
profit/(loss)(3) 1,150 (542)
Net finance costs before
certain re-measurements
and exceptional items (775) (672)
----------------------------------- -------- ---------
Adjusted profit/(loss)
before tax(4) 375 (1,214)
Tax (charge)/credit
on profit before certain
re-measurements and
exceptional items (104) 211
----------------------------------- -------- ---------
Adjusted profit/(loss)
after tax(4) 271 (1,003)
Including certain re-measurements
and exceptional items
Fair value gain/(loss)
on investment properties 43 (412)
Fair value gain/(loss)
on financial instruments 128 (202)
Exceptional items - (184)
Tax (charge)/credit
on certain re-measurements
and exceptional items (29) 16
----------------------------------- -------- ---------
Profit/(loss) after
tax 413 (1,785)
(1) Adjusted operating costs excludes depreciation amortisation
and fair value adjustments on investment properties and exceptional
items which are explained further in note 3
(2) Adjusted EBITDA is profit before interest, taxation,
depreciation, amortisation and fair value adjustments on investment
properties and exceptional items.
(3) Adjusted operating profit/(loss) excludes fair value
adjustments on investment properties and exceptional items.
(4) Adjusted profit before and after tax excludes fair value
adjustments on investment properties and financial instruments,
exceptional items and the associated tax impact of these including
the impact of the UK corporation tax change.
Revenue
At the year ended 31 December 2020, revenue declined 61.7% to
GBP1,175 million (2019: GBP3,070 million). Revenue declined by
70.8% during the fourth quarter in isolation compared to the same
period last year.
Year ended 31 December 2019 2020 Var.
GBPm GBPm %
------------------------ ------- ------- -------
Aeronautical 1,831 647 (64.7)
Retail 722 234 (67.6)
Other 517 294 (43.1)
------------------------ ------- ------- -------
Total revenue 3,070 1,175 (61.7)
------------------------ ------- ------- -------
Aeronautical revenue declined by 64.7%. Aeronautical revenue per
passenger increased 29.2% to GBP29.26 (2019: GBP22.64). The decline
in aeronautical revenue is predominantly due to reduced passenger
numbers. The average revenue per passenger is largely distorted by
the reduced traffic number and an increase in cargo movements which
are charged on a per movement basis.
Year ended 31 December 2019 2020 Var.
GBPm GBPm %
------------------------ ------- ------- -------
Retail concessions 342 97 (71.6)
Catering 64 19 (70.3)
Other retail 113 43 (61.9)
Car parking 125 40 (68.0)
Other services 78 35 (55.1)
------------------------ ------- ------- -------
Total retail revenue 722 234 (67.6)
------------------------ ------- ------- -------
Retail revenue declined by 67.6% driven by reduced passenger
numbers and mix of retail service available. Retail revenue per
passenger increased 18.6% to GBP10.58 (2019: GBP8.93). Retail
income per passenger is largely distorted due to the reduced
passenger numbers
Year ended 31 December 2019 2020 Var.
GBPm GBPm %
------------------------ ------- ------- -------
Other regulated
charges 244 118 (51.6)
Heathrow Express 117 26 (77.8)
Property and other 156 150 (3.8)
------------------------ ------- ------- -------
Total other revenue 517 294 (43.1)
------------------------ ------- ------- -------
Other revenue decreased by 43.1%. Other regulated charges
declined 51.6% predominantly because of fewer passengers and
aircraft movements impacting the ability to recover running costs
in the year. Heathrow Express saw a 77.8% decline in revenue due to
fewer passengers. Property and other revenue decreased 3.8% showing
relative resilience due to targeted rental alleviation from
consolidated operations being spread forward over the residual life
of the contracts.
Adjusted operating costs
Adjusted operating costs decreased 21.2% to GBP905 million
(2019: GBP1,149 million). Operating costs were down 30.4% during
the fourth quarter in isolation compared to the same period last
year. In response to COVID-19, Heathrow's management implemented a
cost reduction programme which delivered GBP303 million of net
savings compared to the budget published in our December 2019
investor report. Furthermore, taking account of the provision for
expected credit loss on debtors of GBP12 million and expansion
related people costs of GBP79 million that were previously
capitalised, gross savings amounted to GBP394 million. Adjusted
operating costs per passenger increased by 188.1% to GBP40.93
(2019: GBP14.21).
Year ended 31 December 2019 2020 Var.
GBPm GBPm %
------------------------ ------- ------- ---------
Employment 378 282 (25.4)
Operational 279 224 (19.7)
Maintenance 173 140 (19.1)
Rates 117 116 (0.9)
Utilities and Other 202 143 (29.2)
------------------------ ------- ------- ---------
Adjusted operating
costs 1,149 905 (21.2)
------------------------ ------- ------- ---------
The management initiatives driving a total of GBP303 million in
net savings or GBP394 million in gross savings, were largely
implemented across April and May, with a second wave of initiatives
launched in October in response to the lower traffic outlook in
2020 and 2021. They included a company-wide pay reduction,
restructuring of the organisation, operating on a smaller
footprint, renegotiating our suppliers' contracts and stopping all
non-essential costs. We also used the Government's furlough scheme
which reduced our people costs by circa GBP36 million. These cost
saving initiatives were partially offset by increased business
resilience costs and a provision for expected credit loss on
debtors mentioned above. Governmental business rates represent 13%
of our cost base and are the single cost we have been unable to
meaningfully reduce despite 73% decrease in traffic and associated
trade. Operating costs per passenger are largely distorted due to
the reduced passenger numbers and the fixed nature of our cost base
in the medium term.
Operating profit / (loss) and Adjusted EBITDA
At the year ended 31 December 2020, the Group recorded an
operating loss of GBP1,138 million (2019: operating profit of
GBP1,193 million). In addition to lower revenue, the loss was
driven by a reduction in the non-cash fair value of our investment
properties of GBP412 million and exceptional items of GBP184
million.
Adjusted EBITDA decreased 85.9% to GBP270 million (2019:
GBP1,921 million), resulting in an Adjusted EBITDA margin of 23%
(2019: 62.6%).
Year ended 31 December 2019 2020
GBPm GBPm
=============================== ====== ========
Operating profit/ (loss) 1,193 (1,138)
=============================== ====== ========
Depreciation and amortisation 771 812
=============================== ====== ========
EBITDA 1,964 (326)
=============================== ====== ========
Exceptional items(1) - 184
Excl. Fair value (gain)/loss
on investment properties (43) 412
------------------------------- ------ --------
Adjusted EBITDA 1,921 270
------------------------------- ------ --------
(1) Please see exceptional items
section for further information
.
Exceptional items
At the year ended 31 December 2020, there was an exceptional
charge of GBP184 million (2019: nil) to the income statement.
Year ended 31 December 2019 2020
GBPm GBPm
------------------------- ------- ------
Business transformation - 92
Asset impairment and
write-off - 92
------------------------- ------- ------
Exceptional pre-tax
charge - 184
------------------------- ------- ------
As a consequence of the impact of the COVID-19 pandemic and a
delay to the Expansion (following the Court of Appeal's ruling on
the Airports National Policy Statement), the Group has undergone a
business transformation in order to simplify operations and reduce
costs. Following this review the Group incurred GBP92 million of
exceptional charges, consisting of GBP142m of people-related costs,
principally redundancy, partially offset by a net GBP50m credit
associated with corresponding pension settlements and
curtailments.
GBP13 million relating to the business transformation programme
is included within provisions at 31 December 2020 and is expected
to be settled within the next financial year .
In addition, the Group has recognised a non-cash impairment and
write-off charge of GBP92m on assets in the course of construction.
While the vast majority of expansion assets remain on the balance
sheet at year-end, a number of partially complete projects have
been placed on hold, some of these projects are unlikely to be
re-started in the foreseeable future or are unlikely to be
restarted without material changes to the original proposal design,
GBP82m of costs incurred to date on these projects have been
impaired. In addition, GBP10m of costs which relates to forecast
re-work, which will be required as a result of the estimated delay
to the Expansion to the programme, have been impaired .
Loss after tax
At the year ended 31 December 2020, the Group recorded a loss
before tax of GBP2,012 million (2019: GBP546
million profit) and a loss after tax of GBP1,785 million (2019: GBP413 million profit).
Year ended 31 December 2019 2020
GBPm GBPm
Operating profit / (loss) 1,193 (1,138)
--------------------------- ------ --------
Net finance costs before
certain remeasurements (775) (672)
Fair value gain/(loss)
on financial instruments 128 (202)
--------------------------- ------ --------
Profit / (loss) before
tax 546 (2,012)
--------------------------- ------ --------
Taxation (charge) /
credit (133) 227
--------------------------- ------ --------
Loss after tax 413 (1,785)
--------------------------- ------ --------
Net finance costs before certain re-measurements were GBP672
million (2019: GBP775 million) due to RPI growth rate for the
12-months to Dec 2020 falling to 1.5%, down from 3.0% in the same
prior period.
Fair value losses on financial instruments increased to GBP202
million (2019: GBP128 million gain) as a result of a decrease in
interest rate expectations due to the global economic crisis which
observed an average 60 bps downward shift of the
6-month LIBOR curve .
Taxation
The tax credit for the 12-month period ended 31 December 2020,
before certain re-measurements and exceptional items, was GBP211
million (2019: GBP104 million charge), at 17.4% (12 months ended 31
December 2019: 27.7%). This represents the best estimate of the
annual effective tax rate expected for the full year, applied to
the pre-tax loss of the 12-month period, before certain
re-measurements and exceptional items. The effective tax rate being
lower (2019: higher) than the statutory rate of 19% (2019: 19%) is
primarily due to non-deductible expenses reducing the tax credit
for the year (2019: non-deductible expenses increasing the tax
charge for the year). The total tax credit for the 12-month period
ended 31 December 2020 is GBP227 million (12 months ended 31
December 2019: GBP133 million charge), representing the sum of the
tax credit on losses before certain re-measurements and the tax
charge on certain re-measurements and exceptional items. For the
period, the Group received a repayment of GBP67 million in
corporation tax (12 months ended 31 December 2019: paid GBP98
million).
Cash position
In the 12 months ended 31 December 2020, there was a decrease of
GBP535 million in cash and cash equivalents compared with an
increase of GBP224 million in the 12 months ended 31 December
2019.
At 31 December 2020, the Heathrow SP Group had GBP3 ,516 million
(31 December 2019: GBP 1,540 million) of cash and cash equivalents
and term deposits, of which cash and cash equivalents were GBP280
million (31 December 2019: GBP 815 million).
This strong cash position was notably enhanced by the capital
injection secured in the last quarter of 2020 of which
GBP600 million were pushed into the Group. Considering the
deteriorating traffic outlook, we opted to use the proceeds of this
capital injection into the Group to optimise our working capital
and to provide further headroom to our financial covenants in 2021.
As a result, GBP282 million of operating costs due in 2021 were
prepaid in December 2020. In addition, a proportion of our swap
portfolio was restructured resulting in circa GBP100 million in
interest being prepaid ahead of 2021.
We have further strengthened our cash management controls given
our significantly increased cash position. These controls include
enhanced monitoring across our commercial partners and further
diversification of our bank counterparties with whom we have cash
deposits.
Cash generated from / (used in) operations
In the 12 months ended 31 December 2020, cash generated from
operations decreased to negative GBP95 million (2019: GBP1,942
million). The following table reconciles Adjusted EBITDA to cash
generated from operations.
Year ended 31 December 2019 2020
GBPm GBPm
--------------------------------- ------ ------
Cash generated from/(used
in) operations 1,942 (95)
Exclude:
Increase/(decrease)
in receivables(1) (57) 239
Increase in inventories - 1
Decrease in trade and
other payables 7 (56)
Decrease in provisions 7 5
Difference between pension
charge and cash contributions 22 51
Cash payments in respect
of exceptional items - 125
Adjusted EBITDA 1,921 270
--------------------------------- ------ ------
(1) Includes movement in Group deposits
Capital expenditure
Total capital expenditure in 2020 was GBP422 million (2019:
GBP856 million) excluding capital creditors movements or
GBP521 million (2019: GBP856 million) including capital
creditors movements.
We invested GBP354 million (2019: GBP620 million) in a variety
of programmes to ensure the safety and resilience of the airport.
We also invested GBP68 million in the period (2019: GBP236 million)
on plans to expand the airport mostly before the Court of Appeal's
judgement was announced.
Investment has focused on Hold Baggage Screening (HBS) upgrade
works, main tunnel works, design for cargo tunnel refurbishment to
ensure fire safety standards are maintained and renewal of assets
that have come to the end of their economic life.
Expansion-related capital expenditure included Category B costs
associated with the consent process and early Category C costs
predominantly relating to early design costs. Since 2016, Heathrow
has invested GBP381 million in Category B costs and GBP127 million
in Category C costs, a total of GBP508 million (before capitalised
interest and after GBP10m of re-work impairment) is carried in our
balance sheet as assets in the course of construction.
Restricted payments
The financing arrangements of the Group and Heathrow Finance plc
("Heathrow Finance") restrict certain payments unless specified
conditions are satisfied. These restricted payments include, among
other things, payments of dividends, distributions and other
returns on share capital, any redemptions or repurchases of share
capital, and payments of fees, interest or principal on any
intercompany loans.
In the 12 months ended 31 December 2020, total restricted
payments amounted to GBP573 million (net) received by Heathrow SP
or GBP107 million (gross) paid excluding cash pushed down from
Heathrow Finance paid by Heathrow SP
Net restricted payments included:
a) GBP107 million (2019: GBP478 million) payment made by
Heathrow SP to Heathrow Finance to primarily fund the GBP100
million (2019: GBP500 million) dividends paid to ultimate
shareholders. This payment was made in February 2020 reflecting the
cumulative outperformance from previous years and before the
significant impacts of COVID-19 on our industry were clear or
anticipated,
b) a net cash inflow of GBP680 million from Heathrow Finance to
Heathrow SP, largely driven by the capital injection secured in
October 2020 (2019: net cash outflow of GBP321 million from
Heathrow SP to Heathrow Finance).
No further restricted payments were made out of the Group as a
result of the trigger event that occurred in relation to the
forecast ICR for Class A and Class B debt for the year ending 31
December 2020 and was reported in June 2020. The trigger event also
resulted in GBP107 million of interests being capitalised on the
Heathrow SP debenture and leading to an amount of GBP787 million
owed to Heathrow Finance.
The trigger event means that cash is trapped within the Group
and cannot be distributed to Heathrow Finance to service debt, nor
to pay dividends to ultimate shareholders. Heathrow Finance itself
has liquidity of GBP375 million, which can cover circa 4 years of
debt service and prior to any debt maturity in 2024.
RECENT FINANCING ACTIVITY
Despite a much more challenging market backdrop given the
COVID-19 pandemic, continued confidence and support for our credit
enabled us to raise GBP2.5 billion debt in 2020 across the capital
structure in bond and loan format.
A total of GBP1.7 billion was raised by the Group alone, GBP50
million was raised at Heathrow Finance and a GBP750 million capital
injection was secured via ADI Finance 2. A further GBP2.1 billion
of debt signed prior to 2020 was drawn down during the first half
of the year.
These actions ensured we maintained a robust liquidity position
throughout the year and provided additional duration and
diversification to our GBP15 billion debt portfolio.
Class A financing activities included:
-- the drawdown of GBP800 million in revolving credit facility
and GBP100 million in working capital facility;
-- a new GBP80 million term note maturing in 2040;
-- a new EUR750m public bond maturing in 2025;
-- a new GBP450m public bond maturing in 2029;
-- a new C$500m public bond maturing in 2031; and
-- the scheduled repayments of GBP4m on the EIB loan.
Class B financing activities included:
-- the drawdown of GBP250m in revolving credit facilities;
-- the drawdown of GBP381m in private placements;
-- the drawdown of a GBP75m term note maturing in 2035;
-- a new GBP182m index-linked private placement maturing in 2032; and
-- the scheduled repayment of a GBP400m public bond in March.
Financing activities at Heathrow Finance included:
-- the drawdown of GBP485m in term loans with maturities ranging between 2026 and 2029;
-- a new GBP50m term loan with a maturity in 2029;
-- the cancellation of GBP22.5m of undrawn debt; and
-- the prepayment of a GBP150m term loan.
In addition, we restored the ADI Finance 2 Limited level of our
capital structure with a GBP750 million facility signed with
private international lenders. The net proceeds were injected into
the Heathrow Finance Group, of which GBP600 million was pushed into
the Heathrow SP Group.
Lastly, we reprofiled GBP5.6 billion of existing interest rate
and inflation swaps and completed GBP4.9 billion of new interest
rate swap transactions which will help to reduce interest payments
over the next few years. The net impact of these transactions saw a
prepayment in 2020 of circa GBP100 million and a reduction in
interest paid in 2021 of circa GBP308 million.
FINANCING POSITION
Debt and liquidity at Heathrow (SP) Limited
At 31 December 2020, Heathrow SP's consolidated nominal net debt
was GBP13,131 million (31 December 2019:
GBP12,412 million). It comprised GBP13,755 million in bond
issues, GBP1,606 million in other term debt, GBP133 million in
index-linked derivative accretion, GBP1,150 million in revolving
credit and working capital facilities and GBP3 million of
additional lease liabilities post transition to IFRS 16. This was
offset by GBP3,516 million in cash and cash equivalents and term
deposits. Nominal net debt comprised GBP11,280 million in senior
net debt and GBP1,851 million in junior debt.
The average cost of Heathrow SP's nominal gross debt at 31
December 2020 was 0.87% (31 December 2019: 3.41%). This includes
interest rate, cross-currency and index-linked hedge costs and
excludes index-linked accretion. Including index-linked accretion,
Heathrow SP's average cost of debt at 31 December 2020 was 1.48%
(31 December 2019: 4.75%). The reduction in the average cost of
debt since the end of 2019 is mainly due to the reprofiling of our
swap portfolio during 2020 to reduce interest as traffic recovers
as well as recent financing activities at a lower cost. Excluding
the impact of our swap portfolio reprofiling, Heathrow SP's average
cost of debt at 31 December 2020 was 2.67% excluding index-linked
accretion and 3.27% including index-linked accretion.
The average life of Heathrow SP's gross debt as at 31 December
2020 was 10.3 years (31 December 2019:
11.5 years).
Nominal net debt excludes any restricted cash and the debenture
between Heathrow SP and Heathrow Finance. It includes all the
components used in calculating gearing ratios under Heathrow SP's
financing agreements including index-linked accretion and
additional lease liabilities entered since the transition to IFRS
16.
The accounting value of Heathrow SP's net debt was GBP13,886
million at 31 December 2020 (31 December 2019: GBP12,684 million).
This includes GBP3,516 million of cash and cash equivalents and
term deposits, and GBP392 million lease liabilities as reflected in
the statement of financial position and excludes accrued
interest.
We have sufficient liquidity to meet all our forecast needs
until at least April 2022 under the extreme stress-test scenario of
no revenue, or well into 2023 under our current traffic forecast.
This includes forecast operational costs and capital investment,
debt service costs, debt maturities and repayments. This liquidity
position takes into account GBP3,891 million in cash resources as
well as undrawn debt and liquidity at Heathrow Finance plc as at 31
December 2020 .
Debt at Heathrow Finance plc
The consolidated nominal net debt of Heathrow Finance increased
to GBP15,120 million (31 December 2019: GBP 14,361 million). This
comprised Heathrow SP's GBP13,131 million nominal net debt,
Heathrow Finance's nominal gross debt of GBP 2, 364 million and
cash and term deposits held at Heathrow Finance of GBP375
million.
Financial ratios
At 31 December 2020, Heathrow SP and Heathrow Finance continue
to operate within required financial ratios. Gearing ratios and
interest coverage ratios are defined within the Glossary.
At 31 December 2020, Heathrow's RAB was GBP16,492 million (31
December 2019: GBP16,598 million). Heathrow SP's senior (Class A)
and junior (Class B) gearing ratios were 68.4% and 79.6%
respectively (31 December 2019: 66.6% and 74.8% respectively) with
respective trigger levels of 72.5% and 85%. Heathrow Finance's
gearing ratio was 91.7% (31 December 2019: 86.5%) with a covenant
of 95% following the waiver secured last July.
In the year ended 31 December 2020, the Group's senior and
junior interest cover ratios were -0.50x and -0.43x respectively
(2019: 3.74x and 3.15x respectively) compared to trigger levels of
1.40x and 1.20x under its financing agreements. Heathrow Finance's
interest cover ratio was -0.36x (2019: 2.71x) compared to a
covenant level of 1.00x under its financing agreements.
As of 31 December 2020, a forecasting event and trigger event
have occurred in relation to the forecast Interest Cover Ratios
('ICRs') for Class A and Class B debt for the financial year ending
31 December 2020. As a result, a distribution lock-up is in place
within Heathrow SP and will have no adverse effect on Heathrow SP's
creditors.
In July, we successfully received approval from Heathrow
Finance's creditors (representing over 95% of the total debt) to
waive the Interest Cover Ratio covenant for the financial year
ending 31 December 2020 and to amend the Regulatory Asset Ratio
covenant from 92.5% to 95.0% and 93.5% for the financial year
ending on 31 December 2020 and 31 December 2021 respectively.
Further details are available in our summary of additional
disclosures in appendix 1.
Under our current traffic scenario, we do not forecast any
covenant breach in 2021. As part of our going concern assessment,
we have also considered a severe but plausible downside scenario
whereby traffic reduced to 27 million passengers. In this downside
scenario, we concluded that sufficient mitigations would be within
management control to avoid any covenant breach. Plausible
scenarios below this 'severe but plausible' downside could cause
Heathrow Finance to breach minimum levels required for covenant
compliance. In this instance, management would need to undertake
additional actions, which could include seeking a further covenant
waiver or amendment from Heathrow Finance creditors. This indicates
the existence of a material uncertainty which could cast
significant doubt upon the Group's ability to continue as a going
concern. This analysis is discussed in more details in our going
concern disclosure.
PENSION SCHEME
We operate a defined benefit pension scheme (the 'BAA Pension
Scheme') which closed to new members in June 2008. At 31 December
2020, the defined benefit pension scheme, as measured under IAS 19,
was funded at 100.3% (31 December 2019: 100.8%). This translated
into a surplus of GBP12 million (31 December 2019: GBP33 million
surplus). The GBP21 million decrease in the surplus in the 12
months is largely due to actuarial losses of GBP125 million,
attributable to a decrease in the net discount rate of 0.8% offset
by contributions in excess of current service cost of GBP55
million. In the year ended 31 December 2020, we contributed GBP78
million (2019: GBP49 million) into the defined benefit pension
scheme including GBP20 million (2019: GBP23 million) in deficit
repair contributions. Management believes that the scheme has no
significant plan-specific or concentration risks.
KEY MANAGEMENT CHANGES
Following a reorganisation of the business that took place on 17
March 2020, Stuart Birrell resigned as Heathrow's Chief Information
Officer and as a director of Heathrow Airport Limited and LHR
Airports Limited. Emma Gilthorpe's role changed from Expansion
Director to Chief Operating Officer, Andrew MacMillan's role
changed from Chief Strategy Officer to Chief Carbon & Strategy
Officer and Chris Garton's role changed from Chief Operating
Officer to Executive Director, Solutions.
OUTLOOK
The outlook for our adjusted EBITDA performance in 2021 remains
consistent with the revised guidance published in our December
Investor Report on 18 December 2020.
We forecast 37.1 million passengers travelling through Heathrow
in 2021 or a 54% reduction compared to 2019. Our forecast assumes
no further recovery during the first quarter and around two thirds
of the annual volume forecast materialising during the second half
of year.
Given the more gradual recovery envisaged, further steps to
reduce our costs were taken in October. Terminal 4 will remain
non-operational throughout 2021 while the ramp up of Terminal 3
will remain contingent on traffic recovery. In the absence of
meaningful Government support, we reduced our people costs further
including additional reductions in our management roles and removal
of all legacy allowances.
Taking into account the mitigations put in place throughout
2020, we do not forecast any covenant breach during 2021 under our
current traffic scenario. Given the degree of uncertainty around
traffic recovery, we have also considered a severe but plausible
downside scenario whereby traffic reduced to 27 million passengers
in 2021. In this scenario, we concluded that sufficient mitigations
would remain within management control to avoid any covenant
breach. However, the impact of COVID-19 continues to create
considerable uncertainty for the aviation industry and the fact
that, under other severe but plausible downside scenarios, the
Group may need to take additional action indicates the existence of
a material uncertainty.
SUMMARY OF ADDITIONAL DISCLOSURES
Heathrow Finance consent solicitation - As a result of the
significant reduction in passenger demand, and temporary reduction
in revenue that arises as a result of COVID-19, Heathrow Finance
launched a consent solicitation process to avoid potential breach
of the HFP Group Covenants in respect of the Financial Year ending
31 December 2020 when tested in June 2021 and Group RAR covenant
for the Financial Year ending 31 December 2021 (being the end of
the current Regulatory Period) when it falls to be tested in June
2022. The consent process was successfully completed in July
2020.
Full RNS available here:
https://www.londonstockexchange.com/news-article/market-news/consent-solicitation-heathrow-finance-plc/14579814
and here
https://www.londonstockexchange.com/news-article/market-news/heathrow-finance-plc-consent-solicitation-result/14608131
Heathrow Finance's credit rating update - Credit rating agency
Moody's downgraded Heathrow Finance plc's debt rating to B1 from
Ba3 and maintained its negative outlook. The one notch downgrade
reflects the slower than expected recovery in passenger demand due
to travel restrictions and quarantine measures. Whilst Moody's
recognised Heathrow's management actions to protect the financial
resilience of the airport, the agency expects key credit metrics to
remain under pressure for longer than initially anticipated.
Full RNS available here:
https://www.londonstockexchange.com/news-article/market-news/heathrow-finance-credit-rating-update/14753972
Heathrow Funding Ltd credit ratings update - Following a single
notch downgrade in March 2020, credit rating agency Standards &
Poor's maintains Heathrow Funding Limited's Class A and B debt
rating, extending its CreditWatch with negative implications. The
agency expects COVID-19 will have a more severe impact than
anticipated with traffic volume deteriorating further in 2020 and
2021 as a direct consequence of UK's Government policy on
quarantines. In their assessment, Standard & Poor's also places
important weight to the upcoming regulatory reset starting on 1
January 2022. Class A and B investment grade credit ratings are
unchanged since March at BBB+ and BBB- respectively.
Full RNS available here:
https://www.londonstockexchange.com/news-article/market-news/no-change-in-heathrow-funding-ltd-credit-ratings/14707345
Heathrow Finance plc announces interest step-up - The Issuer
announces an Interest Step-Up Trigger Date occurred on 11 November
2020.
Full RNS available here:
https://www.londonstockexchange.com/news-article/market-news/heathrow-finance-plc-interest-rate-step-up/14768939
Condensed consolidated income statement for the year ended 31
December 2020
Year ended Year ended
31 December 2020 31 December 2019
Before certain Certain Exceptional Total Before certain Certain Total
re-measurements re-measurements items (3) re-measurements re-measurements
and exceptional (2) and exceptional (2)
items (1) items (1)
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================= ===== =============== =============== ============ ======== =============== =============== ========
Continuing
operations
Revenue 1 1,175 - - 1,175 3,070 - 3,070
Operating costs
(4) 2 (1,717) - (184) (1,901) (1,920) - (1,920)
Other operating
items:
Fair value
(loss)/gain
on investment
properties 7 - (412) - (412) - 43 43
================= ===== =============== =============== ============ ======== =============== =============== ========
Operating
(loss)/profit (542) (412) (184) (1,138) 1,150 43 1,193
================= ===== =============== =============== ============ ======== =============== =============== ========
Financing
Finance income 12 - - 12 9 - 9
Finance cost (684) (202) - (886) (784) 128 (656)
================= ===== =============== =============== ============ ======== =============== =============== ========
Net finance cost 4 (672) (202) - (874) (775) 128 (647)
(Loss)/profit
before tax (1,214) (614) (184) (2,012) 375 171 546
================= ===== =============== =============== ============ ======== =============== =============== ========
Taxation
credit/(charge) 211 110 18 339 (104) (29) (133)
Change
in
tax
rate - (112) - (112) - - -
----------------- ----- --------------- --------------- ------------ -------- --------------- --------------- --------
Taxation
credit/(charge) 5 211 (2) 18 227 (104) (29) (133)
================= ===== =============== =============== ============ ======== =============== =============== ========
(Loss)/profit
for the period
(5) (1,003) (616) (166) (1,785) 271 142 413
================= ===== =============== =============== ============ ======== =============== =============== ========
(1) Amounts stated before certain remeasurements and exceptional items are non-GAAP measures.
(2) Certain re-measurements consist of: fair value gains and
losses on investment property revaluations, gains and losses
arising on the re-measurement of financial instruments, together
with the associated fair value gains and losses on any underlying
hedged items that are part of a cash flow, fair value and economic
hedging relationship and the associated tax impact on these
including the impact of the UK corporation tax rate change .
(3) Exceptional items are one-off material costs that have been
incurred as a result of management decisions made in response to
COVID-19 and the delay to Expansion following the Judicial Review.
Further details can be found in note 3.
(4) Included within Operating costs is a GBP12 million (2019:
GBP1 million) charge for the impairment of trade receivables.
(5) Attributable to owners of the parent.
Condensed consolidated statement of comprehensive income for the
year ended 31 December 2020
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit for the period (1,785) 413
Items that will not be subsequently reclassified to the consolidated income
statement:
Actuarial gain/(loss) on pensions net of tax:
Gain on plan assets(1)) 389 498
Increase in scheme liabilities(1) (492) (509)
Change in tax rate (1) -
Items that may be subsequently reclassified to the consolidated income
statement:
Cash flow hedges net of tax:
Gains/(losses) taken to equity(1) (43) (3)
Transfer to finance cost(1) 53 32
Change in tax rate 4 -
Change in tax rate on other opening balances (1)
============================================================================== ================== ==================
Other comprehensive (expense)/income for the period net of tax (91) 18
============================================================================== ================== ==================
Total comprehensive (expense)/income for the period(2) (1,876) 431
(1) Items in the statement above are disclosed net of tax.
(2) Attributable to owners of the parent.
Condensed consolidated statement of financial position as at 31
December 2020
as at 31 December 2020 as at 31 December 2019
Note GBPm GBPm
Assets
Non-current assets
Property, plant and equipment 6 11,136 11,561
Right of use asset 285 276
Investment properties 7 2,118 2,522
Intangible assets 182 176
Retirement benefit surplus 10 12 33
Derivative financial instruments 9 656 539
Trade and other receivables 20 18
======================================== ===== ======================= =======================
14,409 15,125
======================================== ===== ======================= =======================
Current assets
Inventories 14 13
Trade and other receivables 496 247
Current income tax assets 1 -
Derivative financial instruments 9 146 -
Term deposits 3,236 725
Cash and cash equivalents 280 815
======================================== ===== ======================= =======================
4,173 1,800
======================================== ===== ======================= =======================
Total assets 18,582 16,925
======================================== ===== ======================= =======================
Liabilities
Non-current liabilities
Borrowings 8 (18,635) (15,948)
Derivative financial instruments 9 (1,134) (1,227)
Lease liabilities (349) (346)
Deferred income tax liabilities (784) (934)
Retirement benefit obligations 10 (31) (29)
Provisions (1) (1)
Trade and other payables (6) (5)
======================================== ===== ======================= =======================
(20,940) (18,490)
======================================== ===== ======================= =======================
Current liabilities
Borrowings 8 (1,928) (647)
Derivative financial instruments 9 (21) (55)
Lease liabilities (43) (38)
Provisions (15) (8)
Current income tax liabilities - (31)
Trade and other payables (392) (430)
======================================== ===== ======================= =======================
(2,399) (1,209)
======================================== ===== ======================= =======================
Total liabilities (23,339) (19,699)
======================================== ===== ======================= =======================
Net liabilities (4,757) (2,774)
======================================== ===== ======================= =======================
Equity
Capital and reserves
Share capital 11 11
Share premium 499 499
Merger reserve (3,758) (3,758)
Cash flow hedge reserve (173) (187)
(Accumulated losses)/retained earnings (1,336) 661
======================================== ===== ======================= =======================
Total shareholder's equity (4,757) (2,774)
======================================== ===== ======================= =======================
Condensed consolidated statement of changes in equity for the
year ended 31 December 2020
Attributable to owners of the Company
Share Share premium Merger Cash flow (Accumulated losses)/ Total
capital GBPm reserve hedge reserve retained earnings equity
GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- -------------- --------- --------------- ------------------------- --------
1 January 2019
(previously reported) 11 499 (3,758) (216) 828 (2,636)
Adjustment in respect of:
Transition to IFRS 16 - - - - (89) (89)
-------------------------- --------- -------------- --------- --------------- ------------------------- --------
1 January 2019
(re-stated) 11 499 (3,758) (216) 739 (2,725)
========================== ========= ============== ========= =============== ========================= ========
Comprehensive income:
Profit for the period - - - - 413 413
Other comprehensive
income/(expense):
Fair value gain on cash
flow hedges net of tax - - - 29 - 29
Actuarial gain/(loss) on
pension net of tax:
Gain on plan assets - - - - 498 498
Increase in scheme
liabilities - - - - (509) (509)
========================== ========= ============== ========= =============== ========================= ========
Total comprehensive
income - - - 29 402 431
========================== ========= ============== ========= =============== ========================= ========
Transaction with owners
Dividends paid to
Heathrow Finance plc - - - - (480) (480)
========================== ========= ============== ========= =============== ========================= ========
Total transaction with
owners - - - - (480) (480)
========================== ========= ============== ========= =============== ========================= ========
31 December 2019 11 499 (3,758) (187) 661 (2,774)
Comprehensive income:
Loss for the period - - - - (1,785) (1,785)
Other comprehensive
income/(expense):
Fair value gain on cash
flow hedges net of tax
hedges net of tax - - - 10 - 10
Change in tax rate - - - 4 - 4
Actuarial gain/(loss) on
pension net of tax:
Gain on plan assets - - - - 389 389
Increase in scheme
liabilities - - - - (492) (492)
Change in tax rate - - - - (1) (1)
Change in tax rate on
other opening balances - - - - (1) (1)
========================== ========= ============== ========= =============== ========================= ========
Total comprehensive
income/(expense) - - - 14 (1,890) (1,876)
========================== ========= ============== ========= =============== ========================= ========
Transaction with owners:
Dividends paid to
Heathrow Finance plc - - - - (107) (107)
========================== ========= ============== ========= =============== ========================= ========
Total transaction with
owners - - - - (107) (107)
========================== ========= ============== ========= =============== ========================= ========
31 December 2020 11 499 (3,758) (173) (1,336) (4,757)
Condensed consolidated statement of cash flows for the year
ended 31 December 2020
Year ended Year ended
31 December 2020 31 December 2019
Note GBPm GBPm
Cash flows from operating activities
Cash (used in)/generated from operations(1) 11 (95) 1,942
Taxation:
Corporation tax received/(paid) 67 (98)
Group relief received 2 -
Net cash (used in)/generated from operating activities (26) 1,844
-------------------------------------------------------- ----- ------------------ ------------------
Cash flows from investing activities
Purchase of:
Property, plant and equipment (512) (849)
Investment properties (9) (7)
Increase in term deposits (2) (2,511) (605)
Interest received 12 7
-------------------------------------------------------- ----- ------------------ ------------------
Net cash used in investing activities (3,020) (1,454)
-------------------------------------------------------- ----- ------------------ ------------------
Cash flows from financing activities
Dividends paid to Heathrow Finance plc (107) (480)
Proceeds from issuance of bonds 1,977 857
Repayment of bonds (402) (251)
Repayment of facilities and other financing items (12) (21)
Increase in amount owed to Heathrow Finance plc 787 321
Prepayment of interest on swaps (3) (30) -
Inflation swap restructuring prepaid (3) (47) -
Interest paid (4) (628) (597)
Issuance of term notes 255 340
Drawdown of revolving credit facilities 1,050 -
Settlement of accretion on index-linked swaps (285) (295)
Payment of lease liabilities (36) (33)
Prepayment of lease liabilities(1) (11) -
Consent fee payment (5) - (7)
Net cash generated from/(used in) financing activities 2,511 (166)
-------------------------------------------------------- ----- ------------------ ------------------
Net (decrease)/increase in cash and cash equivalents (535) 224
Cash and cash equivalents at beginning of period 815 591
Cash and cash equivalents at end of period 280 815
(1) Within cash generated from operations, the increase in trade
and other receivables includes GBP247 million relating to
prepayments made to suppliers at 31 December 2020. The total
includes a GBP60 million payment to HMRC in relation to Heathrow's
payroll taxes payable to HMRC during 2021. A further GBP11 million
of prepayments in relation to IFRS 16 lease liabilities are
included within cash flows from financing activities. These
prepayments were made in order to manage banking covenant
ratios.
(2) Term deposits with an original maturity of over three months
are invested at Heathrow Airport Limited.
(3) The Group reprofiled a proportion of existing interest rate
and inflation swaps and completed a series of new interest rate
swap transactions which will help to reduce interest payments over
the next few years, resulting in prepayment of interest in 2020
(4) Included within interest paid is GBP16 million of lease
interest paid (2019: GBP17 million which was previously included in
payment of lease liabilities) and GBP23 million of interest
prepayments (2019: nil) as part of the Group's swap profiling
programme.
(5) Payment in relation to investor's consent regarding IFRS 16 and lease liabilities.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
General information
The financial information set out herein does not constitute the
Group's statutory financial statements for the year ended 31
December 2020 or any other period. The annual financial information
presented herein for the year ended 31 December 2020 is based on,
and is consistent with, the audited consolidated financial
statements of Heathrow (SP) Limited (the 'Group') for the year
ended 31 December 2020. The auditors' report on the 2020 financial
statements was unqualified, did not contain an emphasis of matter
paragraph and did not contain any statements under section 498(2)
or (3) of the Companies Act 2006.
Primary financial statements format
A columnar approach has been adopted in the income statement and
the impact of separately disclosed items is shown in separate
columns. These columns include 'certain re-measurements' and
'exceptional items' which management separates from the underlying
operations of the Group. By isolating certain re-measurements and
exceptional items, management believes the underlying results
provides the reader with a more meaningful understanding of the
performance of the Group, by concentrating on the matters over
which it exerts influence, whilst recognising that information on
these additional items is available within the financial
statements, should the reader wish to refer to them.
The column 'certain re-measurements' in the consolidated income
statement contains the following: i. fair value gains and losses on
investment property revaluations and disposals; ii. derivative
financial instruments and the fair value gains and losses on any
underlying hedged items that are part of a fair value hedging
relationship; iii. the associated tax impacts of the items in (i)
and (ii); and iv. the impact on deferred tax balances of known
changes in tax rates where the deferred tax originally went through
the income statement. The column 'exceptional items' contains the
following: i. exceptional items; and ii. the associated tax impacts
of item (i).
Accounting policies
Basis of preparation and new accounting standards,
interpretations and amendments
The Group's financial statements comply in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006 and are prepared under the
historic cost convention, except for investment properties,
financial assets, derivative financial instruments and financial
liabilities that qualify as hedged items under fair value hedge
accounting. These exceptions to the historic cost convention have
been measured at fair value in accordance with IFRS and as
permitted by the Fair Value Directive as implemented in the
Companies Act 2006.
The financial statements for the twelve-month period ended 31
December 2020 have been prepared on a basis consistent with that
applied in the preparation of the financial statements for the year
ended 31 December 2019 with the exception of the additional
accounting policies and significant accounting judgements and
estimates which have been detailed below.
Going concern
The Directors have prepared the financial information presented
for Heathrow SP on a going concern basis as they have a reasonable
expectation that the entity has adequate resources to continue in
operational existence for the foreseeable future.
The wider Heathrow group can raise finance through both Heathrow
SP and Heathrow Finance Plc ('Heathrow Finance'). Whilst Heathrow
SP operates as an independent securitised group, the Directors have
considered the wider Heathrow group when assessing going concern.
In assessing the going concern position the Directors have
considered the potential impact of COVID-19 on cash flow and
liquidity over the next 12 months from the date of this report and
the corresponding impact on the covenants associated with financing
arrangements. The Directors have also considered the period beyond
12 months to June 2022. Rapid deterioration in traffic and cash
flows have put covenants at Heathrow Finance under strain. As a
result, Heathrow Finance was likely to breach its RAR and ICR
covenant tests in relation to the financial year ending 31 December
2020. However, management agreed a waiver for the ICR covenant and
an amendment to the RAR covenant from Heathrow Finance creditors
which has resulted in no breaches to occur for this period. Details
on the covenants have been included in Note 18 of the Heathrow (SP)
Limited Annual Report and Accounts for the year ended 31 December
2020.
Despite a much more challenging market backdrop given the
COVID-19 pandemic, continued confidence and support for our credit
enabled the wider Heathrow group to raise GBP2.5 billion of debt in
2020 across the capital structure in bond and loan format. A total
of GBP1.7 billion was raised by Heathrow SP alone, GBP50 million
was raised at Heathrow Finance and a GBP750 million capital
injection was secured via ADI Finance 2. A further GBP2.1 billion
of debt signed prior to 2020 was drawn down during the first half
of the year. Consequently, Heathrow SP held cash of GBP3.5 billion
as at 31 December 2020. Total debt maturity within Heathrow SP for
the next 12 months is GBP1.5 billion. The wider Heathrow group has
cash and committed facilities of circa. GBP3.9 billion available.
No debt matures outside of Heathrow SP for the 12 months from the
date of this report.
Taking this into account, Heathrow SP has sufficient liquidity
to meet all its forecast cashflow needs until at least April 2022
even under the extreme scenario of no revenue, or well into 2023
under the base case cashflow forecast. This includes forecast
operational costs, capital investment, debt service costs, debt
maturities and repayments .
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
Modelling the impact of COVID-19
The Directors have modelled future cash flows for the period
beyond 12 months to June 2022 to include the impact of COVID-19
related disruption and have considered the following:
- forecast revenue and operating cash flows from the underlying
operations,
- forecast level of capital expenditure, and
- the overall group liquidity position including cash resources,
the remaining committed and uncommitted facilities available to it,
its scheduled debt maturities, its forecast financial ratios,
projected covenant requirements, and its ability to access the debt
markets.
In our assessment we have included the impacts of several
important actions implemented in 2020 to reduce operating
expenditure including temporarily consolidating our operation in
fewer terminals, cancelling executive pay for a period, a
company-wide pay reduction and bonus cancellation, freezing
recruitment, removing all non-essential costs and adjusting our
capital expenditure.
In modelling the impact of COVID-19, there is a significant
degree of uncertainty given the evolving current environment and
the wide range of potential forecasts being formed by various
stakeholders in the global aviation industry. This element of our
forecasting is therefore inherently subjective. As reported in the
December 2020 Investor Report, the group's financial modelling
under the base case scenario assumes passenger traffic for 2021
will decline 54% compared to 2019 to 37.1m passengers (an increase
of 40% from 22.1m in 2020). As a result, group EBITDA in 2021 are
also expected to reduce from GBP1,330m to GBP493m compared to
GBP1,921 million.
To build the base case forecast of 37.1m passengers in 2021 we
assumed the implementation of a testing regime and a large-scale
vaccine roll out during 2021 to drive the traffic increase compared
to 2020. We then defined the stages of recovery, with key drivers
being COVID-19 control, implementation of testing and then roll-out
of a vaccine. The level of demand at each stage of recovery is
overlayed using data on actual passenger numbers.
This is done at a granular level splitting into geographical
markets and purpose of travel. Thereon, a timeline for moving
between stages using latest information on testing and vaccine roll
out and adjusting this for each of the geographical regions was
taken into account. This approach is calibrated against information
from airlines on planned schedules.
Stress testing
For the purpose of assessing going concern, management has
stress tested this base case with a number of downturn scenarios in
which the timing of the implementation of the testing regime, the
rollout of vaccination programmes and the transition through the
stages of recovery is elongated. This is reflected in further
decreases in passenger numbers and a resulting drop in EBITDA and
operating cashflow. Individually these potential risks are unlikely
to require significant additional management actions to support the
business. The combination of some or all of these potential risks,
or if the impact of the pandemic is significantly more prolonged or
severe than modelled by management, will result in management
action being required to mitigate covenant breaches.
One such scenario represents a 'severe but plausible' downside
for the period beyond 12 months to June 2022 which models 27m
passengers in 2021 and a 47% fall in EBITDA in 2021 compared to the
base case, arising from further COVID-19 related disruption. The
Directors, however, have a reasonable expectation that in this
particular scenario there are operational and financial mitigations
within the control of the group to mitigate against any debt
default covenant breach at December 2021.
Due to the extreme level of uncertainty created by the global
COVID-19 pandemic, the Directors have considered other plausible
scenarios that could result in further reductions in passenger
numbers arising from travel restrictions and reduced customer
confidence in travel. Plausible scenarios below the 'severe but
plausible' downside described above could cause the group to breach
minimum levels required for covenant compliance. In this instance,
management would need to undertake additional actions, including
seeking a further covenant waiver or amendment from Heathrow
Finance creditors. This indicates the existence of a material
uncertainty which could cast significant doubt upon the group and
the company's ability to continue as a going concern.
Conclusion
Having had regard to both liquidity and debt covenants, and
considering severe but plausible downsides, the Directors have
concluded that there will be funds available to meet the group and
the company's funding requirements for at least 12 months from the
date of this report, and that it is accordingly appropriate to
adopt a going concern basis for the preparation of the financial
statements.
The Directors consider that the underlying credit quality of the
business means that it can secure, if necessary, in the event of
severe but plausible downsides, the timely support of its
debtholders as it successfully secured in 2020.
Nevertheless, the impact of COVID-19 continues to create
considerable uncertainty for the aviation industry, which may
result in the group needing to take further action, including
seeking a further covenant waiver or amendment from Heathrow
Finance creditors. This indicates the existence of a material
uncertainty which could cast significant doubt upon the group and
the company's ability to continue as a going concern.
The financial statements do not include the adjustments that
would result if the group and the company were unable to continue
as a going concern.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
Accounting policies in addition to those included in the
consolidated financial statements for the year ended 31 December
2019
The accounting policies applied by the Group in these interim
financial statements are consistent with those applied by the Group
in its consolidated financial statements for the year ended 31
December 2019 with the exception of the additional accounting
policies noted below.
Government grants
Government grants are recognised where it is probable that the
grant will be received, and all the attached conditions have been
complied with. When the grant relates to an expense item, it is
recognised as income on a systematic basis over the period that the
related costs, for which it is intended to compensate, are
expensed. The Group has chosen to present grants related to an
expense item as net deductions against the related expense.
Exceptional items
The Group separately presents certain items on the face of the
income statement as exceptional as it believes it assists investors
to understand underlying performance and aids comparability of the
Group's result between periods. Exceptional items are material
items of income or expense that are considered to merit separate
presentation because of their size or nature. They are not expected
to be incurred on a recurring basis.
Significant accounting judgements and changes in estimates
In applying the Groups accounting policies, management have made
judgements and estimates in a number of key areas. Actual results
may, however, differ from estimates calculated and management
believes that the following areas present the greatest level of
uncertainty.
Critical judgments in applying the Group's accounting
policies
In preparing the twelve-month condensed consolidated financial
information, the areas where judgement has been exercised by
management in applying the Group's accounting policies remain
consistent with those applied to the Annual Report and Accounts for
the year ended 31 December 2020, except for the following critical
judgements:
Going concern
The impact of COVID-19 on going concern was considered in some
detail. Further information can be found within the 'Basis of
preparation and new accounting standards, interpretations and
amendments' section.
Exceptional items
The Group has separately presented certain material one-off
items on the face of the income statement as exceptional as it
believes it assists investors to understand underlying performance
and aids comparability of the Group's result between periods.
Judgement is required in determining whether an item should be
classified as an exceptional item or included within underlying
results. In the current year business transformation costs and
asset impairment and write-off charges, as a consequence of
management decisions made in response to the COVID-19 virus and the
delay to expansion (following the announcement by the Court of
Appeal regarding the Judicial Review into expansion), have been
disclosed as exceptional items. Further details are disclosed in
the accounting policy above and in note 3.
Presentation of prepayments in the cash flow statement
Heathrow may from time to time at major reporting dates prepay
in advance of the operating expense falling due to its suppliers',
payments which are subsequently lodged into an escrow account to
improve the cashflow bank covenant ratio. In accordance, with IAS
7, cash and cash equivalent balances have been shown in accordance
with the definition and thus do not include these prepayments held
in escrow, as these are amounts that are no longer available to the
group, as disclosed in Note 28 of the financial statements. Within
the cashflow statement, these prepayments are presented as
operating cashflows, which form part of the current, trade and
other receivables balance.
Expansion assets
Assets in the course of construction for the expansion of
Heathrow had a net book value of GBP508m as at 31 December 2020.
IAS 16 Property, Plant & Equipment requires it to be probable
that future economic benefits associated with an item will flow to
the entity for an item to be capitalised. Management have
considered the impact of the delay to Expansion (following the
Court of Appeal's ruling on the Airports National Policy Statement)
and the potential impact of COVID-19 and the impact of climate
change on long term passenger demand and have concluded that
expansion remains probable. In October, Heathrow submitted an
appeal to the Supreme Court and, in December, the Supreme Court
unanimously ruled the ANPS as lawful and legal Government policy.
The verdict confirmed the Government had taken into account the
Paris Climate Change Agreement as part of the policy, and that this
would be considered as part of the robust planning processes in the
UK. Heathrow has already committed to net zero and this ruling
recognises the robust planning process that will require us to
prove expansion is compliant with the UK's climate change
obligations, including the Paris Climate Agreement, before
construction can begin. The Government has made decarbonising
aviation a central part of its green growth agenda, through wider
use of Sustainable Aviation Fuel as well as new technology. This is
the right outcome for the country, which will allow Global Britain
to become a reality and Heathrow remains committed to a long-term
sustainable expansion and considers it a probable outcome based on
experience to date. As passenger numbers recover, the immediate
focus will be to continue to ensure their safety and to maintain
our service levels while we consult with investors, government,
airline customers and regulators on our next steps. These include
the continued validation of the underlying business case (traffic
demand and pricing proposition); ensuring a fair and stable
economic regulatory framework; and the confirmation or a review of
the ANPS by the Secretary of State for Transport. Expansion remains
consistent with the commitments we are making around climate change
as detailed in the TCFD section.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
Key sources of estimation uncertainty
In preparing the twelve-month condensed consolidated financial
information, the key sources of estimation uncertainty remain
consistent with those applied to the Annual Report and Accounts for
the year ended 31 December 2020, except for the following:
Investment properties
In applying IAS 40 investment properties have been estimated to
be worth GBP2,118m as at 31 December 2020. To assist in assessing
the valuation of our investment properties Heathrow engages a
professional valuation firm, CBRE Limited, Chartered Surveyors,
that is regulated by the Royal Institution of Chartered Surveyors
(RICS). Its report comments that the outbreak of COVID-19, has
impacted global financial markets and resulted in travel
restrictions having been implemented in many countries. Market
activity, that provides the empirical data for the valuation expert
to have an adequate level of certainty in the valuation, is as a
result being impacted for our sector for specific properties. As at
the valuation date, the valuation expert considered that they can
attach less weight to previous market evidence for comparison
purposes, to inform opinions of value. Indeed, the current response
to COVID-19 means that they are faced with an unprecedented set of
circumstances on which to base a judgement.
Their valuation is therefore reported as being on the basis of
'material valuation uncertainty' as set out in VPS 3 and VPGA 10 of
the RICS Valuation - Global Standards. Consequently, less
certainty, and a higher degree of caution, should be attached to
the investment property valuation than would normally be the
case.
For the avoidance of doubt, the inclusion of the 'material
valuation uncertainty' declaration above does not mean that the
valuation cannot be relied upon. Rather, the declaration has been
included in order to be clear and transparent of the fact that, in
the current circumstances, less certainty can be attached to the
valuation than would otherwise be the case. The material
uncertainty clause is to serve as a precaution and does not
invalidate the valuation.
Management have reviewed the main assumptions underlying the
valuation of Investment properties and provide sensitivity analysis
based on reasonable possible changes to relevant assumptions. The
main estimations made that have a significant risk of resulting in
a material adjustment to the carrying amounts of investment
properties within the next financial year have been assessed as
those related to Car Parks.
Car parks are valued individually based on actual data on
revenue in the current year and expectations of future growth
rates. Sensitivities have been run to analyse the impact of a
reasonable change in growth rates and a reasonable change in base
year revenue informed by discussions with CBRE and internal
Heathrow car park experts. Estimations are also made concerning
expectations of future growth rates of operating costs including
business rates. The results of the sensitivities are shown in Note
7 to the financial statements.
Retirement Benefit Obligations
Certain assumptions have been adopted for factors that determine
the valuation of the Group's liability for pension obligations at
the period end and charges to the income statement. The assumptions
have been determined in consultation with the Group's actuary
considering market and economic conditions. Assumptions can vary
from period to period because of changing conditions and other
determinants which may cause increases or decreases in the
valuation of the Group's liability for pension obligations.
The objective when setting pension scheme assumptions for future
periods is to reflect the expected actual outcomes, other than the
discount rate which must be set by reference to the yield on high
quality corporate bonds with a term consistent with the
obligations. The impact of the change in assumptions on the
valuation of the net financial position of the Group pension scheme
is recorded as a net actuarial gain or loss and is reflected in the
statement of comprehensive income.
The triennial Trustee valuation of the scheme was completed
during 2019 and included updates to mortality rates as well as
other key demographic indicators, which have been used to inform
management assumptions used at 31 December 2020.
Management have reviewed the main assumptions underlying the
valuation of Retirement benefit obligations. The main estimations
made that have a significant risk of resulting in a material
adjustment to the carrying value of the assets and liabilities
relating to the scheme have been assessed as: a) Discount rate, b)
Inflation rates, and c) Mortality/Life expectancy changes.
Sensitivities have been run to analyse the impact of a
reasonable change in these estimations informed by discussions with
scheme actuaries ISIO and internal Heathrow experts.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
1. Segment information
Management has determined the reportable segments of the
business based on those contained within the monthly reports
reviewed and utilised by the relevant Board for allocating
resources and assessing performance. These segments relate to the
operations of Heathrow and Heathrow Express.
The performance of the above segments is measured on a revenue
and Adjusted EBITDA basis, before certain re-measurements and
exceptional items. The reportable segments derive their revenues
from a number of sources including aeronautical, retail, other
regulated charges and other products and services (including rail
income), and this information is also provided to the Board on a
monthly basis.
Table (a) Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Segment Revenue
Under IFRS 15
Aeronautical (1)
Movement charges 244 549
Parking charges 62 74
Passengers charges 341 1,208
--------------------------------------------------------------------------- ------------------ ------------------
Total Aeronautical revenue 647 1,831
Other regulated charges 118 244
Retail services revenue 234 722
Property revenue 20 25
Rail Income
Heathrow Express 26 117
Other 23 23
--------------------------------------------------------------------------- ------------------ ------------------
Revenue reported under IFRS 15 1,068 2,962
Revenue recognised at a point in time 1,028 2,837
Revenue recognised over time 40 125
--------------------------------------------------------------------------- ------------------ ------------------
Total revenue reported under IFRS 15 1,068 2,962
--------------------------------------------------------------------------- ------------------ ------------------
Under IFRS 16
Property (lease-related income) 107 108
Total revenue 1,175 3,070
--------------------------------------------------------------------------- ------------------ ------------------
Heathrow 1,149 2,953
Heathrow Express 26 117
--------------------------------------------------------------------------- ------------------ ------------------
Adjusted EBITDA
Heathrow 284 1,860
Heathrow Express (14) 61
--------------------------------------------------------------------------- ------------------ ------------------
Total adjusted EBITDA 270 1,921
Reconciliation to statutory information:
Depreciation and amortisation (812) (771)
--------------------------------------------------------------------------- ------------------ ------------------
Operating (loss)/profit
(before certain re-measurements and exceptional items) (542) 1,150
Exceptional items (184) -
Fair value (loss)/gain on investment properties
Fair value (loss)/gain on investment properties (certain re-measurements) (412) 43
--------------------------------------------------------------------------- ------------------ ------------------
Operating (loss)/profit (1,138) 1,193
Finance income 12 9
Finance cost (886) (656)
--------------------------------------------------------------------------- ------------------ ------------------
(Loss)/profit before tax (2,012) 546
--------------------------------------------------------------------------- ------------------ ------------------
(1) In 2019, movement charges and passenger charges were
referred to as landing and departure charges. Until 2019, landing
charges were levied for substantially all aircraft (with certain
diplomatic and other flights being exempted). From 2020, movement
charges are now levied instead of landing charges. The charge per
movement is around half of what the landing charges were
previously, however is applied to each aircraft on both take-off
and landing.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
1. Segment information continued
Table (b) Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Property income charged in advance 28 34
Retail and other income charged in advance 14 27
-------------------------------------------- ------------------ ------------------
Total 42 61
All unsatisfied performance obligations at 31 December 2019 were
satisfied in during 2020 and are included within total revenue for
the year. Management expects that all of the transaction price
allocated to the unsatisfied contracts as of the year ended 2020
will be recognised as revenue during the next reporting period.
Table (c) Year ended Year ended
31 December 2020 31 December 2019
Depreciation & Fair value loss(2) Depreciation & Fair value gain(2)
amortisation(1) GBPm amortisation(1) GBPm
GBPm GBPm
Heathrow (769) (412) (716) 43
Heathrow Express (43) - (55) -
------------------ --------------------------- ------------------- --------------------------- -------------------
Total (812) (412) (771) 43
(1) Includes intangible amortisation charge of GBP44 million
(year ended 31 December 2019: GBP43 million).
(2) Reflects fair value (loss)/gain on investment properties only.
Table (d) 31 December 2020 31 December 2019
------------------------------------------------- ---------------------- ----------------------
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
------------------------------------------------- -------- ------------ -------- ------------
Heathrow 13,319 (401) 13,885 (429)
Heathrow Express 647 (13) 652 (15)
------------------------------------------------- -------- ------------ -------- ------------
Total operations 13,966 (414) 14,537 (444)
Unallocated assets and liabilities:
Cash, term deposits and external
borrowings 3,516 (17,219) 1,540 (14,055)
Retirement benefit (obligations)/assets 12 (31) 33 (29)
Derivative financial instruments 802 (1,155) 539 (1,282)
Deferred and current tax assets/(liabilities) 1 (784) - (965)
Amounts owed to group undertakings - (3,344) - (2,540)
Right of use asset and lease liabilities 285 (392) 276 (384)
------------------------------------------------- -------- ------------ -------- ------------
Total 18,582 (23,339) 16,925 (19,699)
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
2. Operating costs
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Employment(1) 282 378
Operational 224 279
Maintenance 140 173
Rates 116 117
Utilities 62 72
Other 81 130
------------------------------------------------------------ ------------------ ------------------
Total operating costs before depreciation and amortisation 905 1,149
Depreciation and amortisation:
Property, plant and equipment 730 693
Intangible assets 44 43
Right of Use (RoU) assets 38 35
------------------------------------------------------------ ------------------ ------------------
812 771
------------------------------------------------------------ ------------------ ------------------
Operating costs before exceptional items 1,717 1,920
------------------------------------------------------------ ------------------ ------------------
Exceptional items (note 3) 184 -
------------------------------------------------------------ ------------------ ------------------
Total operating costs 1,901 1,920
(1) Government grants of GBP36m have been received for
reimbursement of employee costs relating to staff furloughed due to
COVID-19 under the Coronavirus Job Retention Scheme. There are no
unfulfilled conditions or contingencies attached to these
grants.
3. EXCEPTIONAL ITEMS
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Business (92) -
transformation
Asset (92) -
impairment
and
write-off
---------------- ------------------ ------------------
Total (184) -
operating
loss
on
exceptional
items
---------------- ------------------ ------------------
Tax 18 -
credit
on
exceptional
items
---------------- ------------------ ------------------
Loss (166) -
on
exceptional
items
after
tax
Business transformation
As a consequence of the impact of the COVID-19 pandemic and a
delay to the Expansion (following the Court of Appeal's ruling on
the Airports National Policy Statement), the Group has undergone a
business transformation in order to simplify operations and reduce
costs. Following this review the Group incurred GBP92 million of
exceptional charges, consisting of GBP142m of people-related costs,
principally redundancy, partially offset by a net GBP50m credit
associated with corresponding pension settlements and curtailments
- refer to Note 10 for further details. GBP13 million relating to
the business transformation programme is included within provisions
at 31 December 2020 and is expected to be settled within the next
financial year.
Asset impairment and write-off
As a consequence of the impact of the COVID-19 outbreak and the
delay to Expansion (following the Court of Appeal's ruling on the
Airports National Policy Statement), the Group has recognised a
non-cash impairment and write-off charge of GBP92m on assets in the
course of construction. While the vast majority of expansion assets
remain on the balance sheet at year-end, a number of partially
complete projects have been placed on hold, some of these projects
are unlikely to be re-started in the foreseeable future or are
unlikely to be restarted without material changes to the original
proposal design, GBP82m of costs incurred to date on these projects
have been impaired. In addition, GBP10m of costs which relates to
forecast re-work, which will be required as a result of the
estimated delay to the Expansion programme, have been impaired.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
4. Financing
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Finance income
Interest on deposits 12 9
------------------------------------------------------------------------------ ------------------ ------------------
Total finance income 12 9
------------------------------------------------------------------------------ ------------------ ------------------
Finance cost
Interest on borrowings:
Bonds and related hedging instruments(1) (514) (535)
Bank loans, overdrafts and related hedging instruments (63) (58)
Net interest expense on derivatives not in hedge relationship(2) 17 (106)
Facility fees and other charges (15) (10)
Net pension finance costs (1) -
Interest on debenture payable to Heathrow Finance plc (125) (102)
Finance cost on lease liabilities (16) (17)
------------------------------------------------------------------------------ ------------------ ------------------
(717) (828)
Less: capitalised borrowing costs(3) 33 44
------------------------------------------------------------------------------ ------------------ ------------------
Total finance cost (684) (784)
------------------------------------------------------------------------------ ------------------ ------------------
Net finance cost before certain re-measurements (672) (775)
------------------------------------------------------------------------------ ------------------ ------------------
Fair value (loss)/gain on financial instruments
Interest rate swaps: not in hedge relationship
relationship (65) (19)
Index-linked swaps: not in hedge relationship (75) 172
Cross-currency swaps: not in hedge relationship (4), (5) 11 11
Ineffective portion of cash flow hedges (5) (14) (1)
Ineffective portion of fair value hedges (5) (59) (33)
Fair value re-measurements of foreign exchange contracts and currency
balances - (2)
------------------------------------------------------------------------------ ------------------ ------------------
(202) 128
------------------------------------------------------------------------------ ------------------ ------------------
Net finance cost (874) (647)
(1) Includes accretion of GBP24 million for year ended 31
December 2020 (year ended 31 December 2019: GBP35 million) on
index-linked bonds.
(2) Includes accretion of GBP75 million for year ended 31
December 2020 (year ended 31 December 2019: GBP152 million) on
index-linked swaps.
(3) Capitalised interest included in the cost of qualifying
assets arose on the general borrowing pool and is calculated by
applying an average capitalisation rate of 3.82% (year ended 31
December 2019: 4.98%) to expenditure incurred on such assets.
(4) Includes foreign exchange retranslation on the currency
bonds of GBP6 million (2019: GBP4 million) which has moved
systematically in the opposite direction to that of the cross
currency swaps which economically hedge the related currency
bonds.
(5) The value of all currency bonds changes systematically in
the opposite direction to that of the related cross-currency swaps,
in response to movements in underlying exchange rates with a net
nil impact in fair value for foreign exchange movements.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
5. tax CREDIT/(CHARGE)
Year ended Year ended
31 December 2020 31 December 2019
Before certain Certain Exceptional Total Before certain Certain Total
re-measurements re-measurements items GBPm re-measurements re-measurements GBPm
and exceptional GBPm GBPm and exceptional GBPm
items items
GBPm GBPm
----------------- ---------------- ---------------- ------------ ------ ---------------- ---------------- ------
UK corporation
tax:
Current tax
credit/(charge)
at 19% (2019:
19%) 76 (2) 27 101 (96) (2) (98)
Over provision
in respect of
prior years - - - - 8 - 8
Deferred tax:
Current year
credit/(charge) 135 106 (9) 232 (15) (28) (43)
Prior year
credit/(charge) - 6 - 6 (1) 1 -
Change in tax
rate - (112) - (112) - - -
Taxation
credit/(charge)
for the year 211 (2) 18 227 (104) (29) (133)
The total tax credit recognised for the year ended 31 December
2020 was GBP227 million (2019: GBP133 million charge). Based on a
loss before tax for the year of GBP2,012 million (2019: GBP546
million profit).
The total tax credit before certain re-measurements and
exceptional items for the year ended 31 December 2020 was GBP211
million (2019: GBP104 million charge). Based on a loss before tax,
certain re-measurements and exceptional items of GBP1,214 million
(2019: GBP375 million profit), this results in an effective tax
rate of 17.4% (2019: 27.7%). The tax credit for 2020 is less than
implied by the statutory rate of 19% primarily due to
non-deductible expenses reducing the tax credit for the year (2019:
the tax charge was more than implied by the statutory rate of 19%
primarily due to non-deductible expenses increasing the tax charge
for the year).
In addition, there was an GBP110 million tax credit (2019: GBP29
million tax charge) arising from fair value losses on investment
property revaluations and fair value losses on financial
instruments, along with a GBP112m tax charge associated with the
impact from the UK corporation tax rate remaining at 19% on
deferred tax balances and an GBP18 million tax credit on
exceptional items.
The previously announced reduction of the corporation tax rate
to 17% from 1 April 2020 was revoked by the Government in Finance
Act 2020. The headline UK corporation tax rate of 19% was
maintained and substantively enacted in March 2020. The effect of
the rate increase has been reflected in the deferred tax balances
in the financial statements.
Due to the exceptional adverse impact of the COVID-19 pandemic,
the Group has made significant losses during the period ended 31
December 2020. In accordance with updated HMRC guidance, Heathrow
Airport Ltd has made a claim to request repayment of quarterly
instalment payments made in relation to the period ended 31
December 2019 and payments of GBP73 million were returned to
Heathrow Airport Ltd in September 2020 by HMRC, resulting in a net
cash receipt from HMRC for the year of GBP67m (2019: cash payment
of GBP98m). In 2021 Heathrow Airport Ltd intends to submit a loss
carry back claim to carry back all trading losses arising in
Heathrow Airport Ltd in the 2020 period against 2019 taxable
profits. The impact of the estimated loss carry back claim (a tax
credit of GBP100m) is reflected in the tax results and balance
sheet position of the Group as at 31 December 2020.
Finance Act 2018 implemented a new 2% flat rate Structures and
Building Allowance relief (SBA) for non-residential structural
property which will be available where the construction contract is
entered into on or after 29 October 2018. Relief will be provided
on eligible construction costs at an annual rate of 2% on a
straight-line basis, effectively giving tax relief over a 50-year
period. This relief was increased to 3% from 1 April 2020 in
Finance Act 2020. Heathrow is likely to benefit from tax relief in
future years on expenditure which was not eligible under the
previous rules. The increase from 2% to 3% was enacted in July
2020. At the balance sheet date, no material SBA-qualifying assets
had been identified and brought into use.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
6. Property, plant and equipment
Terminal Airfields Plant Other Rail Assets Total
complex and equipment land in the
and buildings course
of construction
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================
Cost
1 January 2019 11,650 1,954 1,141 230 1,435 1,114 17,524
Additions - - - - - 849 849
Borrowing costs
capitalised - - - - - 44 44
Disposals (245) (65) (118) (9) (50) - (487)
Transfer to intangible
assets - - - - - (44) (44)
Transfer to completed
assets 532 127 (27) 53 10 (695) -
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2019 11,937 2,016 996 274 1,395 1,268 17,886
Additions - - - - - 413 413
Borrowing costs
capitalised - - - - - 33 33
Disposals (16) (8) (25) - (1) - (50)
Capital write
off - - - - - (92) (92)
Transfer from
investment properties - - - 1 - - 1
Transfer to intangible
assets - - - - - (50) (50)
Transfer to completed
assets 286 59 90 21 13 (469) -
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2020 12,207 2,067 1,061 296 1,407 1,103 18,141
Depreciation
1 January 2019 (4,394) (508) (526) (78) (613) - (6,119)
Depreciation charge (492) (61) (67) (19) (54) - (693)
Disposals 245 65 118 9 50 - 487
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2019 (4,641) (504) (475) (88) (617) - (6,325)
Depreciation charge (495) (57) (118) (20) (40) - (730)
Disposals 16 8 25 - 1 - 50
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2020 (5,120) (553) (568) (108) (656) - (7,005)
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
Net book value
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2020 7,087 1,514 493 188 751 1,103 11,136
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
31 December 2019 7,296 1,512 521 186 778 1,268 11,561
------------------------ --------- ---------- --------------- --------------- ------ ----------------- --------
The Regulatory Asset Base (RAB) at 31 December 2020 was
GBP16,492 million (31 December 2019 was GBP16,598 million).
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
7. Investment properties
GBPm
------------------ ------
Valuation
1 January 2019 2,472
Additions 7
Revaluation 43
------------------ ------
31 December 2019 2,522
Additions 9
Reclassification (1)
Revaluation (412)
------------------ ------
31 December 2020 2,118
------------------ ------
Investment properties valuations are prepared in accordance with
the valuation manual issued by the Royal Institution of Chartered
Surveyors and appraised by our property management company CBRE
Limited, who are independent and have appropriate recognised
qualifications and experience in the categories and location of our
investment properties being valued.
Management conducts a detailed review of each property to ensure
the correct assumptions and inputs have been used. Meetings with
the valuers are held on a periodic basis to review and challenge
the assumptions used in the valuation techniques, where they are
classified into 3 categories as follows:
Level 1 inputs are quoted prices from active markets at the
measurement date using relevant information generated by market
transactions involving identical or comparable (similar)
assets.
Level 2 inputs are other quoted market prices directly or
indirectly observable and involve a combination of inputs. The car
parks, sites, non-operational land valuations and residential
properties were generated by a market approach involving similar
observable transactions along with land value reversion whilst the
other assets were valued using the capitalised income approach
incorporating net initial and equivalent yield. Some of the
valuation incorporated rent free and void periods where relevant in
order to determine the most reasonable valuation.
Level 3 inputs are based on unobservable inputs which relate to
discounted cash flow technique using an appropriate asset discount
rate including growth rates for the relevant revenues and costs.
Most of this classification is made up of car parks which accounts
for 89% (2019: 91%) of the valuation. In the case of
non-operational hotels' land, the discounted cash flow methodology
has incorporated exit yields, occupancy and ancillary revenues
too.
There were no transfers between the fair value classifications
for investment properties during the year.
The investment property portfolio includes car parks (for
passengers and employees) and maintenance hangars, which together
account for 68% (2019: 71%) of the fair value of the investment
property portfolio at 31 December 2020. The valuation of
maintenance hangers is largely based on long term contractual terms
and are not occupied by the group. They are carried at fair value.
Changes in fair values are presented in profit or loss as part of
other income.
The investment property asset class balance consists of 48%
(2019: 53%) car parks, 25% (2019: 23%) airport operations and 27%
(2019: 24%) land and others. Level 1 to 3 is split according to the
following percentiles respectively: nil (2019: 3%), 59% (2019: 49%)
and 41% (2019: 48%).
The sensitivities analysis below relates specifically to fair
value movements in car parks within the level 3 valuation that
comprises of 92% (2019: 31%) of the total. Therefore, the valuation
of level 3 has been determined based on reasonably possible changes
to the respective assumptions. The methodology used in arriving at
the incremental changes shown is consistent with that used for the
valuation at the year end.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
8. Borrowings
31 December 2020 31 December 2019
GBPm GBPm
Current
Secured
Heathrow Airport Limited debt:
Loans 4 4
Class A1 term loan due 2021 418 -
Heathrow Funding Limited bonds:
6.000% GBP400 million due 2020 - 400
GBP250m Bond 8.5% due 2021 251 -
3.000% CAD450m due 2021 259 -
4.875% US$1,000 million due 2021 742 -
-----------------
Total current (excluding interest
payable) 1,674 404
Interest payable - external 209 215
Interest payable - owed to group
undertakings 45 28
------------------------------------- ----------------- -----------------
Total current 1,928 647
------------------------------------- ----------------- -----------------
Non-current
Secured
Heathrow Funding Limited bonds
8.500% GBP250 million due 2021 - 255
3.000% CAD450 million due 2021 - 260
4.875% US$1,000 million due 2021 - 763
1.650%+RPI GBP180 million due
2022 222 218
1.875% EUR600 million due 2022 549 517
5.225% GBP750 million due 2023 717 703
7.125% GBP600 million due 2024 595 594
0.500% CHF400 million due 2024 336 307
3.250% CAD500 million due 2025 301 288
4.221% GBP155 million due 2026 155 155
0.450% CHF210 million due 2026 177 167
6.750% GBP700 million due 2026 694 693
2.650% NOK1,000 million due 2027 90 85
3.400% CAD400 million due 2028 229 234
7.075% GBP200 million due 2028 199 200
4.150% AUD175 million due 2028 113 103
2.500% NOK1,000 million due 2029 82 76
1.500% EUR750 million due 2030 735 644
3.782% CAD400 million due 2030 235 233
6.450% GBP900 million due 2031 857 855
Zero-coupon EUR50 million due
January 2032 65 58
1.366%+RPI GBP75 million due 2032 88 87
Zero-coupon EUR50 million due
April 2032 64 57
1.875% EUR500 million due 2032 446 421
1.875% EUR650 million due 2034 636 584
4.171% GBP50 million due 2034 50 50
Zero-coupon EUR50 million due
2034 54 49
0.347%+RPI GBP75 million due 2035 76 -
0.337%+RPI GBP75 million due 2036 76 -
1.061%+RPI GBP180 million due
2036 204 202
0.419%+RPI GBP51 million due 2038 51 -
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
8. Borrowings CONTINUED
31 December 2020 31 December
GBPm 2019
GBPm
3.460% GBP105 million due 2038 105 -
1.382%+RPI GBP50 million due 2039 58 58
Zero-coupon EUR86 million due 2039 81 75
3.334%+RPI GBP460 million due 2039 645 638
0.800% JPY1,000 million due 2039 72 69
1.238%+RPI GBP100 million due 2040 115 113
0.362%+RPI GBP75 million due 2041 76 -
5.875% GBP750 million due 2041 739 738
2.926% GBP55 million due 2043 54 54
4.625% GBP750 million due 2046 742 741
1.372%+RPI GBP75 million due 2049 87 86
2.750% GBP400 million due 2049 393 392
0.147%+RPI GBP160 million due 2058 166 165
1.50% EUR 750m due 2025 665 -
2.850% + RPI GBP181.75m due 2032 182 -
3.661% CAD500m due 2031 285 -
2.75% GBP450m due 2029 444 -
--------------------------------------- ----------------- ------------
Total bonds 13,005 11,987
--------------------------------------- ----------------- ------------
Heathrow Airport Limited debt:
Class A1 term loan due 2020 - 418
Class A2 term loan due 2024 100 100
Class A3 term loan due 2029 199 200
Revolving credit facilities 1,150 -
Term notes due 2026-2040 878 723
Loans 4 8
--------------------------------------- ----------------- ------------
Unsecured
Debenture payable to Heathrow Finance
plc 3,299 2,512
------------
Total non-current 18,635 15,948
--------------------------------------- ----------------- ------------
Total borrowings (excluding interest
payable) 20,309 16,352
At 31 December 2020, Heathrow SP's consolidated nominal net debt
was GBP13,131 million. It comprised GBP13,755 million in bond
issues, GBP1,606 million in other term debt, GBP133 million in
index-linked derivative accretion, GBP1,150 million in revolving
credit and working capital facilities and GBP3 million of
additional lease liabilities post transition to IFRS 16. This was
offset by GBP3,516 million in cash and cash equivalents and term
deposits. Nominal net debt comprised GBP11,279 million in senior
net debt and GBP1,851 million in junior debt.
At 31 December 2020, total non-current borrowings due after more
than 5 years was GBP10,703 million (2019: GBP10,883 million),
comprising
GBP9,626 million (2019: GBP9,182m) of bonds and GBP1,077 million
(2019: GBP1,701 million) in bank facilities, excludes lease
liabilities.
Impact of fair value hedge adjustments
The nominal value of debt designated in fair value hedge
relationship was GBP 393 million, EUR 2,000 million, US$ 1,000
million, C$ 1,070 million, CHF 610 million, A$ 175 million, JPY
10,000 million and NOK 2,000 million. Where debt qualifies for fair
value hedge accounting, hedged item adjustments have been applied
as follows:
31 December 2020 31 December 2019
Nominal at hedge Fair value Nominal Fair value
rate adjustment at adjustment
GBPm (1) hedge (1)
GBPm rate GBPm
GBPm
-------------------- ----------------- ------------ -------- ------------
Sterling debt 393 (1) 393 (4)
Euro denominated
debt 1,615 (145) 1,615 (70)
USD denominated
debt 621 (10) 621 (10)
CAD denominated
debt 584 (25) 584 (3)
Other currencies
debt 779 (23) 779 3
-------------------- ----------------- ------------ -------- ------------
Designated in fair
value hedge 3,992 (204) 3,992 (84)
(1) Fair value adjustment is comprised of fair value loss of
GBP185 million (year ended December 2019: GBP52 million loss) on
continuing hedges and GBP19 million loss (year ended December 2019:
GBP32 million loss) on discontinued hedges.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
9. Derivative financial instruments
31 December 2020 Notional Assets Liabilities Total
GBPm GBPm GBPm GBPm
Current
Foreign exchange contracts 31 1 - 1
Interest rate swaps - - - -
Cross-currency swaps 868 144 - 144
Index-linked swaps 326 1 (21) (20)
---------------------------- --------- ------- ------------ ------
1,225 146 (21) 125
---------------------------- --------- ------- ------------ ------
Non-current
Foreign exchange contracts 62 - (3) (3)
Interest rate swaps 6,844 33 (431) (398)
Cross-currency swaps 4,656 547 (47) 500
Index-linked swaps 5,756 76 (653) (577)
---------------------------- --------- ------- ------------ ------
17,318 656 (1,134) (478)
---------------------------- --------- ------- ------------ ------
Total 18,543 802 (1,155) (353)
31 December 2019 Notional Assets Liabilities Total
GBPm GBPm GBPm GBPm
---------------------------- --------- ------- ------------ ------
Current
Foreign exchange contracts 8 - - -
Interest rate swaps 738 - (11) (11)
Index-linked swaps 313 - (44) (44)
---------------------------- --------- ------- ------------ ------
1,059 - (55) (55)
---------------------------- --------- ------- ------------ ------
Non-current
Foreign exchange contracts 33 - (2) (2)
Interest rate swaps 1,572 - (386) (386)
Cross-currency swaps 4,551 482 (25) 457
Index-linked swaps 6,082 57 (814) (757)
---------------------------- --------- ------- ------------ ------
12,238 539 (1,227) (688)
---------------------------- --------- ------- ------------ ------
Total 13,297 539 (1,282) (743)
At 31 December 2020, total non-current notional value of
Derivative financial instruments due in greater than 5 years was
GBP14,170 million (2019: GBP9,057 million), comprising GBP4,926
million (2019: GBP5,311 million) of Index-linked swaps, GBP2,942
million (2019: GBP2,524 million) of Cross-currency swaps, and
GBP6,302 million (2019: GBP1,222 million) of Interest rate
swaps.
Interest rate swaps
Interest rate swaps are maintained by the Group and designated
as hedges, where they qualify against variability in interest cash
flows on current and future floating or fixed rate borrowings. The
gains and losses deferred in equity on the cash flow hedges will be
continuously released to the income statement over the period of
the hedged risk. The fair value gains and losses deferred in equity
relating to the discontinued cash flow hedge relationships will be
continuously released to the income statement over the period of
the hedged risk.
Of the total amount deferred in other comprehensive income gross
of tax of GBP205 million (2019: GBP226 million) related to
discontinued cash flow hedges. During the year, GBP23 million was
deferred to the frozen cash flow hedge reserve, with GBP24 million
recycled from the frozen cash flow hedge reserve to the income
statement in the period.
The losses deferred of GBP20 million (2019: GBP20 million)
expected to be released in less than one year, GBP22 million (2019:
GBP22 million) between one and two years, GBP64 million (2019:
GBP62 million) between two and five years and GBP99 million (2019:
GBP121 million) over five years .
Cross-currency swaps
Cross-currency swaps have been entered into by the Group to
hedge currency risk on interest and principal payments on its
foreign currency-denominated bond issues. The gains and losses
deferred in equity on certain swaps in cash flow hedge
relationships will be continuously released to the income statement
over the period to maturity of the hedged bonds. The losses
deferred of GBP1 million (2019: GBP0.5 million) are expected to be
released in less than one year, losses of GBP1 million (2019:
GBP0.5 million) between one and two years, GBP1 million (2019:
GBP1.3 million) between two and five years and gains of GBP6
million (2019: GBP1 million) over five years.
Index-linked swaps
Index-linked swaps have been entered into in order to
economically hedge RPI linked revenue and the Regulatory Asset Base
but are not designated in a hedge relationship.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
9. Derivative financial instruments CONTINUED
Foreign exchange contracts
Foreign exchange contracts are used to manage exposures relating
to future capital expenditure. Hedge accounting is not sought for
these derivatives.
Fair value estimation
Financial instruments that are measured in the statement of
financial position at fair value are classified by the following
fair value measurement hierarchy:
-- Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
-- Level 2 - inputs other than quoted prices included within
level 1 that are observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from
prices); and
-- Level 3 - inputs for the asset or liability that are not
based on observable market data (that is, unobservable inputs).
At 31 December 2020 and 31 December 2019, all fair value
estimates on derivative financial instruments are included in level
2.
The fair value of financial instruments traded in active markets
is based on quoted market prices at the reporting date. A market is
regarded as active if quoted prices are readily and regularly
available from an exchange, dealer, broker, industry group, pricing
service, or regulatory agency, and those prices represent actual
and regularly occurring market transactions on an arm's length
basis. The quoted market price used for financial assets held by
the Group is the current bid price. These instruments are included
in level 1.
The fair value of financial instruments that are not traded in
an active market (such as derivatives) is determined by using
valuation techniques. These valuation techniques maximise the use
of observable market data where it is available. If all significant
inputs required to fair value an instrument are observable, the
instrument is included in level 2.
If one or more of the significant inputs is not based on
observable market data, the instrument is included in level 3.
Specific valuation techniques used to value financial
instruments include:
-- quoted market prices or dealer quotes for similar instruments;
-- market prices for credit spreads based on counterparty's
credit default swap prices and company's bond spread;
-- the fair value of cross-currency and interest rate swaps is
calculated as the present value of the estimated future cash flows
based on observable yield curves; and
-- other techniques, such as discounted cash flow analysis, are
used to determine fair value for the remaining financial
instruments.
At the restructuring date or initial date of recognition of
index-linked swaps, the fair value of these instruments, as
indicated by their fair value immediately prior to the
restructuring or at initial recognition, could not be supported by
observable inputs alone. These fair values are supported by
unobservable factors including the counterparty's credit, capital,
funding and trading charges. Therefore, such movement was deferred
on the balance sheet in compliance with IFRS 9 and will be
recognised in the income statement on a straight-line basis over
the life of the underlying derivative instrument.
As at 31 December 2020, GBP261 million (31 December 2019: GBP206
million) remained capitalised and GBP28 million (31 December 2019:
GBP32 million) had been recognised in the income statement for the
period.
On a semi-annual basis, the Group reviews any material changes
to the valuation techniques and market data inputs used. The
potential impact to the fair value hierarchy is assessed if it is
deemed a transfer. Significant transfers between levels are
considered effective at the end of the reporting period. During the
period there were no transfers between the levels in the fair value
hierarchy.
The tables below present the Group's assets (other than
investment properties) and liabilities that are measured at fair
value as at 31 December:
31 December 2020
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
----------------------------------- --------- -------- -------- --------
Assets
Assets at fair value through
income statement - 154 - 154
Derivatives qualifying for
hedge accounting - 648 - 648
----------------------------------- --------- -------- -------- --------
Total assets - 802 - 802
Liabilities
Liabilities at fair value through
income statement - (1,109) - (1,109)
Derivatives qualifying for
hedge accounting - (46) - (46)
----------------------------------- --------- -------- -------- --------
Total liabilities - (1,155) - (1,155)
----------------------------------- --------- -------- -------- --------
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
9. Derivative financial instruments CONTINUED
31 December 2019
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
------------------------------------ --------- -------- -------- --------
Assets
Assets at fair value through
income statement - 76 - 76
Derivatives qualifying for
hedge accounting - 463 - 463
------------------------------------ --------- -------- -------- --------
Total assets - 539 - 539
Liabilities
Liabilities at fair value through
income statement - (1,236) - (1,236)
Derivatives qualifying for
hedge accounting - (46) - (46)
------------------------------------ --------- -------- -------- --------
Total liabilities - (1,282) - (1,282)
------------------------------------ --------- -------- -------- --------
10. Retirement benefit obligations
Amounts arising from pensions related liabilities in the Group's
financial statements
The following tables identify the amounts in the Group's
financial statements arising from its pension related liabilities.
Further details of each scheme (except defined contribution
schemes) are disclosed below.
Income statement - pension and other pension related liabilities
costs
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
------------------------------------- ------------------ ------------------
Employment costs:
Defined contribution schemes 14 15
BAA Pension Scheme 24 26
Past service credit - BAA Pension (53) -
Scheme
------------------------------------- ------------------ ------------------
(15) 41
Finance credit - BAA Pension Scheme - (1)
Finance charge - Other pension
and post retirement liabilities - 1
Total pension costs (15) 41
------------------------------------- ------------------ ------------------
Other comprehensive income - loss on pension and other pension
related liabilities
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
---------------------------------- ------------------ ------------------
BAA Pension Scheme loss (125) (17)
Unfunded schemes (2) 2
---------------------------------- ------------------ ------------------
Actuarial loss recognised before
tax (127) (15)
Tax credit on actuarial loss 23 4
---------------------------------- ------------------ ------------------
Actuarial loss recognised after
tax (104) (11)
---------------------------------- ------------------ ------------------
Statement of financial position - net defined benefit pension
deficit and other pension related liabilities
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Fair value of plan assets 4,796 4,302
Benefit obligation (4,784) (4,269)
--------------------------------------------------------- ------------------ ------------------
Surplus in BAA Pension Scheme 12 33
Unfunded pension obligations (30) (28)
Post-retirement medical benefits (1) (1)
--------------------------------------------------------- ------------------ ------------------
Deficit in other pension related liabilities (31) (29)
Net (deficit)/surplus in pension schemes (19) 4
Group share of net (deficit)/surplus in pension schemes (19) 4
--------------------------------------------------------- ------------------ ------------------
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
10. Retirement benefit obligations continued
The Company has the ability to recognise the surplus in the BAA
Pension Scheme in full, because the Company has an unconditional
right to a refund of surplus upon gradual settlement of
liabilities.
There are no reimbursement rights included within scheme assets
which require separate disclosure.
(a) BAA Pension Scheme
The BAA Pension Scheme is a funded defined benefit scheme with
both open and closed sections. The Scheme closed to employees
joining the Group after 15 June 2008. The Scheme's assets are held
separately from the assets of the HAH Group and are administered by
the trustee.
The value placed on the Scheme's obligations as at 31 December
2020 is based on the full actuarial valuation carried out at 30
September 2018. This has been updated at 31 December 2020 by ISIO
Group Limited to take account of changes in economic and
demographic assumptions, in accordance with IAS 19R. The Scheme
assets are stated at their bid value at 31 December 2020. As
required by IAS 19R, the Group recognises re-measurements as they
occur in the statement of comprehensive income.
Year ended 31 December 2020 Year ended 31 December 2019
GBPm GBPm
Fair value of plan assets (1) Quoted Unquoted Total Quoted Unquoted Total
Equity 620 166 786 573 133 706
Property - 149 149 - 147 147
Bonds 476 878 1,354 357 863 1,220
Cash - 191 191 - 111 111
LDI - 1,545 1,545 - 1,325 1,325
Buy in - 339 339 - 322 322
Other 164 268 432 200 271 471
--------------------------------- --------- ------------ ------- --------- ------------ -------
Total fair value of plan assets 1,260 3,536 4,796 1,130 3,172 4,302
--------------------------------- --------- ------------ ------- --------- ------------ -------
(1) Quoted assets have prices in active markets in which
transactions for the asset take place with sufficient frequency and
volume to provide pricing information on an ongoing basis .
At 31 December 2020, the largest single category of investment
was a liability driven investment ('LDI') mandate, with a value of
GBP1,545 million (32% of the asset holding at 31 December 2020).
The purpose of the Scheme entering into this mandate is to reduce
asset/liability mismatch risk. At 31 December 2019, the largest
single category of investment was an LDI mandate, with value of
GBP1,325 million (31% of the asset holding at 31 December
2019).
LDI holdings are portfolios of bonds, repurchase agreements,
interest rate and inflation derivatives which are intended to
protect the Scheme from movements in interest rates and inflation,
so that the fair value of this element of the portfolio moves in
the same way as the fair value of Scheme's obligations.
Analysis of financial assumptions
The financial assumptions used to calculate Scheme assets and
liabilities under IAS 19R were:
Year ended Year ended
31 December 2020 31 December 2019
% %
Rate of increase in pensionable salaries 1.90 1.90
Increase to deferred benefits during deferment 2.60 2.40
Increase to pensions in payment:
Open section 3.00 3.05
Closed section 3.10 3.15
Discount rate 1.30 2.10
Inflation assumption 3.10 3.15
------------------------------------------------ ------------------ ------------------
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
11. Cash generated from operations
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit before tax (2,012) 546
Exceptional items 184 -
------------------------------------------------------------------------ ------------------ ------------------
(Loss)/profit before tax and exceptional items (1,828) 546
Adjustments for:
Net finance cost 874 647
Depreciation 730 693
Amortisation on intangibles 44 43
Amortisation on right of use assets 38 35
Fair value loss/(gain) on investment properties 412 (43)
Working capital changes:
(Increase)/decrease in inventories and trade and other receivables (1) (240) 57
Increase/(decrease) in trade and other payables 56 (7)
Decrease in provisions (5) (7)
Difference between pension charge and cash contributions (51) (22)
------------------------------------------------------------------------ ------------------ ------------------
Cash generated from operations before exceptional items 30 1,942
Cash payments in respect of exceptional items (125) -
------------------------------------------------------------------------ ------------------ ------------------
Cash (used in)/generated from operations (95) 1,942
------------------------------------------------------------------------ ------------------ ------------------
(1) The increase in trade and other receivables includes GBP247
million relating to prepayments made to suppliers at 31 December
2020. The total includes a GBP60 million payment to HMRC in
relation to Heathrow's payroll taxes payable to HMRC during 2021.
These prepayments were made in order to manage banking covenant
ratios. Judgement is required in classifying these prepayments
within the statement of cash flows. Management have concluded these
should be presented within operating activities as they represent
operational prepayments to suppliers (operating cash flows) as
opposed to cash advances to other parties (financing
activities).
12. Commitments and contingent liabilities
Group commitments for property, plant and equipment
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Contracted for, but not accrued:
Baggage systems 49 111
Terminal restoration and modernisation 78 168
Tunnels refurbishments 28 -
Capacity optimisation 27 51
IT projects 2 15
Other projects 8 45
---------------------------------------- ------------------ ------------------
192 390
The figures in the above table are contractual commitments to
purchase goods and services at the reporting date.
13. Related party transactions
The Group entered into the following transactions with related
parties:
Purchase of goods and services Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Amey OWR Ltd - 1
Ferrovial Agroman 28 44
Heathrow Finance plc(1) 125 102
-------------------------------- ------------------ ------------------
153 147
-------------------------------- ------------------ ------------------
(1) Relates to interest on the debenture payable to Heathrow Finance plc (note 4).
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
13. Related party transactions continued
Sales to related party Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Harrods International Limited 6 23
Qatar Airways 22 36
------------------------------- ------------------ ------------------
28 59
------------------------------- ------------------ ------------------
Balances outstanding 31 December 2020 31 December 2019
with related parties
were as follows:
Amounts owed Amounts owed Amounts owed Amounts
by related to related by related owed to
parties parties parties related
GBPm GBPm GBPm parties
GBPm
----------------------- -------------- ------------- ------------- ---------
Heathrow Finance plc - 3,344 - 2,540
Qatar Airways - - 2 -
----------------------- -------------- ------------- ------------- ---------
- 3,344 2 2,540
The related parties outlined above are related through ownership
by the same parties. The transactions relate primarily to
construction projects, loans and interest payable, and are
conducted on an arm's length basis.
14. Reconciliation of our Alternative Performance Measures (
APMs)
Alternative Performance Measures
The Group presents its results in accordance with International
Financial Reporting Standards (IFRS). Management also use other
financial measures not defined by the IFRS as APMs (Alternative
Performance Measures). Management relies on these APMs for
decision-making and for evaluating the Group's performance. Below
we provide an explanation of each APM.
EBITDA
EBITDA is loss or profit before interest, taxation, depreciation
and amortisation. EBITDA is a useful indicator as it is widely used
by investors, analysts and rating agencies to assess operating
performance.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit for the period (1,785) 413
Add: Tax (credit)/charge (227) 133
Add: Net finance cost 874 647
------------------------------------ ------------------ ------------------
Operating (loss)/profit (1,138) 1,193
Add: depreciation and amortisation 812 771
------------------------------------ ------------------ ------------------
EBITDA (326) 1,964
Adjusted EBITDA
Adjusted EBITDA is loss or profit before interest, taxation,
depreciation, amortisation, fair value gains and losses on
investment properties and exceptional items. Adjusted EBITDA is an
approximation of pre-tax operating cash flow and reflects cash
generation before changes in working capital and investment. The
APM assists investors to value the business (valuation using
multiples) and rating agencies and creditors to gauge levels of
leverage by comparing Adjusted EBITDA with net debt.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
14. Reconciliation of our Alternative Performance Measures (
APMs) continued
Adjusted EBITDA continued
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit for the period (1,785) 413
Add: Tax (credit)/charge (227) 133
Add: Net finance cost 874 647
------------------------------------------------------ ------------------ ------------------
Operating (loss)/profit (1,138) 1,193
Add: depreciation and amortisation 812 771
Add: exceptional items 184 -
Add: fair value loss/(gain) on investment properties 412 (43)
------------------------------------------------------ ------------------ ------------------
Adjusted EBITDA 270 1,921
------------------------------------------------------ ------------------ ------------------
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Cash (used in)/generated from operations (95) 1,942
Exclude:
Increase/(decrease) trade and other receivables 239 (57)
Increase in inventories 1 -
(increase)/decrease in trade other payables (56) 7
Decrease in provisions 5 7
Difference between pension charge and cash contributions 51 22
(1125
Cash payments in respect of exceptional items 125 -
Adjusted EBITDA 270 1,921
Adjusted operating (loss)/profit
Adjusted operating (loss)/profit shows operating results
excluding fair value gains and losses on investment properties and
exceptional items. These are excluded as they can vary
significantly from one year to the next due to market perceptions
of the value of the property and the accounting method used to
calculate the fair value. The adjusted measure is used to assess
underlying performance of the trading business.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Operating (loss)/profit(1) (1,138) 1,193
Add: exceptional items 184 -
Add: fair value loss/(gain) on investment properties 412 (43)
Adjusted operating (loss)/profit (542) 1,150
(1) Operating (loss)/profit is presented on the Group Income
statement, it is not defined per IFRS, however it is a generally
accepted profit measure.
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
14. Reconciliation of our Alternative Performance Measures (
APMs) continued
Net finance cost before certain re-measurements
Net finance cost before certain re-measurements exclude fair
value adjustments on financial instruments. Excluding fair value
adjustments can be useful to investors and financial analysts when
assessing the Group's underlying profitability, because they can
vary significantly from one year to the next. A significant portion
of the fair value adjustments on financial instruments occur due to
the business entering into arrangements to hedge against future
inflation. As these contracts do not meet hedge criteria under IFRS
9, fair value adjustments create significant volatility in our IFRS
income statement.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Finance income 12 9
Finance cost (886) (656)
Net finance cost including certain remeasurements (874) (647)
Add: fair value loss/(gain) arising on re-measurement of financial instruments 202 (128)
Net Finance cost before certain remeasurements (672) (775)
Adjusted (loss)/profit before tax
Adjusted (loss)/profit before tax excludes fair value
adjustments on investment properties and financial instruments and
exceptional items. Excluding these can be useful to investors and
financial analysts when assessing the Group's underlying
profitability, because they can vary significantly from one year to
the next.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit before tax (2,012) 546
Add: exceptional items 184 -
Add: fair value loss/(gain) on investment properties 412 (43)
Add: fair value loss/(gain) arising on re-measurement of financial instruments 202 (128)
Adjusted (loss)/profit before tax (1,214) 375
Adjusted (loss)/profit after tax
Adjusted (loss)/profit after tax excludes fair value gains and
losses on investment properties and financial instruments,
exceptional items and the associated tax. Excluding these can be
useful to investors and financial analysts when assessing the
Group's underlying profitability, because they can vary
significantly from one year to the next.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
(Loss)/profit after tax (1,785) 413
Add: exceptional items 184 -
Add: fair value loss/(gain) on investment properties 412 (43)
Add: fair value loss/(gain) arising on re-measurement of financial instruments 202 (128)
Less: tax (credit)/charge on fair value loss on investment properties and
re-measurement of
financial instruments (110) 29
Less tax credit on exceptional items (18) -
Add: change in tax rate 112 -
Adjusted (loss)/profit after tax (1,003) 271
Notes to the condensed consolidated financial statements for the
year ended 31 December 2020
14. Reconciliation of our Alternative Performance Measures (
APMs) continued
Heathrow (SP) Limited consolidated nominal net debt
Consolidated nominal net debt is a measure of financial position
used by our creditors when assessing covenant compliance.
Consolidated nominal net debt is short and long-term debt less
cash and cash equivalents and term deposits. It includes index
linked swap accretion and hedging impact of cross currency interest
rate swaps. It excludes pre-existing lease liabilities recognised
upon transition to IFRS 16, accrued interest, capitalised borrowing
costs and intra-group loans.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Cash and cash equivalents 280 815
Term deposits 3,236 725
Current debt (excluding interest payable) (1,674) (404)
Current lease liability (43) (38)
Non-current debt (15,336) (13,436)
Non-current lease liability (349) (346)
Accounting value of Net debt (13,886) (12,684)
Index-linked swap accretion (1) (133) (345)
Impact of cross currency interest rate swaps (2) 591 349
Bond issuance costs (3) (92) (111)
Less: IFRS 16 lease liability at 31 December 2019 relating to pre-existing
leases (4) 389 379
Consolidated nominal net debt (13,131) (12,412)
(1) Index linked swap accretion is included in nominal net debt,
amounts are reported within derivative financial instruments on the
Statement of financial position.
(2) Where bonds are issued in currencies other than GBP, the
Group has entered into foreign currency swaps to fix the GBP cash
outflows on redemption. The impact of these swaps is reflected in
nominal net debt.
(3) Capitalised bond issue costs are excluded from nominal net debt.
(4) The lease liability relating to leases that existed at the
point of transition to IFRS 16 (1 January 2019) is excluded from
nominal net debt. All new leases entered into post transition are
included.
Regulatory Asset Base (RAB)
The regulated asset base is a regulatory construct, based on
predetermined principles not based on IFRS. By investing
efficiently in the Airport, we add to the RAB over time. The RAB
represents the invested capital on which Heathrow are authorised to
earn a cash return. It is used in key financial ratios and in our
regulatory accounts.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Regulatory Asset Base (RAB) 1 6,492 16,598
Regulatory gearing ratio
The regulatory gearing ratio is consolidated nominal net debt to
the RAB. It is a financial indicator used by investors, financial
analysts, rating agencies, creditors and other parties to ascertain
a company's debt position in regulated industries.
Year ended Year ended
31 December 2020 31 December 2019
GBPm GBPm
Total net debt to RAB 0.796 0.748
Senior net debt to RAB 0.684 0.666
Glossary
Air Transport Movement 'ATM' - means a flight carried out for
commercial purposes and includes scheduled flights operating
according to a published timetable, charter flights, cargo flights
but it does not include empty positioning flights, and private
non-commercial flights.
Airport Service Quality 'ASQ' - quarterly Airport Service
Quality surveys directed by Airports Council International (ACI).
Survey scores range from 1 up to 5.
Baggage connection - numbers of bags connected per 1,000
passengers.
Category B Costs - Capital expenditure related to the consent
process for Expansion.
Connections satisfaction - Measures how satisfied passengers are
with their connections journey via our in-house satisfaction
tracker - QSM Connections. Throughout the year there are 14,000
face-to-face interviews across all terminals where transfer
passengers rate their satisfaction with their Connections
experience on a scale of one to five, where one is 'extremely poor'
and five is 'excellent'.
Departure punctuality - percentage of flights departing within
15 minutes of schedule.
Early Category C Costs - Capital expenditure related to the
early design and construction costs for Expansion.
Gearing ratios - under the Group's financing agreements are
calculated by dividing consolidated nominal net debt by Heathrow'
Regulatory Asset Base ('RAB') value.
Interest Cover Ratio 'ICR ' - under the Group's financing
agreements are calculated as the ratio of cashflow from operations
(excluding cash exceptional items) less tax paid less 2% of RAB to
interest paid. ICR is trigger event and covenant at Class A,
trigger event at Class B and financial covenant at Heathrow
Finance; Class A ICR trigger ratio is 1.40x; Class A ICR covenant
is 1.05x and is calculated as a 3-year trailing average, Class B
ICR trigger ratio is 1.20x, Heathrow Finance ICR covenant is
1.00x.
Lost Time Injury - Lost time injuries are injuries sustained by
colleagues whilst conducting work related duties, resulting in
absence from work for at least a day. The measure is calculated as
a moving annual frequency rate of the number of incidents in the
last 12 months per 100,000 working hours.
NERL - National Air Traffic Services is split into two main
service provision companies, one if which is NATS En-Route PLC
(NERL). NERL is the sole provider of civilian en-route air traffic
control over the UK.
Net-zero carbon - Residual carbon emissions are offset by an
equal volume of carbon removals.
Regulatory asset ratio 'RAR' - is trigger event at Class A and
Class B and financial covenant at Heathrow Finance; Class A RAR
trigger ratio is 72.5%; two Class B triggers apply: at Heathrow
Finance it is 82.0% and at Heathrow (SP) Limited it is 85.0%.
Following the waiver secured in July 2020, Heathrow Finance RAR
covenant was revised from 92.5% to 95% and 93.5% for the financial
year ending 31 December 2020 and 2021 respectively.
Restricted payments - The financing arrangements of the Group
and Heathrow Finance plc ("Heathrow Finance") restrict certain
payments unless specified conditions are satisfied. These
restricted payments include, among other things, payments of
dividends, distributions and other returns on share capital, any
redemptions or repurchases of share capital, and payments of fees,
interest or principal on any intercompany loans.
Security queuing - % of security waiting time measured under 5
minutes, based on 15-minute time period measured.
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END
FR FFFSLFTIVFIL
(END) Dow Jones Newswires
February 24, 2021 02:00 ET (07:00 GMT)
Heathrow Fin 25 (LSE:10FX)
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