##### 



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F/A

o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12 (g) OF THESECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002
 ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from ____________________ to ____________________


Commission file number 333-13096

DRAX HOLDINGS LIMITED(FORMERLY KNOWN AS AES DRAX HOLDINGS LIMITED)
(Exact name of Registrant as specified in its charter)

Cayman Islands
(Jurisdiction of incorporation or organization)

Drax Power Station, P.O. Box 3, Selby, North Yorkshire, YO8 8PQ, England
(Address of principal executive offices)

Securities registered or to be
registered pursuant to Section 12 (b) of the Act: None

Securities registered or to be
registered pursuant to Section 12 (g) of the Act: None

Securities for which there is a
reporting obligation pursuant to Section 15 (d) of the Act:

Title of each class
U.K. (pound) 200,000,000 9.07% Senior Secured Bonds due 2025
U.S.$302,400,000 10.41% Senior Secured Bonds due 2020

Indicate the number of outstanding shares of each of the issuers
classes of capital or common stock as of the close of the period covered by the annual report.
20,051,000 ordinary shares

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ
    
    No  o


Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  þ
    
    Item 18  o






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EXPLANATORY NOTE

This Amendment on Form 20-F/A restates the previously issued 2002 financial
statements of Drax Holdings Limited (formerly known as AES Drax Holdings
Limited) (the Company), Drax Power Limited (formerly known as AES Drax Power
Limited), Drax Limited (formerly known as AES Drax Limited), Drax Electric
Limited (formerly known as AES Drax Electric Limited) and AES Drax Acquisition
Limited for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on Form 20-F on May 16, 2003 (we refer to such Form 20-F,
as the Annual Report). These financial statements have been amended to
reflect changes in the status of certain transactions and balances as at 31
December 2002 in the light of information provided to the Company subsequent to
May 16, 2003 and to reflect post balance sheet events which have occurred since
the original filing, for consequential amendments to disclosure and for other
presentational changes.

No amendment or adjustment to reflect such changes and events is required to
the financial statements of AES Drax Financing Limited for the year ended 31
December 2002 included in the Annual Report. In addition, due to the
withdrawal by The AES Corporation (AES) from the proposed restructuring of
senior debt issued by the Company and the subsequent resignation of directors
appointed by AES from the boards of AES Drax Acquisition Limited, the Company
and its subsidiaries, we are unable to prepare or restate its financial
statements which are included at Item 17 hereof, as filed in the Annual Report.

The Company is, by means of this filing, amending, clarifying and adding
certain disclosure under Item 3 (Key Information), Item 5 (Operating and
Financial Review and Prospects), Item 17 (Financial Statements) and amending
Exhibit 7.1 to reflect the restated financial statements referred to above.

In addition, in connection with the filing of this amended Form 20-F and
pursuant to the rules of the Securities and Exchange Commission, the Company is
including with this amended Form 20-F certain currently dated certifications.

This Form 20-F/A consists of a cover page, this explanatory note, amendments to
Item 3 (Key Information), Item 5 (Operating and Financial Review and
Prospects), the information required by Item 8 (Financial Information) and Item
17 of Form 20-F (Financial Statements), a signature page, and the principal
executive and principal financial officer certifications required to be filed
as exhibits hereto. In accordance with Rule 12b-15 promulgated pursuant to the
Securities Exchange Act of 1934, the complete text of Item 17, as amended, is
included herein.

Other than as indicated in each note entitled Restatement or Post Balance
Sheet Events and contained in the restated financial statements referred to
above and attached as Item 17 hereof, this Form 20-F/A does not reflect events
occurring after the filing of the Annual Report, and does not modify or update
the disclosures therein in any way other than as required to reflect the
amendments described above and set forth below; such disclosures are contained
in the Companys subsequent filings with the SEC.

The filing of this amended Form 20-F shall not be deemed an admission that the
original filing, when made, included any untrue statement of a material fact or
omitted to state a material fact necessary to make a statement not misleading.





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##### 



TABLE OF CONTENTS TO FORM 20-F/A

PagePRESENTATION OF CURRENCY AND FINANCIAL INFORMATION
    
    
    1PART I
    
    
    2ITEM 3.   KEY INFORMATION
    
    
    2Selected Financial Data
    
    
    2Historical Performance Summary  Selected Operating Data
    
    
    4Capitalization and Indebtedness
    
    
    4Reasons for the Offer and Use of Proceeds
    
    
    4Risk Factors
    
    
    6ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    18Results of Operations
    
    
    21Liquidity and Capital Resources
    
    
    28Trend Information
    
    
    37ITEM 8.   FINANCIAL INFORMATION
    
    
    37Consolidated Statements and Other Financial Information
    
    
    37Legal Proceedings
    
    
    37Significant Changes
    
    
    38PART III
    
    
    39ITEM 17.   FINANCIAL STATEMENTS
    
    
    39ITEM 19.   EXHIBITS
    
    
    40SIGNATURES
    
    
    41APPENDIX
    
    
    42


i



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PRESENTATION OF CURRENCY AND FINANCIAL INFORMATION

Amounts set forth in the financial statements included in Item 17 to this
annual report are stated in pounds sterling. In this annual report, references
to £, pounds sterling or Pounds are to the currency of the United
Kingdom, which we sometimes refer to as the UK. References to US dollars,
US$ or $ are to the currency of the United States. In this annual report,
US GAAP means US generally accepted accounting principles and UK GAAP means
UK generally accepted accounting principles.

The financial statements for the AES Drax companies are prepared in
accordance with UK GAAP, which differs in certain significant respects from US
GAAP. For a discussion of these differences and a reconciliation between UK
and US GAAP, see note 27 to our financial statements included in this annual
report.

1



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##### 



PART I

Item 3. Key Information

Selected Financial Data

Set forth below is our selected consolidated profit and loss statement for
the three years ended December 31, 2002 and the consolidated balance sheet as
of December 31, 2002, 2001 and 2000. Financial information for earlier periods
is not available as we were organized on August 26, 1999. This selected profit
and loss data and consolidated balance sheet data have been derived from our
audited consolidated financial statements, prepared in accordance with UK GAAP.
This selected financial data should be read in conjunction with our
consolidated financial statements, related notes and other financial
information included in this annual report.

The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP and (with the exception of
the financial statements of AES Drax Financing Limited) supersede and replace
the original financial statements of the Company dated 14 May 2003 included on
the Form 20-F of the Company filed on 16 May 2003. The financial statements
(with the exception of the financial statements of AES Drax Financing Limited)
have been amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
Company subsequent to the date of the original filing. The financial
statements (with the exception of the financial statements of AES Drax
Financing Limited) have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments to
disclosure and for other presentational changes (see Notes 28 and 29 to the
financial statements of the Company at Item 17 A below). AES Draxs results,
which are consolidated within the results of our parent company, The AES
Corporation, are prepared under US GAAP.

Selected Consolidated Profit and Loss Data in accordance with UK GAAP:

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year endedDecember
31,2002
    
    December 31,2001
    
    December 31,2000(in £000s)Revenues
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,766Gross Profit
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses
    
    
    (899,880
    )(1)
    
    
    (171,019
    )
    
    
    (166,146
    )Operating (loss)/profit
    
    
    (594,511
    )
    
    
    147,880
    
    
    
    178,412Interest receivable and similar income
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862Interest payable and similar charges
    
    
    (180,088
    )
    
    
    (170,787
    )
    
    
    (156,324
    )(Loss) on ordinary activities before taxation
    
    
    (751,051
    )
    
    
    (7,970
    )
    
    
    33,950(Loss) on ordinary activities after taxation
    
    
    (750,541
    )
    
    
    (18,855
    )
    
    
    11,515Dividends
    
    
    
    
    
    
    
    
    
    
    (14,000
    )Retained loss for the financial year
    
    
    (750,541
    )
    
    
    (18,855
    )
    
    
    (2,485
    )


---

|(1) |  | The increase in the Administrative expenses in 2002 is due to two
exceptional items that we incurred: an impairment in Fixed Assets of £579
million and the write-off of £136.8 million of costs associated with the
termination of the Hedging Contract (see Operating and Financial Review
and Prospects  Results of Operations).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2



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##### 



Selected Consolidated Balance Sheet Data in accordance with UK GAAP:

As restated
    
    As restated
    
    As restatedAs of
    
    As of
    
    As ofDecember 31,2002
    
    December 31,2001
    
    December 31,2000(in £000s)Current Assets
    
    
    248,744
    
    
    
    299,938
    
    
    
    319,708Total Assets
    
    
    1,331,862
    
    
    
    2,034,793
    
    
    
    2,115,026Current Liabilities
    
    
    (1,813,107
    )
    
    
    (92,482
    )
    
    
    (160,219
    )Long Term Liabilities
    
    
    (17,246
    )
    
    
    (1,931,512
    )
    
    
    (1,925,153
    )Shareholders Equity
    
    
    (498,491
    )
    
    
    10,799
    
    
    
    29,654Selected Consolidated Profit and Loss Data in accordance with US GAAP:As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year endedDecember 31,2002
    
    December 31,2001
    
    December 31,2000(in £000s)Revenues
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,766Gross Profit
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses
    
    
    (313,776
    )
    
    
    (194,134
    )
    
    
    (157,898
    )Operating (loss)/profit
    
    
    (8,407
    )
    
    
    124,765
    
    
    
    186,660Interest receivable and similar income
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862Interest payable and similar charges
    
    
    (131,718
    )
    
    
    (126,913
    )
    
    
    (111,404
    )(Loss)/profit on ordinary activities before taxation
    
    
    (116,577
    )
    
    
    12,789
    
    
    
    87,118(Loss)/profit on ordinary activities after taxation
    
    
    (96,986
    )
    
    
    22,077
    
    
    
    76,986Selected Consolidated Balance Sheet Data in accordance with US GAAP:As restated
    
    As restated
    
    As restatedAs of
    
    As of
    
    As ofDecember 31,2002
    
    December 31,2001
    
    December 31,2000(in £000s)Current Assets
    
    
    248,744
    
    
    
    299,938
    
    
    
    319,708Total Assets
    
    
    2,618,392
    
    
    
    2,748,123
    
    
    
    2,834,156Current Liabilities
    
    
    (1,801,589
    )
    
    
    (92,482
    )
    
    
    (160,219
    )Long Term Liabilities
    
    
    (161,979
    )
    
    
    (2,138,473
    )
    
    
    (2,150,824
    )Shareholders Equity
    
    
    654,824
    
    
    
    517,168
    
    
    
    523,113As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year endedDecember 31,2002
    
    December 31,2001
    
    December 31,2000Ratio of Earnings to Fixed Charges calculated in accordance with:UK GAAP
    
    
    (3.17
    )(1)
    
    
    0.95
    (2)
    
    
    1.22US GAAP
    
    
    0.11
    (3)
    
    
    1.10
    
    
    
    1.78


---

|(1) |  | The deficit in earnings for the year ended December 31, 2002 under UK GAAP
is £751,051,000
|--- |  | ------------------------------------------------------------------------------------------
|(2) |  | The deficit in earnings for the year ended December 31, 2001 under UK GAAP
is £7,970,000  
|(3) |  | The deficit in earnings for the year ended December 31, 2002 under US GAAP
is £116,577,000

3



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##### 



Historical Performance Summary  Selected Operating Data

The Drax Power Station currently achieves a net thermal efficiency of
approximately 38%. This compares favorably with the 35% to 39% normally
expected for large coal-fired power stations similar to the Drax Power Station.
As the Drax Power Station is fitted with Flue Gas Desulphurization (FGD) and
currently achieves comparable efficiencies to other stations that do not have
FGD, it is in a strong competitive position as it can produce electricity as
inexpensively as competing coal-fired power stations while remaining within
currently permitted sulphur dioxide (SO2) emissions limits.

Data made available by Innogy plc (formerly National Power plc, the former
owner of the Drax Power Station) confirms that the Drax Power Station had an
overall availability of approximately 87% to 88% over the 1996-1999 period.
The Drax Power Stations operating history for the years ended March 31, 1998,
1999 and 2000, the 12 months ended December 31, 2000, 2001 and 2002, and the
three months ended March 31, 2003 is summarized below:

3 Months endedYear ended March 31,
    
    Year ended December 31,
    
    March 31,1998
    
    1999
    
    2000
    
    2000(2)
    
    2001
    
    2002
    
    2003Net Generation
    
    
    23,321
    
    
    
    22,507
    
    
    
    21,595
    
    
    
    23,048
    
    
    
    22,298
    
    
    
    19,454
    
    
    
    7,229(GWh/Yr)Equivalent Availability Factor
    
    
    87.37
    
    
    
    91.10
    
    
    
    81.60
    
    
    
    82.50
    
    
    
    85.80
    
    
    
    81.90
    
    
    
    91.10(% of time the station was
available for generation)Net Capacity Factor
    
    
    71.00
    
    
    
    71.40
    
    
    
    65.15
    
    
    
    66.48
    
    
    
    64.40
    
    
    
    56.30
    
    
    
    85.00(% of actual net generation
to potential max. net
generation)Forced Outage Rate
    
    
    4.60
    
    
    
    5.90
    
    
    
    7.72
    (1)
    
    
    10.26
    (1)
    
    
    8.03
    
    
    
    12.49
    
    
    
    2.20(% of time that a failure or
unplanned condition required
the unit to be removed from
service)Net Thermal Efficiency
    
    
    37.74
    
    
    
    38.87
    
    
    
    38.86
    
    
    
    38.17
    
    
    
    37.30
    
    
    
    37.02
    
    
    
    38.29(% of energy input converted
to electricity)


---

|(1) |  | The operating performance of the Drax Power Station for the year ended
March 31, 2000 was adversely affected by the fire which shut down Unit 3
from December 27, 1999 until the end of the period; and for the year ended
December 31, 2000 by the rotor incident on Unit 2 in September 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Our financial year-end is December 31, so all of these performance
measures are now recorded in line with our financial year.                                                                                                                                                                  

Capitalization and Indebtedness- Not applicable.

Reasons for the Offer and Use of Proceeds- Not applicable.

Significant Developments During 2002 and Recent Developments

For a discussion of these developments please see Information on the
Company  Significant Developments During 2002 and Recent Developments.

4



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Exchange rates

The following tables set forth, for the dates or periods indicated, the
Interbank market rate and generally reflect the exchange rates for transactions
of US $1 million or more. These are the official rates quoted in the media,
such as The Wall Street Journal. These rates have been sourced from OANDA,
The Currency Site (www.oanda.com):

April
    
    March
    
    February
    
    January
    
    December
    
    NovemberUS dollars per £1
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002Noon buying rateHigh
    
    
    1.5989
    
    
    
    1.6162
    
    
    
    1.6580
    
    
    
    1.6562
    
    
    
    1.6070
    
    
    
    1.5974Low
    
    
    1.5457
    
    
    
    1.5534
    
    
    
    1.5698
    
    
    
    1.5904
    
    
    
    1.5447
    
    
    
    1.5409


3 months endedYear ended December 31,
    
    March 31,US dollars per £1
    
    2002
    
    2001
    
    2000
    
    2003Noon buying ratePeriod end rate
    
    
    1.6044
    
    
    
    1.4515
    
    
    
    1.4955
    
    
    
    1.5749Average rate for the period(1)
    
    
    1.5038
    
    
    
    1.4413
    
    
    
    1.5204
    
    
    
    1.6038


5



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Risk Factors

The only securities we have outstanding which are held by the public are
our 9.07% Senior Secured Bonds due 2025 and our 10.41% Senior Secured Bonds due
2025, which we refer to as the bonds. In addition, our indirect parent, AES
Drax Energy Limited has issued 11.25% Senior Secured Notes due 2010 and 11.5%
Senior Secured Notes due 2010, which we refer to as the notes. The risk
factors we have set forth below, therefore, relate to the risks associated with
owning our publicly traded debt securities and the operating risks associated
with the Drax Power Station and our £1,725,000,000 8.86% Guaranteed Secured
Bonds due 2015 issued on November 30, 1999, which bonds and related coupons we
refer to collectively as the Eurobonds,that may affect our ability to repay
our debt obligations.

You should read Information on the Company  Significant Developments
During 2002 and Recent Developments where we describe the Standstill
Arrangements and the current position in relation to our debt restructuring.
We are currently in default under the bonds, the notes and our Eurobonds. As
part of the Standstill Arrangements, some of our defaults have been permanently
waived, some of our defaults have been temporarily waived and some of our
creditors have agreed to forebear the acceleration of debt and enforcement of
security which could arise as a result of a default until the Standstill
Termination Date.

This report also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this annual
report. You should read Forward-Looking Statements for more information
regarding these forward-looking statements.

Risks relating to holding our debt securities



| | Cash flows from the operation of the Drax Power Station are not currently
sufficient to satisfy the interest and principal payments on our financial
obligations. We are operating under a Standstill Agreement with certain of
our senior creditors pending discussions on a restructuring of our
indebtedness and the outcome of those discussions cannot be predicted at this
time. The Standstill Agreement is currently scheduled to terminate on May 31,
2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash flows from the Drax Power Station are not currently sufficient to
satisfy the interest and principal payments on our outstanding indebtedness.
We refer to the direct obligations under the Eurobonds, the fixed coupons on
the Eurobonds and the related swaps and the bonds, together with the related
security arrangements, as our Finance Obligations. Absent a restructuring of
our Finance Obligations, our creditors, including bondholders, may be able to
enforce security arrangements under intercreditor arrangements if certain
conditions are satisfied.

We have proposed a business plan and restructuring proposal, which are
currently under discussion with the syndicate of banks that financed the
subscription for the Eurobonds and the members of the ad hoc committee formed
by holders of the bonds. Holders of the Eurobonds and the coupons related
thereto and the bondholders are referred to collectively as our senior
creditors. Certain sections of our restructuring proposal were filed on a Form
6-K with the SEC on April 11, 2003. Our ability to implement the business plan
and to meet our Finance Obligations depends upon the successful implementation
of a restructuring proposal. The key aims of the restructuring proposal are:



| |  |  | to de-leverage the capital structure of the AES Drax companies;
| | - |  | ---------------------------------------------------------------



| |  |  | to reduce debt with the proceeds of AES Draxs claim against TXU
Europe resulting from termination of the Hedging Contract;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | to preserve liquidity to mitigate the impact of potential prolonged
low market prices or unexpected volatility; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | to benefit from the contributions of The AES Corporation to
maximize value to our creditors.
| | - |  | --------------------------------------------------------------------------------------------

6



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##### 



The restructuring proposal is subject to ongoing discussion with the
steering committee representing our senior creditors. We are not able to
predict the outcome of these discussions. However, if our senior creditors
withdraw their support for the restructuring process, it is likely that they
will seek to enforce their rights under the terms of the Eurobonds, bank
facility and bonds, as applicable. In addition, the Standstill Agreement
currently terminates on May 31, 2003. It is unlikely that a restructuring will
have been completed by May 31, 2003, and no assurance can be given that the
Standstill Arrangements will be extended beyond such date.

In particular, under the Standstill Agreement, the bondholders party
thereto temporarily waived events of default which would have qualified as a
bankruptcy/insolvency event of default, a fundamental event of default under
the intercreditor arrangements between our respective classes of senior
creditors. As more fully described under  Limitation on Enforcement of
Rights such an event permits acceleration and enforcement action to be taken
earlier than with respect to certain other defaults. In accordance with the
terms of the Standstill Agreement, once the Standstill Agreement terminates, if
bondholders elected to accelerate, for purposes of determining the relevant
period of time for enforcement rights, the measuring date would be as if the
Standstill Agreement had never been executed.

In addition, the value of AES Drax Holdings Limiteds assets as at
December 31, 2002 was less than the amount of its liabilities, taking into
account its contingent and prospective liabilities. Pursuant to the terms of
the Standstill Agreement, events of default under the Eurobonds, Bank Facility
and the bonds arising as a result of this position have been temporarily waived
by the senior creditors. If we are unable to agree a restructuring plan
satisfactory to our senior creditors prior to the Standstill Termination Date
(and the Standstill Arrangements are not extended past this date) our senior
creditors will be able to accelerate their debt and to take enforcement action
under their security arrangements as a result of such events of default,
subject to the terms of the intercreditor arrangements.



| | We are substantially leveraged and are not able to service our debt. We are
currently in default on our bonds and our Eurobonds and absent a restructuring
of our Financial Obligations we will be unable to make the payments which are
or will become due.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the Acquisition by AES Drax Limited (AESD), an exempted
company incorporated with limited liability under the laws of the Cayman
Islands, of all the outstanding capital stock of AES Drax Power Limited, a
private limited company organized under the laws of England and Wales and
owner/operator of the Drax Power Station, the AES Drax group is highly
leveraged. The AES Drax groups leverage and obligations has had and could
have important consequences to the holders of the bonds, including the
following:



| |  |  | a significant portion of the Drax Power Stations cash flow from
operations is dedicated to the payment of the AES Drax groups debt
service obligations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the AES Drax groups leverage has made it more sensitive to a
downturn in general economic conditions and changes in market
conditions which impact on electricity prices;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the AES Drax groups substantial indebtedness may limit the
operating companys capacity to respond to market conditions (including
its ability to make capital expenditures, or satisfy working capital,
or other general corporate requirements) or to meet its contractual or
financial obligations under which it is currently in default; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the AES Drax group may be more highly leveraged than other
companies with which it competes, which may place it at a competitive
disadvantage. In addition, if and to the extent the AES Drax group
requires additional financing in the future for working capital,
capital expenditures or other general corporate purposes, the groups
leverage may impair its ability to obtain such additional financing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our indirect parent company, AES Drax Energy Limited (AES Drax Energy), was
unable to make full payment of interest due on the notes on February 28, 2003.
AES Drax Energy is in default under the terms of the notes. If the security
trustee for the noteholders serves a notice in writing to the security trustee
for the bondholders and the holder of the Eurobonds, enforcement action may be
commenced against AES Drax
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### 





| | Energy after 90 days pursuant to the terms of the
intercreditor arrangements. This could result in us ceasing to be a
subsidiary of The AES Corporation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

As part of the Standstill Agreement, our debt service cover ratios were
not calculated as of December 31, 2002 and AES Drax was not permitted to make
any distributions to AES Drax Energy. Since AES Drax Energy had insufficient
funds of its own, AES Drax Energy was unable to make the full amount of the
interest payment of $11.5 million and £7.6 million due on the notes on February
28, 2003. AES Drax Energys failure to make the full amount of the required
interest payment constitutes an event of default under the notes. If the
security trustee for the noteholders serves a notice in writing to the security
trustee for the bondholders and the holder of the Eurobonds, enforcement
action, subject to certain conditions, may be commenced against AES Drax
Energy after 90 days pursuant to the terms of the intercreditor arrangements.
See Limitation on Enforcement of Rights for a description of the
intercreditor arrangements.

We believe that our debt service cover ratios, if calculated as of
December 31, 2002, would be below the levels required at that time.



| | The Hedging Contract was terminated on November 18, 2002. No alternative
long-term electricity hedging arrangements have been entered into. As a
result, the Drax Power Station is currently operating as a purely merchant
power plant, fully exposed to market-related risks.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On November 14, 2002, TXU Europe was required to make a £49 million
payment to AES Drax for power purchased in October under the Hedging Contract.
TXU Europe failed to make the payment, and attempts to negotiate a solution
acceptable to both parties were unsuccessful. On November 18, 2002, AES Drax
terminated the Hedging Contract, with immediate effect, on the grounds of TXU
Europes failure to provide the credit support of approximately £270 million
required under the terms of the Hedging Contract.

As a result of the termination of the Hedging Contract, the Drax Power
Station now operates as a purely merchant facility dependent on revenues
derived from sales of electricity under NETA. AES Drax is therefore exposed to
market-related risks, including general economic conditions, electricity
demand, weather and other circumstances beyond its control. The Hedging
Contract accounted for approximately 60% of the revenues generated by AES Drax
and payments under this agreement were significantly higher than AES Drax is
currently receiving in the open market.

See Information on the Company  Significant Developments During 2002 and
Recent Developments.



| | We entered into a Standstill Agreement with certain of our senior creditors,
temporarily or permanently, waiving certain defaults under the terms of our
Finance Obligations through the Standstill Termination Date. If we are unable
to agree a restructuring plan satisfactory to our senior creditors, we may
lose control of the Drax Power Station.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On November 19, 2002, the TXU group, including TXU Europe (the
counterparty to the Hedging Contract) and the guarantor of the Hedging
Contract, TXU Europe Group plc (TXU Europe Group), was placed into
administration. After termination of the Hedging Contract and the placing of
the TXU group into administration, AES Drax secured the support of the bank
lenders which indirectly financed the Acquisition (the Senior Lenders) to
address the liquidity needs of the project, including the provision of letters
of credit required to support merchant trading of the Drax Power Stations
output in the open market. AES Drax has submitted a claim for capacity damages
of approximately £266 million in accordance with the terms of the Hedging
Contract as well as a claim of approximately £85 million for unpaid electricity
delivered in October and the first half of November. The Hedging Contract
accounted for approximately 60% of the revenues generated by AES Drax and
payments under this agreement were significantly higher than AES Drax is
currently receiving in the open market.

On December 13, 2002, we signed the Standstill Agreement with certain of
our senior creditors to provide time to put in place a debt restructuring. The
Standstill Agreement provides temporary and/or permanent waivers by those
senior creditors of defaults that have occurred or could occur up to the
Standstill Termination Date. Our
failure to implement a restructuring or agree an extension to the
Standstill Termination Date could result in our

8



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Eurobonds and bonds being
declared due and payable which would result in certain other financial
obligations also becoming due and payable. The acceleration of our outstanding
indebtedness could result in our senior creditors enforcing their security.



| | Limitation on Enforcement of Rights
| | -----------------------------------

The indenture relating to the bonds is subject to the terms of an
intercreditor and security trust deed (the AES Intercreditor Deed). The
intercreditor agent is Bankers Trustee Company Limited, which is an affiliate
of Deutsche Bank, which is the agent under the bank facility entered into by
InPower Limited, the holder of the Eurobonds, with the Senior Lenders (see
Information on the Company  Financing). Decisions by the senior creditors
relating to remedies on the occurrence of an event of default are subject to
requirements as to intercreditor voting percentages which decline over time.
As a result of the intercreditor arrangements between the holders of the
Eurobonds and the related coupons and the Senior Lenders, the Senior Lenders
will be able to direct the actions of the holders of the Eurobonds and the
related coupons. Without the consent of the other senior creditors,
bondholders holding at least 25% of the then outstanding aggregate principal
amount of the bonds will be able to require acceleration of the maturity of the
bonds upon a payment or bankruptcy/insolvency event of default. However, for
other fundamental events of default, bondholders will only be able to require
acceleration without the consent of the other senior creditors after 90 days,
and for non-fundamental events of default, only after 180 days, following the
delivery of a notice from the intercreditor agent requesting remedies
instructions. As the aggregate outstanding amount owed to other senior
creditors decreases over time, the time limit after which bondholders may
accelerate their senior debt becomes shorter. In accordance with the
Standstill Agreement, the bondholders party thereto temporarily waived certain
events of default, which would have qualified as a bankruptcy/insolvency event
of default, a fundamental event of default. In accordance with the terms of
the Standstill Agreement and in relation to such temporarily waived events of
default, once the Standstill Agreement terminates, if bondholders elected to
accelerate, for purposes of determining the relevant period of time for
enforcement rights, the measuring date would be as if the Standstill Agreement
had never been executed. Unless a consensual restructuring has been put in
place before the Standstill Termination Date or the Standstill Termination Date
is extended, bondholders holding at least 25% of the aggregate principal amount
of the bonds will be in position to accelerate the maturity of the bonds at any
time after the Standstill Termination Date.

For the exercise of the enforcement of rights with respect to security,
senior creditors representing more than 50% of the aggregate outstanding amount
of senior debt may direct the enforcement action; provided, that after a
specified amount of time (180 days for a payment or bankruptcy/insolvency event
of default, 270 days for a fundamental event of default and 360 days for a
non-fundamental event of default), bondholders holding at least 25% of the then
outstanding aggregate principal amount of the bonds will be able to require the
intercreditor agent to take enforcement action without the consent of the other
senior creditors, if enforcement action with respect to the security has not
already been initiated. However, senior creditors representing more than 50%
of the aggregate outstanding amount of the senior debt will always have the
right to direct what type of enforcement action should be taken. Under certain
circumstances, counterparties to certain interest rate and currency swap
agreements may also have a right to vote. Bondholders will not be able to take
any enforcement action other than in accordance with the terms of the AES
Intercreditor Deed with, among others, the trustee for the holders of the
Eurobonds. Accordingly, the ability of any bondholder or group of bondholders
to take enforcement action may be significantly restricted as a result of the
terms of the AES Intercreditor Deed.

A description of our intercreditor arrangements can be found under
Description of Intercreditor Arrangements in our Registration Statement on
Form F-4 (File no. 333-13096) filed with U.S. Securities and Exchange
Commission on January 24, 2001 (the F-4 Registration Statement) which
description is hereby incorporated by reference herein.



| | Our required interest rate swaps in connection with the Bank Facility have
created additional costs and obligations.
| | --------------------------------------------------------------------------------------------------------------------

The Eurobonds require that we enter into hedges against interest rate
fluctuations on a two-year rolling basis in an amount equal to at least 50% of
the principal amount of the loans under the Bank Facility (as defined under
Information on the Company  Financing). The interest amounts due with
respect to the remaining principal are

9



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thus subject to fluctuations in the
London interbank offered rate (Libor). We currently have hedged £552.4 million
of our floating rate exposure as at December 31, 2002 and such hedging
arrangements satisfy the requirements under the Eurobonds. Our calculation of
the market value of these swap arrangements at March 31, 2003, if terminated
would require that we pay £88 million to our swap counterparties.



| | Fluctuations in currency exchange rates may affect our ability to meet our
payment obligations with respect to the bonds.
| | -------------------------------------------------------------------------------------------------------------------------

We have entered into currency hedging arrangements in order to hedge our
currency risk relating to making payments of interest and principal on the US
dollar bonds. While we believe that we have taken sufficient measures to hedge
our currency risk, if either we or any counterparty to a currency hedging
agreement exercises a right to or causes an early termination then we would be
exposed to risks related to fluctuations in the exchange rate from pounds
sterling into US dollars. If there is a significant movement in this exchange
rate that results in an increase in the pounds sterling cost of US dollars,
then this may have a material adverse effect on our ability to make payments on
the bonds and the other Finance Obligations and to make distributions to make
payments on the notes.

UK TAX RISKS RELATING TO THE STRUCTURE OF THE ACQUISITION



| | Our cash flows could be materially adversely affected if the tax treatment of
the Acquisition structure is different than we expect.
| | ------------------------------------------------------------------------------------------------------------------------------------

The financing of the Acquisition was structured to enhance the cash flows
available to service our financial obligations. The structure is premised on
the following key UK tax assumptions, which we refer to as the key tax
assumptions:



| |  |  | interest payable with respect to the Eurobonds and the bonds will
be deductible for UK tax purposes and the interest amounts can be
surrendered by way of group relief;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | payments on the notes, the bonds and the Eurobonds will not be
subject to UK withholding tax as a result of the notes, the bonds and
the Eurobonds being eurobonds listed on a recognized stock exchange
(within the meaning of Section 841 of the Income and Corporation Taxes
Act of 1988), or otherwise;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there will be no UK tax levied on AES Drax Acquisition Limited in
respect of the shares which it purchased from InPower Limited under
certain forward purchase arrangements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there will be no apportionment under the controlled foreign company
rules of any chargeable profits and creditable tax to us or AES Drax
Acquisition Limited in any accounting period of either company under UK
tax law; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Eurobonds will not be repaid early.
| | - |  | ---------------------------------------

The above is not a full list of the UK tax assumptions on which the
Acquisition structure is premised. If any of the above or other tax
assumptions prove to be incorrect, it could materially adversely affect our
current and future levels of cash flows.

On April 24, 2002 the UK Inland Revenue issued guidance on the application
of certain legislation relating to interest deductions. The guidance does not
have the force of law but, if it proves to be a correct interpretation of UK
law, the Inland Revenue could seek to challenge the interest deduction on the
Eurobonds. If such a challenge were to be successful, it could result in a
part of the interest on the Eurobonds not being deductible, which would impact
our tax charges.

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RISKS RELATING TO OPERATION OF THE DRAX POWER STATION

Dependence Upon Operations of the Drax Power Station



| | Our ability to make payments under our debt obligations is dependent
entirely on the successful operation by AES Drax of the Drax Power Station.
Although the Drax Power Station has generally operated as expected, market
and other factors have resulted in insufficient cash flows to meet all of
our obligations on our indebtedness.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to make any payments of principal, premium, if any, interest
and other amounts on our debt obligations depends entirely on the successful
operation of the Drax Power Station, as this is the only operating asset in our
group.

The initial assumptions on which the AES Drax companies relied when making
the original investment assumed that it would have the protection of its
long-term Hedging Contract with TXU Europe and that electricity prices would
remain at a certain level. Since we acquired the Drax Power Station
electricity prices have declined on average by approximately 40% and in
November 2002 our Hedging Contract with TXU Europe was terminated and the TXU
group entered into administration. These events have materially adversely
affected the operating performance of the Drax Power Station and is largely
responsible for our inability to generate cash flows sufficient to satisfy all
of the financial obligations incurred when the Drax Power Station was acquired.

The successful operation of the Drax Power Station is affected by, among
other things, general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Changes in these factors could
make it more expensive for us to operate the Drax Power Station, could require
additional capital expenditures or could reduce certain benefits currently
available to us. In addition to the other risks identified in this section, a
variety of other risks may affect the Drax Power Station, some of which are
beyond our control, including:



| |  |  | the Drax Power Station could perform below expected levels of output or efficiency;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | coal supply could be interrupted or unavailable;
| | - |  | ------------------------------------------------



| |  |  | operating costs could increase;
| | - |  | -------------------------------



| |  |  | delivery of electrical energy to and from the Drax Power Station by
and to The National Grid Company plc (NGC) could be disrupted;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | environmental problems could arise which could lead to fines,
curtailment or a shutdown of the Drax Power Station and new
environmental legislation or regulations could require an increase in
operating or capital expenditure or a constraint on the output of the
Drax Power Station;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the units and equipment could break down or fail in the future;
| | - |  | ---------------------------------------------------------------



| |  |  | the Drax Power Station could suffer labor disputes;
| | - |  | ---------------------------------------------------



| |  |  | the UK Government could change permit or governmental approval
requirements which could result in curtailment of the output of the
Drax Power Station or otherwise affect the operating environment of the
Drax Power Station;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | third parties could fail to perform their contractual obligations
to us, as in the case of TXU Europe;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | catastrophic events, such as fires, earthquakes, explosions,
floods, severe storms or other occurrences, could affect the Drax Power
Station, NGC or any of our principal suppliers of coal and other
inputs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | new energy technologies could make our plant obsolete or less competitive; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | two-shifting could lead to a higher rate of tube leaks and other outages.
| | - |  | -------------------------------------------------------------------------

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We cannot assure you that none of these events will happen.

Dependence Upon Performance by Third Parties



| | Our ability to generate cash flow to make any payments on our debt
obligations depends on unrelated third parties fulfilling their commitments
to us.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to make payments of principal, premium, if any, and interest
on our debt obligations, may be materially and adversely affected by the
performance of third parties, whom neither we nor any other AES Drax company
control, under commercial agreements to which AES Drax is a party. For
example, TXU Europe and TXU Europe Group, the parent of TXU Europe, failed to
perform their obligations under the Hedging Contract and the related guarantee,
respectively. The Hedging Contract was terminated and no alternative long-term
hedging arrangement exists. As a result, the Drax Power Station is currently
operating under its Electricity Contracting Policy (a policy agreed with its
senior creditors) as a purely merchant power plant, selling electricity under
trades covering periods of between 30 minutes and several months ahead and is
entitled to sell electricity forward for a period not exceeding December 31,
2003. However, the ability of the Drax Power Station to sell electricity
forward is constrained not only by the Electricity Contracting Policy but also
by the availability of credit to support trading in form of letters of credit
issued to AES Draxs trading counterparties.

Other third parties upon whom we depend include, among others:



| |  |  | Innogy plc (formerly National Power plc) under an IT Support
Services Agreement and Technical Support Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | UK Coal Limited (formerly RJB Mining (UK) Limited) under the
Agreement for the Sale of Coal;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | NGC under the Connection and Use of System Code, which relate to
the transmission of power to and from the Drax Power Station;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Signatories to the Balancing and Settlement Code; and
| | - |  | -----------------------------------------------------



| |  |  | Buxton Lime Industries Limited and its affiliates under the Limestone Supply Agreement.
| | - |  | ---------------------------------------------------------------------------------------

We refer to these commercial agreements, together with the other documents
and agreements relating to the Drax Power Station, as the project documents.

AES Drax may not be able to obtain alternative customers, supplies, goods
or services to cover non-performance of third parties if any of these third
parties:



| |  |  | claim that their project documents were not duly authorized by them;
| | - |  | --------------------------------------------------------------------



| |  |  | repudiate their obligations under their project documents;
| | - |  | ----------------------------------------------------------



| |  |  | fail to perform their contractual or other obligations;
| | - |  | -------------------------------------------------------



| |  |  | are excused from performing their obligations because we have
failed to perform our obligations or because an event has occurred
outside of our or their control; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | become unable to perform their obligations under their project
documents due to bankruptcy, insolvency or any similar occurrence.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

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RISKS RELATING TO SUPPLY



| | Following the expiry of the coal supply agreements, the Drax Power Station
may be adversely affected by our inability to obtain coal at reasonable
prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

AES Drax has entered into an agreement to obtain coal supplies from UK
Coal Limited (formerly RJB Mining (UK) Limited), covering approximately
two-thirds of its coal requirements from 2001 through to 2005, as well as
several small short-term supply contracts with other UK coal producers. As
part of the restructuring process, the strategy that AES Drax will employ in
relation to coal purchasing will be under consideration in conjunction with the
senior creditors.

Coal can be purchased on a long-term, medium-term or spot basis. Although
medium- to long-term contracts may offer a degree of security of supply to the
purchaser, historical figures indicate that spot buying is a more
cost-effective option. Conversely, although the international spot market for
coal is relatively large, there can be no assurance of availability of supply
if medium- to long-term contracts are not entered into. In either case,
because AES Drax relies on third-party suppliers for the delivery of coal and
it is exposed to the risk of non-performance by these parties.

There can be no assurance that fuel prices will not increase or that
increased fuel prices would not have a material adverse effect on AES Draxs
results of operations which could adversely affect our ability to meet our
Finance Obligations and our ability to make distributions sufficient to make
payments of principal, premium, if any, and interest on the notes.

Dependence on Local Resources



| | We may incur additional costs if we are unable to dispose of ash locally or
have access to the local water supply.
| | ------------------------------------------------------------------------------------------------------------------

Ash produced by the Drax Power Station is currently sold or deposited in
the Drax Power Stations Barlow ash disposal site. Although it is anticipated
that there will be sufficient capacity at the site until at least 2014, this
may change due to any increase in total electricity generation or any decrease
in ash sales. At that time, AES Drax will be required to obtain regulatory
approvals in order to expand the Barlow ash disposal site. If the ash is
required to be disposed of at other sites, AES Drax may incur additional costs.

The Drax Power Station currently abstracts a large portion of the water
used in its operations from the river Ouse and supplements the supply with
on-site groundwater. The UK Environment Agency has indicated that it may
reduce the allowable quantities of water to be abstracted under the AES Drax
license and may significantly increase license fees. During 2002 such fees
increased by approximately 4.8% and the same fees for 2003 are estimated to
increase by a further 4.1%. (See also Information on the
Company 
Environmental Matters and Regulation  Future Legislation.) If the lower
levels of abstraction are not sufficient to service the Drax Power Stations
needs, the plant may need to use recycled effluent part of the time, which is
likely to cause increased operating and maintenance costs. In addition,
capital expenditures may be necessary if the capacity of the effluent treatment
plant is not sufficient to treat the required quantities.

RISKS ARISING FROM THE MARKET, REGULATION AND DEREGULATION

Dependence on the Market for Electricity in England and Wales



| | AES Draxs ability to pay dividends and our ability to make payments under
our debt obligations depends on the Drax Power Stations ability to sell
power.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

The market for wholesale energy, installed capacity and ancillary services
in England and Wales is largely deregulated. Owners of electricity generation
facilities such as AES Drax are not guaranteed any specified rate of return on
their capital investments or recovery of their costs. Therefore, the revenue
generated will be dependent on electricity trading contracts, which AES Drax
may enter into from time to time with trading counterparties, which, as a
merchant plant, forms the bulk of the revenue of AES Drax. In addition, AES
Drax may sell its output in the

13



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balancing mechanism under NETA. Among the factors that will influence
prices AES Drax can obtain for its energy, all of which factors are beyond AES
Draxs control, are:



| |  |  | the impact of extended periods of low electricity prices due to
significant over-capacity of generation, increased competition and a
lack of incentive for companies to invest in constructing and
commissioning new power plant;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to enter into bilateral contracts for sales of energy or
installed capacity due to, among other things, availability of credit
support for trading;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the likelihood of more stringent environmental regulations in the
UK which could restrict the Drax Power Stations ability to operate or
affect its competitiveness relative to other power stations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decrease in natural gas prices relative to coal, which would make
gas-fired power stations more competitive with the Drax Power Station;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prevailing market prices for coal;
| | - |  | ----------------------------------



| |  |  | the extent of additional supplies of electric energy, installed
capacity and ancillary services from current competitors of the Drax
Power Station or new market entrants, including sales from foreign
electricity producers into the UK, and the development of new power
stations that may be able to produce energy less expensively than the
Drax Power Station;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of NETA on customers and competitors in the electricity
supply market and how certain competitors deal with excess supply or low
market prices. Certain competitors have already mothballed plant and
there has been a tightening of credit requirements following the demise
of Enron;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of the support provided by the UK government to British
Energy;
| | - |  | --------------------------------------------------------------------------



| |  |  | the extended operation of nuclear generating plants selling
electricity under NETA or otherwise and in adjacent markets beyond their
presently expected dates of decommissioning;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent of additional supplies of energy or energy-related
services resulting from an increase in physical transmission capacity in
the wholesale electricity trading market or otherwise;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | weather conditions prevailing in England and Wales from time to time;
| | - |  | ---------------------------------------------------------------------



| |  |  | the possibility of a reduction in the projected rate of growth in
electricity usage as a result of such factors as regional economic
conditions and the implementation of conservation programs; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | export power transmission constraints, which would limit the ability
of the Drax Power Station to sell energy, installed capacity and
ancillary services in adjacent markets in which prices may be higher
than otherwise.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to make payments of interest, principal and premium, if any,
on the bonds and to satisfy our obligations under the other Finance Obligations
will depend upon the future operating performance of the Drax Power Station
including the ability to implement our business strategy, including our
restructuring plan, which will be affected by the factors described herein and
by prevailing economic conditions and financial, business, regulatory and other
factors, many of which are beyond our control. As a result of a number of the
factors cited above the Drax Power Station has not been able to generate
sufficient cash to satisfy all of its Finance Obligations and is currently in
discussions with its senior creditors about a debt restructuring. See
Information on the Company  Significant Developments During 2002 and Recent
Developments and Operating and Financial Review and
Prospects  Liquidity and
Capital Resources.

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Changes in Electricity Regulation Applicable to England and Wales

In connection with the concerns of OFGEM, the principal regulator of the
electricity industry in England and Wales, which we sometimes refer to herein
as the Regulator,over the fairness and transparency of the pricing mechanism
for electricity in England and Wales, the UK Government replaced the pool
arrangements for the trading of wholesale electricity in England and Wales with
NETA, which was implemented on March 27, 2001. NETA was implemented to improve
market information and transparency, enhance liquidity and reduce the
opportunities for the exercise of market power by generators. There have been
numerous changes in the two years since NETA was implemented and energy
regulation continues to change and develop. Although NETA has impacted
electricity prices, NETA has not generally been considered to be the principal
underlying cause behind the decline in UK power prices; this is more likely due
to the over-capacity in the UK generation market, increased competition and
fragmentation of the market. As a result, we cannot assure you that further
development of NETA will not have a significant adverse effect on AES Draxs
revenues and its ability to pay dividends to its shareholders in amounts which
will enable us to meet our obligations under the Finance Obligations. Failure
to receive dividends indirectly from AES Drax will materially adversely affect
our ability to make any payments on the bonds.

NETA includes a Balancing and Settlement Code: if a generators output
does not match its contracted position, it is required to pay out-of-balance
charges and/or penalties. If AES Drax is unable physically to generate to its
contract position, the payment of such out-of-balance charges and/or penalties
could be significant.

The electricity industry in England and Wales is subject to extensive
legal and regulatory controls to ensure, among other things, that reasonable
demand for electricity is satisfied, that proper safety standards are
maintained and that competition is promoted in the electricity generation and
supply markets. It is expected that the regulators will continue to scrutinize
closely the electricity industry and may from time to time intervene in a
manner that may have a material impact on future revenues to be earned from the
Drax Power Station.



| | The operations of the Drax Power Station could be adversely affected if it
cannot comply with regulatory standards.
| | -------------------------------------------------------------------------------------------------------------------

The Drax Power Station is subject to extensive EU, national and local
statutory and regulatory standards, laws and regulations governing, among other
things, limits on discharges to air and water, noise emissions, the generation,
storage, handling and use of waste and health and safety standards. The Drax
Power Station is also required to maintain numerous permits and governmental
approvals for its operations. In the ordinary course of its business, the Drax
Power Station has pending applications for new, or renewals for existing,
permits and governmental approvals. Such pending applications relate to
increased limits on SO2 emissions and the ability to burn biomass in lieu of
coal and petcoke. If AES Drax fails to obtain, renew or maintain the permits
and governmental approvals required to operate the Drax Power Station or to
comply with, or to satisfy new conditions of, such standards, laws,
regulations, permits and governmental approvals, it could incur material costs
or liabilities, fines or penalties or other sanctions, including the limitation
or suspension of operations.

Because the laws and regulations affecting the Drax Power Station and AES
Drax are complex, constantly changing, possibly applied retroactively and
generally becoming increasingly stringent, changes in these laws and
regulations may cause increased compliance costs, the need for additional
capital expenditures or the reduction of certain benefits currently available
to the Drax Power Station. These laws and regulations could also expose AES
Drax to liabilities, including remediation liabilities, relating to previous
operations or for actions taken or conditions caused by third parties. Under
the terms of the project documents, AES Drax is responsible for paying all
costs resulting from changes in or enforcement of all statutes, regulations and
permits. AES Draxs failure to comply with any such statutes or regulations or
any change in the requirements of such statutes or regulations could result in
civil or criminal liability, the limitation or suspension of operations,
imposition of clean up liens, fines or penalties and large expenditures. We
cannot assure you that the Drax Power Station has been or will be at all times
in complete compliance with such standards, laws, regulations, permits and
governmental approvals or that AES Drax will not incur material costs,
liabilities, fines or penalties or suffer other sanctions, including the
limitation on or suspension of operations in the future. Further, we cannot
assure you that the costs of complying with current and future environmental
and health and safety standards, laws and regulations and any liabilities
arising from current or past operations will not adversely affect AES Draxs
business, results of operations or financial condition.

15



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Uncertainties Associated with Insurance



| | Although AES Drax is required to maintain insurance under the Finance
Obligations and the indenture for the bonds, loss proceeds might not be
sufficient to satisfy our obligations under the bonds and the Finance
Obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the original terms of the Finance Obligations, AES Drax was required
to maintain property, business interruption, earthquake, catastrophic and
general liability insurance for the Drax Power Station in accordance with the
minimum insurance requirements contained in such financing documents. AES Drax
was unable to obtain insurance in accordance with the minimum insurance
requirements under the bond indenture, therefore, following discussion with the
Senior Lenders, it was agreed that we should seek to renew the insurance on the
basis of material damage cover only initially and during the 6 month period
following November 27, 2002 we would examine the options for re-introducing
business interruption coverage. Accordingly, in November 2002, we entered into
a supplemental indenture to amend the minimum insurance requirements to reflect
the following:



| | (i) |  | A maximum deductible not to exceed £5 million each and every
loss and which shall not be subject to an annual aggregate
deductible.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | The minimum sum insured shall be $1 billion (£600 million) in
respect of Property (Material Damage) All Risks Insurance.
Business interruption insurance shall not be required for a period
of six months from November 27, 2002.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These limits became effective after the insurance consultant, Willis Limited,
confirmed that the minimum insurance requirements as set forth in the original
bond documentation are no longer available on commercially reasonable terms,
and the amendments proposed above are reasonable having regard for good
industry practice.

The premium under our current coverage is approximately £5.2 million per
annum (plus Insurance Premium Tax (IPT)), a reduction of approximately £6
million from our previous annual premium, in part due to the coverage not
including business interruption.

We cannot assure you that these insurance policies will be available in
the future on commercially reasonable terms or that the amounts for which AES
Drax is insured or which AES Drax receives under such insurance policies will
cover all losses. If AES Drax suffers an insurable loss, the insurance
proceeds received by it may not be sufficient to cover the business loss, to
repair and reinstate the affected facilities or to satisfy all the Finance
Obligations, including payments of principal, premium, if any, interest and
other amounts on the bonds. Given the historically cyclical nature of the
insurance market, while the insurance premiums originally forecast for the life
of the Finance Obligations were, in the view of the independent insurance
adviser, reasonable estimates in light of current market conditions, actual
premiums may be significantly higher than those projected.

RISKS RELATING TO CONTROL BY AES



| | We and the other AES Drax companies are controlled by The AES Corporation
(AES), which may have conflicting interests with respect to the operation of
the Drax Power Station.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We and AES Drax are indirect, wholly owned subsidiaries of AES. At the
time of the Acquisition, we and AES Drax received all of our equity funding for
our business and operations from AES. Since the Acquisition, the only other
sources of funding have been dividends flowing from AES Drax and the
intermediate holding companies. These funds are derived from internally
generated cash flows from the Drax Power Station. Although the cash flows
generated by the Drax Power Station have not been sufficient for us to satisfy
our financial obligations, AES has not been and is not obligated to provide any
loans or equity contributions to make up such shortfall and there can be no
assurance that AES would decide to provide any such loan or equity
contribution. In addition, although AES has committed to supporting our
restructuring proposal, AES Drax is now classified as held for sale in the AES
consolidated balance sheet due to the termination of the Hedging Contract and a
consequent after-tax impairment loss of approximately $893 million in the
fourth quarter of 2002.

16



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AESs existing plants in England and Wales, including AES Indian Queens
(Newquay, England), AES Fifoots Point (Newport, Wales)  currently in
administrative receivership  and AES Barry (Barry, Wales), together with Medway
Power Limited (Medway, England), which is operated by an AES affiliate and 25%
owned by AES, participate in the electricity trading markets in England and
Wales under NETA. Each AES facility is a separate business entity, and there
is no assurance that such facilities will not compete with each other in the
wholesale electricity trading market following the implementation of NETA.
Fifoots has been put up for sale by its administrative receiver, KPMG.

17



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Item 5. Operating and Financial Review and Prospects

AES Drax Holdings Limited

Given that we are a holding company with no operations of our own, the
following discussion relates to the operating results of AES Drax, the owner of
the Drax Power Station. AES Drax will provide distributions, group relief
payments and/or intercompany loans to our indirect subsidiary, AESD, to pay
principal, premium, if any, and interest on our debt obligations.

General

The following discussion contains forward-looking statements regarding AES
Drax and its operations. These statements are based on the current plans and
expectations of AES Drax and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statement. Important factors that
could cause actual results to differ include risks set forth in Key
Information  Risk Factors.

The economics of any electric power facility are primarily a function of
the price of electricity, the quantity of electricity which is produced and
sold and the level of operating expenses incurred. Generally, the greater the
percentage of time a unit is operating, the greater the revenues associated
with that unit.

During 2000 AES Draxs business activities concentrated on selling
electricity generated by the Drax Power Station into the Pool. The Pool
remained in place until March 27, 2001 when NETA was implemented. See
Information on the Company  Business Overview  Changes to the Electricity
Market in England and Wales. The market for wholesale electric energy and
energy services has now been largely deregulated as a result of implementation
of NETA compared with the prior Pool arrangements. In a competitive market
where operation is based on bids made by owners of generating assets in the
region, AES Drax expects that owners of lower marginal cost facilities will bid
lower prices, and therefore these facilities will be in operation more often
than higher marginal cost facilities.

The Drax Power Station is capable of operating at high availability due to
the high quality of its design and construction under the direction of the
CEGB. Despite the fire involving Unit 3 on December 27, 1999 and the
rotor-winding fault reported on Unit 2 in the quarter ended September 30, 2000
weighted average (based on capacity) availability for 2000 was approximately
82.5%. For the year ended December 31, 2001, the station had a weighted
average (based on capacity) equivalent availability factor of 85.8%. For the
year ended December 31, 2002, the station had a weighted average (based on
capacity) equivalent availability factor of 81.90%. This reduction in
availability compared to 2001 was due primarily to the increased levels of
two-shifting caused by the manner in which TXU Europe called power under the
Hedging Contract prior to its termination and the increased levels of forced
outages which resulted from this regime. As we have moved back into baseload
operation through the first quarter of 2003, both the plant availability and
forced outage rates have improved. For the three months ended March 31, 2003,
the Drax Power Stations weighted average (based on capacity) equivalent
availability factor was 91.10% and its forced outage rate was 2.2%, compared to
88.70% and 11.26%, respectively, for the three months ended March 31, 2002.



| | Termination of the Hedging Contract
| | -----------------------------------

The Hedging Contract was terminated on November 18, 2002 following the
failure by TXU Europe to pay for the power supplied by AES Drax to TXU Europe
in respect of the month of October and part of the month of November (up to the
date of termination) and TXU Europes failure to provide a letter of credit as
required by the terms of the Hedging Contract. The termination of the Hedging
Contract has had a significant impact upon the results of AES Drax for the year
ended December 31, 2002 and will affect the future results of AES Drax as we
migrate to becoming a fully-merchant plant. In the financial statements to
December 31, 2002 we have recorded a provision of £136.8 million and a
contingency in respect of the potential Capacity Damages payable under the
termination of the contract of approximately £266 million.

18



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The £136.8 million provision consists of four distinct elements:



| |  |  | The revenues from TXU Europe under the Hedging Contract consisted
of two components, a capacity fee (which was essentially fixed) and a
variable call payment, which was based upon the volumes of power sold
by AES Drax to TXU Europe. Under the Hedging Contract, the cashflows
received in respect of the capacity fees were shaped, so that the
payments were higher through the first and fourth quarter of each
calendar year. However, the accounting policy that we adopted was to
smooth the receipt of the capacity fees and treat them as a fixed
amount received each month. In 2002, the capacity fees payable were
approximately £18.8 million pounds per month.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | However, as at the date of termination, our balance sheet included
an amount of accrued income in respect of the TXU Europe capacity
fees, as the cash receipts in the period to November 18, 2002 were
approximately £55.6 million less than the revenues reflected on
the income statement. Therefore, we created a provision for this
accrued income during the quarter ended December 31, 2002. The
change between this figure and the £70.9 million originally
estimated in the September 30, 2002 6-K filing is due to an
adjustment to take account of the movement in this accrual between
September 30, 2002 and the date of termination of the Hedging
Contract.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prior to the commencement of the Hedging Contract in April 2000,
AES Drax paid TXU Europe a £10 million fee pursuant to the Hedging
Contract in connection with the structuring of the transactions
contemplated by the Agreement:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The accounting treatment was to amortize this fee over the life of
the Hedging Contract, a period of approximately 15 years. As at
the date of termination of the Hedging Contract, a balance of £8.3
million remained. Therefore, due to the termination of the
Hedging Contract we wrote-off this balance during the quarter
ended December 31, 2002.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In addition, AES Drax paid £1.2 million of professional fees
relating to the renegotiating of the Hedging Contract due to the
introduction of NETA and its conversion to the new trading regulations.
The accounting treatment adopted was to amortize these costs over the
remaining life of the Hedging Contract, a period of approximately 13
years. As at the date of termination, a balance of £1.1 million
remained. Therefore, due to the termination of the Hedging Contract,
we wrote-off this balance during the quarter ended December 31, 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A provision in respect of the power sold to TXU Europe under the
Hedging Contract during October and in the period to November 18, 2002,
when the contract was terminated. TXU Europe have not paid us for this
power and a provision of approximately £71.8 million (excluding VAT)
was made during the quarter ended December 31, 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

We prepare our financial statements in accordance with accounting
principles generally accepted in the U.K. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. The significant accounting policies which we believe are most
critical to understanding and evaluating our reported financial results include
revenue recognition, impairment of long-lived assets, deferred finance costs
and derivatives.

AES Draxs critical accounting policies are:



| |  |  | Revenue recognition
| | - |  | -------------------



| |  |  | Revenues from the sale of electricity are recorded based upon
output delivered and capacity provided at rates specified under
contract terms or prevailing market rates. Revenues in respect of
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



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| |  |  | the Hedging Contract were recorded on an accruals basis, which
meant that although the capacity payments payable under the
contract were higher in the winter months and lower in the summer
months, we record them as being received in equal monthly
instalments.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill/Impairment of long-lived assets
| | - |  | ----------------------------------------



| |  |  | We evaluate the impairment of our long-lived assets based on
analysis performed under UK GAAP. Under UK GAAP, goodwill arising
on the acquisition of subsidiaries represents the excess of the
fair value of the consideration given over the fair value of the
identifiable net assets acquired. Goodwill is capitalized and
amortized over twenty years. Under US GAAP, the Acquisition has
been treated as an acquisition of assets and accordingly the
entire purchase price, including certain liabilities assumed, has
been allocated to tangible fixed assets and depreciated over the
estimated useful lives of the assets, being thirty five years.
Under UK GAAP, we have recorded an impairment loss measured by
reference to the value in use of the assets. Under US GAAP, an
impairment loss on the tangible fixed assets is recorded only if
the assets are not recoverable from their undiscounted cash flows.
No impairment had been recognized under US GAAP.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Given the ongoing nature of the Standstill Arrangements, and that
no conclusion has been reached upon a restructuring proposal, it
is not appropriate to treat the assets owned by AES Drax Holdings
Limited as held for sale. This uncertainty will only be resolved
following the completion of the discussions with our senior
creditors, or absent a restructuring of our indebtedness, the
potential enforcement of security arrangements under intercreditor
arrangements if certain conditions are satisfied. Therefore,
under US GAAP, no impairment is disclosed in our financial
statements of AES Drax Holdings or our subsidiaries for the year
ended December 31, 2002. See the reconciliation between UK and US
GAAP, contained in note 28 to our financial statements included in
this annual report.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under US GAAP, Financial Accounting Standard (FAS) No. 144
states that a long-lived asset classified as held for sale is held
on the balance sheet at the lower of its carrying amount or fair
value. As a result, our ultimate parent company, AES recorded an
after-tax impairment loss of approximately $893 million in the
fourth quarter of 2002 relating to AES Drax and AES Drax was
classified as held for sale in AESs consolidated balance sheet.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred finance costs
| | - |  | ----------------------



| |  |  | Financing costs are deferred and amortized over the related
financing period using the effective interest method of
amortization. Deferred financing costs are shown net of
accumulated amortization of £13.5 million and £8.9 million as of
December 31, 2002 and December 31, 2001, respectively and have
been deducted from the associated loan balances.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Derivatives
| | - |  | -----------



| |  |  | Investments or financial derivative instruments accounted for as
hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as
hedges at the inception of the contract. Gains and losses on
hedges of existing assets or liabilities are included in the
carrying amounts of those assets or liabilities and are ultimately
recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of
carrying amounts when the hedged transaction occurs. Commercial
activities denominated in foreign currencies are recorded in
sterling at actual exchange rates as at the date of the
transaction or at the contracted rate if the transaction is
covered by a forward foreign exchange contract or other hedging
instrument. Monetary assets and liabilities denominated in foreign
currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated
hedged rate.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Pension costs
| | - |  | -------------



| |  |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service
costs are recognised immediately in the profit and loss account if the
benefits have vested. If the benefits have not vested immediately, the
costs are recognised over the period until vesting occurs. The interest
cost and the expected return on assets are shown as a net amount of other
finance costs or credits adjacent to interest. Actuarial gains and losses
are recognised immediately in the statement of total recognised gains and
losses.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered
funds. Pension scheme assets are measured at fair value and liabilities
are measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially
and are updated at each balance sheet date. The resulting defined benefit
asset or liability, net of the related deferred tax, is presented
separately after other net assets on the face of the balance sheet.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

AES Draxs results of operations through the majority of the period
covered by this report relied on payments made to it by TXU Europe under the
Hedging Contract, on revenues from the sale of electric energy, capacity and
other related products, its ability to successfully operate under NETA, its
trading strategy and on the level of its operating expenses.

As a result of termination of the Hedging Contract, the following results
are not necessarily indicative of results we expect to achieve in future
periods, as we only began operating as a fully merchant plant as of November
19, 2002.

The financial statements for the AES Drax companies are prepared in
accordance with UK GAAP, which differs in certain significant respects from US
GAAP. For a discussion of these differences and a reconciliation between UK
and US GAAP, see note 27 to our financial statements included in this annual
report.



| | Year ended December 31, 2002 compared to the year ended December 31, 2001
| | -------------------------------------------------------------------------

Revenues for the year ended December 31, 2002 totaled £524.8 million
(2001: £586.1 million). The decrease in revenues for 2002, compared to the
same period in 2001 is due principally to the termination of the Hedging
Contract in mid-November (see Information on the Company-Significant
Developments During 2002 and Recent Developments) at which time we stopped
selling power to TXU Europe and began selling electricity into the market. The
revenues in the fourth quarter of 2002 include approximately £71.8 million of
revenues for which we have not received payment from TXU Europe and for which
we have established an offsetting provision as described below. As we only
began to shift to a pure merchant plant at this time and we were in
negotiations with certain of our senior creditors regarding standstill
arrangements and a new trading strategy and electricity contracting policy,
these developments as well as arrangements with counterparties regarding credit
enhancement also impacted our ability to capture certain merchant sales. The
decrease in revenues is due to the loss of the capacity payment payable by TXU
Europe under the Hedging Contract, which would have contributed a further £18.8
million of revenues in December 2002 and the overall decline in capture price
from an average of £29.16/MWh to £24.40/MWh seen at the end of 2002. Most of
this decline is due to the transition from the Hedging Contract, which had
accounted for approximately 60% of the revenues generated by the Drax Power
Station and was terminated on November 18, 2002, to becoming a fully merchant
plant, where we were capturing only market prices averaging around £16.92/MWh
during the last part of the year.

The 10.4% decrease in revenues for the year ended December 31, 2002
compared with the previous year, are once again primarily due to the reduction
in prices over the last twelve months and a 12.6% decrease in generation from
21,314GWh in 2001 to 18,627GWh. This decrease primarily reflects both the
impact of increased competition and over-capacity within the UK generation
market. During the period the Hedging Contract was in place, it also

21



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reflects the increased proportion of our sales which were made under the
Hedging Contract prior to termination, increasing the average capture price
from £27.50/GWh to £28.18/GWh, an increase of 2.5% over 2001 which indicates
the benefit the Hedging Contract had provided AES Drax as market prices
declined.

Prices throughout 2002 for Annual Baseload Contracts have fallen from
around £18.45/MWh in December 2001 to £16.92/MWh, by December 31, 2002. The
following graph shows the trend in such baseload prices over the year ended
December 31, 2002:

Annual Baseload Prices

(ANNUAL BASELOAD PRICES - LINE GRAPH)

During the first quarter of 2003, prices increased sharply through January
when we successfully hedged some of our output. We believe that this price
peak was caused by uncertainty in the market place following the administration
of the TXU group and the issues faced by British Energy at that time. The
table above also shows the trend in baseload prices since January 1, 2003.

Cost of sales for the year ended December 31, 2002 were £219.5 million,
compared to £267.2 million for the year ended December 31, 2001. The year
ended December 31, 2002 shows a 17.9% reduction in fuel costs, reflecting the
12.8% reduction in generation for 2002 compared to 2001 and a reduction in our
fuel costs resulting from the change from the Innogy coal contract, to the one
with UK Coal, which occurred during 2001.

The cost of fuel remained in line with expectations due to the transition
to supply contracts with all our major coal suppliers. However, during the
last quarter of 2002, in response to the developments relating to the
termination of the Hedging Contract, the payment terms for UK Coal were
temporarily revised as AES Drax paid them weekly in arrears. This arrangement
was partially off-set by a discount of GBP LIBOR plus 3% for the earlier
payment.

Gross profit (revenues less cost of goods sold) was £305.4 million for the
year ended December 31, 2002 (2001: £318.9 million). This gives a gross margin
for the twelve months of approximately 58.2% (2001: 54.4%). The improvement in
the gross margin for the year ended December 31, 2002 is mostly due to a slight
improvement in the average selling price (an increase of 2.5%), an increase in
the proportion of our electricity that was sold to TXU Europe under the Hedging
Contract for the period ended November 18, 2002, and the reduced fuel costs of
approximately £0.70/MWh from contracts with our major suppliers. The increase
in the average selling price was solely due to the terms of the Hedging
Contract and we do not expect that we will be able to capture such selling
prices in the future absent significant changes in the market.

22



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Administrative expenses for the year ended December 31, 2002 totaled
£899.9 million (2001: £171.0 million). This total for 2002 includes an
exceptional item relating to the termination of the Hedging Contract and an
impairment of fixed assets, as a result of the termination of the Hedging
Contract totaling £501.8 million.

The component parts of this exceptional item can be summarized as follows:

TXU-related write-offs and provision
    
    £136.8 millionImpairment of fixed assets
    
    £579.0 millionTotal
    
    £715.8 million


A break-down and explanation of the £136.8 million has been provided above
(see  Results of Operations), although the constituent parts are summarized
below:

Write-off of accrued income
    
    £  55.6 millionWrite-off of structuring fee
    
    £    8.3 millionWrite-off of professional fees
    
    £    1.1 millionProvision for power sold, but not paid for
    
    £  71.8 millionTotal
    
    £136.8 million


The impairment of fixed assets is in line with the requirements of FRS 11
- The Impairment of Fixed Assets and Goodwill, under UK GAAP. This standard
tries to ensure that fixed assets and goodwill are recorded at no more than
their recoverable amount. It considers how financial statements should treat
any impairment loss which becomes apparent and tries to ensure that sufficient
disclosure is given to enable users of financial statements to understand the
impact of impairment.

In our case, we have compared the book value of our fixed assets (both
tangible and intangible) totaling approximately £1,297 million against the net
present value (NPV) of the estimated future discounted cashflows of the
business. The discount rate used has been reviewed for reasonableness, and we
are satisfied that a post-tax discount rate of 7.9% is appropriate. The
cashflows used for this exercise were sourced from our Restructuring Plan (see
Information on the Company-Significant Developments During 2002 and Recent
Developments). The result of this impairment test is that the book value of
the fixed assets exceeds the NPV of the cashflows by approximately £579
million. Therefore, we are required to record a write-off against our fixed
assets of this amount, which is charged initially against our Intangible
Assets, which comprise of the goodwill that arose upon acquisition of Drax
Power Station by AES (see Notes 4 and 8 to the financial statements of the
Company included in this annual report) and subsequently against the companys
Tangible Assets.

This write-off reduces the Intangible Assets from a book value of £549.6
million to £Nil, and the Tangible Assets from £1,112.6 million to £1,083.1
million.

The normal administrative expenses consist primarily of fixed
operations, maintenance and other variable costs and the expenditure was
broadly in line with our expectations. The expenses for the year ended
December 31, 2002 totaled £184.1 million (2001: £171.0 million).

The additional £13.1 million of administrative expenses for the year ended
December 31, 2002 compared to 2001, can be attributed to the following factors:



| |  |  | The increase in our insurance premiums following renewal in
November 2001, when our premiums increased from approximately £3.7
million per annum to £7.5 million per annum. This significant increase
in the premiums payable was due to the reasons noted above. This added
approximately £5.9 million to our insurance expense for the year ended
December 31, 2002 compared to the same period in 2001 and insurance
premiums paid totaled £10.9 million for the year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | The amortization of an acquisition adjustment for the fuel contract
with Innogy plc was completed when the contract expired in September
2001. This adjustment had a beneficial effect on our amortization
expense during the first half of 2001; so as this is no longer
available, this has increased our amortization expense for the year
ended December 31, 2002 by £17.2 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The significant amount of expenditure on professional and legal
fees in 2002, which totaled £7.8 million compared to £1.8 million in
2001.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our total Use of System charges also increased in 2002, from
approximately £31 million per annum in 2001 to £34 million in 2002,
which reflects the fact that NETA was only introduced at the end of
March 2001 and 2002 will include a full year of charges.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The above increases were also off-set by reductions in other areas:



| |  |  | The Enron write-off that occurred in 2001 of £3.3 million.
| | - |  | ----------------------------------------------------------



| |  |  | The deferral of the major outage on Unit 2, which reduced
expenditure by £5.5 million and other savings on maintenance that
totaled £5.1 million. Expenditure has been deferred as a result of
lower generation levels and through our own cost-cutting initiatives.
Our commitments under the Hedging Contract prior to its termination and
the running regime of the plant, has meant that it has been difficult
to release plant (bring it out of service) as often as maintenance
routines would dictate. Therefore some maintenance expenditure has
been deferred and rescheduled until such time as the plant can be
released.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries are approximately £1 million lower than the same period in
2001, with reduced staffing levels and encouraging people to transfer
onto contracts where their overtime is built into their basic salary.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We achieved a reduction in our rates expense for 2002, resulting
from previous unplanned outages at the plant, which totaled
approximately £2.1 million for the year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other reductions and savings in administrative expenses generated a
further reduction against 2001 of £2.0 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------

Interest receivable and other income totaled £23.5 million for the year
ended December 31, 2002. The charges were £14.9 million for the year 2001,
representing an increase of approximately 58% increase for the year 2002. This
income represents not only the interest accrued on the various bank balances
held by AES Drax, but also reflects the benefits accrued from the Harich Swap.
The 58% increase in interest income for 2002 compared to 2001, is attributable
to an increase in the Harich Swap income resulting from the deferral of the
£30.8m coupon payment, plus the additional benefit that accrued under the
Harich Swap in 2002 due to the lower interest rates. GBP 6-month LIBOR has
decreased from 5.9% in January 2001 to 4.3% in December 2002.

Interest payable and similar charges were £180.1 million for the year
ended December 31, 2002. The charges totaled £170.8 million for the year 2001,
representing an increase of 5.4% respectively, in 2002. The interest expense
comprises two major components:



| | (i) |  | The bank debt, which has a principal under UK GAAP of
£1.37 billion as at December 31, 2002, accruing interest at
8.9% per annum. This principal is calculated by deducting
the proceeds of the issuance of the bonds from the value of
the Eurobonds issued at financial close (£1.725 billion).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | The bonds, which have a principal of £400 million, of
which half accrues interest at 10.41% and the other half at
9.07%.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------

The additional interest expense charged in addition to the above, reflects
the impact of the various interest rate and foreign currency swaps that AES
Drax has in place, plus the costs of the letter of credit used to fund the debt
service reserve accounts with a minimum balance, which we refer to as the
Required Balance, required pursuant to

24



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the terms of the Eurobonds. The interest rate swaps are currently
increasing our interest expense as interest rates (GBP 6 month LIBOR) have
continued to decline to a low of 3.9900% as at December 31, 2002 (2001:
4.32875%).

The level of interest expense reflects the significant borrowings we made
to finance the acquisition of the Drax Power Station. The average rate of
interest applicable to our financial obligations is approximately 8.9% (2001:
8.9%).

The December 2002 interest payment on both the Bank Facility and the bonds
was made on schedule when we remitted approximately £28.1m to InPower Limited
for payment of interest to the Senior Lenders and £9m and $16m to the
bondholders. However, we did not pay the portion of the Eurobond coupon
corresponding to the principal due on the bank debt that was due on December
31, 2002 which totaled £30.8 million. This deferral of the payment of
principal was agreed as part of the Standstill Arrangements (see Information
on the Company-Significant Developments During 2002 and Recent Developments).

Due to the impact of the exceptional administrative expenses, the loss on
ordinary activities before taxation for the year ended December 31, 2002 was
approximately £751.1 million (2001: Loss of £8.0 million) on which we received
a corporation tax credit of £0.5 million (2001: Charge of £10.9 million). This
equates to an effective tax rate of 0.09% (2001: 137%), even though UK
corporation tax rate is currently 30%. The reason for the credit in 2002 is
primarily due to the impact of the exceptional administrative expenses, which
have resulted in zero taxable profits for 2002 and the £0.5m credit represents
the movement in the deferred tax provision for the year.



| | Year ended December 31, 2001 compared to the year ended December 31, 2000
| | -------------------------------------------------------------------------

Revenues for the year ended December 31, 2001 were £586.1 million (2000:
£622.8 million).

The 5.9% decrease in revenues for the year ended December 31, 2001
compared with the previous year, are primarily due to the reduction in prices
over the last twelve months and a 3.4% decrease in generation from 22,074 GWh
in 2000 to 21,314 GWh. Although prices decreased over the 12 months to
December 2001, the impact on our revenues was not as significant, if you
compare total revenues to generation sold, as our average price capture for the
year only declined by 2.5% from £28.21 in 2000 to £27.50 in 2001.

Prices throughout 2001 for Annual Baseload Contracts fell from around
£19.10/MWh at the commencement of NETA in March 2001 to £18.45/MWh, by December
31, 2001. The following graph shows the trend in such baseload prices over the
year ended December 31, 2001:

25



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Annual Baseload Prices

(ANNUAL BASELOAD PRICES - LINE GRAPH)

There are a number of factors that contributed to these price peaks and troughs:



| |  |  | In the period prior to NETA go-live there was a great deal of uncertainty about how NETA would impact upon the
market-place, so there was a sharp decline in prices through Quarter 1.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prices quickly recovered following the introduction of NETA, though we believe that this had more to do with an uncertainty
about participants bidding strategies and the general fragmentation of the market following the significant changes in
ownership of plant that had occurred.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through Quarter 3 prices remained reasonably flat, staying generally in the range of £19.00 to £19.50/MWh.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | In Quarter 4, there was an unexpected change when the traditional seasonal peak in Winter 2002 did not materialize and
prices dropped from £19.00 to £18.00/MWh, before recovering to around £18.50/MWh at the close of the year. This was when
the impact of the over-capacity that exists within the UK generation market became most apparent.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although there were significant fluctuations in market prices during 2000,
there was not the same decline as experienced during 2001. However, the impact
of such fluctuations on AES Draxs earnings were still hedged via the Hedging
Contract, which covered approximately 60% of our revenues during this period.

Cost of sales for the year ended December 31, 2001 were £267.2 million,
compared to £278.2 million. The year ended December 31, 2001 shows only a 4.1%
reduction in fuel costs, reflecting the 2.4% reduction in generation for 2001
compared to 2000 and a reduction in our fuel costs resulting from the change
from the Innogy Coal Contract, to the one with UK Coal. The impact of the
reduction is also reflected in AES Draxs load factor, which decreased from
66.5% for the year ended December 31, 2000 to 64.4% for the year ended December
31, 2001.

The cost of fuel remained in line with expectations due to the transition
from the supply contract with Innogy (formerly National Power) to one with UK
Coal (formerly RJB Mining). Therefore the reduced fuel costs were in line with
our expectations.

Administrative expenses for the year ended 31 December, 2001 were £171.0
million (2000: £166.1 million). These expenses consisted primarily of fixed
operations, maintenance and other variable costs and the expenditure

26



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was broadly in line with our expectations. The increased level of expenditure in
the fourth quarter of 2001 was due to the following:



| |  |  | For the last quarter of 2001, BSUoS charges totaled £1.8m of
additional costs over 2000.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | The write-off of a bad debt of £3.3 million with Enron, which
collapsed during the fourth quarter of 2001. This write-off included
not only our exposure to them for energy sales but also for some coal
trades. We believe this was actually a good result for AES Drax as at
one stage, Enron comprised almost 50% of our trading activity under
NETA bilateral contracts. However, we were able to react quickly to
the changes that took place in the market in the run-up to Enrons
demise and reduced our exposure to a more manageable level.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in our insurance premiums following renewal in
November, when our premiums increased from approximately £3.7 million
per annum to £7.5 million per annum. This significant increase in the
premiums payable was due to:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The impact of September 11th on the insurance market as a whole.
| | - |  | ----------------------------------------------------------------



| |  |  | The withdrawal of certain insurers from the power sector.
| | - |  | ---------------------------------------------------------



| |  |  | Insufficient capacity available in the insurance market at the time of renewal.
| | - |  | -------------------------------------------------------------------------------



| |  |  | AES Draxs claims history during the first year of the policy.
| | - |  | --------------------------------------------------------------



| | This added approximately £1 million to our insurance expense for
the quarter ended December 31, 2001 compared to the same period in
2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The balance of the £8m increase in administrative expenses for the
fourth quarter of 2001, compared to 2000, was incurred on additional
amortization expense. The amortization of an acquisition adjustment
for the fuel contract with Innogy (formerly National Power) was
completed when the contract expired in September 2001. This increased
our amortization expense for the fourth quarter of 2001 by £6.9
million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The additional £5 million of administrative expenses for the year ended
December 31, 2001 compared to 2000 was primarily due to the BSUoS charges, the
Enron bad-debt and insurance. BSUoS charges are paid daily and for 2001 they
totaled approximately £8.2 million.

Interest payable and similar charges totaled £170.8 million for the year
ended December 31, 2001. The charges were £156.3 million for the year 2000,
representing an increase of approximately 9% respectively, in 2001.

The additional interest expense charged over the rates carried by the
indebtedness reflects the impact of the various interest rate and foreign
currency swaps that AES Drax has in place, plus the costs of the letter of
credit used to fund the Required Balance under the Bank Facility. The interest
rate swaps increased our interest expense as interest rates (GBP 6 month LIBOR)
had fallen to an unexpected low of 4.13625% as at December 31, 2001.

Our interest expense increased from 2000 to 2001 as a result of the
refinancing in August 2000, where we replaced a portion of the Eurobonds with
the bonds, which incur a higher rate of interest (9.07%  10.41% vs 8.86%). A
portion of this increase was off-set by the bridging loan, which was still in
place during the first quarter of 2000 incurring interest at approximately 9%
per annum. The average rate of interest applicable to our financial
obligations in 2001 was approximately 8.9% (2000: 8.9%).

The December 2001 interest payment on both the Eurobonds and the bonds was
made on schedule when we remitted approximately £55m to the banks and £9m and
$16m to the bondholders.

Interest receivable and other income totaled £14.9 million for the year
ended December 31, 2001. The charges were £11.9 million for the year 2000,
representing a increase of approximately 20% for the year 2001. This income
represented not only the interest accrued on the various bank balances held by
AES Drax, but also reflected the

27



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benefits accrued from the Harich Swap. The
increase in our interest income was due to the reclassification of the certain
interest expense that we netted-off against interest income in 2000. The
expenditure was reclassified was mainly the costs of the letters of credit and
associated fees.

Gross profit (revenues less cost of goods sold) £318.9 million (2000:
£344.6 million) for the year ended December 31, 2001. Operating profit from
continuing operations £147.9 million (2000: £178.4 million) for the year ended
December 31, 2001.

This resulted in a gross margin of approximately 54.4% (2000: 55.3%) for
the year ended December 31, 2001. The loss on ordinary activities before
taxation for the year ended December 31, 2001 was approximately £8 million
(2000: Profit of £34 million) on which we incurred corporation tax of £10.9
million (2000: £22.4 million). This equates to an effective tax rate of 137%
(2000: 66%), even though UK corporation tax rate is currently 30%. The reason
for the increased tax charge was primarily due to the significant value of the
disallowable items in our tax computation that are added back when calculating
the taxable profits in 2001 and 2000, and the impact of the deferred tax
charges.

Liquidity and Capital Resources

Following the termination of the Hedging Contract and the appointment of
administrators for TXU Europe and TXU Europe Group on November 18 and 19, 2002,
respectively, AES Drax has traded on a fully merchant basis to generate
revenue. AES Drax did not receive payment for sales made to TXU Europe in
October and the first-half of November 2002 prior to termination and the
receipt and timing of such payment, together with amounts relating to AES
Draxs claim for Capacity Damages, will now be subject to the administration
process relating to TXU Europe and TXU Europe Group. In addition to adopting a
fully merchant strategy since termination, AES Drax immediately following
termination entered into an agreement with NGC to supply power for the first
five days post-termination, which provided the benefit of advanced payments
ahead of the normal Grid Trade Master Agreement settlement date (tenth business
day of the following month). AES Drax initially took steps to restrict cash
outflows by consuming stocks of coal and hence reducing coal purchases,
agreeing rescheduled payments with UK Coal, negotiating the deferment of
payments for rates and VAT, agreeing a refund of on-account corporation tax
payments and generally instituting rigorous creditor payment approval
processes.

Our ability to enter into any new medium electricity trading term
contracts was dependent on the availability of additional credit support.
Under the terms of the Standstill Agreement, AES Drax has utilized £30 million
of funds under the Group Account Agreement to create a new account called the
Collateral Financing Account. This account has been used to provide the cash
collateral required by one of the Senior Lenders, National Westminster Bank, to
issue letters of credit necessary to provide the credit support required by
both our trading counterparties and Elexon who administer NETA.

At present, we have entered into firm sales for approximately 55% of our
available capacity for the period from April 15, 2003 to September 30, 2003.
We are hoping to achieve a load factor of approximately 50% through the third
quarter of 2003 and an average of approximately 75% for the whole of 2003. Our
firm sales for Summer 2003 should provide an average capture price of between
£15 and £16 per MWh.

As part of our restructuring proposal we are proposing to utilise any
funds received from the administration of the TXU group to prepay a portion of
the senior debt. In addition, we have also outlined a debt conversion to
reduce leverage. The combination of both proposals, would allow the business
to meet our projected debt service cashflows using the funds generated from our
proposed trading strategy for the plant. These proposals have been submitted
to the senior creditors, and the Senior Lenders and bondholders are currently
considering these proposals.

As part of the Standstill Arrangements, the Group Account Agreement was
amended to create two new bank accounts:



| |  |  | Collateral Financing Account this account contained the £30
million of funds intended to provide collateral for credit support and
to meet any working capital requirements. Approximately £24.7 million
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | has been transferred into the Cash Cover Account, to provide collateral
for the letters of credit issued to our trading counterparties for
credit support.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In addition, there is a further requirement within the revised
Group Account Agreement whereby, any excess cash above a minimum
balance of £25 million for any continuous period of 30 days is
swept from the Proceeds Account into the Collateral Financing
Account. At March 31, 2003 approximately £21.2 million has been
transferred into the Collateral Financing Account. Therefore, the
balance on the Collateral Financing Account as at March 31, 2003
was approximately £26.7 million.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash Cover Account this account holds the funds which provide
cash collateral for the issuance of letters of credit by the National
Westminster Bank.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Group Account Agreement, there are other key accounts that
contain the cash utilised for the operation of the business, or held for the
purposes of debt service. As at March 31, 2003 the balances on the following
accounts were:



| |  |  | Senior Debt Service Reserve Account |  | £45.2 million
| | - |  | ----------------------------------- |  | -------------



| |  |  | Insurance Reserve Account |  | £0.02 million
| | - |  | ------------------------- |  | -------------

The £15 million of funds previously held in this account were transferred
to the Colleral Financing Account, under the revised Group Account Agreement.



| |  |  | Proceeds Account |  | £54.1 million
| | - |  | ---------------- |  | -------------

AES Drax expects to incur approximately £6.8 million in capital
expenditures in the year 2003. During 2002 we spent £5.2 million (2001: £6.1
million, 2000: £12 million) on various capital projects, the largest of which
in 2002 was the replacement of motors on PA Fans, with variable frequency
drives which totaled £1.2 million. Future capital commitments shall be met
from the working capital of AES Drax. In addition to capital requirements
associated with the ownership and operation of the Drax Power Station, AES Drax
will have significant fixed charge obligations in the future, principally
relating to the fixed operating expenses incurred in connection with operating
the station.

Compliance with environmental standards will continue to be reflected in
AES Draxs capital expenditures and operating costs. Based on the current
status of regulatory requirements, AES Drax does not anticipate that any
capital expenditures or operating expenses associated with complying with
current environmental laws and regulations will have a material effect on its
results of operations or its financial condition other than the planned
expenditures for completing the fitting of low NOx burners to Units 2 and 3.
See Information on the Company  Business Overview  Environmental Matters and
Regulation  Integrated Pollution Control.

Certain of the forward-looking debt service cover ratios as of June 30,
2002 were below the level required to permit our subsidiary AES Drax Holdings
Limited to make any distributions of available cash to us at that time.
Further, AES Drax Holdings was not permitted to make any distributions to Drax
Energy to permit Drax Energy to make the required interest payments of
$11,500,000 and £7,593,750 to its noteholders due on February 28, 2003.

The payment of interest on the notes in February 2002 was made, in part,
from funds in the notes debt service reserve accounts held at AES Drax Energy.
We were not permitted to make distributions to AES Drax Energy to permit
interest due on the notes to be paid on August 30, 2002. The AES Corporation,
however, made a contribution to AES Drax Energy which together with amounts
then held in the notes debt service reserve fund was sufficient to make the
payments then due. As of February 2003, the note debt service reserve accounts
held a balance of $22,142.02 and £40,643.91, resulting in a significant
shortfall. As a result of the foregoing, AES Drax Energy did not have
sufficient funds to cover the required interest payments due in February 2003
on the notes in full.

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Such payment failure constituted an event of default under the notes
subject to a 15-day grace period, although pursuant to intercreditor
arrangements the noteholders have no enforcements rights until 90 days
following delivery of certain required notices under the intercreditor
arrangements. No such notices under the intercreditor arrangements have been
delivered.

The Bonds

Proceeds from the issuance of the bonds were used to prepay a portion of
the fixed coupons on the Eurobonds (described below). A full description of
the terms and conditions of the bonds, common security arrangements with the
Eurobonds and intercreditor arrangements, is included under Description of the
Bonds in our F-4 Registration Statement, which description is hereby
incorporated by reference herein.

The Eurobonds

The Eurobonds are senior secured debt obligations of AES Drax Holdings
with an aggregate principal amount of £1,725 million due 2015. The Eurobonds
provide for fixed semi-annual interest payments at a per annum rate of 8.86%.
The Eurobonds are not guaranteed by AES, and the sole source of funds for
payments due under the Eurobonds (together with payments due under the bonds)
are distributions and payments in respect of surrender of tax relief and
intercompany loans received by us from our subsidiaries.

The terms and conditions of the Eurobonds contain covenants requiring each
of the companies subject to its terms, including us and our subsidiaries, to:



| |  |  | provide regular financial and other information;
| | - |  | ------------------------------------------------



| |  |  | comply with material project agreements; and
| | - |  | --------------------------------------------



| |  |  | operate and maintain the Drax Power Station in accordance with agreed standards.
| | - |  | --------------------------------------------------------------------------------

The terms and conditions of the Eurobonds also contain covenants limiting
the ability of each of the companies subject to the terms thereof to:



| |  |  | incur additional debt;
| | - |  | ----------------------



| |  |  | pledge assets;
| | - |  | --------------



| |  |  | enter into sale-leaseback transactions;
| | - |  | ---------------------------------------



| |  |  | make loans other than certain permitted intercompany loans;
| | - |  | -----------------------------------------------------------



| |  |  | make capital expenditures;
| | - |  | --------------------------



| |  |  | enter into mergers or sell assets;
| | - |  | ----------------------------------



| |  |  | change lines of business;
| | - |  | -------------------------



| |  |  | make distributions or other payments with respect to its share capital;
| | - |  | -----------------------------------------------------------------------



| |  |  | open or maintain any accounts other than in accordance with certain account agreements; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | enter into, amend or terminate any Acquisition agreement, project
document or any of the agreements relating to the Subordinated
Obligations or the notes.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the terms and conditions of the Eurobonds restrict the making
of distributions to make payments on the notes and distributions to AES unless
AES Drax complies with certain debt service coverage and other financial
ratios. See  Limits on Distributions under our Finance Obligations.

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The terms and conditions of the Eurobonds contain the following events of default:



| |  |  | failure to make payments when due;
| | - |  | ----------------------------------



| |  |  | failure to comply with certain covenants;
| | - |  | -----------------------------------------



| |  |  | any material misrepresentation;
| | - |  | -------------------------------



| |  |  | the default under other debt of any relevant company or, in certain cases, under the Hedging Contract;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the occurrence of a bankruptcy or insolvency proceeding involving
any relevant party or any party to a material project document;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | any cessation of all or a substantial portion of its business by a
relevant company or any party to a material project document which
cessation by such party would be likely to have a material adverse
effect;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | breach by any AES Drax company of a project document or any breach
by a third party to a material project document that is likely to have
a material adverse effect on the ability of the holders to be repaid
under the Eurobonds or of the Senior Lenders to be repaid under the
Bank Facility;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to maintain all material permits;
| | - |  | -----------------------------------------



| |  |  | effectiveness of the collateral securing the loans;
| | - |  | ---------------------------------------------------



| |  |  | abandonment or nationalization of the Drax Power Station;
| | - |  | ---------------------------------------------------------



| |  |  | the cancellation, suspension or cessation of required insurance coverage;
| | - |  | -------------------------------------------------------------------------



| |  |  | loss of title to material assets or the occurrence of extended and material force majeure;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | an inability to carry on business or to make payments when they
come due as a result of changes in the regulatory regime;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | default in the satisfaction of legal judgments;
| | - |  | -----------------------------------------------



| |  |  | failure to satisfy minimum loan life and historic debt service coverage ratios; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | change of control events relating to the AES Drax companies or InPower Limited.
| | - |  | -------------------------------------------------------------------------------

We were also required to make customary representations and warranties on
behalf of ourselves and the other relevant companies. As a result of
developments during the second half of 2002, including, in particular, the
termination of the Hedging Contract, a number of defaults and events of default
have occurred under the Eurobonds. These defaults or events of default have
been permanently or temporarily waived under the Standstill Agreement.

The Bank Facility

The Bank Facilityis a senior secured credit facility comprised of term
loans from the Senior Lenders. The net proceeds of the bonds used to prepay
the fixed coupons on the Eurobonds were used by InPower Limited to repay
approximately £370 million of the Bank Facility. As of March 31, 2003,
the aggregate principal amount outstanding under the Bank Facility is £842.6
million. InPower Limiteds obligations under the Bank Facility are secured by
security granted over the Eurobonds from InPower Limited and indirectly by
BondPower Limited as assignee of the principal of the Eurobonds. The
obligations under the Eurobonds have the benefit of security from our
subsidiaries and certain other AES Drax companies, which is the same security
available for the bonds and rank pari passuwith the bonds. Therefore, if the
Senior Lenders enforce the Bank Facility, subject to the provisions of the AES
Intercreditor Deed with the trustee for the bondholders, they will have the
right to control the enforcement of the security package granted in respect of
the Eurobonds. In addition the Banks have the ability upon enforcement to sell
the Eurobonds (or any part of them) to third parties.

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Pricing on the loans under the Bank Facility is based on the London
interbank offered rate (Libor), reset periodically, plus a margin ranging from
1.50% to 3.0%, depending on the ratings that Moodys, Standard & Poors and
Duff & Phelps assign the loans from time to time. Currently the loans are
rated Caa2 by Moodys, D by Standard & Poors, and CC by Fitch (formerly Duff &
Phelps) resulting in an interest rate currently of Libor + 3.00% (effective
from January 1, 2003). These ratings reflect downgrades by all three rating
agencies, as a reaction to the termination of the Hedging Contract and the
signing of the Standstill Agreement.

Scheduled amortization of the Bank Facility loans consist of payments of a
percentage of the principal of the loans, together with accrued interest, in
six-month intervals which commenced June 30, 2000. Scheduled repayments range
under the Bank Facility from 0.3% to 5.15% of the current aggregate principal
amount of £842.6 million. A principal installment of £30,770,000 (2001:
£22,625,000) was due on December 31, 2002 and the final installment due on June
30, 2015 will be £40,725,000, or 4.8% of the £842.6 million aggregate principal
amount of the loans. The principal payment due on December 31, 2002 was
deferred in accordance with the terms of the Standstill Agreement and the
restructuring proposal would make additional changes to the existing
amortization schedule.

In addition, we have an obligation to prepay the coupons on the Eurobonds
and to offer to repurchase the bonds if we receive proceeds from (1) certain
payments from the UK Government to compensate for any loss of property rights
or (2) certain insurance awards. These proceeds shall be applied pro rata
among the bondholders and the holders of the coupons of the Eurobonds, taking
into account any net payment under the AES Drax Swap. If any bondholder does
not exercise its rights pursuant to the offer to purchase, the pro rataportion
of the payment allocated to such bondholder shall be applied in repayment of
the coupons on the Eurobonds at the net present value of the coupon amount,
taking into account any net payment under the AES Drax Swap. InPower Limited
has agreed to use any such payments received from a prepayment of the coupons
on the Eurobonds to prepay loans made under the Bank Facility.

The Bank Facility has covenants, events of defaults and representations
that match those of the Eurobonds, and InPower Limited and BondPower Limited
have agreed that the exercise of their rights and remedies under the Eurobonds
will be at the direction of the security trustee for the Senior Lenders. The
existence of any event of default would permit the Senior Lenders to accelerate
the loans. If the Senior Lenders chose to accelerate the loans, the loans
would become immediately due and payable. As the Eurobonds have been pledged
to the Senior Lenders as security for the Bank Facility, the Senior Lenders,
subject to the terms and conditions of the AES Intercreditor Deed, would have
the option to control the enforcement of the Eurobonds.



| | Repayment of the Bank Facility and Eurobonds
| | --------------------------------------------

Repayment of principal and interest on the loans made under the Bank Facility can be funded only through:



| |  |  | payment of the fixed rate coupons on the Eurobonds by us to InPower Limited; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | payments (if any) by AES Drax under a swap with Harich (which is
back-to-back with a swap between Harich and InPower Limited) (the
Harich Swap).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

Any such payments shall be made on a pari passubasis with payments due on
the bonds and are subject to the cashflow waterfall.

Application of Principal Payments Received on the Eurobonds

Under the terms of a subscription agreement between InPower Limited and
us, InPower Limited has agreed to subscribe for preference shares issued by us
on the maturity date of the Eurobonds. InPower Limited is required to apply
all principal payments under the Eurobonds, once all amounts outstanding on the
Bank Facility have been paid in full, to that subscription. InPower Limited
sold to AES Drax Acquisition Limited the right to receive the preference shares
when they are issued in exchange for an up front £425 million payment, which
InPower Limited used in part to fund its acquisition of the Eurobonds.

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Swaps with Harich to facilitate InPower Limited Payments

Payments of principal and interest on the loans by InPower Limited under
the Bank Facility are serviced by corresponding payments made by us with
respect to the Eurobonds. However, while InPower Limited receives fixed rate
interest payments with respect to the Eurobonds, it is required to pay floating
rate interest on the loans under the Bank Facility. In addition, the scheduled
payments of principal and interest under the Eurobonds do not match scheduled
debt service on the loans. As originally modeled, it was likely that, in the
early years, amounts payable on the Eurobonds would be insufficient to pay debt
service on the loans and in the latter years such amounts would exceed debt
service.

In order to balance its payments and receipts, InPower Limited has entered
into a fixed to floating rate swap with Harich, which we refer to as the
InPower Swap, which will cover interest payments on the aggregate outstanding
principal amount of the loans under the Bank Facility, and Harich has entered
into an almost identical fixed to floating swap with AES Drax, which we refer
to as the AES Drax Swap, the only difference being that AES Drax will make an
additional payment to Harich to finance Harichs expenses and tax liabilities.
The intended effect of the swaps is to ensure that interest payments with
respect to the Eurobonds will be adjusted to match required debt service under
the Bank Facility.

AES Drax is required under the terms of the Eurobonds to hedge a minimum
of 50% of its interest exposure on a two-year rolling basis. It currently has
hedged £623 million of its floating rate exposure on a two-year basis and has
implemented a hedging program intended to address the requirements under the
Eurobonds.

Mechanics of Swaps

Under the InPower Swap, InPower Limited receives interest calculated on
the basis of a floating rate from Harich, matching the interest on the
outstanding principal amount of the loans under the Bank Facility and pays a
series of fixed amounts to Harich. The AES Drax Swap is on identical terms
except as described above. It is anticipated that in the early years InPower
Limited will be the net recipient of payments under the swaps and in the later
years AES Drax will be the net recipient. The intended effect is to ensure
that interest payments with respect to the Eurobonds combined with the Swaps
match required debt service payments under the Bank Facility.

Harichs only business is to enter into the swaps described in this
section, and its obligations to pay under one swap will be conditional on
receipt of the corresponding payment under the other swap.

Impact of Mandatory Prepayments

The Bank Facility imposes mandatory prepayments on InPower Limited in
certain circumstances, including if there is any voluntary prepayment of the
Eurobonds. Prepayments under the Bank Facility and the Eurobonds will affect
the amounts to be paid under the swaps described above. In the event there is
a prepayment under the Bank Facility and the Eurobonds, the swaps with Harich
either will be adjusted or an additional swap will be entered into (including
the notional amount on which interest is paid and the fixed interest payments
and any amounts then owing under the swap transactions) to take account of the
prepayment in order to ensure that at such date, payments received with respect
to the Eurobonds, as adjusted by the swaps, will be approximately equal to (but
not less than) the debt service obligations with respect to the Bank Facility.
Any such adjustment may involve payment of an adjustment amount by either
InPower Limited or AES Drax, which is intended to balance the effect of
payments on the Eurobonds.

AES Drax has sought to mitigate any possible exposure to fluctuations in
the current market price for electricity by entering into contracts relating to
the sale of electricity.

Limits on Distributions under our Finance Obligations

As typical for a project financing such as the Drax Power Station, all
cash receipts are paid into specified accounts and any cash outflows from AES
Drax are required to pass through a series of accounts, referred to as the
Cashflow Waterfall, established pursuant to the terms of a group account
agreement entered into pursuant to the

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##### 



terms of the Eurobonds, the Bank
Facility and the bonds, which we refer to as the Group Account Agreement. In
addition, distributions and other payments to shareholders from which payments
on the notes were to be made were only permitted if the financial ratio tests
in the Eurobonds, the Bank Facility and the bonds were met. Cash would not be
released from the project accounts in the event we failed to meet the required
debt service cover ratios. See Tests and Financial Ratios under the Finance
Obligations and Description of the Bonds  Restrictions on Distributions
incorporated by reference herein to the description Description of Bonds set
forth in the F-4 Registration Statement. Since June 30, 2002 no distributions
or other payments to shareholders have been or may currently be made. This is
due to the failure to satisfy certain ratio tests, the termination of the
Hedging Contract and the existence of certain defaults and events of default
under the Eurobonds, the Bank Facility and the bonds. The terms of the
Cashflow Waterfall and the Group Account Agreement are expected to be
reconsidered as part of the debt restructuring proposal being considered by our
senior creditors.

Exposure Account

AES Drax is required to maintain an exposure account to cover certain
balancing charges that may arise under the balancing and settlement code to be
introduced under NETA and certain contractual damages. These charges would
arise if the Drax Power Station was unable to generate sufficient electrical
capacity to satisfy its obligations under contracts or if it over-supplies
power.

AES Drax will be obligated to make deposits into the exposure account if
the projected net exposure to balancing charges and similar expenses for the
six month period following the date on which the projected net exposure is
calculated (generally on each interest payment date) is greater than £15
million, in an amount sufficient to cover such projected exposure.

Funding of Debt Service Reserve Accounts

Pursuant to the Group Account Agreement, AES Drax had agreed to maintain a
debt service reserve account with a minimum balance, to be funded from
cashflow, the Required Balance, which initially was equal to the greater of (a)
the aggregate of six months interest payments on the Eurobonds; six months
interest and principal on the bonds and the net payment by AES Drax under the
AES Drax Swap relating to the next interest payment date and (b) £50 million.

AES Drax was permitted to substitute a letter of credit (or other demand
instrument) with a renewable maximum maturity of six months (in an agreed form
and from a bank with a rating by Standard & Poors or Moodys of at least A and
A2, respectively (if rated by both)) in lieu of cash in the debt service
reserve account. Such letter of credit (or other demand instrument) was
required to have a face value equal to the amount necessary to maintain the
minimum balance plus an amount equivalent to interest which would have been
earned on such amount in the debt service reserve account. Letters of credit
were utilized to fund the Required Balance due at December 31, 2002.

The Required Balance was funded via a letter of credit from Canadian
Imperial Bank of Commerce (CIBC) totaling £52.25 million and the balance of the
£104.5 million, being provided from the Bank of America, backed by the AES Corp
revolver. However, as part of the Standstill Arrangements a demand was made on
the Standstill Date under the DSRA Letter of Credit issued by CIBC for the
maximum amount available of £52.25 million.

These funds were used in part to fund the Collateral Financing Account and
to pay the debt service payments that were due on December 31, 2002 to the
Senior Lenders. On the Standstill Date, £52.25 million was transferred
from CIBC into the Debt Service Reserve Account. On the same day, all of
the funds held in the Holding Account, which was a further £58.7 million were
also transferred into the Debt Service Reserve Account. On December 11, 2002
£15 million was transferred from the Debt Service Reserve Account to the
Collateral Financing Account. Finally, on December 30, 2002, £53.4 million was
transferred from the Debt Service Reserve Account to the Proceeds Account and
used to make the debt service payments of:



| |  |  | Eurobond interest payment to Inpower Limited
| | - |  | --------------------------------------------

34



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##### 





| |  |  | amounts due in respect of the Harich Swap to Inpower Limited
| | - |  | ------------------------------------------------------------



| |  |  | payments due to the interest rate swap and currency swap counterparties
| | - |  | -----------------------------------------------------------------------



| |  |  | payment of the bond interest payments due on December 31, 2002
| | - |  | --------------------------------------------------------------

Under the Standstill Agreement, the Security Trustee may also make a
further demand against the remaining letter of credit of up to £15.4 million.
However, no such demand has yet been received. It is envisaged that as part of
the restructuring process that all of the funds available, £52.25 million,
under the remaining letter of credit with Bank of America will be called by the
Security Trustee.

We anticipate that the arrangements for the funding of debt service
reserve accounts will be revised as part of any restructuring with the senior
creditors, although there can be no assurance that any such restructuring will
be achieved.

Key UK Tax Assumptions

The financing of the Acquisition was structured to enhance the cash flows
available to service the Finance Obligations and to make distributions
sufficient to pay principal and interest on the notes as well as make
distributions to AES. The structure is premised on the following key tax
assumptions, which we refer to as the key tax assumptions:



| |  |  | interest payable with respect to the Eurobonds and the bonds will
be deductible for UK tax purposes and the interest amounts can be
surrendered by way of group relief;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | payments on the notes, the bonds and the Eurobonds will not be
subject to UK withholding tax as a result of the notes, the bonds and
the Eurobonds being eurobonds listed on a recognized stock exchange
(within the meaning of Section 841 of the Income and Corporation Taxes
Act 1988), or otherwise;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there will be no UK tax levied on AES Drax Acquisition Limited in
respect of the shares which it purchased from InPower Limited under the
forward purchase agreement referred to above under Information on the
Company-Financing (or of the right to these shares);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there will be no apportionment under the controlled foreign company
rules of any chargeable profits and creditable tax to us or AES Drax
Acquisition Limited in any accounting period of either company under UK
tax law; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Eurobonds will not be repaid early.
| | - |  | ---------------------------------------

The above is not a full list of the UK tax assumptions on which the
acquisition structure is premised. If any of the above or other tax
assumptions prove to be incorrect, it could materially adversely affect our
levels of cash flows available to service our debt obligations.

Cash Flows

Operations

Under the Standstill Arrangement, our Senior Lenders and certain
bondholders have agreed to certain amendments and waivers to their respective
financing documents which permitted AES Drax to have access to £30 million of
funds previously unavailable under the financing documentation, £15 million of
which was released from the insurance reserve account, set up previously as
part of the bank waiver/insurance renewal process in the first half of 2002.
These funds, subject to certain consent rights of the steering committee of the
Senior Lenders and the ad hoccommittee of bondholders, are available to
provide credit support to electricity counterparties and suppliers and for
working capital needs.

35



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##### 



A portion of the coupon due on December 31, 2002 on the Eurobonds,
equivalent to the interest due on the Bank Facility, and the interest on the
bonds were paid on the due date from our debt service reserve accounts. The
Debt Service Reserve Account for payments on the Eurobonds and bonds was fully
funded, and we obtained the necessary waivers to permit such funds to be used
to make payments due at the year-end. The requisite amendments and waivers
necessary were reflected in the terms of the Standstill Agreement. In
addition, the Eurobond Trustee agreed not to enforce security during the
standstill period notwithstanding that the portion of the coupon due to the
holders of the Eurobonds on December 31, 2002 equivalent to the principal
payment due under the Bank Facility was not made.

The downgrades of our debt increased the interest payable on the
Eurobonds, where the margin above GBP LIBOR has now increased to 300 basis
points.

Based on cashflow forecasts prepared on the basis of the measures being
implemented and the additional credit support and working capital that has been
made available as part of the Standstill Agreement, as well as AES Draxs
implementation of an electricity trading strategy as a fully merchant plant,
AES Drax believes that it will have adequate cashflow to satisfy its
operational needs through December 2003. However, AES Drax does not have
sufficient funds to satisfy its debt obligations and is currently in
discussions with its Senior Lenders and an ad hoc committee of bondholders
regarding the restructuring of these obligations. AES Drax does not expect to
have the ability to make distribution to permit payments on the notes and is
not currently engaged in any formal discussions regarding the notes. No
assurance can be given that any successful restructuring will be achieved and
that any restructuring will be agreed or implemented prior to the Standstill
Termination Date, or that such period would be extended.

The table below shows our estimates of the debt service payable (interest
and principal) under the current terms of our Finance Obligations on each
source of debt over the next five years. The cash flow from the operations of
the Drax Power Station is not currently sufficient to meet these obligations
and if a consensual restructuring was to be agreed, we would expect these
amounts to change as a result of the ongoing consideration of our restructuring
proposal by certain of our senior creditors.

2003
    
    2004
    
    2005
    
    2006
    
    2007(£ million)
    
    (£ million)
    
    (£ million)
    
    (£ million)
    
    (£ million)Eurobonds
    
    
    111.6
    
    
    
    112.1
    
    
    
    102.8
    
    
    
    103.5
    
    
    
    103.5Bonds
    
    
    36.5
    
    
    
    36.5
    
    
    
    36.5
    
    
    
    36.5
    
    
    
    36.5Notes
    
    
    31.6
    
    
    
    31.6
    
    
    
    31.6
    
    
    
    31.6
    
    
    
    31.6


As of December 31, 2002, our known contractual obligations are as follows:

Payment due by period (amounts in millions)Less thanContractual obligations
    
    Total
    
    1 year
    
    1 to 3 years
    
    3 to 5 years
    
    Over 5 yearsIndebtedness
    
    £
    2,125.0
    
    
    £
    
    
    
    £
    
    
    
    £
    
    
    
    £
    2,125.0Purchase Obligations
    
    £
    0.6
    
    
    £
    0.2
    
    
    £
    0.3
    
    
    £
    0.1
    
    
    £
    Total
    
    £
    2,125.6
    
    
    £
    0.2
    
    
    £
    0.3
    
    
    £
    0.1
    
    
    £
    2,125.0


Under UK GAAP, there is no amortization of the Eurobonds, the bonds or the
notes disclosed on the balance sheet and the coupon payments made by us in
respect of the Eurobonds are matched to the amortization profile of the Bank
Facility, via the Harich Swap. The cash payments made are shown in the table
above which summarises the debt service payable in cash terms. Following the
loss of the Hedging Contract, we undertook a full review of the carrying value
of all assets, which has resulted in a write-off in our fourth quarter results
(see Results of Operations).

36



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##### 



Investing Activities

We engaged in no material investing activities for the quarter ended
December 31 2002, other than the capital expenditure that was agreed as part of
our annual budget. During the year, we have spent £5,224,000 (2001:
£6,119,000, 2000: £11,993,000) on various capital projects, including most
significantly, the replacement of motors on PA fans in 2002, the installation
of low NOx burners on Unit 1 in 2001 and replacement of the generator rotor on
Unit 3 in 2000.

Financing Activities

We engaged in no material financing activities for the quarter ended
December 31, 2002.

On December 31, 2002 AES Drax Holdings used cash from the senior debt
service reserve account to pay the interest due on the bonds and a portion of
the coupon on the Eurobonds equal to the interest due under the Bank Facility.

Trend Information

See Information on the Company  Significant Developments During 2002 and
Recent Developments.

Item 8. Financial Information

Consolidated Statements and Other Financial Information

The Consolidated Financial Statements are included in Item 17 of this
Annual Report.

Legal Proceedings

TXU Administration

On November 19, 2002, TXU Europe and TXU Europe Group were placed into
administration. The TXU group companies creditors committees have been
holding regular meetings, by conference call and in person, since the
administrators were appointed. AES Drax is serving on the creditors committee
for both TXU Europe and TXU Europe Group.

In order to receive information from the administrators in its role as a
member of the creditors committees, AES Drax has been required to sign
confidentiality undertakings in relation to all information it receives in such
capacity. AES Drax has submitted a claim for capacity damages of approximately
£266 million as well as a claim of approximately £85 million for unpaid
electricity in the TXU administration.

Judicial review of transmission losses decision

AES Drax Power Limited has submitted an application seeking permission for
a judicial review of the decision by the Gas and Electricity Markets Authority
to implement a zonal transmission losses scheme in England and Wales.
Transmission losses are inevitable, with the majority of electricity lost
through a function of current flowing through transportation equipment and
causing heating of that equipment; these losses increase with distance. Most
generation is located in the North of England and Scotland while most demand is
in the South. This means
electricity is transported long distances from generators to users, which
increases losses. Introducing a zonal transmission losses scheme will mean
that power stations in the North, such as AES Drax, and customers in the South
will suffer a loss. AES Drax has been working with other generators and
convened a consortium to take the matter forward.

British Energy

AES Drax Power Limited has lodged an application with the European Courts
to annul the state aid decision taken by the European Commission in favor of
British Energy. In November 2002, the European Commission

37



---



##### 



authorized a £650
million loan that had been granted by UK Government to aid British Energy
following the collapse in wholesale power prices. Central to the case made by
AES Drax is that the European Commission failed to take into account the impact
of the State aid on competitors. The application was filed with the European
Court of First Instance in Luxembourg, the European Unions second highest
court, in April 2003. The European Commission is currently studying the UK
Governments long-term restructuring plan for British Energy, which was
submitted to Brussels in March 2003.

General

AES Drax Holdings Limited is not party to any legal proceedings other than
in the ordinary course of business, the ultimate resolution of which is not
expected to have a material adverse effect on the financial position or
profitability of AES Drax Holdings Limited or the other AES Drax companies.

Significant Changes

Except as described under Information on the Company  Significant
Developments During 2002 and Recent Developments, no significant change has
occurred since December 31, 2002, the date of the financial statements included
in this annual report.

38



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##### 



PART III

Item 17. Financial Statements

This appendix to the annual report contains the audited financial statements of the following companies:

PageA
    
    DRAX HOLDINGS LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    A1 - 37B
    
    DRAX POWER LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    B1 - 28C
    
    DRAX LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    C1 - 30D
    
    DRAX ELECTRIC LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    D1 - 29E
    
    AES DRAX ACQUISITION LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    E1 - 35F
    
    AES DRAX FINANCING LIMITEDReport and Financial Statements for the year ended 31 December 2002
    
    
    F1 - 8


39



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##### 



Item 19. Exhibits

The following is a list of exhibits
filed as part of this annual report:

Exhibit no.
    
    Document1.1
    
    
    Articles of Association of AES Drax Holdings Limited*1.2
    
    
    Memorandum of Association of AES Drax Holdings Limited*1.3
    
    
    Articles of Association of AES Drax Power Limited*1.4
    
    
    Memorandum of Association of AES Drax Power Limited*1.5
    
    
    Articles of Association of AES Drax Limited*1.6
    
    
    Memorandum of Association of AES Drax Limited*1.7
    
    
    Articles of Association of AES Drax Acquisition Limited*1.8
    
    
    Memorandum of Association of AES Drax Acquisition Limited*1.9
    
    
    Articles of Association of AES Drax Electric Limited*1.10
    
    
    Memorandum of Association of AES Drax Electric Limited*1.11
    
    
    Articles of Association of AES Drax Financing Limited*1.12
    
    
    Memorandum of Association of AES Drax Financing Limited*2.1
    
    
    Indenture, dated as of August 2, 2000 among AES Drax Holdings Limited, AES Drax
Power Limited, AES Drax Limited, AES Drax Acquisition Limited, AES Drax Electric
Limited, AES Drax Financing Limited and The Bank of New York, as Trustee, attaching
the form of notation of guarantee*2.2
    
    
    AES English Debenture originally dated November 30, 1999, as amended and restated on April 10, 2000*2.3
    
    
    Supplemental AES English Debenture dated August 2, 2000*2.4
    
    
    Share Mortgage over shares in AES Drax Limited created by AES Drax Electric Limited
and AES Drax Financing Limited, dated November 30, 1999, as amended and restated on
April 10, 2000 and further amended and restated on August 2, 2000*
Supplemental to the Share Mortgage over shares in AES Drax Limited2.5
    
    
    Share Mortgage over shares in AES Drax Holdings Limited created by AES Drax
Acquisition Limited, dated November 30, 1999, as amended and restated on April 10,
2000 and further amended and restated on August 2, 2000*
Share Mortgage over shares in AES Drax Electric Limited created by AES Drax Holdings2.6
    
    
    AES Intercreditor and Security Trust Deed originally dated November 30, 1999, as
restated on April 10, 2000 and as further amended and restated on August 2, 2000*2.7
    
    
    Supplemental Indenture dated as of December 12, 2002****4.1
    
    
    Share Sale and Purchase Agreement, dated as of August 18, 1999 between AES Drax
Limited and National Power plc*4.2
    
    
    Third Supplemental Bond Trust Deed dated as of August 2, 2000 attaching the form of
the modified and restated Bond Trust Deed dated as of November 30, 1999*4.3
    
    
    Assignment of Rights to be Allocated Preference Shares dated November 30, 1999*4.4
    
    
    Perpetual Cumulative Preference Share Subscription Agreement dated November 30, 1999*4.5
    
    
    Standstill Agreement****7.1
    
    
    Computation of Ratio of Earnings to Fixed Charges**8.1
    
    
    Subsidiaries of AES Drax Holdings Limited*10.1
    
    
    AES Drax Holdings Limited Registration Statement on Form F-4 (file no. 333-13096)
filed on January 24, 2001***12.1
    
    
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**13.1
    
    
    Certifications pursuant to 18 United States Code 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002**


---

|*    |  | Incorporated by reference to the AES Drax Holdings Limited Registration
Statement (file no. 333-13096) on Form F-4 filed on January 24, 2001.                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   |  | Filed herewith.                                                                                                                                                                                                                           
|***  |  | Incorporated by reference only to the extent of those certain references in
this Annual Report which specifically identify sections of the AES Drax
Holdings Limited F-4 Registration Statement as being incorporated by reference
herein.
|**** |  | Incorporated by reference to the AES Drax Holdings Limited periodic
report on Form 6-K filed on December 13, 2002.                                                                                                                        

40



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##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has authorized the undersigned to sign
this annual report on its behalf.

DRAX HOLDINGS LIMITEDDate:  November 10, 2003
    
    By:
    
    /s/  Gordon Horsfield
Gordon Horsfield
DirectorDate:  November 10, 2003
    
    By:
    
    /s/  Gerald Wingrove
Gerald Wingrove
Director


41



---



##### 



APPENDIX









































42



---



##### 



Company Registration No. 92144











DRAX HOLDINGS LIMITED
(formerly AES Drax Holdings Limited)



Financial Statements
31 December 2002
(As restated, see note 28)







A-1



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent Auditors Report
    
    
    A-3Consolidated Profit and Loss Account
    
    
    A-4Statement of Total Recognised Gains and Losses
    
    
    A-4Consolidated Balance Sheet
    
    
    A-5Consolidated Cash Flow Statement
    
    
    A-6Notes to the Accounts
    
    
    A-7


A-2



---



##### 



INDEPENDENT AUDITORS REPORT TO THE DIRECTORS OF DRAX HOLDINGS LIMITED
(formerly AES Drax Holdings Limited)

We have audited the accompanying balance sheets of Drax Holdings Limited
(formerly AES Drax Holdings Limited) as of 31 December 2002 and 2001, and the
related consolidated profit and loss accounts, statements of total recognised
gains and losses and cash flows for each of the three years in the period ended
31 December 2002. These financial statements are the responsibility of the
companys directors. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at 31 December 2002 and 2001,
and the results of its operations and its cash flows for each of the three
years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in note 27.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in note 28, the financial statements have been restated.

Deloitte & Touche LLP
Chartered Accountants
 
Leeds
6 November 2003

A-3



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002 (As restated, see note 28)

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year endedNote
    
    31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000TURNOVER  continuing operations
    
    2
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,776Cost of sales
    
    
    
    
    (219,462
    )
    
    
    (267,204
    )
    
    
    (278,218
    )GROSS PROFIT
    
    
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses  normal
    
    
    
    
    (184,079
    )
    
    
    (171,019
    )
    
    
    (166,146
    ) exceptional
    
    4
    
    
    (715,801
    )
    
    
    
    
    
    
    (899,880
    )
    
    
    (171,019
    )
    
    
    (166,146
    )OPERATING (LOSS)/PROFIT  continuing
operations
    
    3
    
    
    (594,511
    )
    
    
    147,880
    
    
    
    178,412Interest receivable and other income
    
    5
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862Interest payable and similar charges
    
    6
    
    
    (180,088
    )
    
    
    (170,787
    )
    
    
    (156,324
    )(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION
    
    
    
    
    (751,051
    )
    
    
    (7,970
    )
    
    
    33,950Tax on (loss)/profit on ordinary activities
    
    7
    
    
    510
    
    
    
    (10,885
    )
    
    
    (22,435
    )(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION
    
    
    
    
    (750,541
    )
    
    
    (18,855
    )
    
    
    11,515Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    (14,000
    )RETAINED LOSS FOR THE FINANCIAL YEAR
TRANSFERRED FROM RESERVES
    
    
    
    
    (750,541
    )
    
    
    (18,855
    )
    
    
    (2,485
    )


STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES

There are no recognised gains and losses for the years ended 31 December 2002,
2001 and 2000 other than as stated in the profit and loss account. Therefore,
no statement of total recognised gains and losses has been presented.

A-4



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

CONSOLIDATED BALANCE SHEET
As at 31 December 2002 (As restated, see note 28)

As restated
    
    As restatedNote
    
    2002
    
    2001£000
    
    £000FIXED ASSETSIntangible assets
    
    8
    
    
    
    
    
    
    594,610Tangible assets
    
    9
    
    
    1,083,118
    
    
    
    1,140,2451,083,118
    
    
    
    1,734,855CURRENT ASSETSStocks
    
    10
    
    
    31,327
    
    
    
    62,563Debtors
    
    11
    
    
    132,397
    
    
    
    196,579Cash at bank and in hand
    
    12
    
    
    85,020
    
    
    
    40,796248,744
    
    
    
    299,938CREDITORS: amounts falling due within one
year
    
    13
    
    
    (1,813,107
    )
    
    
    (92,482
    )NET CURRENT (LIABILITIES)/ASSETS
    
    
    
    
    (1,564,363
    )
    
    
    207,456TOTAL ASSETS LESS CURRENT LIABILITIES
    
    
    
    
    (481,245
    )
    
    
    1,942,311CREDITORS: amounts falling due after more
than one year
    
    14
    
    
    (368
    )
    
    
    (1,914,124
    )PROVISIONS FOR LIABILITIES AND CHARGES
    
    17
    
    
    (16,878
    )
    
    
    (17,388
    )NET (LIABILITIES)/ASSETS
    
    
    
    
    (498,491
    )
    
    
    10,799CAPITAL AND RESERVESCalled up share capital
    
    18
    
    
    20,051
    
    
    
    20,051Capital reserve
    
    19
    
    
    52,250
    
    
    
    Profit and loss account
    
    19
    
    
    (570,792
    )
    
    
    (9,252
    )TOTAL EQUITY SHAREHOLDERS (DEFICIT)/FUNDS
    
    20
    
    
    (498,491
    )
    
    
    10,799


A-5



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2002 (As restated, see note 28)

As restated
    
    As restated
    
    As restatedNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    21
    
    
    138,120
    
    
    
    174,131
    
    
    
    172,616Returns on investments and servicing of financeInterest received
    
    
    
    
    4,098
    
    
    
    4,679
    
    
    
    9,083Interest paid
    
    
    
    
    (144,672
    )
    
    
    (178,074
    )
    
    
    (140,302
    )Net cash outflow from returns on investments and
servicing of finance
    
    
    
    
    (140,574
    )
    
    
    (173,395
    )
    
    
    (131,219
    )Taxation
    
    
    
    
    (348
    )
    
    
    (9,160
    )
    
    
    (19,104
    )Capital expenditurePayments to acquire tangible fixed assets
    
    
    
    
    (5,224
    )
    
    
    (6,119
    )
    
    
    (11,993
    )Receipts from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    29
    
    
    
    5,500(5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    (14,000
    )Cash (outflow)/inflow before use of liquid resources
and financing
    
    
    
    
    (8,026
    )
    
    
    (14,514
    )
    
    
    1,800Management of liquid resourcesIncrease in restricted cash deposits
    
    
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )FinancingNew borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    400,000Issue costs on new borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    (16,207
    )Prepayment of coupons
    
    
    
    
    
    
    
    
    
    
    
    
    (383,793
    )Funding of capital reserve
    
    28
    
    
    52,250
    
    
    
    
    
    
    
    Decrease in cash in the year
    
    22, 23
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )


A-6



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES
|-- |  | --------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU Europe Energy
Trading Limited (TXU Europe) and the appointment of joint
administrators of TXU Europe and TXU Europe Group plc (TXU Group) on 18 and 19 November
2002, respectively, the company entered discussions with its senior lenders
in order to address the potential defaults under the senior financing
documents arising from the TXU situation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at 30
June 2002, were below the threshold required to permit distributions. As a
result, Drax Power Limited was not permitted to make distributions to AES
Drax Energy Limited to permit interest due on the high yield notes to be
paid on 30 August 2002. The AES Corporation, however, made a contribution
to AES Drax Energy Limited which together with amounts then held in the
high yield note debt service reserve account was sufficient to make the
payments then due. At the time The AES Corporation stated that there were
no assurances that it would agree to make any similar payments in the
future. Any improvements in the forward looking ratios were dependent on a
favourable change in the forward curve for electricity prices during the
period from 30 June to 31 December 2002. Such improvements did not occur
and the ratios were below 1.19:1 at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the end
of February 2003. Such failure constitutes an event of default under the
notes, although any enforcement rights are subject to a 90-day grace period
as well as the terms and conditions of certain intercreditor arrangements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Drax group of companies (Drax) has been operating under standstill
arrangements with certain of its senior creditors since 12 December 2002.
The purpose of the standstill arrangements is to provide Drax and the
senior creditors with a period of stability during which discussions
regarding consensual restructuring of Drax can take place. The bank
lenders and the senior bondholders have agreed to waive certain events of
default under the Eurobonds or the senior bonds, as applicable, not to
accelerate payment of the obligations and would not seek to enforce
security during the standstill period. Although the standstill period
under the original standstill agreement terminated on 31 May 2003, Drax had
reached agreement on three further standstill agreements, which have now
expired, and is currently operating under a long term standstill agreement,
agreed with the steering committee representing the senior banks (the Steering Committee) and the Ad Hoc Committee formed by
holders of Drax Holdings Limiteds senior bonds (the Ad Hoc Committee).
This agreement became effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the companys lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The directors of the company believe that the standstill arrangements will
facilitate an agreed restructuring of Drax. On this basis, the directors
of the company consider it appropriate to prepare the financial statements
on the going concern basis. The financial statements do not include any
adjustments that would result from a withdrawal of support by the companys
lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-7



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTSYear ended
31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Accounting policies
| |  | -------------------



| |  | The financial statements are prepared in accordance with applicable United
Kingdom accounting standards. The particular accounting policies adopted
are described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------



| |  | Basis of consolidation
| |  | ----------------------



| |  | The group consolidates the accounts of the company and all its subsidiary
undertakings up to 31 December 2002.
| |  | --------------------------------------------------------------------------------------------------------------



| |  | Intangible fixed assets
| |  | -----------------------



| |  | Goodwill represents the excess of the fair value of the consideration given
over the fair value of the identifiable net assets acquired. Acquired
goodwill is capitalised and amortised over 20 years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tangible fixed assets
| |  | ---------------------



| |  | Freehold land and assets in the course of construction are not depreciated.
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The estimated useful lives are:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Freehold buildings, plant and machinery |  | 30-40 years
| |  | --------------------------------------- |  | -----------



| |  | Plant spares |  | 30-40 years
| |  | ------------ |  | -----------



| |  | Fixtures and fittings |  | 3-5   years
| |  | --------------------- |  | -----------



| |  | Stocks
| |  | ------



| |  | Stocks are stated at the lower of cost, inclusive of appropriate overheads,
and net realisable value. Net realisable value is based on estimated
selling price less all further costs to completion and all relevant
marketing, selling and distribution costs.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxation
| |  | --------



| |  | Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the groups taxable
profits and its results as stated in the financial statements that arise
from the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not there will be suitable taxable profits
from which the future reversal of the underlying timing differences can be
deducted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leased assets
| |  | -------------



| |  | Operating lease rentals are charged to income in equal annual amounts over
the lease term.
| |  | ------------------------------------------------------------------------------------------

A-8



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Pension costs
| |  | -------------



| |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs
are recognised immediately in the profit and loss account if the benefits
have vested. If the benefits have not vested immediately, the costs are
recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs
or credits adjacent to interest. Actuarial gains and losses are recognised
immediately in the statement of total recognised gains and losses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are
measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and
are updated at each balance sheet date. The resulting defined benefit asset
or liability, net of the related deferred tax, is presented separately
after other net assets on the face of the balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The group has adopted the transitional disclosure requirements of FRS 17.
| |  | -------------------------------------------------------------------------



| |  | Revenue recognition
| |  | -------------------



| |  | Revenues from the sale of electricity are recorded based upon output
delivered and capacity provided at rates specified under contract terms or
prevailing market rates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivatives
| |  | -----------



| |  | Investments or financial derivative instruments accounted for as hedges are
structured so as to reduce the market risk associated with the underlying
transaction being hedged and are designated as hedges at the inception of
the contract. Gains and losses on hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriate hedged rate.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred finance costs
| |  | ----------------------



| |  | Financing costs are deferred and amortised over the related financing
period using the effective interest method of amortisation. Deferred
financing costs are shown net of accumulated amortisation and are presented
as deductions from the associated loan balances.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-9



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|2. |  | TURNOVER
|-- |  | --------



| |  | Turnover comprises primarily sales to the electricity trading market in
England and Wales of electricity generated by the group. Most of the power
plants revenue relies on sales contracts with a few large customers. One
customer accounted for 65.1% of revenues in the year to December 31, 2002.
Two customers accounted for 67.9% and 9.0% of revenues in 2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | OPERATING (LOSS)/PROFIT
|-- |  | -----------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Operating (loss)/profit is stated after
charging/(crediting):Depreciation of owned assets
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )




|4. |  | EXCEPTIONAL ITEMS
|-- |  | -----------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bad debt expense
    
    
    136,801
    
    
    
    
    
    
    
    Impairment loss (note 8 & 9)
    
    
    579,000
    
    
    
    
    
    
    
    715,801
    
    
    
    
    
    
    
    




| |  | On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
TXU Group. As a consequence of this, on 18 November 2002, Drax
Power Limited terminated the Hedging Contract with TXU Europe, a subsidiary of TXU Group,
to minimise financial exposure. On 19 November 2002, TXU Group filed a
petition on behalf of itself, TXU UK Limited and TXU Europe, seeking
protection from its creditors, which was approved, putting the three
companies into temporary administration.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a result, the company has made 100% provision against all amounts owed
by TXU Europe in respect of the Hedging Contract and the termination of
that contract, as at 18 November 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included within administrative expenses is an exceptional item of £579
million in respect of an impairment loss on goodwill and fixed assets. The
impairment loss was measured by reference to the value in use of the assets
using a discount rate of 7.9% which reflects the risks inherent in the
forecast cash flows.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The tax effect of the bad debt expense is £41 million. The impairment of
goodwill and fixed assets is non-deductible and so has no tax effect.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------

A-10



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|5. |  | INTEREST RECEIVABLE AND SIMILAR INCOME
|-- |  | --------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bank interest receivable
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862




|6. |  | INTEREST PAYABLE AND SIMILAR CHARGES
|-- |  | ------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bank interest and other loans
    
    
    175,442
    
    
    
    166,011
    
    
    
    152,365Amortisation of other assets
    
    
    575
    
    
    
    525
    
    
    
    Amortisation of deferred financing costs
    
    
    4,071
    
    
    
    4,251
    
    
    
    3,959180,088
    
    
    
    170,787
    
    
    
    156,324




|7. |  | TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
|-- |  | -------------------------------------------



| | (a) |  | Analysis of charge in the year
| | --- |  | ------------------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000United Kingdom corporation tax at 30%  current year
    
    
    
    
    
    
    4,643
    
    
    
    13,970 prior year
    
    
    
    
    
    
    35
    
    
    
    458
    
    
    
    4,678
    
    
    
    14,428Deferred tax  Timing differences, origination and reversal
    
    
    (662
    )
    
    
    6,207
    
    
    
    7,953 Adjustment in respect of prior years
    
    
    152
    
    
    
    
    
    
    
    54(510
    )
    
    
    6,207
    
    
    
    8,007(510
    )
    
    
    10,885
    
    
    
    22,435


A-11



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|7. |  | TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES (continued)
|-- |  | -------------------------------------------------------



| | (b) |  | Factors affecting tax charge for the current year
| | --- |  | -------------------------------------------------



| |  | The tax assessed for the period is higher than that resulting from applying
the standard rate of corporation tax in the UK (30%) (2001: 30%) (2000:
30%). The differences are explained below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000(Loss)/profit on ordinary activities before tax
    
    
    (751,051
    )
    
    
    (7,970
    )
    
    
    33,950Tax on profit on ordinary activities at 30%
(2001 & 2000: 30%)
    
    
    (225,315
    )
    
    
    (2,391
    )
    
    
    10,185Effects of:Expenses not deductible for tax purposes
    
    
    208,568
    
    
    
    13,241
    
    
    
    11,738Capital allowances in excess of depreciation
    
    
    662
    
    
    
    (6,207
    )
    
    
    (7,953
    )Tax losses not utilised
    
    
    16,085
    
    
    
    
    
    
    
    Adjustment in respect of prior years
    
    
    
    
    
    
    35
    
    
    
    458Current tax charge for the year
    
    
    
    
    
    
    4,678
    
    
    
    14,428




|8. |  | INTANGIBLE FIXED ASSETS
|-- |  | -----------------------



| |  | The intangible fixed assets comprise of goodwill which arose on the
acquisition of Drax Power Limited.
| |  | ------------------------------------------------------------------------------------------------------

Goodwill£000CostAt 1 January 2002
    
    
    665,185Reclassification
    
    
    (11,206
    )At 31 December 2002
    
    
    653,979AmortisationAt 1 January 2002
    
    
    70,575Charge for the year
    
    
    33,876Impairment (note 4)
    
    
    549,528At 31 December 2002
    
    
    653,979Net book valueAt 31 December 2002
    
    
    At 31 December 2001
    
    
    594,610




| |  | The reclassification above was in respect of an amount relating to the VAT
on certain transactions which occurred at the time of the acquisition of
Drax Power Station by The AES Corporation in November 1999. These
transactions related to the acquisition of the opening coal stock and the
purchase of intellectual property. The transactions were recorded gross
rather than net of VAT in the calculation of the goodwill arising upon
acquisition. The company has subsequently adjusted both goodwill and the
VAT creditor.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-12



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|9. |  | TANGIBLE FIXED ASSETS
|-- |  | ---------------------

Plant,Freehold
    
    machinery,land and
    
    fixtures &
    
    Plantbuildings
    
    fittings
    
    spares
    
    Total£000
    
    £000
    
    £000
    
    £000CostAt 1 January 2002
    
    
    132,181
    
    
    
    1,081,136
    
    
    
    21,011
    
    
    
    1,234,328Additions
    
    
    
    
    
    
    2,794
    
    
    
    2,430
    
    
    
    5,224Disposals
    
    
    
    
    
    
    (2,414
    )
    
    
    
    
    
    
    (2,414
    )Issues
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )At 31 December 2002
    
    
    132,181
    
    
    
    1,081,516
    
    
    
    23,417
    
    
    
    1,237,114Accumulated depreciationAt 1 January 2002
    
    
    9,735
    
    
    
    83,342
    
    
    
    1,006
    
    
    
    94,083Charge for the year
    
    
    3,209
    
    
    
    29,143
    
    
    
    502
    
    
    
    32,854Disposals
    
    
    
    
    
    
    (2,413
    )
    
    
    
    
    
    
    (2,413
    )Impairment (note 4)
    
    
    
    
    
    
    29,472
    
    
    
    
    
    
    
    29,472At 31 December 2002
    
    
    12,944
    
    
    
    139,544
    
    
    
    1,508
    
    
    
    153,996Net book valueAt 31 December 2002
    
    
    119,237
    
    
    
    941,972
    
    
    
    21,909
    
    
    
    1,083,118At 31 December 2001
    
    
    122,446
    
    
    
    997,794
    
    
    
    20,005
    
    
    
    1,140,245




| |  | Freehold land amounting to £1,060,000 (2001: £1,060,000) has not been
depreciated.
| |  | ----------------------------------------------------------------------------------



|10. |  | STOCKS
|--- |  | ------

2002
    
    2001£000
    
    £000Raw materials and consumables
    
    
    31,327
    
    
    
    62,563


A-13



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|11. |  | DEBTORS
|--- |  | -------

As restated
    
    As restated2002
    
    2001£000
    
    £000Trade debtors
    
    
    52,462
    
    
    
    104,849Amounts owed by immediate parent
    
    
    536
    
    
    
    531Amounts owed by other group companies
    
    
    68,500
    
    
    
    68,500Prepayments and other debtors
    
    
    10,899
    
    
    
    22,699132,397
    
    
    
    196,579




| |  | Included within other debtors is VAT receivable of £Nil (2001: £1.8
million), a swap advance debtor of £1.4 million (2001: swap advance
creditor £23.5 million) and an insurance debtor of £0.2 million (2001: £0.5
million). Subsequent to 31 December 2002, the company has written-off
amounts owed by other group companies of £68.5 million as a consequence of
the withdrawal of support by The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Included within prepayments and other debtors is an amount outstanding from
the employee share ownership plan (ESOP) totalling £2,858,000, loaned for
the purchase of 129,029 shares in the common stock of The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. |  | CASH AT BANK AND IN HAND
|--- |  | ------------------------



| |  | Included within the total cash balance are restricted cash deposits
amounting to £44,970,000 (2001: £9,689,000). These comprise part of a
required balance which needs to be in place on each repayment date. Also
included is restricted cash of £13,400,000 (2001: £Nil) over which National
Westminster Bank plc has a charge.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
|--- |  | ----------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Trade creditors
    
    
    15,222
    
    
    
    2,679Corporation tax
    
    
    1,204
    
    
    
    1,556Amounts owed to fellow subsidiary
    
    
    1,702
    
    
    
    822Amounts owed to ultimate parent
    
    
    7,367
    
    
    
    5,125Other creditors and accruals
    
    
    44,606
    
    
    
    82,300Other loans (note 15)
    
    
    1,743,006
    
    
    
    1,813,107
    
    
    
    92,482




| |  | Included within other creditors is VAT payable of £9.8 million (2001: £28.2
million) and accrued interest of £30.7 million (2001: £Nil).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

A-14



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|14. |  | CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
|--- |  | -------------------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Other loans (note 15)
    
    
    
    
    
    
    1,724,480Retentions
    
    
    368
    
    
    
    643Amounts owed to fellow subsidiary undertaking
    
    
    
    
    
    
    189,001368
    
    
    
    1,914,124




| |  | All retentions are payable within 1 to 2 years.
| |  | -----------------------------------------------



|15. |  | BORROWINGS
|--- |  | ----------



| |  | The borrowings at 31 December 2002 consist of Guaranteed Secured Bonds.
There are two tranches of bonds, the Original Bonds issued on 30 November,
1999 to finance the acquisition of Drax Power Station by AES and a second
tranche issued on 2 August 2000, the net proceeds from which were used to
prepay £383.6 million of interest. The Original Bonds are guaranteed on an unlimited, unconditional
and irrevocable basis by each of Drax Power Limited, AES Drax Acquisition
Limited, Drax Holdings Limited, AES Drax Financing Limited and Drax Limited
and each such entity has granted security over all their assets as security
for, inter alia, the Original Bonds and certain related swaps, finance
documents and guarantees. The New Bonds are guaranteed on an unlimited,
unconditional and irrevocable basis by each of Drax Power Limited, AES Drax
Acquisition Limited, Drax Holdings Limited, AES Drax Financing Limited,
Drax Limited and Drax Electric Limited and each such entity has granted
security over all their assets as security for, inter alia, the New Bonds
and certain related swaps, finance documents and guarantees.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Repayment of all of the Guaranteed Secured Bonds is further secured by
direct agreements from certain of the major project parties and other
security arrangements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Original Bonds bear a fixed rate of interest of 8.86% and interest is
payable semi-annually over fifteen years. The New Bonds comprise of
$302,400,000 of 10.41% senior secured bonds and £200,000,000 of 9.07%
senior secured bonds, maturing on 31 December 2020 and 31 December 2025
respectively. Interest on the New Bonds is payable semi-annually commencing
31 December 2000 for 20 years on the dollar bonds and 25 years on the
sterling bonds.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Analysis of loan repayments are:Within one year (note 28)Original Bonds
    
    
    1,357,396
    
    
    
    New Bonds
    
    
    385,610
    
    
    
    1,743,006
    
    
    
    After five yearsOriginal Bonds
    
    
    
    
    
    
    1,339,623New Bonds
    
    
    
    
    
    
    384,857
    
    
    
    1,724,480


A-15



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|15. |  | BORROWINGS (continued)
|--- |  | ----------------------



| |  | Borrowings are stated after deducting deferred finance costs and prepaid
coupons as follows:
| |  | --------------------------------------------------------------------------------------------

DeferredGross
    
    finance
    
    Prepaid
    
    Netborrowings
    
    costs
    
    coupons
    
    borrowings£000
    
    £000
    
    £000
    
    £000As at 31 December 2002Original Bonds
    
    
    1,725,000
    
    
    
    (21,775
    )
    
    
    (345,829
    )
    
    
    1,357,396New Bonds
    
    
    400,000
    
    
    
    (14,390
    )
    
    
    
    
    
    
    385,6102,125,000
    
    
    
    (36,165
    )
    
    
    (345,829
    )
    
    
    1,743,006As at 31 December 2001Original Bonds
    
    
    1,725,000
    
    
    
    (25,091
    )
    
    
    (360,286
    )
    
    
    1,339,623New Bonds
    
    
    400,000
    
    
    
    (15,143
    )
    
    
    
    
    
    
    384,8572,125,000
    
    
    
    (40,234
    )
    
    
    (360,286
    )
    
    
    1,724,480




|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
|--- |  | -------------------------------------------



| |  | The group issues or holds financial instruments for two purposes.
| |  | -----------------------------------------------------------------



| |  |  | Financial instruments relating to the operations, financing and
risks of the operating company, Drax Power Limited.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Financial instruments relating to the financing and risks of the
debt holding company, Drax Holdings Limited and the consolidated risks
of the Group.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Group finances its operations by a mix of retained profits, senior
secured bank debt and senior secured bonds. The Groups financial
instruments comprise borrowings, cash and liquid resources, items that
arise directly from its operations and derivative transactions. The main
risks arising from the Groups financial instruments are interest rate
risk, currency risk and liquidity risk.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest Rate Risk
| |  | ------------------



| |  | The Group is partly financed by borrowings at both fixed and floating rates
of interest.
| |  | ----------------------------------------------------------------------------------------



| |  | The Original Bonds require that we enter into hedges against interest rate
fluctuations on a two-year rolling basis in an amount equal to at least 50%
of the principal amount of the loans under the Bank Facility. The interest
amounts due with respect to the remaining principal are thus subject to
fluctuations in the London interbank offered rate (LIBOR). We currently
have hedged £565 million of our floating rate exposure and such hedging
arrangements satisfy the requirements under the Original Bonds.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the New Bonds, we currently have £132 million of floating rate
exposure.
| |  | ----------------------------------------------------------------------------



| |  | Currency Risk
| |  | -------------



| |  | The Group is partly financed by borrowings in US Dollars. The Group also
holds certain US Dollar denominated bank accounts.
| |  | ---------------------------------------------------------------------------------------------------------------------------



| |  | The Group has eliminated the currency risk via cross-currency swaps for the
$302,400,000 New Bonds issued by Drax Holdings Limited in August 2000. At
31 December 2002, currency swaps covered 100% (2001: 100%) of the nominal
amount of the US Dollar borrowings and 100% of the interest cost of these
borrowings (2001: 100%).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There are no material currency risks in the operating company, Drax Power
Limited.
| |  | ----------------------------------------------------------------------------------

A-16



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Liquidity Risk
| |  | --------------



| |  | The Group requires access to sufficient liquidity to enable it to meet its
obligations as they fall due and to provide adequately for contingencies.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the operating company, Drax Power Limited, short-term liquidity is
provided by a committed bank facility of £15 million (2001: £15 million).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the holding company, Drax Holdings Limited, short-term liquidity was
provided by a £52 million letter of credit from Bank of America, which
comprises part of the Required Balance on the Debt Service Account as
stated in the Facility Agreement with the senior banks. The cash balance
on these Debt Service Accounts at 31 December 2002 totalled £44.8 million
(2001: £9.7 million).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Generation Business
| |  | -----------------------



| |  | Hedging
| |  | -------



| |  | The operating company, Drax Power Limited, earned a significant proportion
of its revenues from a Hedging Contract with TXU, before the termination of
the contract in November 2002. This allowed Drax Power Limited to hedge
the risks associated with sales of electricity as a purely merchant
facility, into the Pool, where generators are subject to market-related
risks, including general economic conditions, electricity demand, weather,
increasing competition and other circumstances beyond their control.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Numerical Disclosures
| |  | ---------------------



| |  | The numerical disclosures below deal with financial assets and liabilities
as defined in Financial Reporting Standard 13 Derivatives and Other
Financial Instruments: Disclosures(FRS13). Certain financial assets and
liabilities, such as investments in subsidiary companies, are excluded from
the scope of these disclosures. As permitted by FRS13, short-term debtors
and creditors have been excluded from the disclosures.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest rate risk profile of financial assets and financial liabilities
| |  | ------------------------------------------------------------------------



| |  | Financial assets
| |  | ----------------



| |  | The interest rate profile of the Groups financial assets was:
| |  | --------------------------------------------------------------

Total
    
    Floating rate financial assets31 December
    
    31 December
    
    31 December
    
    31 DecemberCurrency
    
    2002
    
    2001
    
    2002
    
    2001£000s
    
    £000s
    
    £000s
    
    £000sSterling
    
    
    84,947
    
    
    
    40,690
    
    
    
    84,947
    
    
    
    40,690Dollar
    
    
    73
    
    
    
    106
    
    
    
    73
    
    
    
    106Total
    
    
    85,020
    
    
    
    40,796
    
    
    
    85,020
    
    
    
    40,796




| |  | The Groups financial assets comprise of deposits bearing interest at the
rate agreed between the Group and its banks.
| |  | ----------------------------------------------------------------------------------------------------------------------

A-17



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Financial liabilities
| |  | ---------------------



| |  | After taking account of the various currency and interest rate swaps
entered into by the Group, the interest rate profile of the Groups gross
financial liabilities was:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total
    
    Floating rate financial liabilities
    
    Fixed
rate financial liabilities31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 DecemberCurrency
    
    2002
    
    2001
    
    2002
    
    2001
    
    2002
    
    2001£000s
    
    £000s
    
    £000s
    
    £000s
    
    £000s
    
    £000sSterling
    
    
    2,125,000
    
    
    
    2,125,000
    
    
    
    866,775
    
    
    
    808,815
    
    
    
    1,258,225
    
    
    
    1,316,185Total
    
    
    2,125,000
    
    
    
    2,125,000
    
    
    
    866,775
    
    
    
    808,815
    
    
    
    1,258,225
    
    
    
    1,316,185


Fixed rate financial liabilitiesWeighted average interest
    
    Weighted average period
    
    Weighted average periodrate
    
    for which rate is fixed
    
    until maturity31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 DecemberCurrency
    
    2002
    
    2001
    
    2002
    
    2001
    
    2002
    
    2001%
    
    %
    
    Years
    
    Years
    
    Years
    
    YearsSterling
    
    
    5.928
    
    
    
    6.771
    
    
    
    16.1
    
    
    
    16.6
    
    
    
    16.1
    
    
    
    16.6




| |  | The floating rate liabilities comprise Original Bonds of £734,775,000
(2001: £676,815,000) and New Bonds of £132,000,000 (2001: £132,000,000)
that bear interest at rates based upon LIBOR for terms of up to six months.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fixed rate liabilities comprise Original Bonds of £990,225,000 (2001:
£1,048,185,000) and New Bonds of £268,000,000 (2001: £268,000,000) that
bear interest rates set under the terms of the bonds.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Maturity of financial liabilities
| |  | ---------------------------------



| |  | The maturity profile of the Groups financial liabilities was as follows:
| |  | -------------------------------------------------------------------------

Gross Borrowings31 December
    
    31 December2002
    
    2001£000s
    
    £000sIn one year or less, or on demand
    
    
    
    
    
    
    In more than one year but not more than two years
    
    
    
    
    
    
    In more than two years but not more than five years
    
    
    
    
    
    
    In more than five years
    
    
    2,125,000
    
    
    
    2,125,000Total
    
    
    2,125,000
    
    
    
    2,125,000




| |  | Drax has been operating under Standstill Arrangements since 12 December
2002. Borrowings have therefore been presented as falling due within one
year.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

A-18



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Fair Value Disclosures
| |  | ----------------------



| |  | Set out below is a comparison of book values and fair values of the Groups
financial assets and liabilities.
| |  | -------------------------------------------------------------------------------------------------------------

31 December 2002
    
    31 December 2001Book Value
    
    Fair Value
    
    Book Value
    
    Fair Value£000s
    
    £000s
    
    £000s
    
    £000sFinancial assetsBank deposits
    
    
    85,020
    
    
    
    85,020
    
    
    
    40,796
    
    
    
    40,796Primary financial instruments issued
to finance the Groups operationsNet borrowings
    
    
    1,743,006
    
    
    
    1,471,343
    
    
    
    1,724,480
    
    
    
    1,507,789Derivative financial instruments
held to manage the interest
rate and currency profileInterest rate swaps
    
    
    
    
    
    
    (75,870
    )
    
    
    
    
    
    
    (46,982
    )Currency swaps
    
    
    
    
    
    
    7,812
    
    
    
    
    
    
    
    13,518




| |  | The fair values of financial assets have been determined by reference to
quoted market prices where available. The estimated difference between the
book and fair value of such assets is not material.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of the long-term borrowings have been determined by
reference to either a quoted market value or, the fair values of the
unquoted debt have been calculated by discounting the estimated cash flows
for each instrument at the appropriate market discount rate, in effect at
the balance sheet date.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of the currency swaps and Sterling and US Dollar denominated
bonds have been determined by reference to prices available from the
markets on which these instruments or similar instruments are traded.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of CFDs have been calculated by reference to managements
estimates of future electricity pool prices and potential impact of NETA.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Gains and losses on financial assets and financial liabilities held or
issued for trading
| |  | -----------------------------------------------------------------------------------------



| |  | No gains or losses have been recognised which relate to trading in
financial assets and financial liabilities.
| |  | --------------------------------------------------------------------------------------------------------------

A-19



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Gains and losses on hedges
| |  | --------------------------



| |  | The Group enters into CFDs, EFAs and similar contracts to hedge against
fluctuations in the selling price for electricity obtained from the Pool.
It also uses interest rate swaps and currency swaps to manage its interest
rate profile and currency risk. Changes in the fair value of instruments
used as hedges are not recognised in the financial statements until the
hedged position matures. An analysis of unrecognised gains and losses is
as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total NetGains
    
    Losses
    
    Gains/(Losses)£000s
    
    £000s
    
    £000sUnrecognised gains and
losses on hedges at 1
January 2002
    
    
    13,518
    
    
    
    (46,982
    )
    
    
    (33,464
    )Gains and losses
arising in previous
years that were
recognised in the year
    
    
    (13,518
    )
    
    
    46,982
    
    
    
    33,464Gains and losses
arising before 1
January 2002 that were
not recognised in the
year
    
    
    
    
    
    
    
    
    
    
    Gains and losses
arising in the year
that were not
recognised in the year
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )Unrecognised gains and
losses at 31 December
2002
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )Gains and losses
expected to be
recognised in the next
financial year
    
    
    
    
    
    
    
    
    
    
    Gains and losses
expected to be
recognised after the
next financial year
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )




|17. |  | PROVISIONS FOR LIABILITIES AND CHARGES
|--- |  | --------------------------------------

At
    
    
    
    At1 January
    
    Current
    
    31 December2002
    
    year credit
    
    2002£000
    
    £000
    
    £000Deferred taxation
    
    
    17,278
    
    
    
    (510
    )
    
    
    16,768Reinstatement provision
    
    
    110
    
    
    
    
    
    
    
    11017,388
    
    
    
    (510
    )
    
    
    16,878




| |  | The amount of deferred taxation provided in the financial statements is:
| |  | ------------------------------------------------------------------------

2002
    
    2001£000
    
    £000Capital allowances in excess of depreciation
    
    
    16,768
    
    
    
    17,278


A-20



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|18. |  | CALLED UP SHARE CAPITAL
|--- |  | -----------------------

2002
    
    2001£000
    
    £000Group and CompanyAuthorised1,000,000,000 ordinary shares of £1 each
    
    
    1,000,000
    
    
    
    1,000,000Called up, allotted and fully paid20,050,002 ordinary shares of £1 each
    
    
    20,051
    
    
    
    20,051




|19. |  | RESERVES
|--- |  | --------

As restated
    
    Profit andCapital reserve
    
    loss account
    
    Total£000
    
    £000
    
    £000At 1 January 2002
    
    
    
    
    
    
    (9,252
    )
    
    
    (9,252
    )Retained loss for the financial year
    
    
    
    
    
    
    (750,541
    )
    
    
    (750,541
    )Other reserve movement
    
    
    
    
    
    
    189,001
    
    
    
    189,001Capital contribution in the year
    
    
    52,250
    
    
    
    
    
    
    
    52,250At 31 December 2002
    
    
    52,250
    
    
    
    (570,792
    )
    
    
    (518,542
    )




| |  | The other reserve movement relates to a group reorganisation during the
year ended 31 December 2002. As a consequence, an amount previously
recorded as due to a fellow subsidiary of £189,001,000 was credited to
reserves.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|20. |  | RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS (DEFICIT)/FUNDS
|--- |  | ------------------------------------------------------------

2002
    
    2001£000
    
    £000Loss for the financial year
    
    
    (750,541
    )
    
    
    (18,855
    )Capital contribution in the year
    
    
    52,250
    
    
    
    Other reserve movement
    
    
    189,001
    
    
    
    Net reduction in shareholders funds
    
    
    (509,290
    )
    
    
    (18,855
    )Opening shareholders funds
    
    
    10,799
    
    
    
    29,654Closing shareholders (deficit)/funds
    
    
    (498,491
    )
    
    
    10,799


A-21



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|21. |  | RECONCILIATION OF OPERATING (LOSS)/PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES
|--- |  | --------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Operating (loss)/profit
    
    
    (594,511
    )
    
    
    147,880
    
    
    
    178,412Depreciation
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Loss on disposal of fixed assets
    
    
    
    
    
    
    19
    
    
    
    Plant spares issues
    
    
    24
    
    
    
    155
    
    
    
    Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )Decrease/(increase) in stocks
    
    
    31,236
    
    
    
    (2,617
    )
    
    
    (7,413
    )Decrease/(increase) in debtors
    
    
    78,116
    
    
    
    20,622
    
    
    
    (91,052
    )(Decrease)/increase in creditors
    
    
    (41,870
    )
    
    
    (50,783
    )
    
    
    49,592Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Harich Swap interest
    
    
    19,395
    
    
    
    10,265
    
    
    
    2,452138,120
    
    
    
    174,131
    
    
    
    172,616




| |  | The restatement of the cashflows for the years ended 31 December 2002, 2001
and 2000 relates to a reclassification of the amounts generated under a
financing hedging swap (note 28).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The decrease in debtors during the year ended 31 December 2002 is after
reflecting the exceptional bad debt expense of £136,801,000 recorded in the
year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|22. |  | RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
|--- |  | -------------------------------------------------------

As restated
    
    As restated
    
    As restated2002
    
    2001
    
    2000£000
    
    £000
    
    £000Decrease in cash in the year
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )Cash inflow from increase in debt financing, net of
issue costs
    
    
    
    
    
    
    
    
    
    
    (383,793
    )Repayment of debt
    
    
    
    
    
    
    
    
    
    
    383,793Amortisation of deferred finance costs
    
    
    (4,071
    )
    
    
    (4,251
    )
    
    
    (3,959
    )Amortisation of prepaid coupons
    
    
    (14,457
    )
    
    
    (13,265
    )
    
    
    (10,242
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Movement in net debt in the year
    
    
    25,696
    
    
    
    (32,030
    )
    
    
    (12,401
    )Net debt brought forward
    
    
    (1,683,682
    )
    
    
    (1,651,652
    )
    
    
    (1,639,251
    )Net debt carried forward
    
    
    (1,657,986
    )
    
    
    (1,683,682
    )
    
    
    (1,651,652
    )


A-22



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|23. |  | ANALYSIS OF CHANGES IN NET DEBT
|--- |  | -------------------------------

At
    
    
    
    
    
    
    
    At1 January2002
    
    Cash flow
    

Non-cashmovements
    
    31 December2002£000
    
    £000
    
    £000
    
    £000Cash at bank and in hand
    
    
    31,107
    
    
    
    (4,277
    )
    
    
    
    
    
    
    26,830Restricted cash deposits
    
    
    9,689
    
    
    
    48,501
    
    
    
    
    
    
    
    58,19040,796
    
    
    
    44,224
    
    
    
    
    
    
    
    85,020Other loans
    
    
    (1,724,478
    )
    
    
    
    
    
    
    (18,528
    )
    
    
    (1,743,006
    )(1,683,682
    )
    
    
    44,224
    
    
    
    (18,528
    )
    
    
    (1,657,986
    )




|24. |  | PENSION SCHEME FUNDING
|--- |  | ----------------------



| |  | Pension schemes operated
| |  | ------------------------



| |  | Within the UK the Group principally operates an approved defined benefit
scheme, on behalf of the AES Drax Power Group of the Electricity Supply
Pension Scheme (ADPG ESPS).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular pension costs  SSAP 24
| |  | -------------------------------



| |  | Pensions costs for the ADPG ESPS in the year were £1,700,000 (2001:
£1,469,000), comprising a regular cost of £1,500,000 (2001: £1,200,000)
plus variations totalling £200,000 (2001: £(200,000)). A variation of
£(100,000) has arisen due to £800,000 of the valuation surplus being
carried forward unutilised, which is being spread as a level percentage of
salaries over the average remaining working life of the membership
(approximately 11 years). A further variation of £(100,000) has arisen due
to the application of reduced contributions from 1 January 2002 to 31 March
2002 from the valuation surplus. The remaining variation of £400,000 has
arisen due to certain special events, generating additional liabilities and
triggering employer contributions. In the year, redundancies have resulted
in an additional pension cost of £400,000, which has been partially offset
by additional employer contributions of £200,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
Consultants, assessed the ESPS in respect of the AES Drax Power Group as at
31 December 2002 using the projected unit method and a market based
valuation approach to ascertain its cost to the Group. The principal
financial assumptions were that the rate of return would be 4.5% per annum
higher than the rate of price inflation, that increases in past and future
pensions would be in line with price inflation, and that future salary
growth would exceed price inflation by 2.75% per annum, depending on salary
levels at the valuation date. Following the actuarial valuation it was
agreed that the Group would pay an average contribution rate of 12% of
annual salaries, subject to review at future valuations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the date of the latest actuarial valuation the market value of the
assets of the ADPG ESPS was £44.6 million and the actuarial value of the
assets was sufficient to cover between 115% and 120% of the benefits that
had accrued to members, after allowing for expected increases in future
earnings. The next scheduled actuarial valuation of the ADPG ESPS will be
as at 31 March 2004.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-23



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | FRS 17
| |  | ------



| |  | In November 2000 the Accounting Standards Board issued FRS 17 Retirement
Benefits replacing SSAP 24 Accounting for Pensions Costs. Certain
disclosures are required in the transition period before full adoption of
FRS 17 for periods ending on or after June 22, 2001. These further
disclosures are included below.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The principal actuarial assumptions used as at 31 December 2002 are shown
below:
| |  | --------------------------------------------------------------------------------

2002
    
    2001Rate of increase in salaries
    
    
    3.8
    %
    
    
    4.0
    %Rate of increase of pensions in payment and deferment
    
    
    2.5
    %
    
    
    2.6
    %Discount rate
    
    
    5.4
    %
    
    
    5.8
    %Inflation assumption
    
    
    2.3
    %
    
    
    2.5
    %




| |  | The following contributions were made to the ADPG ESPS during 2002:
| |  | -------------------------------------------------------------------

Year ended31 December2002£millionsCompany contributions
    
    
    1.6Member contributions
    
    
    0.6




| |  | Analysis of amount charged to operating profit:
| |  | -----------------------------------------------

Year ended31 December2002£ millionsCurrent service cost
    
    
    1.9Past service cost
    
    
    Early retirement deficiency cost
    
    
    0.4Total operating cost
    
    
    2.3




| |  | Analysis of amount credited to other finance income:
| |  | ----------------------------------------------------

Year ended31 December2002£ millionsExpected return on pension plan assets
    
    
    3.3Less: Interest on pension plan liabilities
    
    
    (3.2
    )Net return
    
    
    0.1


A-24



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
shown below:
| |  | -----------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsEquities
    
    
    29.5
    
    
    
    36.1Bonds
    
    
    5.9
    
    
    
    6.6Other
    
    
    0.4
    
    
    
    0.7Market value of assets
    
    
    35.8
    
    
    
    43.4Actuarial value of liabilities
    
    
    (60.8
    )
    
    
    (53.9
    )Deficit in the scheme
    
    
    (25.0
    )
    
    
    (10.5
    )Related deferred tax asset (assumed 30% rate)
    
    
    7.5
    
    
    
    3.2Net pension liability
    
    
    (17.5
    )
    
    
    (7.3
    )




| |  | Analysis of movement in deficit during the year:
| |  | ------------------------------------------------

Year ended31 December2002£ millionsDeficit in scheme at 1 January 2002
    
    
    (10.5
    )Current service cost
    
    
    (1.9
    )Contributions
    
    
    2.2Early retirement deficiency cost
    
    
    (0.4
    )Actuarial loss
    
    
    (14.4
    )Deficit in scheme at 31 December 2002
    
    
    (25.0
    )




| |  | Analysis of amount recognised in Statement of Total Recognised Gains and
Losses:
| |  | --------------------------------------------------------------------------------

Year ended31 December2002£ millionsActual return less expected return on pension scheme assets
    
    
    (11.8
    )Experience gains arising on the scheme liabilities
    
    
    0.1Changes in assumptions underlying the present value of the
scheme liabilities
    
    
    (2.7
    )Actuarial loss recognised in STRGL
    
    
    (14.4
    )


A-25



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Had the company adopted FRS 17 early, Group profit and loss reserves would
have been stated as follows:
| |  | -------------------------------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsProfit and loss reserve in the financial statements as at year end
    
    
    (570.8
    )
    
    
    (9.3
    )Deficit in relation to the ADPG ESPS, net of related deferred tax asset
    
    
    (17.5
    )
    
    
    (7.3
    )Profit and loss reserve as adjusted
    
    
    (588.3
    )
    
    
    (16.6
    )




|25. |  | ULTIMATE PARENT COMPANY
|--- |  | -----------------------



| |  | The immediate parent company is AES Drax Acquisition Limited, a company
registered in England and Wales.
| |  | --------------------------------------------------------------------------------------------------------



| |  | The parent undertaking of the smallest group, which includes the company
and for which group accounts are prepared, is AES UK Power Holdings
Limited, a company incorporated in England and Wales. Copies of the group
accounts of AES UK Power Holdings Limited can be obtained from Companies
House, Crown Way, Cardiff CF14 3UZ.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at 31 December 2002, the ultimate parent company and controlling entity,
and largest group for which group accounts are prepared, was The AES
Corporation, a company incorporated in the State of Delaware, USA. Copies
of the parent groups financial statements can be obtained from the
Securities and Exchange Commission, 450, 5th Street NW, Washington DC
20549, USA.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 September 2003, notices were issued to the Company and the other
companies in the group by JP Morgan Chase Bank in its role of Security
Trustee in respect of the Guaranteed Secured Bonds in respect of an event
of default as a result of the non-payment of coupons as at 31 December 2002
and 30 June 2003. A further notice was also issued to AES Drax
Acquisitions Holdings Limited, the immediate parent of AES Drax Acquisition
Limited, stating that AES Drax Acquisition Limited would be prevented from
exercising any voting rights or other powers in respect of the ordinary
shares that it holds in AES Drax Acquisition Limited. The effect of this
notice is that The AES Corporation, who remains the ultimate parent
company, is unable to exercise any control over AES Drax Acquisition
Limited or any of its subsidiaries and that control of the group lies with
the senior creditors of the group.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|26. |  | NATURE OF BUSINESS
|--- |  | ------------------



| |  | The principal activity of the group is the ownership and operation of the
Drax Power Station, a 3,960 megawatt (gross) coal-fired power station based
in the North of England.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
|--- |  | ---------------------------------------------



| |  | This note is provided in addition to the previous financial information for
US users of the accounts.
| |  | -----------------------------------------------------------------------------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect on net income,
shareholders equity, the cash flow statement and comprehensive income is
shown in the tables on pages 29 to 31.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred taxation is provided at the anticipated tax rates
on timing differences arising from the inclusion of items of income and
expenditure in taxation computations in periods different from those in
which they are included in the financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-26



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Under US GAAP, deferred taxation is provided on all temporary differences
between tax and book bases of assets and liabilities under the liability
method, subject to a valuation allowance where applicable in respect of
deferred taxation assets, in accordance with SFAS 109, Accounting for
Income Taxes. As a result certain items that are treated as permanent
items under UK GAAP are treated as temporary differences under US GAAP. In
addition, deferred tax is also provided on certain of the other adjustments
between UK and US GAAP described herein. Such amounts are reported in the
profit and loss account except where the adjustment is recorded directly to
shareholders equity; for example, in relation to the additional minimum
pension liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pensions
| |  | --------



| |  | Under UK GAAP, where pensions are provided by means of a funded defined
benefits scheme, annual contributions are based on actuarial advice. The
expected cost of providing pensions is recognised on a systematic basis
over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining
service lives of current employees on a straight-line basis.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 87, Employers Accounting for Pensions, prescribes the
method of actuarial valuation, which includes differences from certain
assumptions used for the UK GAAP actuarial computation. In addition, assets
are assessed at current settlement rates. Certain variations from regular
cost are allocated in equal amounts over the average remaining service
lives of current employees. An additional minimum pension liability equal
to the excess of the accumulated benefit obligation over the plan assets
must be recognised at the balance sheet date with a corresponding entry
recorded as an intangible asset, to the extent of unamortised prior service
cost, and the balance, if any, in other comprehensive income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest and equity contribution
| |  | --------------------------------



| |  | Under UK GAAP, interest is charged on the £1,725 million Guaranteed Secured
Bonds. Under US GAAP, £425 million of the £1,725 million Guaranteed
Secured bond is treated as an equity contribution. Therefore, interest
under US GAAP is charged on the net £1,300 million.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The £1,300 million represents a senior secured bank facility. Repayment of
the bank facility is secured by a security interest in the £1,725 million
Guaranteed Secured Bonds. Enforcement of the bank facility will give the
bank lenders the right to enforce the security package granted under the
Guaranteed Secured Bonds. Interest on the bank facility accrues at LIBOR +
1.8%. Principal repayments are due semi-annually over a fifteen year period
commencing 30 June 2000. Principal repayments of £25 million, £370 million,
£2.7 million, £9.1 million, £22.6 million and £28.1 million were made on 30
June 2000, 2 August 2000, 31 December 2000, 30 June 2001, 31 December 2001
and 30 June 2002 respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Goodwill and tangible fixed assets
| |  | ----------------------------------



| |  | Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over the
fair value of the identifiable net assets acquired. Goodwill is
capitalised under the heading, Intangible assets, and amortised over its
expected useful economic life, subject to a maximum of twenty years. Such
goodwill is subject to review for impairment in accordance with FRS 11,
Impairment of Fixed assets and Goodwill, which allows testing for
impairment at the income generating unit level. In the year ended 31
December 2002 the Company has recorded an impairment loss, based on a
discounted cash flow calculation, of £579 million.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-27



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Under US GAAP, the acquisition has been treated as an acquisition of assets
and accordingly the entire purchase price, including certain liabilities
assumed, has been allocated to tangible fixed assets and depreciated over
the estimated useful lives of the assets, being thirty five years.
Furthermore, additional net deferred tax liabilities recorded at the
acquisition date under US GAAP resulted in an increase in the amount
allocated to tangible fixed assets resulting in additional depreciation
expense. In accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-lived Assets, an impairment loss shall be recognized only
if the carrying amount of a long-lived asset exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. No impairment was recognised under US GAAP.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivative Instruments and Hedging Activities
| |  | ---------------------------------------------



| |  | Under UK GAAP, investments or financial derivative instruments accounted
for as hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as hedges
at the inception of the contract. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amounts of those assets
or liabilities and are ultimately recognized in the profit and loss account
as part of those carrying amounts. Gains and losses on qualifying hedges
of firm commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated hedged rate.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, requires all derivative financial instruments to be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings unless specific hedge
accounting criteria are met. Where the derivative instrument qualifies for
hedge accounting, changes in fair value of the instrument are recorded in
earnings or other comprehensive income (a separate component of equity)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction and whether or not
the hedge is effective. For fair value hedge transactions in which a
company is hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative will generally be
offset in the income statement by changes in the hedged items fair value.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For cash flow hedge transactions, in which a company is hedging the
variability of cash flows related to a variable-rate asset, liability or a
forecasted transaction, changes in the fair value of the derivative
instrument are initially reported in other comprehensive income and them
reclassified as earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The ineffective
portion of all hedges are recognised in current-period earnings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to qualify for hedge accounting under SFAS 133, a company must
formally document, designate and assess, periodically, the effectiveness of
transactions that qualify for hedge accounting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactions, contracts, assets and liabilities denominated in foreign
currencies are recorded at the exchange rate prevailing on the date of the
transaction, and assets and liabilities are recorded at the period end
date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-28



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Severance accrual and unfavourable IT contract
| |  | ----------------------------------------------



| |  | Under UK GAAP only those liabilities that existed in the acquired business
may be reflected in the purchase price allocation. Liabilities arising
from the acquirers intentions may not be recognised. Therefore under UK
GAAP it is not permissible to record a severance accrual for the costs
associated with terminating employees of the acquired business or for the
unfavourable IT contract. Instead such amounts must be provided for and
expensed in the post-acquisition financial statements of the acquirer.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, such amounts may be recorded as part of the acquisition of
Drax Power Limited in accordance with EITF 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Recently issued but not yet adopted accounting pronouncements
| |  | -------------------------------------------------------------



| |  | Asset retirement obligations.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective 1 January 2003, requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the
costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The company will adopt SFAS No. 143 effective 1 January 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has completed a detailed assessment of the specific
applicability and implications of SFAS No. 143. The scope of SFAS No. 143
includes primarily active ash landfills, water treatment basins and the
removal or dismantlement of certain plant and equipment. As of 31 December
2002, the company had a recorded liability of approximately £0.1 million
related to asset retirement obligations. Upon adoption of SFAS No. 143, the
company is not required to record any additional liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Exit or disposal activities.In June 2002, the Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior to
issuance of SFAS No. 146, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after 31 December 2002. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-based compensation.In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the
adoption of this pronouncement to have a material impact on our financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Guarantor accounting.We will apply the initial recognition and
measurement provisions of FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others, on a prospective basis for all
guarantees issued after 31 December 2002. Under FIN 45, at the inception of
guarantees issued after 31 December 2002, we will record the fair value of
the guarantee as a liability, with the offsetting entry being recorded
based on the circumstances in which the guarantee was issued. We will
account for any fundings under the guarantee as a reduction of the
liability. After funding has ceased, we will recognize the remaining
liability in the income statement on a straight-line basis over the
remaining term of the guarantee. In general, we enter into various
agreements providing financial performance assurance to third parties on
behalf of certain subsidiaries.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-29



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Such agreements include guarantees, letters of credit and surety bonds. FIN
45 does not encompass guarantees issued either between parents and their
subsidiaries or between corporations under common control, a parents
guarantee of its subsidiarys debt to a third party (whether the parent is
a corporation or an individual), a subsidiarys guarantee of the debt owed
to a third party by either its parent or another subsidiary of that parent,
nor guarantees of a companys own future performance. Adoption of FIN 45
will have no impact to our historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The
company does not expect adoption of the liability recognition provisions of
FIN 45 to have a material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Variable interest entities.FIN 46, Consolidation of Variable Interest
Entities, is effective immediately for all enterprises with variable
interests in variable interest entities created after 31 January 2003. FIN
46 provisions must be applied to variable interests in variable interest
entities created before 1 February 2003 as at 31 December 2003. If an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur and/or receives a majority of the entitys
expected residual returns if they occur. If significant variable interests
are held in a variable interest entity, the company must disclose the
nature, purpose, size and activity of the variable interest entity and the
companys maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after 31
January 2003. We do not believe that the adoption of FIN 46 will result in
our consolidation of any previously unconsolidated entities or material
additional disclosure.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | DIG Issue C11.In connection with the January 2003 FASB Emerging Issues
Task Force (EITF) meeting, the FASB was requested to reconsider an
interpretation of SFAS No. 133. The interpretation, which is contained in
the Derivatives Implementation Groups C11 guidance, relates to the pricing
of contracts that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that contains broad
market indices (e.g. CPI) could qualify as a normal purchase or sale. The
company is currently re-evaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial instruments with characteristics of both liabilities and equity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with characteristics of both liabilities and equity.
SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects an issuers
accounting for 3 types of freestanding financial instruments, namely:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1 |  | Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | 2 |  | Instruments, other than outstanding shares, that do or may not
require the issuer to buy back some of its shares in exchange for
cash or other assets. These instruments include put options and
forward purchase contracts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 |  | Obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers
shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-30



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | SFAS No. 150 does not apply to features in embedded financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after 31 May 2003 and
otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement
is not permitted. This would apply to the £425 million forward purchase of
preference shares that is disclosed in AES Drax Acquisition Limiteds
financial statements, note 15. The company is currently evaluating the
effects that this guidance will have on its results of operations and
financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Net (loss)/income under UK GAAP
    
    
    (750,541
    )
    
    
    (18,855
    )
    
    
    (2,485
    )US GAAP adjustments:Dividends
    
    
    
    
    
    
    
    
    
    
    14,000Additional depreciation on tangible fixed assets
    
    
    (39,676
    )
    
    
    (39,676
    )
    
    
    (39,676
    )Severance pay expensed under UK GAAP
    
    
    
    
    
    
    
    
    
    
    12,053Unfavourable IT contract
    
    
    
    
    
    
    
    
    
    
    1,995Deferred taxation
    
    
    19,081
    
    
    
    20,173
    
    
    
    12,303Derivative instruments and hedging activities
    
    
    (251
    )
    
    
    (11,762
    )
    
    
    Foreign exchange on the debt denominated in US$
    
    
    13,155
    
    
    
    (5,553
    )
    
    
    Goodwill amortisation
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Interest
    
    
    48,370
    
    
    
    43,874
    
    
    
    44,920Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Net (loss)/income under US GAAP
    
    
    (96,986
    )
    
    
    22,077
    
    
    
    76,986


As restated
    
    As restated31 December2002
    
    31 December2001£000
    
    £000Shareholders (deficit)/equity under UK GAAP
    
    
    (498,491
    )
    
    
    10,799US GAAP adjustments:Tangible fixed assets, cost
    
    
    1,408,909
    
    
    
    796,033Additional depreciation on tangible fixed assets
    
    
    (122,379
    )
    
    
    (82,703
    )Deferred taxation
    
    
    (644,694
    )
    
    
    (666,607
    )Derivative instruments and hedging activities
    
    
    (54,601
    )
    
    
    (48,932
    )Foreign exchange on debt denominated in US$
    
    
    11,518
    
    
    
    (8,414
    )Additional minimum pension liability
    
    
    (10,800
    )
    
    
    Interest and equity contribution
    
    
    565,362
    
    
    
    516,992Shareholders equity under US GAAP
    
    
    654,824
    
    
    
    517,168


A-31



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | In addition to the recognition and measurement differences set out in the
reconciliation tables above here are a number of classification differences
between UK and US GAAP. These are described below:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred financing costs
| |  | ------------------------



| |  | Under UK GAAP the direct costs of obtaining finance are offset against the
related borrowing. Under US GAAP financing costs are reported as a
separate asset.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred tax liabilities are presented net with Provisions
for liabilities and charges. Under US GAAP deferred taxes are presented
as current or long term based upon the term of the item to which they
relate. Deferred tax assets and liabilities may only be offset to the
extent that they are both classified as short or long term.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cash flow statement
| |  | -------------------



| |  | A reconciliation of the consolidated cash flow statement prepared under UK
GAAP to a statement of cash flows prepared under US GAAP is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    138,120
    
    
    
    174,131
    
    
    
    162,374Returns on investments and servicing of finance
    
    
    (140,574
    )
    
    
    (173,395
    )
    
    
    (131,219
    )Taxation
    
    
    (348
    )
    
    
    (9,160
    )
    
    
    (19,104
    )Net cash flows (used in)/provided by operating activities per
US GAAP
    
    
    (2,802
    )
    
    
    (8,424
    )
    
    
    12,051Capital expenditure
    
    
    (5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Increase in restricted cash deposits
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )Net cash used in investing activities per US GAAP
    
    
    (53,725
    )
    
    
    (6,538
    )
    
    
    (15,734
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (14,000
    )Prepayments of coupons
    
    
    
    
    
    
    
    
    
    
    (373,551
    )New borrowings, net of issue costs
    
    
    
    
    
    
    
    
    
    
    383,793Capital contribution
    
    
    52,250
    
    
    
    
    
    
    
    Net cash provided by/(used in) financing
activities per US GAAP
    
    
    52,250
    
    
    
    
    
    
    
    (3,758
    )Decrease in cash
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Cash brought forward
    
    
    40,796
    
    
    
    55,310
    
    
    
    53,510Cash carried forward
    
    
    85,020
    
    
    
    40,796
    
    
    
    55,310


A-32



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Comprehensive (loss)/income under US GAAP is as follows:
| |  | --------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Net (loss)/income under US GAAP
    
    
    (96,986
    )
    
    
    22,077
    
    
    
    76,986Derivative loss
    
    
    (5,418
    )
    
    
    (37,170
    )
    
    
    Transfer of derivatives to profit and loss account
    
    
    6,777
    
    
    
    (2,861
    )
    
    
    Minimum pension obligation
    
    
    (10,800
    )
    
    
    
    
    
    
    Deferred income tax on derivatives and minimum
pension liability
    
    
    2,832
    
    
    
    12,009
    
    
    
    Comprehensive (loss)/income
    
    
    (103,595
    )
    
    
    (5,945
    )
    
    
    76,986




|28. |  | RESTATEMENT
|--- |  | -----------



| |  | These financial statements supersede and replace the original financial
statements of the company dated 14 May 2003 included on the Form 20-F of
the company filed on 16 May 2003. The financial statements have been
amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
company subsequent to the date of the original filing. The financial
statements have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments
to disclosure and for other presentational changes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the restatements, equity shareholders funds has been
increased by £52.25 million as at 31 December 2002 and by nil as at 31
December 2001. The restatements have no effect on the consolidated net
loss or net cashflows in the years ended 31 December 2002, 2001 and 2000.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP the net impact of the restatements is to increase
shareholders equity by £64.9 million and £14.2 million at 31 December 2002
and 2001 respectively and to increase/(reduce) the net loss by £2.1
million, (£2.8 million) and nil in the years ended 31 December 2002, 2001
and 2000.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The change in equity shareholders funds as at 31 December 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of £52.25 million. This related to a draw down made in December
2002 under the terms of a letter of credit established by The AES
Corporation. The AES Corporation has subsequently confirmed that it had
waived any rights to repayment against the company in respect of the draw
down in a letter dated 25 January 2002. Accordingly, the amount has been
reclassified into a capital reserve. This change has reduced the
liabilities and increased the net assets of the company by £52.25 million
each respectively as at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The balance sheet as at 31 December 2002 has also been amended to reflect
the reclassification of loans from due after more than one year to due
within one year (note 15).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The presentation of deferred finance costs and prepaid interest has been
changed to reclassify these amounts from prepayments and other debtors to
be deductions from the associated loans in the balance sheet as at 31
December 2002 and 2001. In the profit and loss account the amortisation of
deferred financing costs has been reclassified from administrative expenses
to interest payable and similar charges. The classification of cash flows
has also been amended for the years ended 31 December 2002, 2001 and 2000
to reflect this change in presentation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-33



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT (continued)
|--- |  | -----------------------



| |  | The restatements of the balance sheets as of 31 December 2002 and 2001 and
of the profit and loss accounts for the years ended 31 December 2002, 2001
and 2000 are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As previouslyreported
    
    Restatements
    
    As restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2002Fixed assets
    
    
    1,083,118
    
    
    
    
    
    
    
    1,083,118Current assets
    
    
    630,738
    
    
    
    (381,994
    )
    
    
    248,744Creditors: amounts falling due within one year
    
    
    (122,351
    )
    
    
    (1,690,756
    )
    
    
    (1,813,107
    )Creditors: amounts falling due after
more than one year
    
    
    (2,125,368
    )
    
    
    2,125,000
    
    
    
    (368
    )Provisions
    
    
    (16,878
    )
    
    
    
    
    
    
    (16,878
    )Net liabilities
    
    
    (550,741
    )
    
    
    52,250
    
    
    
    (498,491
    )Deficit on equity shareholders funds
    
    
    (550,741
    )
    
    
    52,250
    
    
    
    (498,491
    )Balance sheet as of 31 December 2001Fixed assets
    
    
    1,734,855
    
    
    
    
    
    
    
    1,734,855Current assets
    
    
    700,458
    
    
    
    (400,520
    )
    
    
    299,938Creditors: amounts falling due within one year
    
    
    (92,482
    )
    
    
    
    
    
    
    (92,482
    )Creditors: amounts falling due after
more than one year
    
    
    (2,314,644
    )
    
    
    400,520
    
    
    
    (1,914,124
    )Provisions
    
    
    (17,388
    )
    
    
    
    
    
    
    (17,388
    )Net assets
    
    
    10,799
    
    
    
    
    
    
    
    10,799Equity shareholders funds
    
    
    10,799
    
    
    
    
    
    
    
    10,799Profit and loss account for the year ended 31 December 2002
    
    
    
    
    
    
    
    
    
    
    Turnover
    
    
    524,831
    
    
    
    
    
    
    
    524,831Cost of sales
    
    
    (219,462
    )
    
    
    
    
    
    
    (219,462
    )Administrative expenses
    
    
    (904,526
    )
    
    
    4,646
    
    
    
    (899,880
    )Interest receivable and similar income
    
    
    23,548
    
    
    
    
    
    
    
    23,548Interest payable and similar charges
    
    
    (175,442
    )
    
    
    (4,646
    )
    
    
    (180,088
    )Tax on (loss)/profit on ordinary activities
    
    
    510
    
    
    
    
    
    
    
    510Loss on ordinary activities after taxation
    
    
    (750,541
    )
    
    
    
    
    
    
    (750,541
    )


A-34



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT (continued)
|--- |  | -----------------------

As previouslyreported
    
    Restatements
    
    As restated£000
    
    £000
    
    £000Profit and loss account for the year ended 31 December 2001Turnover
    
    
    586,103
    
    
    
    
    
    
    
    586,103Cost of sales
    
    
    (267,204
    )
    
    
    
    
    
    
    (267,204
    )Administrative expenses
    
    
    (175,795
    )
    
    
    4,776
    
    
    
    (171,019
    )Interest receivable and similar income
    
    
    14,937
    
    
    
    
    
    
    
    14,937Interest payable and similar charges
    
    
    (166,011
    )
    
    
    (4,776
    )
    
    
    (170,787
    )Tax on (loss)/profit on ordinary activities
    
    
    (10,885
    )
    
    
    
    
    
    
    (10,885
    )Loss on ordinary activities after taxation
    
    
    (18,855
    )
    
    
    
    
    
    
    (18,855
    )Profit and loss account for the year ended 31 December 2000Turnover
    
    
    622,776
    
    
    
    
    
    
    
    622,776Cost of sales
    
    
    (278,218
    )
    
    
    
    
    
    
    (278,218
    )Administrative expenses
    
    
    (170,105
    )
    
    
    3,959
    
    
    
    (166,146
    )Interest receivable and similar income
    
    
    11,862
    
    
    
    
    
    
    
    11,862Interest payable and similar charges
    
    
    (152,365
    )
    
    
    (3,959
    )
    
    
    (156,324
    )Tax on (loss)/profit on ordinary activities
    
    
    (22,435
    )
    
    
    
    
    
    
    (22,435
    )Profit on ordinary activities after taxation
    
    
    11,515
    
    
    
    
    
    
    
    11,515




| |  | The restatement of cash flows for the years ended 31 December 2002, 2001
and 2000 relates to an adjustment to interest received in respect of the
timing of cash flows under a financing hedging swap of £19.4 million, £10.3
million and £2.5 million respectively. These adjustments are offset by
corresponding changes to the reported net cash inflows from operating
activities and there was no effect on the consolidated net cashflows in
either the current or prior years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Restatement of US GAAP reconciliations
| |  | --------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net income/(loss) under US GAAPAs previously reported
    
    
    (106,270
    )
    
    
    22,435
    
    
    
    62,986US GAAP adjustmentsDividends paid (i)
    
    
    
    
    
    
    
    
    
    
    14,000Deferred taxation (ii)
    
    
    (3,871
    )
    
    
    5,195
    
    
    
    Derivatives and hedging activities (iii)
    
    
    13,155
    
    
    
    (5,553
    )
    
    
    As restated
    
    
    (96,986
    )
    
    
    22,077
    
    
    
    76,986


A-35



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT (continued)
|--- |  | -----------------------

2002
    
    2001£000
    
    £000Shareholders equity under US GAAPAs previously reported
    
    
    585,691
    
    
    
    508,378Increase in equity shareholders funds under UK GAAP
as described above
    
    
    52,250
    
    
    
    US GAAP adjustmentsDeferred taxation (ii)
    
    
    19,620
    
    
    
    14,680Additional minimum pension liability (iv)
    
    
    (10,800
    )
    
    
    Derivatives and hedging activities (iii)
    
    
    8,063
    
    
    
    (5,890
    )As restated
    
    
    654,824
    
    
    
    517,168




| | (i) |  | Under UK GAAP, dividends are shown as a deduction on the face of
the profit and loss account, whereas under US GAAP, dividends are
deducted directly from shareholders equity. As previously reported,
the US GAAP reconciliation had started with the net income/(loss) as
reported under UK GAAP, after deducting dividends. This adjustment is
necessary to start the reconciliation with net income/(loss) before
dividends, in order to conform with standard US practice.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | These adjustments are necessary to reflect the deferred tax
effect of the US GAAP adjustments made in respect of derivative
instruments and hedging activities and the additional minimum pension
liability.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) |  | This adjustment is required to recognise foreign exchange gains
and losses arising on debt denominated in US$ when it is retranslated
at the spot rate on the balance sheet date. Under UK GAAP, debt
hedged by currency swaps is translated at the hedged rate.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) |  | The additional minimum pension liability had been previously
reported in the US GAAP reconciliation disclosures, but had been
omitted from the reconciliation of shareholders equity.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|29. |  | POST BALANCE SHEET EVENTS
|--- |  | -------------------------



| |  | Standstill arrangements with certain senior creditors
| |  | -----------------------------------------------------



| |  | Drax has been operating under standstill arrangements with certain of its
senior creditors since 12 December 2002. The purpose of the standstill
arrangements is to provide Drax and the senior creditors with a period of
stability during which discussions regarding consensual restructuring of
Drax can take place (the Restructuring). The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period. Although the standstill period under the original
standstill agreement terminated on 31 May 2003, Drax had reached agreement
on three further standstill agreements, which have now expired, and is
currently operating under a long term standstill agreement, agreed with the
Steering Committee and the Ad Hoc Committee. This agreement became
effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This matter is discussed more fully in note 1, Basis of Preparation and
Accounting Policies.
| |  | --------------------------------------------------------------------------------------------

A-36



---



##### 



DRAX HOLDINGS LIMITED (formerly AES Drax Holdings Limited)

NOTE TO THE ACCOUNTS
Year ended 31 December 2002



|29. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | The AES Corporation
| |  | -------------------



| |  | Based on negotiations through the end of June 2003, the steering committee
representing the syndicate of banks (the Senior Lenders) which financed
the Eurobonds issued by Drax Holdings Limited to finance the acquisition of
the Drax Power Station, and the Ad Hoc Committee (together with the
Steering Committee, the Senior Creditors Committees), reached agreement
on more detailed terms of the Restructuring, and each of the Senior
Creditors Committees, the Drax Companies and The AES Corporation indicated
their support for a Restructuring to be implemented based upon the proposed
restructuring terms (the Restructuring Proposal).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 23 July 2003, Drax received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the
Restructuring and to purchase certain debt to be issued in the
Restructuring described in the Restructuring Proposal (the International
Power Proposal).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 28 July 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring
unless each member of the Senior Creditors Committees met certain
conditions by no later than 5 August 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 July 2003, the directors of Drax Holdings Limited and Drax Power
Limited appointed Gordon Horsfield and Gerald Wingrove as directors of Drax
Holdings Limited and Drax Power Limited. They, together with Lord Taylor
of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On the evening of 5 August 2003 The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
| |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of Drax Holdings Limited and Drax Power
Limited and stated their intention to resign as directors from the boards
of the other Drax companies (other than AES Drax Power Finance Holdings
Limited and AES Drax Energy Limited). They resigned from AES Drax
Acquisition Limited, Drax Electric Limited and Drax Limited on 8 August
2003. Accordingly, the boards of each of Drax Holdings Limited and Drax
Power Limited now comprise Lord Taylor of Blackburn, Gordon Horsfield and
Gerald Wingrove, the boards of each of Drax Electric Limited and Drax
Limited comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald
Wingrove and the board of AES Drax Acquisition Limited comprises Gordon
Horsfield and Gerald Wingrove.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the withdrawal of support by The AES Corporation, the
company has written down amounts due from another group company of £68.5
million in the third quarter of 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 14 August 2003, Drax received a letter from Goldman Sachs International,
pursuant to which it proposed to participate in the Restructuring in place
of The AES Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 19 August 2003, Drax received a letter from International Power plc,
pursuant to which it revised the International Power Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | On 21 August 2003, Drax received a letter from BHP Billiton in respect of
the Restructuring.
| |  | --------------------------------------------------------------------------------------------



| |  | On 30 August 2003, Drax announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman
Sachs International, and having noted the letter received from Miller,
McConville, Christen, Hutchison and Waffel, and following discussions with
the senior creditors of Drax, Drax entered into an exclusive arrangement
with International Power plc on the basis of a revised offer received from
International Power plc on 30 August 2003 to participate in the
Restructuring.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 3 October 2003, AES Drax Power Limiteds name was changed to Drax Power
Limited, AES Drax Limiteds name was changed to Drax Limited, AES Drax
Electric Limiteds name was changed to Drax Electric Limited and AES Drax
Holdings Limiteds name was changed to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-37



---



##### 



Company Registration No. 3618559











DRAX POWER LIMITED (formerly AES Drax Power Limited)



Financial Statements
31 December 2002
(As restated, see note 26)







B-1



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent
Auditors Report
    
    
    B-3Profit and Loss Account
    
    
    B-4Statement of Total Recognised Gains and Losses
    
    
    B-4Balance Sheet
    
    
    B-5Cash Flow Statement
    
    
    B-6Notes to the Accounts
    
    
    B-7


B-2



---



##### 



INDEPENDENT AUDITORS REPORT TO THE DIRECTORS OF DRAX POWER LIMITED
(formerly AES Drax Power Limited)

We have audited the accompanying balance sheets of Drax Power Limited (formerly
AES Drax Power Limited) as of 31 December 2002 and 2001, and the related profit
and loss accounts, statements of total recognised gains and losses and cash
flows for each of the three years in the period ended 31 December 2002. These
financial statements are the responsibility of the companys directors. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at 31 December 2002 and 2001,
and the results of its operations and its cash flows for each of the three
years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in note 25.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in note 26, the financial statements have been restated.

Deloitte & Touche LLP
Chartered Accountants
 
Leeds
6 November 2003

B-3



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002 (As restated, see note 26)

As restatedYear ended
    
    Year ended
    
    Year endedNote
    
    31
December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000TURNOVER  continuing operations
    
    
    2
    
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,956Cost of sales
    
    
    
    
    
    
    (219,462
    )
    
    
    (267,204
    )
    
    
    (278,218
    )GROSS PROFIT
    
    
    
    
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,738Administrative expenses  normal
    
    
    
    
    
    
    (150,024
    )
    
    
    (154,449
    )
    
    
    (158,014
    ) exceptional
    
    
    4
    
    
    
    (219,719
    )
    
    
    
    
    
    
    (369,743
    )
    
    
    (154,449
    )
    
    
    (158,014
    )OPERATING (LOSS)/PROFIT  continuing operations
    
    
    3
    
    
    
    (64,374
    )
    
    
    164,450
    
    
    
    186,724Interest receivable and other income
    
    
    5
    
    
    
    23,625
    
    
    
    14,834
    
    
    
    11,154Interest payable and similar charges
    
    
    6
    
    
    
    (1,354
    )
    
    
    (3,919
    )
    
    
    (LOSS)/PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION
    
    
    
    
    
    
    (42,103
    )
    
    
    175,365
    
    
    
    197,878Tax on (loss)/profit on ordinary activities
    
    
    7
    
    
    
    (21,024
    )
    
    
    (60,975
    )
    
    
    (68,306
    )(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION
    
    
    
    
    
    
    (63,127
    )
    
    
    114,390
    
    
    
    129,572Dividends
    
    
    8
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )RETAINED (LOSS)/PROFIT FOR THE FINANCIAL
YEAR TRANSFERRED (FROM)/TO RESERVES
    
    
    17, 18
    
    
    
    (63,127
    )
    
    
    (10,994
    )
    
    
    7,736


STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

There are no recognised gains and losses for the years ended 31 December 2002,
2001 and 2000 other than as stated in the profit and loss account. Therefore,
no statement of total recognised gains and losses has been presented.



B-4



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

BALANCE SHEET
As at 31 December 2002 (As restated, see note 26)

As restatedNote
    
    2002
    
    2001£000
    
    £000FIXED ASSETSTangible assets
    
    
    9
    
    
    
    1,083,118
    
    
    
    1,140,245CURRENT ASSETSStocks
    
    
    10
    
    
    
    31,327
    
    
    
    62,563Debtors
    
    
    11
    
    
    
    157,687
    
    
    
    168,047Cash at bank and in hand
    
    
    12
    
    
    
    84,916
    
    
    
    39,790273,930
    
    
    
    270,400CREDITORS: amounts falling due
within one year
    
    
    13
    
    
    
    (50,437
    )
    
    
    (92,371
    )NET CURRENT ASSETS
    
    
    
    
    
    
    223,493
    
    
    
    178,029TOTAL ASSETS LESS CURRENT
LIABILITIES
    
    
    
    
    
    
    1,306,611
    
    
    
    1,318,274CREDITORS: amounts falling due
after more than one year
    
    
    14
    
    
    
    (78,548
    )
    
    
    (78,824
    )PROVISIONS FOR LIABILITIES AND
CHARGES
    
    
    15
    
    
    
    (16,878
    )
    
    
    (17,388
    )1,211,185
    
    
    
    1,222,062CAPITAL AND RESERVESCalled up share capital
    
    
    16
    
    
    
    1,000
    
    
    
    1,000Share premium
    
    
    17
    
    
    
    1,204,542
    
    
    
    1,204,542Capital reserve
    
    
    17
    
    
    
    52,250
    
    
    
    Profit and loss account
    
    
    17
    
    
    
    (46,607
    )
    
    
    16,520TOTAL EQUITY SHAREHOLDERS FUNDS
    
    
    18
    
    
    
    1,211,185
    
    
    
    1,222,062


The financial information set out above does not constitute the companys
statutory accounts for the year ended 31 December 2002 or 31 December 2001.
Statutory accounts for 2001 have been delivered to the Registrar of Companies
and those for 2002 will be delivered in due course. The auditors have reported
on those accounts; their reports were unqualified and did not contain
statements under Section 237(2) or (3) of the Companies Act 1985.

B-5



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

CASH FLOW STATEMENT
Year ended 31 December 2002 (As restated, see note 26)

As restated
    
    As restated
    
    As restatedNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    19
    
    
    
    70,608
    
    
    
    189,797
    
    
    
    186,369Returns on investments and servicing of financeInterest received
    
    
    
    
    
    
    4,175
    
    
    
    4,576
    
    
    
    8,375Interest paid
    
    
    
    
    
    
    (54,800
    )
    
    
    (3,919
    )
    
    
    Net cash inflow from returns on investments
and servicing of finance
    
    
    
    
    
    
    (50,625
    )
    
    
    657
    
    
    
    8,375Taxation
    
    
    
    
    
    
    (21,883
    )
    
    
    (59,231
    )
    
    
    (68,888
    )Capital expenditurePayments to acquire tangible fixed assets
    
    
    
    
    
    
    (5,224
    )
    
    
    (6,119
    )
    
    
    (11,993
    )Receipts from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    5,500(5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Cash outflow before use of liquid resources
    
    
    
    
    
    
    (7,124
    )
    
    
    (251
    )
    
    
    (2,473
    )Management of liquid resourcesIncrease in restricted cash deposits
    
    
    
    
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )FinancingFunding of capital reserve
    
    
    26
    
    
    
    52,250
    
    
    
    
    
    
    
    Decrease in cash in the year
    
    
    20
    
    
    
    (3,375
    )
    
    
    (699
    )
    
    
    (11,714
    )


B-6



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES
|-- |  | --------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU Europe Energy
Trading Limited (TXU Europe) and the appointment of joint administrators
of TXU Europe and TXU Europe Group plc (TXU Group) on 18 and 19 November
2002, respectively, the company entered discussions with its senior lenders
in order to address the potential defaults under the senior financing
documents arising from the TXU situation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at 30
June 2002, were below the threshold required to permit distributions. As a
result, Drax Power Limited was not permitted to make distributions to AES
Drax Energy Limited to permit interest due on the high yield notes to be
paid on 30 August 2002. The AES Corporation, however, made a contribution
to AES Drax Energy Limited which together with amounts then held in the
high yield note debt service reserve account was sufficient to make the
payments then due. At the time The AES Corporation stated that there were
no assurances that it would agree to make any similar payments in the
future. Any improvements in the forward looking ratios were dependent on a
favourable change in the forward curve for electricity prices during the
period from 30 June to 31 December 2002. Such improvements did not occur
and the ratios were below 1.19:1 at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the end
of February 2003. Such failure constitutes an event of default under the
notes, although any enforcement rights are subject to a 90-day grace period
as well as the terms and conditions of certain intercreditor arrangements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Drax group of companies (Drax) has been operating under standstill
arrangements with certain of its senior creditors since 12 December 2002.
The purpose of the standstill arrangements is to provide Drax and the
senior creditors with a period of stability during which discussions
regarding consensual restructuring of Drax can take place. The bank
lenders and the senior bondholders have agreed to waive certain events of
default under the Eurobonds or the senior bonds, as applicable, not to
accelerate payment of the obligations and would not seek to enforce
security during the standstill period. Although the standstill period
under the original standstill agreement terminated on 31 May 2003, Drax had
reached agreement on three further standstill agreements, which have now
expired, and is currently operating under a long term standstill agreement,
agreed with the steering
committee representing the senior banks (the Steering Committee) and the Ad Hoc Committee formed by
holders of Drax Holdings Limiteds senior bonds (the Ad Hoc Committee).
This agreement became effective on 9 October 2003 and will
expire on 31 December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the companys lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The directors of the company believe that the standstill arrangements will
facilitate an agreed restructuring of Drax. On this basis, the directors
of the company consider it appropriate to prepare the financial statements
on the going concern basis. The financial statements do not include any
adjustments that would result from a withdrawal of support by the companys
lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-7



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Accounting policies
| |  | -------------------



| |  | The financial statements are prepared in accordance with applicable United
Kingdom accounting standards. The particular accounting policies adopted
are described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------



| |  | Tangible fixed assets
| |  | ---------------------



| |  | Freehold land and assets in the course of construction are not depreciated.
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The estimated useful lives are:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Freehold buildings, plant and machinery |  | 30-40 years
| |  | --------------------------------------- |  | -----------
| |  | Plant spares                            |  | 30-40 years
| |  | Fixtures and fittings                   |  | 3-5   years



| |  | Stocks
| |  | ------



| |  | Stocks are stated at the lower of cost, inclusive of appropriate overheads,
and net realisable value. Net realisable value is based on estimated
selling price less all further costs to completion and all relevant
marketing, selling and distribution costs.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxation
| |  | --------



| |  | Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the groups taxable
profits and its results as stated in the financial statements that arise
from the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not there will be suitable taxable profits
from which the future reversal of the underlying timing differences can be
deducted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leased assets
| |  | -------------



| |  | Operating lease rentals are charged to income in equal annual amounts over
the lease term.
| |  | ------------------------------------------------------------------------------------------

B-8



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Pension costs
| |  | -------------



| |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs
are recognised immediately in the profit and loss account if the benefits
have vested. If the benefits have not vested immediately, the costs are
recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs
or credits adjacent to interest. Actuarial gains and losses are recognised
immediately in the statement of total recognised gains and losses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are
measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and
are updated at each balance sheet date. The resulting defined benefit asset
or liability, net of the related deferred tax, is presented separately
after other net assets on the face of the balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has adopted the transitional disclosure requirements of FRS 17.
| |  | ---------------------------------------------------------------------------



| |  | Revenue recognition
| |  | -------------------



| |  | Revenues from the sale of electricity are recorded based upon output
delivered and capacity provided at rates specified under contract terms or
prevailing market rates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivatives
| |  | -----------



| |  | Investments or financial derivative instruments accounted for as hedges are
structured so as to reduce the market risk associated with the underlying
transaction being hedged and are designated as hedges at the inception of
the contract. Gains and losses on hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriate hedged rate.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred finance costs
| |  | ----------------------



| |  | Financing costs are deferred and amortised over the related financing
period using the effective interest method of amortisation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | TURNOVER
|-- |  | --------



| |  | Turnover comprises primarily sales to the electricity trading market in
England and Wales of electricity generated by the company. Most of the
power plants revenue relies on sales contracts with a few large customers.
One customer accounted for 65.1% of revenues in the year to 31 December
2002. Two customers accounted for 67.9% and 9.0% of revenues in 2001 and
43.5% and 19.5% of revenues in 2000.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-9



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|3. |  | OPERATING (LOSS)/PROFIT
|-- |  | -----------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Operating (loss)/profit is stated after charging:Depreciation of owned assets
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937




|4. |  | EXCEPTIONAL ITEMS
|-- |  | -----------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bad debt expense
    
    
    136,801
    
    
    
    
    
    
    
    Provision against intercompany debtor
    
    
    53,446Impairment (note 9)
    
    
    29,472
    
    
    
    
    
    
    
    219,719
    
    
    
    
    
    
    
    




| |  | On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
TXU Group. As a consequence of this, on 18 November 2002, Drax
Power Limited
terminated the Hedging Contract with TXU Europe, a subsidiary of TXU Group,
to minimise financial exposure. On 19 November 2002, TXU Group filed a
petition on behalf of itself, TXU UK Limited and TXU Europe, seeking
protection from its creditors, which was approved, putting the three
companies into temporary administration. As a result, the company has made
100% provision against all amounts owed by TXU Europe in respect of the
Hedging Contract and the termination of that contract, as at 18 November
2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included within administrative expenses is an exceptional item of £29
million in respect of an impairment loss on fixed assets. The impairment
loss was measured by reference to the value in use of the assets using a
discount rate of 7.9% which reflects the risks inherent in the forecast
cash flows.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The tax effect of the bad debt expense is £41 million. The impairment of
fixed assets is non-deductible and so has no tax effect.
| |  | ---------------------------------------------------------------------------------------------------------------------------------



|5. |  | INTEREST RECEIVABLE AND SIMILAR INCOME
|-- |  | --------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bank interest receivable
    
    
    23,625
    
    
    
    14,834
    
    
    
    11,154


B-10



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|6. |  | INTEREST PAYABLE AND SIMILAR CHARGES
|-- |  | ------------------------------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Bank interest and other loans
    
    
    1,354
    
    
    
    3,919
    
    
    
    




|7. |  | TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
|-- |  | -------------------------------------------



| | a) |  | Analysis of charge in the year
| | -- |  | ------------------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000United Kingdom corporation tax at 30%  current year
    
    
    
    
    
    
    4,643
    
    
    
    13,949 prior year
    
    
    
    
    
    
    
    
    
    
    458Group relief
    
    
    21,534
    
    
    
    50,125
    
    
    
    45,89221,534
    
    
    
    54,768
    
    
    
    60,299Deferred tax  Timing differences, origination and reversal
    
    
    (662
    )
    
    
    6,207
    
    
    
    7,953 Adjustment in respect of prior years
    
    
    152
    
    
    
    
    
    
    
    54(510
    )
    
    
    6,207
    
    
    
    8,00721,024
    
    
    
    60,975
    
    
    
    68,306




| | b) |  | Factors affecting tax charge for the current year
| | -- |  | -------------------------------------------------



| |  | The tax assessed for the period is higher than that resulting from applying
the standard rate of corporation tax in the UK (30%) (2001: 30%) (2000:
30%). The differences are explained below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000(Loss)/profit on ordinary activities before tax
    
    
    (42,103
    )
    
    
    175,365
    
    
    
    197,878Tax on (loss)/profit on ordinary activities at 30%
(2001 & 2000: 30%)
    
    
    (12,631
    )
    
    
    52,610
    
    
    
    59,363Effects of:Expenses not deductible for tax purposes
    
    
    33,503
    
    
    
    8,365
    
    
    
    8,431Capital allowances in excess of depreciation
    
    
    662
    
    
    
    (6,207
    )
    
    
    (7,953
    )Adjustment in respect of prior years
    
    
    
    
    
    
    
    
    
    
    458Current tax charge for the year
    
    
    21,534
    
    
    
    54,768
    
    
    
    60,299


B-11



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|8. |  | DIVIDENDS
|-- |  | ---------

Year ended
    
    Year ended
    
    Year ended31 December2002
    
    31 December2001
    
    31 December2000£000
    
    £000
    
    £000Dividend on ordinary shares of £Nil (2001: £125.38)
(2000: £121.84) per share
    
    
    
    
    
    
    125,384
    
    
    
    121,836




|9. |  | TANGIBLE FIXED ASSETS
|-- |  | ---------------------

Plant, machinery,Freehold land
    
    fixtures &and buildings
    
    fittings
    
    Plant spares
    
    Total£000
    
    £000
    
    £000
    
    £000CostAt 1 January 2002
    
    
    132,181
    
    
    
    1,081,136
    
    
    
    21,011
    
    
    
    1,234,328Additions
    
    
    
    
    
    
    2,794
    
    
    
    2,430
    
    
    
    5,224Disposals
    
    
    
    
    
    
    (2,414
    )
    
    
    
    
    
    
    (2,414
    )Issues
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )At 31 December 2002
    
    
    132,181
    
    
    
    1,081,516
    
    
    
    23,417
    
    
    
    1,237,114Accumulated depreciationAt 1 January 2002
    
    
    9,735
    
    
    
    83,342
    
    
    
    1,006
    
    
    
    94,083Charge for the year
    
    
    3,209
    
    
    
    29,143
    
    
    
    502
    
    
    
    32,854Disposals
    
    
    
    
    
    
    (2,413
    )
    
    
    
    
    
    
    (2,413
    )Impairment (note 4)
    
    
    
    
    
    
    29,472
    
    
    
    
    
    
    
    29,472At 31 December 2002
    
    
    12,944
    
    
    
    139,544
    
    
    
    1,508
    
    
    
    153,996Net book valueAt 31 December 2002
    
    
    119,237
    
    
    
    941,972
    
    
    
    21,909
    
    
    
    1,083,118At 31 December 2001
    
    
    122,446
    
    
    
    997,794
    
    
    
    20,005
    
    
    
    1,140,245




| |  | Freehold land amounting to £1,060,000 (2001: £1,060,000) has not been
depreciated.
| |  | ----------------------------------------------------------------------------------



|10. |  | STOCKS
|--- |  | ------

2002
    
    2001£000
    
    £000Raw materials and consumables
    
    
    31,327
    
    
    
    62,563


B-12



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|11. |  | DEBTORS
|--- |  | -------

2002
    
    2001£000
    
    £000Trade debtors
    
    
    52,462
    
    
    
    104,849Amounts owed by intermediate parent companies
    
    
    94,516
    
    
    
    41,061Prepayments and other debtors
    
    
    10,709
    
    
    
    22,137157,687
    
    
    
    168,047




| |  | Included within other debtors is VAT receivable of £Nil (2001: £1.8
million), an insurance debtor of £0.2 million (2001: £0.5 million) and a
swap advance debtor of £1.4 million (2001: swap advance creditor £23.5
million).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Included within prepayments and other debtors is an amount outstanding from
the employee share ownership plan (ESOP) totalling £2,858,000, loaned for
the purchase of 129,029 shares in the common stock of The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. |  | CASH AT BANK AND IN HAND
|--- |  | ------------------------



| |  | Included within the total cash balance are restricted cash deposits
amounting to £44,790,000 (2001: £9,689,000). These comprise part of a
required balance which needs to be in place on each repayment date. Also
included is restricted cash of £13,400,000 (2001: £Nil) over which National
Westminster Bank plc has a charge.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
|--- |  | ----------------------------------------------

As restated2002
    
    2001£000
    
    £000Trade creditors
    
    
    15,222
    
    
    
    2,679Amounts owed to fellow subsidiary undertakings
    
    
    12,908
    
    
    
    822Amounts owed to ultimate parent
    
    
    7,265
    
    
    
    5,012Corporation tax
    
    
    1,204
    
    
    
    1,555Other creditors and accruals
    
    
    13,838
    
    
    
    82,30350,437
    
    
    
    92,371




| |  | Included within other creditors is VAT repayable of £9.8 million (2001:
£28.2 million).
| |  | ---------------------------------------------------------------------------------------



|14. |  | CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
|--- |  | -------------------------------------------------------

2002
    
    2001£000
    
    £000Amounts owed to immediate parent
    
    
    78,180
    
    
    
    78,180Retentions
    
    
    368
    
    
    
    64478,548
    
    
    
    78,824




| |  | The amount owed to the immediate parent company has no fixed repayment
date, however the directors of the immediate parent company have indicated
that payment will not be requested within one year. No interest is payable
on this amount.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | All retentions are payable within 1 to 2 years.
| |  | -----------------------------------------------

B-13



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|15. |  | PROVISIONS FOR LIABILITIES AND CHARGES
|--- |  | --------------------------------------

31 December2001
    
    Current yearcredit
    
    31 December2002£000
    
    £000
    
    £000Deferred taxation
    
    
    17,278
    
    
    
    (510
    )
    
    
    16,768Reinstatement provision
    
    
    110
    
    
    
    
    
    
    
    11017,388
    
    
    
    (510
    )
    
    
    16,878




| |  | The amount of deferred taxation provided in the financial statements is:
| |  | ------------------------------------------------------------------------

2002
    
    2001£000
    
    £000Capital allowances in excess of depreciation
    
    
    16,768
    
    
    
    17,278




|16. |  | CALLED UP SHARE CAPITAL
|--- |  | -----------------------

2002
    
    2001£000
    
    £000Authorised1,000,001 ordinary shares of £1 each
    
    
    1,000
    
    
    
    1,000Called up, allotted and fully paid1,000,001 ordinary shares of £1 each
    
    
    1,000
    
    
    
    1,000




|17. |  | RESERVES
|--- |  | --------

As restated
    
    Profit and lossShare premium
    
    Capital reserve
    
    account
    
    Total£000
    
    £000
    
    £000
    
    £000At 1 January 2002
    
    
    1,204,542
    
    
    
    
    
    
    
    16,520
    
    
    
    1,221,062Retained loss for the financial year
    
    
    
    
    
    
    
    
    
    
    (63,127
    )
    
    
    (63,127
    )Capital contribution in the year
    
    
    
    
    
    
    52,250
    
    
    
    
    
    
    
    52,250At 31 December 2002
    
    
    1,204,542
    
    
    
    52,250
    
    
    
    (46,607
    )
    
    
    1,210,185




|18. |  | RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS
|--- |  | --------------------------------------------------

As restated2002
    
    2001£000
    
    £000Loss for the financial year
    
    
    (63,127
    )
    
    
    (10,994
    )Capital contribution
    
    
    52,250
    
    
    
    Net movement in shareholders funds
    
    
    (10,877
    )
    
    
    (10,994
    )Opening shareholders funds
    
    
    1,222,062
    
    
    
    1,233,056Closing shareholders funds
    
    
    1,211,185
    
    
    
    1,222,062


B-14



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|19. |  | RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES
|--- |  | -------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31
December
2002
    
    31
December
2001
    
    31
December
2000£000
    
    £000
    
    £000Operating (loss)/profit
    
    
    (64,374
    )
    
    
    164,450
    
    
    
    186,724Depreciation
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Loss on disposal of fixed asset
    
    
    
    
    
    
    19
    
    
    
    Plant spares issues
    
    
    24
    
    
    
    155
    
    
    
    Decrease/(increase) in stocks
    
    
    31,236
    
    
    
    (2,617
    )
    
    
    (7,413
    )Decrease/(increase) in debtors
    
    
    63,861
    
    
    
    40,332
    
    
    
    (107,666
    )(Decrease)/increase in creditors
    
    
    (41,860
    )
    
    
    (55,310
    )
    
    
    80,335Impairment of fixed assets
    
    
    29,472
    
    
    
    
    
    
    
    Harich Swap interest
    
    
    19,395
    
    
    
    10,265
    
    
    
    2,45270,608
    
    
    
    189,797
    
    
    
    186,369




| |  | The restatement of the cashflows for the years ended 31 December 2002, 2001
and 2000 relates to a reclassification of the amounts generated under a
financing hedging swap (note 26).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The decrease in debtors during the year ended 31 December 2002 is after
reflecting the exceptional bad debt expense of £136,801,000 recorded in the
year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|20. |  | RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
|--- |  | --------------------------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Decrease in cash in the year
    
    
    (3,375
    )
    
    
    (699
    )
    
    
    (11,714
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Movement in net funds in the year
    
    
    45,126
    
    
    
    (251
    )
    
    
    (2,473
    )Net funds brought forward
    
    
    39,790
    
    
    
    40,041
    
    
    
    42,514Net funds carried forward
    
    
    84,916
    
    
    
    39,790
    
    
    
    40,041




|21. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



| |  | Guaranteed Secured Bonds amounting to £1,725 million are guaranteed on an
unlimited, unconditional and irrevocable basis by each of Drax Power
Limited, Drax Limited, Drax Electric Limited, AES Drax Financing Limited
and AES Drax Acquisition Limited and each such entity has granted security
over all their assets as security for, inter alia, the Guaranteed Secured
Bonds and certain related swaps, finance documents and guarantees (note
6). Repayment of the Guaranteed Secured Bonds is further secured by
direct agreements from certain of the major project parties and other
security arrangements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-15



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING
|--- |  | ----------------------



| |  | Pension schemes operated
| |  | ------------------------



| |  | Within the UK the Group principally operates an approved defined benefit
scheme, on behalf of the AES Drax Power Group of the Electricity Supply
Pension Scheme (ADPG ESPS).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular pension costs  SSAP 24
| |  | -------------------------------



| |  | Pensions costs for the ADPG ESPS in the year were £1,648,000 (2001:
£2,248,000), comprising a regular cost of £1,475,000 (2001: £1,484,000)
plus variations totalling £173,000 (2001: £764,000). A variation of
£(114,000) has arisen due to £800,000 of the valuation surplus being
carried forward unutilised, which is being spread as a level percentage of
salaries over the average remaining working life of the membership
(approximately 11 years). A further variation of £(113,000) has arisen due
to the application of reduced contributions from 1 January 2002 to 31 March
2002 from the valuation surplus. The remaining variation of £400,000 has
arisen due to certain special events, generating additional liabilities and
triggering employer contributions. In the year, redundancies have resulted
in an additional pension cost of £400,000, which has been partially offset
by additional employer contributions of £173,000.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
Consultants, assessed the ESPS in respect of the AES Drax Power Group as at
31 December 2002 using the projected unit method and a market based
valuation approach to ascertain its cost to the Group. The principal
financial assumptions were that the rate of return would be 4.5% per annum
higher than the rate of price inflation, that increases in past and future
pensions would be in line with price inflation, and that future salary
growth would exceed price inflation by 2.75% per annum, depending on salary
levels at the valuation date. Following the actuarial valuation it was
agreed that the Group would pay an average contribution rate of 12% of
annual salaries, subject to review at future valuations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the date of the latest actuarial valuation the market value of the
assets of the ADPG ESPS was £44.6 million and the actuarial value of the
liabilities was sufficient to cover between 115% and 120% of the benefits
that had accrued to members, after allowing for expected increases in
future earnings. The next scheduled actuarial valuation of the ADPG ESPS
will be as at 31 March 2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | FRS 17
| |  | ------



| |  | In November 2000 the Accounting Standards Board issued FRS 17 Retirement
Benefits replacing SSAP 24 Accounting for Pensions Costs. Certain
disclosures are required in the transition period before full adoption of
FRS 17 for periods ending on or after 22 June 2001. These further
disclosures are included below.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The principal actuarial assumptions used as at 31 December 2002 are shown
below:
| |  | --------------------------------------------------------------------------------

2002
    
    2001Rate of increase in salaries
    
    
    3.8
    %
    
    
    4.0
    %Rate of increase of pensions in payment and deferment
    
    
    2.5
    %
    
    
    2.6
    %Discount rate
    
    
    5.4
    %
    
    
    5.8
    %Inflation assumption
    
    
    2.3
    %
    
    
    2.5
    %




| |  | The following contributions were made to the ADPG ESPS during 2002:
| |  | -------------------------------------------------------------------

Year
ended
31 December2002£millionsCompany
contributions
    
    
    1.6Member
contributions
    
    
    0.6


B-16



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount charged to operating profit:
| |  | -----------------------------------------------

Year ended31
December
2002£ millionsCurrent service cost
    
    
    1.9Past service cost
    
    
    Early retirement deficiency cost
    
    
    0.4Total operating cost
    
    
    2.3




| |  | Analysis of amount credited to other finance income:
| |  | ----------------------------------------------------

Year ended31
December
2002£ millionsExpected return on pension plan assets
    
    
    3.3Less: Interest on pension plan liabilities
    
    
    (3.2
    )Net return
    
    
    0.1




| |  | The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
shown below:
| |  | -----------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsEquities
    
    
    29.5
    
    
    
    36.1Bonds
    
    
    5.9
    
    
    
    6.6Other
    
    
    0.4
    
    
    
    0.7Market value of assets
    
    
    35.8
    
    
    
    43.4Actuarial value of liabilities
    
    
    (60.8
    )
    
    
    (53.9
    )Deficit in the scheme
    
    
    (25.0
    )
    
    
    (10.5
    )Related deferred tax asset (assumed 30% rate)
    
    
    7.5
    
    
    
    3.2Net pension liability
    
    
    (17.5
    )
    
    
    (7.3
    )




| |  | Analysis of movement in deficit during the year:
| |  | ------------------------------------------------

Year ended31
December
2002£ millionsDeficit in scheme at 1 January 2002
    
    
    (10.5
    )Current service cost
    
    
    (1.9
    )Contributions
    
    
    2.2Early retirement deficiency cost
    
    
    (0.4
    )Actuarial loss
    
    
    (14.4
    )Deficit in scheme at 31 December 2002
    
    
    (25.0
    )


B-17



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount recognised in Statement of Total Recognised Gains and
Losses:
| |  | --------------------------------------------------------------------------------

Year ended31
December
2002£ millionsActual return less expected return on pension scheme assets
    
    
    (11.8
    )Experience gains arising on the scheme liabilities
    
    
    0.1Changes in assumptions underlying the present value of the
scheme liabilities
    
    
    (2.7
    )Actuarial loss recognised in STRGL
    
    
    (14.4
    )




| |  | Had the company adopted FRS 17 early, Group profit and loss reserves would
have been stated as follows:
| |  | -------------------------------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsProfit and loss reserve in the financial statements as at year end
    
    
    (46.6
    )
    
    
    16.5Deficit in relation to the ADPG ESPS, net of related deferred tax
asset
    
    
    (17.5
    )
    
    
    (7.3
    )Profit and loss reserve as adjusted
    
    
    (64.1
    )
    
    
    9.2




|23. |  | ULTIMATE PARENT COMPANY
|--- |  | -----------------------



| |  | The immediate parent company is Drax Limited (formerly AES Drax Limited), a
company incorporated in the Cayman Islands.
| |  | -----------------------------------------------------------------------------------------------------------------------



| |  | The parent undertaking of the smallest group, which includes the company
and for which group accounts are prepared, is AES UK Power Holdings
Limited, a company incorporated in England and Wales. Copies of the group
accounts of AES UK Power Holdings Limited can be obtained from Companies
House, Crown Way, Cardiff CF14 3UZ.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at 31 December 2002, the ultimate parent company and controlling entity,
and largest group for which group accounts are prepared, was The AES
Corporation, a company incorporated in the State of Delaware, USA. Copies
of the parent groups financial statements can be obtained from the
Securities and Exchange Commission, 450, 5th Street NW, Washington DC
20549, USA.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 September 2003, notices were issued to the company and the other
companies in the group by JP Morgan Chase Bank in its role of Security
Trustee in respect of the Guaranteed Secured Bonds in respect of an event
of default as a result of the non-payment of coupons as at 31 December 2002
and 30 June 2003. A further notice was also issued to AES Drax
Acquisitions Holdings Limited, the immediate parent of AES Drax Acquisition
Limited, stating that AES Drax Acquisition Limited would be prevented from
exercising any voting rights or other powers in respect of the ordinary
shares that it holds in AES Drax Acquisition Limited. The effect of this
notice is that The AES Corporation, who remains the ultimate parent
company, is unable to exercise any control over AES Drax Acquisition
Limited or any of its subsidiaries and that control of the group lies with
the senior creditors of the group.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|24. |  | NATURE OF BUSINESS
|--- |  | ------------------



| |  | The principal activity of the company is the operation of the Drax Power
Station, a 3,960 megawatt (gross) coal-fired power station based in the North
of England.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-18



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
|--- |  | ---------------------------------------------



| |  | This note is provided in addition to the previous financial information for
US users of the accounts.
| |  | -----------------------------------------------------------------------------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect on net income,
shareholders equity, the cash flow statement and comprehensive income is
shown in the tables on pages 21 and 22.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred taxation is provided at the anticipated tax rates
on timing differences arising from the inclusion of items of income and
expenditure in taxation computations in periods different from those in
which they are included in the financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, deferred taxation is provided on all temporary differences
between tax and book bases of assets and liabilities under the liability
method, subject to a valuation allowance where applicable in respect of
deferred taxation assets, in accordance with SFAS 109, Accounting for
Income Taxes. As a result certain items that are treated as permanent
items under UK GAAP are treated as temporary differences under US GAAP. In
addition, deferred tax is also provided on certain of the other adjustments
between UK and US GAAP described herein. Such amounts are reported in the
profit and loss account except where the adjustment is recorded directly to
shareholders equity; for example, in relation to the additional minimum
pension liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pensions
| |  | --------



| |  | Under UK GAAP, where pensions are provided by means of a funded defined
benefits scheme, annual contributions are based on actuarial advice. The
expected cost of providing pensions is recognised on a systematic basis
over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining
service lives of current employees on a straight-line basis.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 87, Employers Accounting for Pensions, prescribes the
method of actuarial valuation, which includes differences from certain
assumptions used for the UK GAAP actuarial computation. In addition, assets
are assessed at current settlement rates. Certain variations from regular
cost are allocated in equal amounts over the average remaining service
lives of current employees. An additional minimum pension liability equal
to the excess of the accumulated benefit obligation over the plan assets
must be recognised at the balance sheet date with a corresponding entry
recorded as an intangible asset, to the extent of unamortised prior service
cost, and the balance, if any, in other comprehensive income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Push down of acquisition debt
| |  | -----------------------------



| |  | Under US GAAP the £1,300 million senior secured bank facility used to
finance the acquisition of Drax Power Limited would be pushed down to the
company acquired and the related interest expense would be recorded. The
other side of the entry would be to shareholders equity. Interest
attributable to the acquisition debt, net of any corresponding tax benefit,
is recorded in the statement of operations. Interest on the bank facility
accrues at LIBOR + 1.8%. Principal payments are due semi-annually over a
fifteen year period commencing 30 June 2000. Principal repayments of £25
million, £370 million, £2.7 million, £9.1 million, £22.6 million and £28.1
million were made on 30 June 2000, 2 August 2000, 31 December 2000, 30 June
2001, 31 December 2001 and 30 June 2002, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under UK GAAP, such entries are not recorded.
| |  | ---------------------------------------------



| |  | Impairment of fixed assets
| |  | --------------------------



| |  | Under UK GAAP, if events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, an impairment review
must be performed. An impaired asset must be written down to its
recoverable amount (the higher of its net selling price and its value in
use). The assessment of impairment and any resultant write-down to value
in use are both determined using discounted cashflows. Under UK GAAP, an
impairment of £29.5 million was recorded.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, if events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, an impairment review
must be performed, by comparing the undiscounted cashflows arising from use
of the asset with its carrying value. Where this indicates a deficit, the
impairment is calculated by reference to fair value which, in the absence
of market price, is generally calculated by reference to discounted
cashflows. No impairment was necessary under US GAAP.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-19



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Derivative Instruments and Hedging Activities
| |  | ---------------------------------------------



| |  | Under UK GAAP, investments or financial derivative instruments accounted
for as hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as hedges
at the inception of the contract. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amounts of those assets
or liabilities and are ultimately recognized in the profit and loss account
as part of those carrying amounts. Gains and losses on qualifying hedges
of firm commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated hedged rate.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, requires all derivative financial instruments to be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings unless specific hedge
accounting criteria are met. Where the derivative instrument qualifies for
hedge accounting, changes in fair value of the instrument are recorded in
earnings or other comprehensive income (a separate component of equity)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction and whether or not
the hedge is effective. For fair value hedge transactions in which a
company is hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative will generally be
offset in the income statement by changes in the hedged items fair value.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For cash flow hedge transactions, in which a company is hedging the
variability of cash flows related to a variable-rate asset, liability or a
forecasted transaction, changes in the fair value of the derivative
instrument are initially reported in other comprehensive income and them
reclassified as earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The ineffective
portion of all hedges are recognised in current-period earnings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to qualify for hedge accounting under SFAS 133, a company must
formally document, designate and assess, periodically, the effectiveness of
transactions that qualify for hedge accounting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactions, contracts, assets and liabilities denominated in foreign
currencies are recorded at the exchange rate prevailing on the date of the
transaction, and assets and liabilities are recorded at the period end
date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Push down of acquisition adjustments
| |  | ------------------------------------



| |  | Under US GAAP certain adjustments made in the holding company to record the
acquisition of Drax Power Limited would be pushed down to the company.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This results in the following differences:
| |  | ------------------------------------------



| | (1) |  | Adjustment to the carrying value of the plant to reflect the
purchase price for the asset
| | --- |  | -----------------------------------------------------------------------------------------



| | (2) |  | Record a liability for the unfavourable coal purchase contract
| | --- |  | --------------------------------------------------------------



| | (3) |  | Record a liability for the estimated cost of severing certain
employees
| | --- |  | -----------------------------------------------------------------------



| | (4) |  | Record a deferred tax liability for the difference between the
purchase price of the plant and its tax basis
| | --- |  | ------------------------------------------------------------------------------------------------------------



| | (5) |  | Record a liability for the unfavourable IT contract
| | --- |  | ---------------------------------------------------



| |  | Since the acquisition of Drax Power was treated as the acquisition of an
asset rather than the acquisition of a business, the recognition of the
deferred tax liability resulted in a gross-up of the amount assigned to the
plant. This gross-up adjustment results in an additional depreciation
under US GAAP.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-20



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Under UK GAAP only those liabilities that existed in the acquired business
may be reflected in the purchase price allocation. Liabilities arising
from the acquirers intentions may not be recognised. Therefore under UK
GAAP it is not permissible to record a severance accrual for the costs
associated with terminating employees of the acquired business or for the
unfavourable IT contract. Instead such amounts must be provided for and
expensed in the post-acquisition financial statements of the acquirer.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, such amounts may be recorded as part of the acquisition of
Drax Power Limited in accordance with EITF 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination.
Under UK GAAP, no push down adjustments are recorded.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Recently issued but not yet adopted accounting pronouncements
| |  | -------------------------------------------------------------



| |  | Asset retirement obligations.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective 1 January 2003, requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the
costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The company will adopt SFAS No. 143 effective 1 January 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has completed a detailed assessment of the specific
applicability and implications of SFAS No. 143. The scope of SFAS No. 143
includes primarily active ash landfills, water treatment basins and the
removal or dismantlement of certain plant and equipment. As of 31 December
2002, the company had a recorded liability of approximately £0.1 million
related to asset retirement obligations. Upon adoption of SFAS No. 143, the
company is not required to record any additional liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Exit or disposal activities.In June 2002, the Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior to
issuance of SFAS No. 146, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after 31 December 2002. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-based compensation.In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the
adoption of this pronouncement to have a material impact on our financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Guarantor accounting.We will apply the initial recognition and
measurement provisions of FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others, on a prospective basis for all
guarantees issued after 31 December 2002. Under FIN 45, at the inception of
guarantees issued after 31 December 2002, we will record the fair value of
the guarantee as a liability, with the offsetting entry being recorded
based on the circumstances in which the guarantee was issued. We will
account for any fundings under the guarantee as a reduction of the
liability. After funding has ceased, we will recognize the remaining
liability in the income statement on a straight-line basis over the
remaining term of the guarantee. In general, we enter into various
agreements providing financial performance assurance to third parties on
behalf of certain subsidiaries.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-21



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Such agreements include guarantees, letters of credit and surety bonds. FIN
45 does not encompass guarantees issued either between parents and their
subsidiaries or between corporations under common control, a parents
guarantee of its subsidiarys debt to a third party (whether the parent is
a corporation or an individual), a subsidiarys guarantee of the debt owed
to a third party by either its parent or another subsidiary of that parent,
nor guarantees of a companys own future performance. Adoption of FIN 45
will have no impact to our historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The
company does not expect adoption of the liability recognition provisions of
FIN 45 to have a material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Variable interest entities.FIN 46, Consolidation of Variable Interest
Entities, is effective immediately for all enterprises with variable
interests in variable interest entities created after 31 January 2003. FIN
46 provisions must be applied to variable interests in variable interest
entities created before 1 February 2003 as at 31 December 2003. If an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur and/or receives a majority of the entitys
expected residual returns if they occur. If significant variable interests
are held in a variable interest entity, the company must disclose the
nature, purpose, size and activity of the variable interest entity and the
companys maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after 31
January 2003. We do not believe that the adoption of FIN 46 will result in
our consolidation of any previously unconsolidated entities or material
additional disclosure.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | DIG Issue C11.In connection with the January 2003 FASB Emerging Issues
Task Force (EITF) meeting, the FASB was requested to reconsider an
interpretation of SFAS No. 133. The interpretation, which is contained in
the Derivatives Implementation Groups C11 guidance, relates to the pricing
of contracts that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that contains broad
market indices (e.g. CPI) could qualify as a normal purchase or sale. The
company is currently re-evaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial instruments with characteristics of both liabilities and equity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with characteristics of both liabilities and equity.
SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects an issuers
accounting for 3 types of freestanding financial instruments, namely:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1 |  | Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | 2 |  | Instruments, other than outstanding shares, that do or may not
require the issuer to buy back some of its shares in exchange for
cash or other assets. These instruments include put options and
forward purchase contracts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 |  | Obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers
shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | SFAS No. 150 does not apply to features in embedded financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after 31 May 2003 and
otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement
is not permitted. This would apply to the £425 million forward purchase of
preference shares that is disclosed in AES Drax Acquisition Limiteds
financial statements, note 15. The company is currently evaluating the
effects that this guidance will have on its results of operations and
financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-22



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under UK GAAP
    
    
    (63,127
    )
    
    
    114,390
    
    
    
    129,572US GAAP adjustments:Effects of push down of acquisition adjustments:Additional depreciation on tangible fixed assets
    
    
    (39,676
    )
    
    
    (39,676
    )
    
    
    (39,676
    )Severance pay expensed under UK GAAP
    
    
    
    
    
    
    
    
    
    
    12,053Unfavourable IT contract
    
    
    
    
    
    
    
    
    
    
    1,995Unfavourable coal contract
    
    
    
    
    
    
    17,789
    
    
    
    25,188Deferred taxation
    
    
    20,869
    
    
    
    17,813
    
    
    
    12,303Push down interest
    
    
    (8,610
    )
    
    
    (56,543
    )
    
    
    (66,201
    )Derivative instruments and hedging activities
    
    
    6,942
    
    
    
    (9,449
    )
    
    
    Impairment of fixed assets
    
    
    29,472
    
    
    
    
    
    
    
    Net (loss) / income under US GAAP
    
    
    (54,130
    )
    
    
    44,324
    
    
    
    75,234


As restated
    
    As restated31 December
    
    31 December2002
    
    2001£000
    
    £000Shareholders equity under UK GAAP
    
    
    1,211,185
    
    
    
    1,222,062US GAAP adjustments:Tangible fixed assets, cost
    
    
    1,414,242
    
    
    
    1,384,770Additional depreciation on tangible fixed assets
    
    
    (122,379
    )
    
    
    (82,703
    )Deferred taxation
    
    
    (637,363
    )
    
    
    (669,568
    )Push down of acquisition debt
    
    
    (842,555
    )
    
    
    (870,610
    )Derivative instruments and hedging activities
    
    
    (67,520
    )
    
    
    (47,478
    )Additional minimum pension liability
    
    
    (10,800
    )
    
    
    Shareholders equity under US GAAP
    
    
    944,810
    
    
    
    936,473




| |  | In addition to the recognition and measurement differences set out in the
reconciliation tables above there are a number of classification
differences between UK and US GAAP. These are described below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred tax liabilities are presented net within
Provisions for liabilities and charges. Under US GAAP deferred taxes are
presented as current or long term based upon the term of the item to which
they relate. Deferred tax assets and liabilities may only be offset to the
extent that they are both classified as short or long term.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-23



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Cash flow statement
| |  | -------------------



| |  | A reconciliation of the consolidated cash flow statement prepared under UK
GAAP to a statement of cash flows prepared under US GAAP is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    70,628
    
    
    
    189,797
    
    
    
    186,369Returns on investments and servicing of finance
    
    
    (50,625
    )
    
    
    657
    
    
    
    8,375Taxation
    
    
    (21,883
    )
    
    
    (59,231
    )
    
    
    (68,888
    )Net cash flows (used in) / provided by operating
activities per US GAAP
    
    
    (1,900
    )
    
    
    131,223
    
    
    
    125,856Capital expenditure
    
    
    (5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Increase in restricted cash deposits
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )Net cash used in investing activities per US GAAP
    
    
    (53,725
    )
    
    
    (6,538
    )
    
    
    (15,734
    )Equity dividends paid
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Capital contribution
    
    
    52,250
    
    
    
    
    
    
    
    Net cash provided by / (used in) financing
activities per US GAAP
    
    
    52,250
    
    
    
    (125,384
    )
    
    
    (121,836
    )Decrease in cash
    
    
    (3,375
    )
    
    
    (699
    )
    
    
    (11,714
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Cash brought forward
    
    
    39,790
    
    
    
    40,041
    
    
    
    42,514Cash carried forward
    
    
    84,916
    
    
    
    39,790
    
    
    
    40,041




| |  | Comprehensive (loss) / income under US GAAP is as follows:
| |  | ----------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under US GAAP
    
    
    (54,130
    )
    
    
    44,324
    
    
    
    75,234Derivative loss
    
    
    (18,889
    )
    
    
    (26,620
    )
    
    
    Minimum pension obligation
    
    
    (7,560
    )
    
    
    
    
    
    
    Comprehensive (loss) / income
    
    
    (80,579
    )
    
    
    17,703
    
    
    
    75,234


B-24



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | RESTATEMENT
|--- |  | -----------



| |  | These financial statements supersede and replace the original financial
statements of the company dated 14 May 2003 included on the Form 20-F of
the company filed on 16 May 2003. The financial statements have been
amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
company subsequent to the date of the original filing. The financial
statements have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments
to disclosure and for other presentational changes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the restatements, equity shareholders funds have been
increased by £52.25 million as at 31 December 2002 and by £Nil as at 31
December 2001. The restatements have no effect on the consolidated net
loss, net assets or net cashflows in the years ended 31 December 2002, 2001
and 2000.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An amount of £53.4 million has been reclassified from interest payable to
exceptional administrative expenses in the year ended 31 December 2002,
being the provision against an intercompany debtor. The restatement has no
effect on the consolidated net loss, net assets or net cashflows as at 31
December 2002, 2001 or 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, the net impact of the restatements is to increase
shareholders equity by £64.9 million and £14.2 million at 31 December 2002
and 2001 respectively and to increase the net loss by £2.1 million in year
ended 31 December 2002 and to reduce the net loss by £128.2 million and
£121.8 million in the years ended 31 December 2001 and 2000 respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The change in equity shareholders funds as at 31 December 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of £52.25 million. This related to a draw down made by the
company under the terms of a letter of credit established by The AES
Corporation. The AES Corporation has subsequently confirmed that it had
waived any rights to repayment against the company in respect of the draw
down in a letter dated 25 January 2002. Accordingly, the amount has been
reclassified into a capital reserve. This change has reduced the
liabilities and increased the net assets of the company by £52.25 million
each respectively as at 31 December 2002. The effect of the restatement is
as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As previously
    
    Restate-reported
    
    ments
    
    As restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2002Fixed assets
    
    
    1,083,118
    
    
    
    
    
    
    
    1,083,118Current assets
    
    
    273,930
    
    
    
    
    
    
    
    273,930Creditors: amounts falling due within one year
    
    
    (102,687
    )
    
    
    52,250
    
    
    
    (50,437
    )Creditors: amounts falling due after more
than one year
    
    
    (78,548
    )
    
    
    
    
    
    
    (78,548
    )Provisions
    
    
    (16,878
    )
    
    
    
    
    
    
    (16,878
    )Net assets
    
    
    1,158,935
    
    
    
    52,250
    
    
    
    1,211,185Equity shareholders funds
    
    
    1,158,935
    
    
    
    52,250
    
    
    
    1,211,185Profit and loss account for the year ended
31 December 2002Turnover
    
    
    524,831
    
    
    
    
    
    
    
    524,831Cost of sales
    
    
    (219,462
    )
    
    
    
    
    
    
    (219,462
    )Administrative expenses
    
    
    (316,297
    )
    
    
    (53,446
    )
    
    
    (369,743
    )Interest receivable and similar income
    
    
    23,548
    
    
    
    
    
    
    
    23,548Interest payable and similar charges
    
    
    (54,800
    )
    
    
    53,446
    
    
    
    (1,354
    )Tax on (loss) / profit on ordinary activities
    
    
    (21,024
    )
    
    
    
    
    
    
    (21,024
    )Loss on ordinary activities after taxation
    
    
    (63,127
    )
    
    
    
    
    
    
    (63,127
    )


B-25



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | RESTATEMENT (continued)
|--- |  | -----------------------



| |  | The restatement of cash flows for the years ended 31 December 2002, 2001
and 2000 relates to an adjustment to interest received in respect of the
timing of cash flows under a financing hedging swap of £19.4 million, £10.3
million and £2.5 million respectively. These adjustments are offset by
corresponding changes to the reported net cash inflows from operating
activities and there was no effect on the consolidated net cashflows in
either the current or prior years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Restatement of US GAAP reconciliations
| |  | --------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net loss under US GAAPAs previously reported
    
    
    (52,047
    )
    
    
    (83,895
    )
    
    
    (46,602
    )US GAAP adjustmentsDividends paid (i)
    
    
    
    
    
    
    125,384
    
    
    
    121,836Deferred taxation (ii)
    
    
    (2,083
    )
    
    
    2,835
    
    
    
    As restated
    
    
    (54,130
    )
    
    
    44,324
    
    
    
    75,234


2002
    
    2001£000
    
    £000Shareholders equity under US GAAPAs previously reported
    
    
    879,864
    
    
    
    922,230Increase in equity shareholders funds under
UK GAAP as described above
    
    
    52,250
    
    
    
    US GAAP adjustmentsDeferred taxation (ii)
    
    
    23,496
    
    
    
    14,243Additional minimum pension liability (iii)
    
    
    (10,800
    )
    
    
    As restated
    
    
    944,810
    
    
    
    936,473




|(i) |  | Under UK GAAP, dividends are shown as a deduction on the face of
the profit and loss account, whereas under US GAAP, dividends are
deducted directly from shareholders equity. As previously reported,
the US GAAP reconciliation had started with the net income/(loss) as
reported under UK GAAP, after deducting dividends. This adjustment is
necessary to start the reconciliation with net income/(loss) before
dividends, in order to conform with standard US practice.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) |  | These adjustments are necessary to reflect the deferred tax effect
of the US GAAP adjustments made in respect of derivative instruments
and hedging activities and the additional minimum pension liability.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iii) |  | The additional minimum pension liability had been previously
reported in the US GAAP reconciliation disclosures, but had been
omitted from the reconciliation of shareholders equity.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-26



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | POST BALANCE SHEET EVENTS
|--- |  | -------------------------



| |  | Standstill arrangements with certain senior creditors
| |  | -----------------------------------------------------



| |  | Drax has been operating under standstill arrangements with certain of its
senior creditors since 12 December 2002. The purpose of the standstill
arrangements is to provide Drax and the senior creditors with a period of
stability during which discussions regarding consensual restructuring of
Drax can take place (the Restructuring). The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period. Although the standstill period under the original
standstill agreement terminated on 31 May 2003, Drax had reached agreement
on three further standstill agreements, which have now expired, and is
currently operating under a long term standstill agreement, agreed with the
Steering Committee and the Ad Hoc Committee. This agreement became
effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This matter is discussed more fully in note 1, Basis of Preparation and
Accounting Policies.
| |  | --------------------------------------------------------------------------------------------



| |  | The AES Corporation
| |  | -------------------



| |  | Based on negotiations through the end of June 2003, the steering committee
representing the syndicate of banks (the Senior Lenders) which financed
the Eurobonds issued by Drax Holdings Limited to finance the acquisition of
the Drax Power Station, and the Ad Hoc Committee (together with the
Steering Committee, the Senior Creditors Committees), reached agreement
on more detailed terms of the Restructuring, and each of the Senior
Creditors Committees, the Drax Companies and The AES Corporation indicated
their support for a Restructuring to be implemented based upon the proposed
restructuring terms (the Restructuring Proposal).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 23 July 2003, Drax received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the
Restructuring and to purchase certain debt to be issued in the
Restructuring described in the Restructuring Proposal (the International
Power Proposal).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 28 July 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring
unless each member of the Senior Creditors Committees met certain
conditions by no later than 5 August 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 July 2003, the directors of Drax Holdings Limited and Drax Power
Limited appointed Gordon Horsfield and Gerald Wingrove as directors of Drax
Holdings Limited and Drax Power Limited. They, together with Lord Taylor
of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On the evening of 5 August 2003 The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
| |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of Drax Holdings Limited and Drax Power
Limited and stated their intention to resign as directors from the boards
of the other Drax companies (other than AES Drax Power Finance Holdings
Limited and AES Drax Energy Limited). They resigned from AES Drax
Acquisition Limited, Drax Electric Limited and Drax Limited on 8 August
2003. Accordingly, the boards of each of Drax Holdings Limited and Drax
Power Limited now comprise Lord Taylor of Blackburn, Gordon Horsfield and
Gerald Wingrove, the boards of each of Drax Electric Limited and Drax
Limited comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald
Wingrove and the board of AES Drax Acquisition Limited comprises Gordon
Horsfield and Gerald Wingrove.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the withdrawal of support by The AES Corporation, the
company has written down amounts due from another group company of £68.5
million in the third quarter of 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-27



---



##### 



DRAX POWER LIMITED (formerly AES Drax Power Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | On 14 August 2003, Drax received a letter from Goldman Sachs International,
pursuant to which it proposed to participate in the Restructuring in place
of The AES Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 19 August 2003, Drax received a letter from International Power plc,
pursuant to which it revised the International Power Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | On 21 August 2003, Drax received a letter from BHP Billiton in respect of
the Restructuring.
| |  | --------------------------------------------------------------------------------------------



| |  | On 30 August 2003, Drax announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman
Sachs International, and having noted the letter received from Miller,
McConville, Christen, Hutchison and Waffel, and following discussions with
the senior creditors of Drax, Drax entered into an exclusive arrangement
with International Power plc on the basis of a revised offer received from
International Power plc on 30 August 2003 to participate in the
Restructuring.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 3 October 2003, AES Drax Power Limiteds name was changed to Drax Power
Limited, AES Drax Limiteds name was changed to Drax Limited, AES Drax
Electric Limiteds name was changed to Drax Electric Limited and AES Drax
Holdings Limiteds name was changed to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B-28



---



##### 



Company Registration No. 91616











DRAX LIMITED (formerly AES Drax Limited)



Financial Statements
31 December 2002
(As restated, see note 27)







C-1



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent Auditors Report
    
    
    C-3Consolidated Profit and Loss Account
    
    
    C-4Statement of Total Recognised Gains and Losses
    
    
    C-4Consolidated Balance Sheet
    
    
    C-5Consolidated Cash Flow Statement
    
    
    C-6Notes to the Accounts
    
    
    C-7


C-2



---



##### 





| |  | INDEPENDENT AUDITORS REPORT TO THE
DIRECTORS OF DRAX LIMITED
(formerly AES
Drax Limited)
| |  | -----------------------------------------------------------------------------------------



| |  | We have audited the accompanying balance sheets of Drax Limited (formerly AES
Drax Limited) as of 31 December 2002 and 2001, and the related consolidated
profit and loss accounts, statements of total recognised gains and losses and
cash flows for each of the three years in the period ended 31 December 2002.
These financial statements are the responsibility of the companys directors.
Our responsibility is to express an opinion on these financial statements based
on our audits.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at 31 December 2002 and 2001,
and the results of its operations and its cash flows for each of the three
years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in note 26.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As discussed in note 27, the financial statements have been restated.
| |  | ---------------------------------------------------------------------
|
| |  | Deloitte & Touche LLP
Chartered Accountants
 
Leeds
6 November 2003  

C-3



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

CONSOLIDATED PROFIT AND LOSS
ACCOUNT
Year ended 31 December 2002 (As restated, see note 27)

As restated31 December
    
    31 December
    
    31 DecemberNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000TURNOVER  continuing operations
    
    
    2
    
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,776Cost of sales
    
    
    
    
    
    
    (219,462
    )
    
    
    (267,204
    )
    
    
    (278,218
    )GROSS PROFIT
    
    
    
    
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses  normal
    
    
    
    
    
    
    (183,900
    )
    
    
    (170,536
    )
    
    
    (165,035
    ) exceptional
    
    
    4
    
    
    
    (769,247
    )
    
    
    
    
    
    
    (953,147
    )
    
    
    (170,536
    )
    
    
    (165,035
    )OPERATING (LOSS) / PROFIT  continuing
operations
    
    
    3
    
    
    
    (647,778
    )
    
    
    148,363
    
    
    
    179,523Interest receivable and other income
    
    
    5
    
    
    
    23,626
    
    
    
    14,836
    
    
    
    11,405Interest payable and similar charges
    
    
    6
    
    
    
    (1,354
    )
    
    
    (3,919
    )
    
    
    (LOSS) / PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION
    
    
    
    
    
    
    (625,506
    )
    
    
    159,280
    
    
    
    190,928Tax on (loss) / profit on ordinary activities
    
    
    7
    
    
    
    (21,024
    )
    
    
    (61,010
    )
    
    
    (68,327
    )(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION
    
    
    
    
    
    
    (646,530
    )
    
    
    98,270
    
    
    
    122,601Dividends
    
    
    8
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )RETAINED (LOSS) / PROFIT FOR THE FINANCIAL
YEAR TRANSFERRED (FROM) / TO RESERVES
    
    
    18, 19
    
    
    
    (646,530
    )
    
    
    (27,114
    )
    
    
    765




| |  | STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
| |  | ----------------------------------------------



| |  | There are no recognised gains and losses for the years ended 31 December 2002,
2001 and 2000 other than as stated in the profit and loss account. Therefore,
no statement of total recognised gains and losses has been presented.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-4



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

CONSOLIDATED BALANCE SHEET
As at 31 December 2002 (As restated, see note 27)

As restatedNote
    
    2002
    
    2001£000
    
    £000FIXED ASSETSIntangible assets
    
    
    9
    
    
    
    
    
    
    
    594,610Tangible assets
    
    
    10
    
    
    
    1,083,118
    
    
    
    1,140,2451,083,118
    
    
    
    1,734,855CURRENT ASSETSStocks
    
    
    11
    
    
    
    31,327
    
    
    
    62,563Debtors
    
    
    12
    
    
    
    157,687
    
    
    
    168,047Cash at bank and in hand
    
    
    13
    
    
    
    84,943
    
    
    
    39,816273,957
    
    
    
    270,426CREDITORS: amounts falling due within
one year
    
    
    14
    
    
    
    (45,103
    )
    
    
    (98,243
    )NET CURRENT ASSETS
    
    
    
    
    
    
    228,854
    
    
    
    172,183TOTAL ASSETS LESS CURRENT LIABILITIES
    
    
    
    
    
    
    1,311,972
    
    
    
    1,907,038CREDITORS: amounts falling due after
more than one year
    
    
    15
    
    
    
    (368
    )
    
    
    (644
    )PROVISIONS FOR LIABILITIES AND CHARGES
    
    
    16
    
    
    
    (16,878
    )
    
    
    (17,388
    )1,294,726
    
    
    
    1,889,006CAPITAL AND RESERVESCalled up share capital
    
    
    17
    
    
    
    2
    
    
    
    2Share premium
    
    
    18
    
    
    
    1,893,999
    
    
    
    1,893,999Capital reserve
    
    
    18
    
    
    
    52,250
    
    
    
    Profit and loss account
    
    
    18
    
    
    
    (651,525
    )
    
    
    (4,995
    )TOTAL SHAREHOLDERS FUNDS
    
    
    19
    
    
    
    1,294,726
    
    
    
    1,889,006Attributable to equity shareholders
    
    
    
    
    
    
    1,294,724
    
    
    
    1,889,004Attributable to non-equity shareholders
    
    
    
    
    
    
    2
    
    
    
    2


C-5



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

CONSOLIDATED CASHFLOW STATEMENT
Year ended 31 December 2002 (As restated, see note 27)

As restated
    
    As restated
    
    As restatedNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    20
    
    
    
    70,608
    
    
    
    189,832
    
    
    
    175,191Returns on investments and servicing of
financeInterest received
    
    
    
    
    
    
    4,176
    
    
    
    4,578
    
    
    
    8,626Interest paid
    
    
    
    
    
    
    (54,800
    )
    
    
    (3,919
    )
    
    
    Net cash (outflow) / inflow from returns on investments
and servicing of finance
    
    
    
    
    
    
    (50,624
    )
    
    
    659
    
    
    
    8,626Taxation
    
    
    
    
    
    
    (21,883
    )
    
    
    (59,285
    )
    
    
    (68,889
    )Capital expenditurePayments to acquire tangible fixed assets
    
    
    
    
    
    
    (5,224
    )
    
    
    (6,119
    )
    
    
    (11,993
    )Receipts from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    5,500(5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Cash outflow before use of liquid resources
    
    
    
    
    
    
    (7,123
    )
    
    
    (268
    )
    
    
    (13,401
    )Management of liquid resourcesIncrease in restricted cash deposits
    
    
    
    
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )FinancingFunding of capital reserve
    
    
    27
    
    
    
    52,250
    
    
    
    
    
    
    
    Decrease in cash in the year
    
    
    21
    
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )


C-6



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES
|-- |  | --------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU Europe Energy
Trading Limited (TXU Europe) and the appointment of joint administrators
of TXU Europe and TXU Europe Group plc (TXU Group) on 18 and 19 November
2002, respectively, the company entered discussions with its senior lenders
in order to address the potential defaults under the senior financing
documents arising from the TXU situation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at 30
June 2002, were below the threshold required to permit distributions. As a
result, Drax Power Limited was not permitted to make distributions to AES
Drax Energy Limited to permit interest due on the high yield notes to be
paid on 30 August 2002. The AES Corporation, however, made a contribution
to AES Drax Energy Limited which together with amounts then held in the
high yield note debt service reserve account was sufficient to make the
payments then due. At the time The AES Corporation stated that there were
no assurances that it would agree to make any similar payments in the
future. Any improvements in the forward looking ratios were dependent on a
favourable change in the forward curve for electricity prices during the
period from 30 June to 31 December 2002. Such improvements did not occur
and the ratios were below 1.19:1 at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the end
of February 2003. Such failure constitutes an event of default under the
notes, although any enforcement rights are subject to a 90-day grace period
as well as the terms and conditions of certain intercreditor arrangements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Drax group of companies (Drax) has been operating under standstill
arrangements with certain of its senior creditors since 12 December 2002.
The purpose of the standstill arrangements is to provide Drax and the
senior creditors with a period of stability during which discussions
regarding consensual restructuring of Drax can take place. The bank
lenders and the senior bondholders have agreed to waive certain events of
default under the Eurobonds or the senior bonds, as applicable, not to
accelerate payment of the obligations and would not seek to enforce
security during the standstill period. Although the standstill period
under the original standstill agreement terminated on 31 May 2003, Drax had
reached agreement on three further standstill agreements, which have now
expired, and is currently operating under a long term standstill agreement,
agreed with the steering
committee representing the senior banks (the Steering Committee) and the Ad Hoc Committee formed by
holders of Drax Holdings Limiteds senior bonds (the Ad Hoc Committee).
This agreement became effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the companys lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The directors of the company believe that the standstill arrangements will
facilitate an agreed restructuring of Drax. On this basis, the directors
of the company consider it appropriate to prepare the financial statements
on the going concern basis. The financial statements do not include any
adjustments that would result from a withdrawal of support by the companys
lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-7



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Accounting policies
| |  | -------------------



| |  | The financial statements are prepared in accordance with applicable United
Kingdom accounting standards. The particular accounting policies adopted
are described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------



| |  | Basis of consolidation
| |  | ----------------------



| |  | The group consolidates the accounts of the company and its subsidiary
undertaking up to 31 December 2002.
| |  | ---------------------------------------------------------------------------------------------------------



| |  | Intangible fixed assets
| |  | -----------------------



| |  | Goodwill represents the excess of the fair value of the consideration given
over the fair value of the identifiable net assets acquired. Acquired
goodwill is capitalised and amortised over 20 years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tangible fixed assets
| |  | ---------------------



| |  | Freehold land and assets in the course of construction are not depreciated.
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The estimated useful lives are:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Freehold buildings, plant and machinery |  | 30-40 years
| |  | --------------------------------------- |  | -----------
| |  | Plant spares                            |  | 30-40 years
| |  | Fixtures and fittings                   |  | 3-5   years



| |  | Stocks
| |  | ------



| |  | Stocks are stated at the lower of cost, inclusive of appropriate overheads,
and net realisable value. Net realisable value is based on estimated
selling price less all further costs to completion and all relevant
marketing, selling and distribution costs.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxation
| |  | --------



| |  | Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the groups taxable
profits and its results as stated in the financial statements that arise
from the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not there will be suitable taxable profits
from which the future reversal of the underlying timing differences can be
deducted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leased assets
| |  | -------------



| |  | Operating lease rentals are charged to income in equal annual amounts over
the lease term.
| |  | ------------------------------------------------------------------------------------------

C-8



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Pension costs
| |  | -------------



| |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs
are recognised immediately in the profit and loss account if the benefits
have vested. If the benefits have not vested immediately, the costs are
recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs
or credits adjacent to interest. Actuarial gains and losses are recognised
immediately in the statement of total recognised gains and losses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are
measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and
are updated at each balance sheet date. The resulting defined benefit asset
or liability, net of the related deferred tax, is presented separately
after other net assets on the face of the balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The group has adopted the transitional disclosure requirements of FRS 17.
| |  | -------------------------------------------------------------------------



| |  | Revenue recognition
| |  | -------------------



| |  | Revenues from the sale of electricity are recorded based upon output
delivered and capacity provided at rates specified under contract terms or
prevailing market rates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivatives
| |  | -----------



| |  | Investments or financial derivative instruments accounted for as hedges are
structured so as to reduce the market risk associated with the underlying
transaction being hedged and are designated as hedges at the inception of
the contract. Gains and losses on hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriate hedged rate.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred finance costs
| |  | ----------------------



| |  | Financing costs are deferred and amortised over the related financing
period using the effective interest method of amortisation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | TURNOVER
|-- |  | --------



| |  | Turnover comprises primarily sales to the electricity trading market in
England and Wales of electricity generated by the group. Most of the power
plants revenue relies on sales contracts with a few large customers. One
customer accounted for 65.1% of revenues in the year to 31 December 2002.
Two customers accounted for 67.9% and 9.0% of revenues in 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-9



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|3. |  | OPERATING (LOSS) / PROFIT
|-- |  | -------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit is stated after
charging / (crediting):Depreciation of owned assets
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )




|4. |  | EXCEPTIONAL ITEMS
|-- |  | -----------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bad debt expense
    
    
    136,801
    
    
    
    
    
    
    
    Provision against intercompany debtor
    
    
    53,446Impairment loss (note 9 & 10)
    
    
    579,000
    
    
    
    
    
    
    
    769,247
    
    
    
    
    
    
    
    




| |  | On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
TXU Group. As a consequence of this, on 18 November 2002, Drax
Power Limited
terminated the Hedging Contract with TXU Europe, a subsidiary of TXU Group,
to minimise financial exposure. On 19 November 2002, TXU Group filed a
petition on behalf of itself, TXU UK Limited and TXU Europe, seeking
protection from its creditors, which was approved, putting the three
companies into temporary administration. As a result, the company has made
100% provision against all amounts owed by TXU Europe in respect of the
Hedging Contract and the termination of that contract, as at 18 November
2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included within administrative expenses is an exceptional item of £579
million in respect of an impairment loss on goodwill and fixed assets. The
impairment loss was measured by reference to the value in use of the assets
using a discount rate of 7.9% which reflects the risks inherent in the
forecast cash flows.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The tax effect of the bad debt expense is £41 million. The impairment of
goodwill and fixed assets is non-deductible and so has no tax effect.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | INTEREST RECEIVABLE AND SIMILAR INCOME
|-- |  | --------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest receivable
    
    
    23,626
    
    
    
    14,836
    
    
    
    11,405




|6. |  | INTEREST PAYABLE AND SIMILAR CHARGES
|-- |  | ------------------------------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest and other loans
    
    
    1,354
    
    
    
    3,919
    
    
    
    


C-10



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|7. |  | TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES
|-- |  | ---------------------------------------------



| | a) |  | Analysis of charge in the year
| | -- |  | ------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000United Kingdom corporation tax at 30%  current year
    
    
    
    
    
    
    4,643
    
    
    
    13,970 prior year
    
    
    
    
    
    
    35
    
    
    
    458Group relief
    
    
    21,534
    
    
    
    50,125
    
    
    
    45,89221,534
    
    
    
    54,803
    
    
    
    60,320Deferred tax  Timing differences, origination and reversal
    
    
    (662
    )
    
    
    6,207
    
    
    
    7,953 Adjustment in respect of prior years
    
    
    152
    
    
    
    
    
    
    
    54(510
    )
    
    
    6,207
    
    
    
    8,00721,024
    
    
    
    61,010
    
    
    
    68,327




| | b) |  | Factors affecting tax charge for the current year
| | -- |  | -------------------------------------------------



| |  | The tax assessed for the period is higher than that resulting from applying
the standard rate of corporation tax in the UK (30%)
(2001: 30%)
(2000: 30%). The differences are explained below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000(Loss) / profit on ordinary activities before tax
    
    
    (625,506
    )
    
    
    159,280
    
    
    
    190,928Tax on profit on ordinary activities at 30%
(2001 & 2000: 30%)
    
    
    (187,652
    )
    
    
    47,784
    
    
    
    57,278Effects of:Expenses not deductible for tax purposes
    
    
    208,524
    
    
    
    13,191
    
    
    
    10,537Capital allowances in excess of depreciation
    
    
    662
    
    
    
    (6,207
    )
    
    
    (7,953
    )Adjustment in respect of prior years
    
    
    
    
    
    
    35
    
    
    
    458Current tax charge for the year
    
    
    21,534
    
    
    
    54,803
    
    
    
    60,320




|8. |  | DIVIDENDS
|-- |  | ---------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Dividend paid on
preference
shares of £Nil
(2001: £73,539)
(2000: £71,458)
per share
    
    
    
    
    
    
    125,384
    
    
    
    121,836


C-11



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|9. |  | INTANGIBLE FIXED ASSETS
|-- |  | -----------------------



| |  | The intangible fixed assets comprise of goodwill which arose on the
acquisition of Drax Power Limited.
| |  | ------------------------------------------------------------------------------------------------------

Goodwill£000CostAt 1 January 2002
    
    
    665,185Reclassification
    
    
    (11,206
    )At 31 December 2002
    
    
    653,979AmortisationAt 1 January 2002
    
    
    70,575Charge for the year
    
    
    33,876Impairment (note 4)
    
    
    549,528At 31 December 2002
    
    
    653,979Net book valueAt 31 December 2002
    
    
    At 31 December 2001
    
    
    594,610




| |  | The reclassification above was in respect of an amount relating to the VAT
on certain transactions which occurred at the time of the acquisition of
Drax Power Station by the AES Corporation in November 1999. These
transactions related to the acquisition of the opening coal stock and the
purchase of intellectual property. The transactions were recorded gross
rather than net of VAT in the calculation of the goodwill arising upon
acquisition. The company has subsequently adjusted both goodwill and the
VAT creditor.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. |  | TANGIBLE FIXED ASSETS
|--- |  | ---------------------

Freehold
    
    Plant, machinery,land and buildings
    
    fixtures & fittings
    
    Plant spares
    
    Total£000
    
    £000
    
    £000
    
    £000CostAt 1 January 2002
    
    
    132,181
    
    
    
    1,081,136
    
    
    
    21,011
    
    
    
    1,234,328Additions
    
    
    
    
    
    
    2,794
    
    
    
    2,430
    
    
    
    5,224Disposals
    
    
    
    
    
    
    (2,414
    )
    
    
    
    
    
    
    (2,414
    )Issues
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )At 31 December 2002
    
    
    132,181
    
    
    
    1,081,516
    
    
    
    23,417
    
    
    
    1,237,114Accumulated depreciationAt 1 January 2002
    
    
    9,735
    
    
    
    83,342
    
    
    
    1,006
    
    
    
    94,083Charge for the year
    
    
    3,209
    
    
    
    29,143
    
    
    
    502
    
    
    
    32,854Disposals
    
    
    
    
    
    
    (2,413
    )
    
    
    
    
    
    
    (2,413
    )Impairment (note 4)
    
    
    
    
    
    
    29,472
    
    
    
    
    
    
    
    29,472At 31 December 2002
    
    
    12,944
    
    
    
    139,544
    
    
    
    1,508
    
    
    
    153,996Net book valueAt 31 December 2002
    
    
    119,237
    
    
    
    941,972
    
    
    
    21,909
    
    
    
    1,083,118At 31 December 2001
    
    
    122,446
    
    
    
    997,794
    
    
    
    20,005
    
    
    
    1,140,245




| |  | Freehold land amounting to £1,060,000 (2001: £1,060,000) has not been
depreciated.
| |  | ----------------------------------------------------------------------------------

C-12



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|11. |  | STOCKS
|--- |  | ------

2002
    
    2001£000
    
    £000Raw materials and consumables
    
    
    31,327
    
    
    
    62,563




|12. |  | DEBTORS
|--- |  | -------

2002
    
    2001£000
    
    £000Trade debtors
    
    
    52,462
    
    
    
    104,849Amounts owed by fellow subsidiary undertakings
    
    
    94,516
    
    
    
    41,061Prepayments and other debtors
    
    
    10,709
    
    
    
    22,137157,687
    
    
    
    168,047




| |  | Included within other debtors is VAT receivable of £Nil (2001: £1.8
million), an insurance debtor of £0.2 million (2001: £0.5 million) and a
swap advance debtor of £1.4 million (2001: swap advance creditor £23.5
million).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Included within prepayments and other debtors is an amount outstanding from
the employee share ownership plan (ESOP) totalling £2,858,000, loaned for
the purchase of 129,029 shares in the common stock of The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | CASH AT BANK AND IN HAND
|--- |  | ------------------------



| |  | Included within the total cash balance are restricted cash deposits
amounting to £44,790,000 (2001: £9,689,000). These comprise part of a
required balance which needs to be in place on each repayment date. Also
included is restricted cash of £13,400,000 (2001: £Nil) over which National
Westminster Bank plc has a charge.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|14. |  | CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
|--- |  | ----------------------------------------------

As restated2002
    
    2001£000
    
    £000Trade creditors
    
    
    15,222
    
    
    
    2,679Amounts owed to fellow subsidiary undertakings
    
    
    7,575
    
    
    
    6,695Amounts owed to ultimate parent
    
    
    7,265
    
    
    
    5,012Corporation tax
    
    
    1,204
    
    
    
    1,556Other creditors and accruals
    
    
    13,837
    
    
    
    82,30145,103
    
    
    
    98,243




| |  | Included within other creditors is VAT payable of £9.8 million (2001: £28.2
million).
| |  | -------------------------------------------------------------------------------------



|15. |  | CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
|--- |  | -------------------------------------------------------

2002
    
    2001£000
    

£000Retentions
    
    
    368
    
    
    
    644




| |  | All retentions are payable within 1 to 2 years.
| |  | -----------------------------------------------

C-13



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | PROVISIONS FOR LIABILITIES AND CHARGES
|--- |  | --------------------------------------

At
    
    Current
    
    At1 January
    
    year
    
    31 December2002
    
    credit
    
    2002£000
    
    £000
    
    £000Deferred taxation
    
    
    17,278
    
    
    
    (510
    )
    
    
    16,768Reinstatement provision
    
    
    110
    
    
    
    
    
    
    
    11017,388
    
    
    
    (510
    )
    
    
    16,878




| |  | The amount of deferred taxation provided in the financial statements is:
| |  | ------------------------------------------------------------------------

2002
    
    2001£000
    
    £000GroupCapital allowances in excess of
depreciation
    
    
    16,768
    
    
    
    17,278




|17. |  | CALLED UP SHARE CAPITAL
|--- |  | -----------------------

2002
    
    2001£
    
    £Authorised200 ordinary shares of £1 each
    
    
    200
    
    
    
    2002,000 preference shares of £1 each
    
    
    2,000
    
    
    
    2,000Called up, allotted and fully paid190 ordinary shares of £1 each
    
    
    190
    
    
    
    1901,705 preference shares of £1 each
    
    
    1,705
    
    
    
    1,705




| |  | The special rights and restrictions attached to and imposed on the Ordinary
Shares and the Preference Shares are as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | Redemption and purchase
| |  | -----------------------



| |  | The ordinary shares and preference shares each have power for the company
insofar as is permitted by law, to redeem or purchase any of its shares and
to increase or reduce the said capital subject to the provisions of the
Companies Law (1998 Revision) and the Articles of Association and to issue
any part of its capital, whether original, redeemed or increased with or
without any preference, priority or special privilege or subject to any
postponement of rights or to any conditions or restrictions and so that
unless the conditions of issue shall otherwise expressly declare every
issue of shares whether declared to be preference or otherwise shall be
subject to the powers herein before contained.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-14



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|17. |  | CALLED UP SHARE CAPITAL (continued)
|--- |  | -----------------------------------



| |  | Allocation of profits and losses
| |  | --------------------------------



| |  | Profits for each Fiscal Year shall be allocated to the Shareholders in the
following order of priority:
| |  | -------------------------------------------------------------------------------------------------------



| |  |  | to the Preferred Shareholders, and if more than one pro rata to
the number of Preferred Shares held, in an amount equal to the excess
of (i) the aggregate Preferred Return accrued from the issuance of the
Preferred Shares through to the end of such Fiscal Year over (ii) the
aggregate Profits previously allocated for all prior Fiscal Years;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to the Preferred Shareholders, and if more than one pro rata to
the number of Preferred Shares held, in an amount equal to the excess
of (i) the aggregate Losses previously allocated to the Preferred
Shareholders for all prior Fiscal Years over (ii) the aggregate
Profits previously allocated for all prior Fiscal Years;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to the Ordinary Shareholders, and if more than one pro rata to
the number of Ordinary Shares held, in an amount equal to the excess
of (i) the aggregate Losses previously allocated to the Ordinary
Shareholders for all prior Fiscal Years over (ii) the aggregate
Profits previously allocated for all prior Fiscal Years;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to the Pre-Conversion Ordinary Shareholders, and if more than one
pro rata to the number of Ordinary Shares held, in an amount equal to
the excess of (i) one-third (1/3) of the amount allocated to the
Preferred Shareholders for all Fiscal Years prior to the conversion
over (ii) Profits previously allocated; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the balance, if any, to the Shareholders pro rata in accordance
with their Sharing Ratios.
| | - |  | ------------------------------------------------------------------------------------------



| |  | Losses for any Fiscal Year shall be allocated to the Shareholders in the
following order of priority:
| |  | -----------------------------------------------------------------------------------------------------



| |  |  | until the conversion of the Preferred Shares into Ordinary
Shares, first, to each Ordinary Shareholder and, if more than one, pro
rata to the number of Ordinary Shares held until its Adjusted Capital
Account equals zero, and the balance, if any, to each Preferred
Shareholder and, if more than one, pro rata to the number of Preferred
Shares held until its Adjusted Capital Account equals zero; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | from and after the conversion of the Preferred Shares into
Ordinary Shares, to the Ordinary Shareholders, pro rata in accordance
with their Sharing Ratios.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Conversion of preferred shares to ordinary shares
| |  | -------------------------------------------------



| |  | The holders of the Preferred Shares shall be entitled by notice in writing
to the company at any time on or after the fifth anniversary of the date on
which the Preferred Shares are issued (30 November 1999) to convert their
Preferred Shares into Ordinary Shares in the manner set out in the Articles
of Association at the rate of 0.4423 of an Ordinary Share for every 1
Preferred Share held.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Ordinary Shares issued upon conversion shall rank pari passu in all
respects with the Ordinary Shares of the company in issue immediately prior
thereto save for any dividends declared or accrued prior to the date of
actual conversion.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lien of shares
| |  | --------------



| |  | The company shall have a first and paramount lien and charge on all Shares
(whether fully paid-up or not) registered in the name of a Shareholder
(whether solely or jointly with others) for all debts, liabilities or
engagements to or with the company (whether presently payable or not) by
such Shareholder or his estate, either alone or jointly with any other
person, whether a Shareholder or not, but the Directors may at any time
declare any Share to be wholly or in part exempt from the provisions of
this Article. The registration of a transfer of any such Share shall
operate as a waiver of the companys lien (if any) thereon. The companys
lien (if any) on a Share shall extend to all dividends or other monies
payable in respect thereof.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Votes of shareholders
| |  | ---------------------



| |  | Subject to any rights or restrictions for the time being attached to any
class or classes of Shares, on a show of hands every Shareholder of record
present in person or by proxy at a general meeting shall have one vote and
on a poll every Shareholder of record present in person or by proxy shall
have one vote for each Ordinary Share and one vote for each Preferred Share
registered in his name in the register of Shareholders.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-15



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|17. |  | CALLED UP SHARE CAPITAL (continued)
|--- |  | -----------------------------------



| |  | Distributions
| |  | -------------



| |  | Distributions with respect to Shares shall be distributed only when, as,
and if distributions are declared by the Directors as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to the Preferred Shareholders, if any, and if more than one pro
rata to the number of Preferred Shares held, in an amount equal to the
excess of (i) the aggregate Preferred Return accrued from the date of
the issuance of the Preferred Shares through the end of the current
Fiscal Year over (ii) the aggregate distributions previously for the
current and all prior Fiscal Years;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to the Pre-Conversion Ordinary Shareholders, and if more than one
pro rata to the number of Ordinary Shares held, in an amount equal to
the excess of (i) one-third (1/3) of the aggregate amount distributed
to the Preferred Shareholders for the current and all prior Fiscal
Years over (ii) the aggregate distributions previously made for the
current and all prior Fiscal Years; provided however, that such amount
shall be reduced to the extent necessary to ensure that the profits of
the company attributable to (i) the current Fiscal Year which would
otherwise be distributed to such Pre-Conversion Ordinary Shareholders
under this paragraph (b) and paragraph (c) do not exceed 25 percent of
the total profits of the company for such Fiscal Year and (ii) any
prior Fiscal Year which would otherwise be distributed to such
Pre-Conversion Ordinary Shareholders under this paragraph (b) and
paragraph (c) do not exceed 25 percent of the total profits of the
company for such Fiscal Year; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the balance, if any, to the Shareholders pro rata in accordance
with their Sharing Ratios.
| | - |  | ------------------------------------------------------------------------------------------



|18. |  | RESERVES
|--- |  | --------

As restated
    
    Profit and lossShare premium
    
    Capital reserve
    
    account
    
    Total£000
    
    £000
    
    £000
    
    £000At 1 January 2002
    
    
    1,893,999
    
    
    
    
    
    
    
    (4,995
    )
    
    
    1,889,004Retained loss for the financial year
    
    
    
    
    
    
    
    
    
    
    (646,530
    )
    
    
    (646,530
    )Capital contribution in the year
    
    
    
    
    
    
    52,250
    
    
    
    
    
    
    
    52,250At 31 December 2002
    
    
    1,893,999
    
    
    
    52,250
    
    
    
    (651,525
    )
    
    
    1,294,724




|19. |  | RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS
|--- |  | --------------------------------------------------

As restated2002
    
    2001£000
    
    £000Loss for the financial year
    
    
    (646,530
    )
    
    
    (27,114
    )Capital contribution in the year
    
    
    52,250
    
    
    
    Net reduction in shareholders funds
    
    
    (594,280
    )
    
    
    (27,114
    )Opening shareholders funds
    
    
    1,889,006
    
    
    
    1,916,120Closing shareholders funds
    
    
    1,294,726
    
    
    
    1,889,006


C-16



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|20. |  | RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
|--- |  | -------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit
    
    
    (647,778
    )
    
    
    148,363
    
    
    
    179,523Depreciation
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Loss on disposal of fixed assets
    
    
    
    
    
    
    19
    
    
    
    Plant spares issues
    
    
    24
    
    
    
    155
    
    
    
    Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )Decrease / (increase) in stocks
    
    
    31,236
    
    
    
    (2,617
    )
    
    
    (7,413
    )Decrease / (increase) in debtors
    
    
    63,861
    
    
    
    40,332
    
    
    
    (107,657
    )(Decrease) / increase in creditors
    
    
    (41,860
    )
    
    
    (55,275
    )
    
    
    67,661Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Harich Swap interest
    
    
    19,395
    
    
    
    10,265
    
    
    
    2,45270,608
    
    
    
    189,832
    
    
    
    175,191




| |  | The restatement of the cashflows for the years ended 31 December 2002, 2001
and 2000 relates to a reclassification of the amounts generated under a
financing hedging swap (note 27).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The decrease in debtors during the year ended 31 December 2002 is after
reflecting the exceptional bad debt expense of £136,801,000 recorded in the
year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|21. |  | RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
|--- |  | --------------------------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Decrease in cash in the year
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Movement in net funds in the year
    
    
    45,127
    
    
    
    (268
    )
    
    
    (13,401
    )Net funds brought forward
    
    
    39,816
    
    
    
    40,084
    
    
    
    53,485Net funds carried forward
    
    
    84,943
    
    
    
    39,816
    
    
    
    40,084




|22. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



| |  | Guaranteed Secured Bonds amounting to £1,725 million are guaranteed on an
unlimited, unconditional and irrevocable basis by each of Drax Power
Limited, Drax Limited, Drax Electric Limited, AES Drax Financing Limited
and AES Drax Acquisition Limited and each such entity has granted security
over all their assets as security for, inter alia, the Guaranteed Secured
Bonds and certain related swaps, finance documents and guarantees (note 6).
Repayment of the Guaranteed Secured Bonds is further secured by direct
agreements from certain of the major project parties and other security
arrangements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-17



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|23. |  | PENSION SCHEME FUNDING
|--- |  | ----------------------



| |  | Pension schemes operated
| |  | ------------------------



| |  | Within the UK the Group principally operates an approved defined benefit
scheme, on behalf of the AES Drax Power Group of the Electricity Supply
Pension Scheme (ADPG ESPS).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular pension costs  SSAP 24
| |  | -------------------------------



| |  | Pensions costs for the ADPG ESPS in the year were £1,648,000 (2001:
£2,248,000), comprising a regular cost of £1,475,000 (2001: £1,484,000)
plus variations totalling £173,000 (2001: £764,000). A variation of
£(114,000) has arisen due to £800,000 of the valuation surplus being
carried forward unutilised, which is being spread as a level percentage of
salaries over the average remaining working life of the membership
(approximately 11 years). A further variation of £(113,000) has arisen due
to the application of reduced contributions from 1 January 2002 to 31 March
2002 from the valuation surplus. The remaining variation of £400,000 has
arisen due to certain special events, generating additional liabilities and
triggering employer contributions. In the year, redundancies have resulted
in an additional pension cost of £400,000, which has been partially offset
by additional employer contributions of £173,000.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
Consultants, assessed the ESPS in respect of the AES Drax Power Group as at
31 December 2002 using the projected unit method and a market based
valuation approach to ascertain its cost to the Group. The principal
financial assumptions were that the rate of return would be 4.5% per annum
higher than the rate of price inflation, that increases in past and future
pensions would be in line with price inflation, and that future salary
growth would exceed price inflation by 2.75% per annum, depending on salary
levels at the valuation date. Following the actuarial valuation it was
agreed that the Group would pay an average contribution rate of 12% of
annual salaries, subject to review at future valuations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the date of the latest actuarial valuation the market value of the
assets of the ADPG ESPS was £44.6 million and the actuarial value of the
liabilities was sufficient to cover between 115% and 120% of the benefits
that had accrued to members, after allowing for expected increases in
future earnings. The next scheduled actuarial valuation of the ADPG ESPS
will be as at 31 March 2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | FRS 17
| |  | ------



| |  | In November 2000 the Accounting Standards Board issued FRS 17 Retirement
Benefits replacing SSAP 24 Accounting for Pensions Costs. Certain
disclosures are required in the transition period before full adoption of
FRS 17 for periods ending on or after 22 June 2001. These further
disclosures are included below.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The principal actuarial assumptions used as at 31 December 2002 are shown
below:
| |  | --------------------------------------------------------------------------------

2002
    
    2001Rate of increase in salaries
    
    
    3.8
    %
    
    
    4.0
    %Rate of increase of pensions in payment and deferment
    
    
    2.5
    %
    
    
    2.6
    %Discount rate
    
    
    5.4
    %
    
    
    5.8
    %Inflation assumption
    
    
    2.3
    %
    
    
    2.5
    %




| |  | The following contributions were made to the ADPG ESPS during 2002:
| |  | -------------------------------------------------------------------

Year ended31 December2002£millionsCompany contributions
    
    
    1.6Member contributions
    
    
    0.6


C-18



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|23. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount charged to operating profit:
| |  | -----------------------------------------------

Year ended31 December2002£ millionsCurrent service cost
    
    
    1.9Past service cost
    
    
    Early retirement deficiency cost
    
    
    0.4Total operating cost
    
    
    2.3




| |  | Analysis of amount credited to other finance income:
| |  | ----------------------------------------------------

Year ended31 December2002£ millionsExpected return on pension plan assets
    
    
    3.3Less: Interest on pension plan liabilities
    
    
    (3.2
    )Net return
    
    
    0.1




| |  | The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
shown below:
| |  | -----------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsEquities
    
    
    29.5
    
    
    
    36.1Bonds
    
    
    5.9
    
    
    
    6.6Other
    
    
    0.4
    
    
    
    0.7Market value of assets
    
    
    35.8
    
    
    
    43.4Actuarial value of liabilities
    
    
    (60.8
    )
    
    
    (53.9
    )Deficit in the scheme
    
    
    (25.0
    )
    
    
    (10.5
    )Related deferred tax asset (assumed 30% rate)
    
    
    7.5
    
    
    
    3.2Net pension liability
    
    
    (17.5
    )
    
    
    (7.3
    )




| |  | Analysis of movement in deficit during the year:
| |  | ------------------------------------------------

Year ended31 December2002£ millionsDeficit in scheme at 1 January 2002
    
    
    (10.5
    )Current service cost
    
    
    (1.9
    )Contributions
    
    
    2.2Early retirement deficiency cost
    
    
    (0.4
    )Actuarial loss
    
    
    (14.4
    )Deficit in scheme at 31 December 2002
    
    
    (25.0
    )


C-19



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|23. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount recognised in Statement of Total Recognised Gains and
Losses:
| |  | --------------------------------------------------------------------------------

Year ended31 December2002£ millionsActual return less expected return on pension scheme assets
    
    
    (11.8
    )Experience gains arising on the scheme liabilities
    
    
    0.1Changes in assumptions underlying the present value of the scheme liabilities
    
    
    (2.7
    )Actuarial loss recognised in STRGL
    
    
    (14.4
    )




| |  | Had the company adopted FRS 17 early, Group profit and loss reserves would
have been stated as follows:
| |  | -------------------------------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsProfit and loss reserve in the financial statements as at year end
    
    
    (651.5
    )
    
    
    (5.0
    )Deficit in relation to the ADPG ESPS, net of related deferred tax asset
    
    
    (17.5
    )
    
    
    (7.3
    )Profit and loss reserve as adjusted
    
    
    (669.0
    )
    
    
    (12.3
    )




|24. |  | ULTIMATE PARENT COMPANY
|--- |  | -----------------------



| |  | The immediate parent company is Drax Electric Limited (formerly AES Drax
Electric Limited), a company incorporated in the Cayman Islands.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | The parent undertaking of the smallest group, which includes the company
and for which group accounts are prepared, is AES UK Power Holdings
Limited, a company incorporated in England and Wales. Copies of the group
accounts of AES UK Power Holdings Limited can be obtained from Companies
House, Crown Way, Cardiff CF14 3UZ.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at 31 December 2002, the ultimate parent company and controlling entity,
and largest group for which group accounts are prepared, was The AES
Corporation, a company incorporated in the State of Delaware, USA. Copies
of the parent groups financial statements can be obtained from the
Securities and Exchange Commission, 450, 5th Street NW, Washington DC
20549, USA.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 September 2003, notices were issued to the Company and the other
companies in the group by JP Morgan Chase Bank in its role of Security
Trustee in respect of the Guaranteed Secured Bonds in respect of an event
of default as a result of the non-payment of coupons as at 31 December 2002
and 30 June 2003. A further notice was also issued to AES Drax
Acquisitions Holdings Limited, the immediate parent of AES Drax Acquisition
Limited, stating that AES Drax Acquisition Limited would be prevented from
exercising any voting rights or other powers in respect of the ordinary
shares that it holds in AES Drax Acquisition Limited. The effect of this
notice is that The AES Corporation, who remains the ultimate parent
company, is unable to exercise any control over AES Drax Acquisition
Limited or any of its subsidiaries and that control of the group lies with
the senior creditors of the group.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|25. |  | NATURE OF BUSINESS
|--- |  | ------------------



| |  | The principal activity of the group is the ownership and operation of the
Drax Power Station, a 3,960 megawatt (gross) coal-fired power station based
in the North of England.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-20



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
|--- |  | ---------------------------------------------



| |  | This note is provided in addition to the previous financial information for
US users of the accounts.
| |  | -----------------------------------------------------------------------------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect on net income,
shareholders equity, the cash flow statement and comprehensive income is
shown in the tables on pages 23 to 24.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred taxation is provided at the anticipated tax rates
on timing differences arising from the inclusion of items of income and
expenditure in taxation computations in periods different from those in
which they are included in the financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, deferred taxation is provided on all temporary differences
between tax and book bases of assets and liabilities under the liability
method, subject to a valuation allowance where applicable in respect of
deferred taxation assets, in accordance with SFAS 109, Accounting for
Income Taxes. As a result certain items that are treated as permanent
items under UK GAAP are treated as temporary differences under US GAAP. In
addition, deferred tax is also provided on certain of the other adjustments
between UK and US GAAP described herein. Such amounts are reported in the
profit and loss account except where the adjustment is recorded directly to
shareholders equity; for example, in relation to the additional minimum
pension liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pensions
| |  | --------



| |  | Under UK GAAP, where pensions are provided by means of a funded defined
benefits scheme, annual contributions are based on actuarial advice. The
expected cost of providing pensions is recognised on a systematic basis
over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining
service lives of current employees on a straight-line basis.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 87, Employers Accounting for Pensions, prescribes the
method of actuarial valuation, which includes differences from certain
assumptions used for the UK GAAP actuarial computation. In addition, assets
are assessed at current settlement rates. Certain variations from regular
cost are allocated in equal amounts over the average remaining service
lives of current employees. An additional minimum pension liability equal
to the excess of the accumulated benefit obligation over the plan assets
must be recognised at the balance sheet date with a corresponding entry
recorded as an intangible asset, to the extent of unamortised prior service
cost, and the balance, if any, in other comprehensive income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Push down of acquisition debt
| |  | -----------------------------



| |  | Under US GAAP the £1,300 million senior secured bank facility used to
finance the acquisition of Drax Power Limited would be pushed down to the
company acquired and the related interest expense would be recorded. The
other side of the entry would be to shareholders equity. Interest
attributable to the acquisition debt, net of any corresponding tax benefit,
is recorded in the statement of operations. Interest on the bank facility
accrues at LIBOR + 1.8%. Principal payments are due semi-annually over a
fifteen year period commencing 30 June 2000. Principal repayments of £25
million, £370 million, £2.7 million, £9.1 million, £22.6 million and £28.1
million were made on 30 June 2000, 2 August 2000, 31 December 2000, 30 June
2001, 31 December 2001 and 30 June 2002, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under UK GAAP, such entries are not recorded.
| |  | ---------------------------------------------



| |  | Goodwill and tangible fixed assets
| |  | ----------------------------------



| |  | Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over the
fair value of the identifiable net assets acquired. Goodwill is
capitalised under the heading, Intangible assets, and amortised over its
expected useful economic life, subject to a maximum of twenty years. Such
goodwill is subject to a review for impairment in accordance with FRS 11,
Impairment of Fixed Assets and Goodwill, which allows testing for
impairment at the income generating unit level. In the year ended 31
December 2002 the Company has recorded an impairment loss, based on a
discounted cash flow calculation, of £579 million.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-21



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Under US GAAP, the acquisition has been treated as an acquisition of assets
and accordingly the entire purchase price, including certain liabilities
assumed, has been allocated to tangible fixed assets and depreciated over
the estimated useful lives of the assets, being thirty five years.
Furthermore, additional net deferred tax liabilities recorded at the
acquisition date under US GAAP resulted in an increase in the amount
allocated to tangible fixed assets resulting in additional depreciation
expense.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-lived Assets, an impairment loss shall be recognized only if the
carrying amount of a long-lived asset exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. No impairment was recognised under US GAAP.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivative Instruments and Hedging Activities
| |  | ---------------------------------------------



| |  | Under UK GAAP, investments or financial derivative instruments accounted
for as hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as hedges
at the inception of the contract. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amounts of those assets
or liabilities and are ultimately recognized in the profit and loss account
as part of those carrying amounts. Gains and losses on qualifying hedges
of firm commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated hedged rate.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, requires all derivative financial instruments to be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings unless specific hedge
accounting criteria are met. Where the derivative instrument qualifies for
hedge accounting, changes in fair value of the instrument are recorded in
earnings or other comprehensive income (a separate component of equity)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction and whether or not
the hedge is effective. For fair value hedge transactions in which a
company is hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative will generally be
offset in the income statement by changes in the hedged items fair value.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For cash flow hedge transactions, in which a company is hedging the
variability of cash flows related to a variable-rate asset, liability or a
forecasted transaction, changes in the fair value of the derivative
instrument are initially reported in other comprehensive income and them
reclassified as earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The ineffective
portion of all hedges are recognised in current-period earnings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to qualify for hedge accounting under SFAS 133, a company must
formally document, designate and assess, periodically, the effectiveness of
transactions that qualify for hedge accounting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactions, contracts, assets and liabilities denominated in foreign
currencies are recorded at the exchange rate prevailing on the date of the
transaction, and assets and liabilities are recorded at the period end
date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Severance accrual and unfavourable IT contract
| |  | ----------------------------------------------



| |  | Under UK GAAP only those liabilities that existed in the acquired business
may be reflected in the purchase price allocation. Liabilities arising
from the acquirers intentions may not be recognised. Therefore under UK
GAAP it is not permissible to record a severance accrual for the costs
associated with terminating employees of the acquired business or for the
unfavourable IT contract. Instead such amounts must be provided for and
expensed in the post-acquisition financial statements of the acquirer.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, such amounts may be recorded as part of the acquisition of
Drax Power Limited in accordance with EITF 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-22



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Recently issued but not yet adopted accounting pronouncements
| |  | -------------------------------------------------------------



| |  | Asset retirement obligations.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective 1 January 2003, requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the
costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The company will adopt SFAS No. 143 effective 1 January 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has completed a detailed assessment of the specific
applicability and implications of SFAS No. 143. The scope of SFAS No. 143
includes primarily active ash landfills, water treatment basins and the
removal or dismantlement of certain plant and equipment. As of 31 December
2002, the company had a recorded liability of approximately £0.1 million
related to asset retirement obligations. Upon adoption of SFAS No. 143, the
company is not required to record any additional liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Exit or disposal activities.In June 2002, the Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior to
issuance of SFAS No. 146, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after 31 December 2002. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-based compensation.In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the
adoption of this pronouncement to have a material impact on our financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Guarantor accounting.We will apply the initial recognition and
measurement provisions of FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others, on a prospective basis for all
guarantees issued after 31 December 2002. Under FIN 45, at the inception of
guarantees issued after 31 December 2002, we will record the fair value of
the guarantee as a liability, with the offsetting entry being recorded
based on the circumstances in which the guarantee was issued. We will
account for any fundings under the guarantee as a reduction of the
liability. After funding has ceased, we will recognize the remaining
liability in the income statement on a straight-line basis over the
remaining term of the guarantee. In general, we enter into various
agreements providing financial performance assurance to third parties on
behalf of certain subsidiaries.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Such agreements include guarantees, letters of credit and surety bonds. FIN
45 does not encompass guarantees issued either between parents and their
subsidiaries or between corporations under common control, a parents
guarantee of its subsidiarys debt to a third party (whether the parent is
a corporation or an individual), a subsidiarys guarantee of the debt owed
to a third party by either its parent or another subsidiary of that parent,
nor guarantees of a companys own future performance. Adoption of FIN 45
will have no impact to our historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The
company does not expect adoption of the liability recognition provisions of
FIN 45 to have a material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-23



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Variable interest entities.FIN 46, Consolidation of Variable Interest
Entities, is effective immediately for all enterprises with variable
interests in variable interest entities created after 31 January 2003. FIN
46 provisions must be applied to variable interests in variable interest
entities created before 1 February 2003 as at 31 December 2003. If an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur and/or receives a majority of the entitys
expected residual returns if they occur. If significant variable interests
are held in a variable interest entity, the company must disclose the
nature, purpose, size and activity of the variable interest entity and the
companys maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after 31
January 2003. We do not believe that the adoption of FIN 46 will result in
our consolidation of any previously unconsolidated entities or material
additional disclosure.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | DIG Issue C11.In connection with the January 2003 FASB Emerging Issues
Task Force (EITF) meeting, the FASB was requested to reconsider an
interpretation of SFAS No. 133. The interpretation, which is contained in
the Derivatives Implementation Groups C11 guidance, relates to the pricing
of contracts that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that contains broad
market indices (e.g. CPI) could qualify as a normal purchase or sale. The
company is currently re-evaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial instruments with characteristics of both liabilities and equity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with characteristics of both liabilities and equity.
SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects an issuers
accounting for 3 types of freestanding financial instruments, namely:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1 |  | Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | 2 |  | Instruments, other than outstanding shares, that do or may
not require the issuer to buy back some of its shares in exchange
for cash or other assets. These instruments include put options and
forward purchase contracts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 |  | Obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | SFAS No. 150 does not apply to features in embedded financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after 31 May 2003 and
otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement
is not permitted. This would apply to the £425 million forward purchase of
preference shares that is disclosed in AES Drax Acquisition Limiteds
financial statements, note 15. The company is currently evaluating the
effects that this guidance will have on its results of operations and
financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-24



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under UK GAAP
    
    
    (646,530
    )
    
    
    98,270
    
    
    
    122,601US GAAP adjustments:Additional depreciation on tangible fixed assets
    
    
    (39,676
    )
    
    
    (39,676
    )
    
    
    (39,676
    )Severance pay expensed under UK GAAP
    
    
    
    
    
    
    
    
    
    
    12,053Unfavourable IT contract
    
    
    
    
    
    
    
    
    
    
    1,995Deferred taxation
    
    
    20,869
    
    
    
    17,813
    
    
    
    12,303Push down interest
    
    
    (8,610
    )
    
    
    (56,543
    )
    
    
    (66,201
    )Derivative instruments and hedging activities
    
    
    6,942
    
    
    
    (9,449
    )
    
    
    Goodwill amortisation
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Impairment of goodwill and tangible fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Net (loss) / income under US GAAP
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951


As restated
    
    As restated31 December
    
    31 December2002
    
    2001£000
    
    £000Shareholders equity under UK GAAP
    
    
    1,294,726
    
    
    
    1,889,006US GAAP adjustments:Tangible fixed assets, cost
    
    
    1,408,909
    
    
    
    795,763Additional depreciation on tangible fixed assets
    
    
    (122,379
    )
    
    
    (82,703
    )Deferred taxation
    
    
    (637,363
    )
    
    
    (669,298
    )Push down of acquisition debt
    
    
    (842,555
    )
    
    
    (870,610
    )Derivative instruments and hedging activities
    
    
    (67,520
    )
    
    
    (47,478
    )Additional minimum pension liability
    
    
    (10,800
    )
    
    
    Shareholders equity under US GAAP
    
    
    1,023,018
    
    
    
    1,014,680




| |  | In addition to the recognition and measurement differences set out in the
reconciliation tables above there are a number of classification
differences between UK and US GAAP. These are described below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred tax liabilities are presented net within
Provisions for liabilities and charges. Under US GAAP deferred taxes are
presented as current or long term based upon the term of the item to which
they relate. Deferred tax assets and liabilities may only be offset to the
extent that they are both classified as short or long term.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-25



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Cash flow statement
| |  | -------------------



| |  | A reconciliation of the consolidated cash flow statement prepared under UK
GAAP to a statement of cash flows prepared under US GAAP is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    70,608
    
    
    
    189,832
    
    
    
    175,191Returns on investments and servicing of finance
    
    
    (50,624
    )
    
    
    659
    
    
    
    8,626Taxation
    
    
    (21,883
    )
    
    
    (59,285
    )
    
    
    (68,889
    )Net cash flows (used in) / provided by operating
activities per US GAAP
    
    
    (1,899
    )
    
    
    131,206
    
    
    
    114,928Capital expenditure
    
    
    (5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Increase in restricted cash deposits
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )Net cash used in investing activities per US GAAP
    
    
    (53,725
    )
    
    
    (6,538
    )
    
    
    (15,734
    )Equity dividends paid
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Capital contribution
    
    
    52,250
    
    
    
    
    
    
    
    Net cash provided by / (used in) financing
activities per US GAAP
    
    
    52,250
    
    
    
    (125,384
    )
    
    
    (121,836
    )Decrease in cash
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Cash brought forward
    
    
    39,816
    
    
    
    40,084
    
    
    
    53,485Cash carried forward
    
    
    84,943
    
    
    
    39,816
    
    
    
    40,084




| |  | Comprehensive (loss) / income under US GAAP is as follows:
| |  | ----------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under US GAAP
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951Derivative loss
    
    
    (18,889
    )
    
    
    (26,620
    )
    
    
    Minimum pension obligation
    
    
    (7,560
    )
    
    
    
    
    
    
    Comprehensive (loss) / income
    
    
    (80,578
    )
    
    
    17,671
    
    
    
    76,951


C-26



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | RESTATEMENT
|--- |  | -----------



| |  | These financial statements supersede and replace the original financial
statements of the company dated 14 May 2003 included on the Form 20-F of
the company filed on 16 May 2003. The financial statements have been
amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
company subsequent to the date of the original filing. The financial
statements have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments
to disclosure and for other presentational changes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the restatements, equity shareholders funds has been
increased by £52.25 million as at 31 December 2002 and by nil as at 31
December 2001. The restatements have no effect on the consolidated net
loss, net assets or net cashflows in the years ended 31 December 2002, 2001
and 2000.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An amount of £53.4 million has been reclassified from interest payable to
exceptional administrative expenses in the year ended 31 December 2002,
being the provision against an intercompany debtor. The restatement has no
effect on the consolidated net loss, net assets or net cashflows as at 31
December 2002, 2001 or 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP the net impact of the restatements is to increase
shareholders equity by £64.9 million and £14.2 million at 31 December 2002
and 2001 respectively and to increase the net loss by £2.1 million in year
ended 31 December 2002 and to reduce the net loss by £128.2 million and
£121.8 million in the years ended 31 December 2001 and 2000 respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The change in equity shareholders funds as at 31 December 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of £52.25 million. This related to a draw down made in December
2002 under the terms of a letter of credit established by The AES
Corporation. The AES Corporation has subsequently confirmed that it had
waived any rights to repayment against the company in respect of the draw
down in a letter dated 25 January 2002. Accordingly, the amount has been
reclassified into a capital reserve. This change has reduced the
liabilities and increased the net assets of the company by £52.25 million
each respectively as at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The effect of the restatement is as follows:
| |  | --------------------------------------------

As previously
    
    Restate-reported
    
    ments
    
    As restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2002Fixed assets
    
    
    1,083,118
    
    
    
    
    
    
    
    1,083,118Current assets
    
    
    273,957
    
    
    
    
    
    
    
    273,957Creditors: amounts falling due within one year
    
    
    (97,353
    )
    
    
    52,250
    
    
    
    (45,103
    )Creditors: amounts falling due after more
than one year
    
    
    (368
    )
    
    
    
    
    
    
    (368
    )Provisions
    
    
    (16,878
    )
    
    
    
    
    
    
    (16,878
    )Net assets
    
    
    1,242,476
    
    
    
    52,250
    
    
    
    1,294,726Equity shareholders funds
    
    
    1,242,476
    
    
    
    52,250
    
    
    
    1,294,726Profit and loss account for the year ended
31 December 2002Turnover
    
    
    524,831
    
    
    
    
    
    
    
    524,831Cost of sales
    
    
    (219,462
    )
    
    
    
    
    
    
    (219,462
    )Administrative expenses
    
    
    (316,297
    )
    
    
    (53,446
    )
    
    
    (369,743
    )Interest receivable and similar income
    
    
    23,548
    
    
    
    
    
    
    
    23,548Interest payable and similar charges
    
    
    (54,800
    )
    
    
    53,446
    
    
    
    (1,354
    )Tax on (loss) / profit on ordinary activities
    
    
    (21,024
    )
    
    
    
    
    
    
    (21,024
    )Loss on ordinary activities after taxation
    
    
    (63,127
    )
    
    
    
    
    
    
    (63,127
    )


C-27



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | RESTATEMENT (continued)
|--- |  | -----------------------



| |  | The restatement of cash flows for the years ended 31 December 2002, 2001
and 2000 relates to an adjustment to interest received in respect of the
timing of cash flows under a financing hedging swap of £19.4 million, £10.3
million and £2.5 million respectively. These adjustments are offset by
corresponding changes to the reported net cash inflows from operating
activities and there was no effect on the consolidated net cashflows in
either the current or prior years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Restatement of US GAAP reconciliations
| |  | --------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net loss under US GAAPAs previously reported
    
    
    (52,046
    )
    
    
    (83,928
    )
    
    
    (44,885
    )US GAAP adjustmentsDividends paid (i)
    
    
    
    
    
    
    125,384
    
    
    
    121,836Deferred taxation (ii)
    
    
    (2,083
    )
    
    
    2,835
    
    
    
    As restated
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951


2002
    
    2001£000
    
    £000Shareholders equity under US GAAPAs previously reported
    
    
    958,072
    
    
    
    1,000,437Increase in equity shareholders funds under
UK GAAP as described above
    
    
    52,250
    
    
    
    US GAAP adjustmentsDeferred taxation (ii)
    
    
    23,496
    
    
    
    14,243Additional minimum pension liability (iii)
    
    
    (10,800
    )
    
    
    As restated
    
    
    1,023,018
    
    
    
    1,014,680




|(iv) |  | Under UK GAAP, dividends are shown as a deduction on the face of
the profit and loss account, whereas under US GAAP, dividends are
deducted directly from shareholders equity. As previously reported,
the US GAAP reconciliation had started with the net income/(loss) as
reported under UK GAAP, after deducting dividends. This adjustment is
necessary to start the reconciliation with net income/(loss) before
dividends, in order to conform with standard US practice.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(v) |  | These adjustments are necessary to reflect the deferred tax effect
of the US GAAP adjustments made in respect of derivative instruments
and hedging activities and the additional minimum pension liability.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vi) |  | The additional minimum pension liability had been previously
reported in the US GAAP reconciliation disclosures, but had been
omitted from the reconciliation of shareholders equity.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|28. |  | POST BALANCE SHEET EVENTS
|--- |  | -------------------------



| |  | Standstill arrangements with certain senior creditors
| |  | -----------------------------------------------------



| |  | Drax has been operating under standstill arrangements with certain of its
senior creditors since 12 December 2002. The purpose of the standstill
arrangements is to provide Drax and the senior creditors with a period of
stability during which discussions regarding consensual restructuring of
Drax can take place (the Restructuring). The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period. Although the standstill period under the original
standstill agreement terminated on 31 May 2003, Drax had reached agreement
on three further standstill agreements, which have now expired, and is
currently operating under a long term standstill agreement, agreed with the
Steering Committee and the Ad Hoc Committee. This agreement became
effective on 9 October 2003 and will expire on 31 December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-28



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | Under the Standstill Arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This matter is discussed more fully in note 1, Basis of Preparation and
Accounting Policies.
| |  | --------------------------------------------------------------------------------------------



| |  | The AES Corporation
| |  | -------------------



| |  | Based on negotiations through the end of June 2003, the steering committee
representing the syndicate of banks (the Senior Lenders) which financed
the Eurobonds issued by Drax Holdings Limited to finance the acquisition of
the Drax Power Station, and the Ad Hoc Committee (together with the
Steering Committee, the Senior Creditors Committees), reached agreement
on more detailed terms of the Restructuring, and each of the Senior
Creditors Committees, the Drax Companies and The AES Corporation indicated
their support for a Restructuring to be implemented based upon the proposed
restructuring terms (the Restructuring Proposal).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 23 July 2003, Drax received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the
Restructuring and to purchase certain debt to be issued in the
Restructuring described in the Restructuring Proposal (the International
Power Proposal).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 28 July 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring
unless each member of the Senior Creditors Committees met certain
conditions by no later than 5 August 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 July 2003, the directors of Drax Holdings Limited and Drax Power
Limited appointed Gordon Horsfield and Gerald Wingrove as directors of Drax
Holdings Limited and Drax Power Limited. They, together with Lord Taylor
of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On the evening of 5 August 2003, The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------



| |  | On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of Drax Holdings Limited and Drax Power
Limited and stated their intention to resign as directors from the boards
of the other Drax companies (other than AES Drax Power Finance Holdings
Limited and AES Drax Energy Limited). They resigned from AES Drax
Acquisition Limited, Drax Electric Limited and Drax Limited on 8 August
2003. Accordingly, the boards of each of Drax Holdings Limited and Drax
Power Limited now comprise Lord Taylor of Blackburn, Gordon Horsfield and
Gerald Wingrove, the boards of each of Drax Electric Limited and Drax
Limited comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald
Wingrove and the board of AES Drax Acquisition Limited comprises Gordon
Horsfield and Gerald Wingrove.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the withdrawal of support by The AES Corporation, the
company has written down amounts due from another group company of £68.5
million in the third quarter of 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 14 August 2003, Drax received a letter from Goldman Sachs International,
pursuant to which it proposed to participate in the Restructuring in place
of The AES Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 19 August 2003, Drax received a letter from International Power plc,
pursuant to which it revised the International Power Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | On 21 August 2003, Drax received a letter from BHP Billiton in respect of
the Restructuring.
| |  | --------------------------------------------------------------------------------------------

C-29



---



##### 



DRAX LIMITED (formerly AES Drax Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | On 30 August 2003, Drax announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman
Sachs International, and having noted the letter received from Miller,
McConville, Christen, Hutchison and Waffel, and following discussions with
the senior creditors of Drax, Drax entered into an exclusive arrangement
with International Power plc on the basis of a revised offer received from
International Power plc on 30 August 2003 to participate in the
Restructuring.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 3 October 2003, AES Drax Power Limiteds name was changed to Drax Power
Limited, AES Drax Limiteds name was changed to Drax Limited, AES Drax Electric
Limiteds name was changed to Drax Electric Limited and AES Drax Holdings
Limiteds name was changed to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

C-30



---



##### 



Company Registration No. 102237











DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)



Financial Statements
31 December 2002
(As restated, see note 27)







D-1



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent Auditors Report
    
    
    D-3Consolidated Profit and Loss Account
    
    
    D-4Statement of Total Recognised Gains and Losses
    
    
    D-4Consolidated Balance Sheet
    
    
    D-5Consolidated Cash Flow Statement
    
    
    D-6Notes to the Accounts
    
    
    D-7


D-2



---



##### 



INDEPENDENT AUDITORS REPORT TO THE
DIRECTORS OF DRAX ELECTRIC LIMITED
(formerly AES Drax Electric Limited)

We have audited the accompanying balance sheets of Drax Electric Limited
(formerly AES Drax Electric Limited) as of 31 December 2002 and 2001, and the
related consolidated profit and loss accounts, statements of total recognised
gains and losses and cash flows for each of the three years in the period ended
31 December 2002. These financial statements are the responsibility of the
companys directors. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at 31 December 2002 and 2001,
and the results of its operations and its cash flows for each of the three
years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in note 26.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in note 27, the financial statements have been restated.

Deloitte & Touche LLP
Chartered Accountants

Leeds
6 November 2003

D-3



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002 (As restated, see note 27)

As restated31 December
    
    31 December
    
    31 DecemberNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000TURNOVER  continuing operations
    
    
    2
    
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,776Cost of sales
    
    
    
    
    
    
    (219,462
    )
    
    
    (267,204
    )
    
    
    (278,218
    )GROSS PROFIT
    
    
    
    
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses  normal
    
    
    
    
    
    
    (183,900
    )
    
    
    (170,536
    )
    
    
    (165,035
    ) exceptional
    
    
    4
    
    
    
    (769,247
    )
    
    
    
    
    
    
    (953,147
    )
    
    
    (170,536
    )
    
    
    (165,035
    )OPERATING (LOSS) / PROFIT  continuing
operations
    
    
    3
    
    
    
    (647,778
    )
    
    
    148,363
    
    
    
    179,523Interest receivable and other income
    
    
    5
    
    
    
    23,626
    
    
    
    14,836
    
    
    
    11,405Interest payable and similar charges
    
    
    6
    
    
    
    (1,354
    )
    
    
    (3,919
    )
    
    
    (LOSS) / PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION
    
    
    
    
    
    
    (625,506
    )
    
    
    159,280
    
    
    
    190,928Tax on (loss) / profit on ordinary activities
    
    
    7
    
    
    
    (21,024
    )
    
    
    (61,010
    )
    
    
    (68,327
    )(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION
    
    
    
    
    
    
    (646,530
    )
    
    
    98,270
    
    
    
    122,601Dividends
    
    
    8
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )RETAINED (LOSS) / PROFIT FOR THE FINANCIAL
YEAR TRANSFERRED (FROM) / TO RESERVES
    
    
    18,19
    
    
    
    (646,530
    )
    
    
    (27,114
    )
    
    
    765




| |  | STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
| |  | ----------------------------------------------



| |  | There are no recognised gains and losses for the years ended 31 December 2002,
2001 and 2000 other than as stated in the profit and loss account. Therefore,
no statement of total recognised gains and losses has been presented.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-4



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

CONSOLIDATED BALANCE SHEET
As at 31 December 2002 (As restated, see note 27)

As restated
    
    As restatedNote
    
    2002
    
    2001£000
    
    £000FIXED ASSETSIntangible assets
    
    
    9
    
    
    
    
    
    
    
    594,610Tangible assets
    
    
    10
    
    
    
    1,083,118
    
    
    
    1,140,2451,083,118
    
    
    
    1,734,855CURRENT ASSETSStocks
    
    
    11
    
    
    
    31,327
    
    
    
    62,563Debtors
    
    
    12
    
    
    
    157,687
    
    
    
    168,047Cash at bank and in hand
    
    
    13
    
    
    
    84,943
    
    
    
    39,816273,957
    
    
    
    270,426CREDITORS: amounts falling due within one year
    
    
    14
    
    
    
    (45,103
    )
    
    
    (98,243
    )NET CURRENT ASSETS
    
    
    
    
    
    
    228,854
    
    
    
    172,183TOTAL ASSETS LESS CURRENT LIABILITIES
    
    
    
    
    
    
    1,311,972
    
    
    
    1,907,038CREDITORS: amounts falling due after more than
one year
    
    
    15
    
    
    
    (1,200,369
    )
    
    
    (1,389,645
    )PROVISIONS FOR LIABILITIES AND CHARGES
    
    
    16
    
    
    
    (16,878
    )
    
    
    (17,388
    )94,725
    
    
    
    500,005CAPITAL AND RESERVESCalled up share capital
    
    
    17
    
    
    
    505,000
    
    
    
    505,000Capital reserve
    
    
    18
    
    
    
    52,250
    
    
    
    Profit and loss account
    
    
    18
    
    
    
    (462,525
    )
    
    
    (4,995
    )TOTAL EQUITY SHAREHOLDERS FUNDS
    
    
    19
    
    
    
    94,725
    
    
    
    500,005


D-5



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2002 (As restated, see note 27)

As restated
    
    As restated
    
    As restatedNotes
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    20
    
    
    
    70,608
    
    
    
    189,832
    
    
    
    175,191Returns on investments and servicing of financeInterest received
    
    
    
    
    
    
    4,176
    
    
    
    4,578
    
    
    
    8,626Interest paid
    
    
    
    
    
    
    (54,800
    )
    
    
    (3,919
    )
    
    
    Net cash (outflow) / inflow from returns on investments and servicing of finance
    
    
    
    
    
    
    (50,624
    )
    
    
    659
    
    
    
    8,626Taxation
    
    
    
    
    
    
    (21,883
    )
    
    
    (59,285
    )
    
    
    (68,889
    )Capital expenditurePayments to acquire tangible fixed assets
    
    
    
    
    
    
    (5,224
    )
    
    
    (6,119
    )
    
    
    (11,993
    )Receipts from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    5,500(5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Cash outflow before use of liquid resources
    
    
    
    
    
    
    (7,123
    )
    
    
    (268
    )
    
    
    (13,401
    )Management of liquid resourcesIncrease in restricted cash deposits
    
    
    
    
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )FinancingFunding of capital reserve
    
    
    27
    
    
    
    52,250
    
    
    
    
    
    
    
    Decrease in cash in the year
    
    
    21
    
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )


D-6



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES
|-- |  | --------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU Europe Energy
Trading Limited (TXU Europe) and the appointment of joint administrators
of TXU Europe and TXU Europe Group plc (TXU Group) on 18 and 19 November
2002, respectively, the company entered discussions with its senior lenders
in order to address the potential defaults under the senior financing
documents arising from the TXU situation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at 30
June 2002, were below the threshold required to permit distributions. As a
result, Drax Power Limited was not permitted to make distributions to AES
Drax Energy Limited to permit interest due on the high yield notes to be
paid on 30 August 2002. The AES Corporation, however, made a contribution
to AES Drax Energy Limited which together with amounts then held in the
high yield note debt service reserve account was sufficient to make the
payments then due. At the time The AES Corporation stated that there were
no assurances that it would agree to make any similar payments in the
future. Any improvements in the forward looking ratios were dependent on a
favourable change in the forward curve for electricity prices during the
period from 30 June to 31 December 2002. Such improvements did not occur
and the ratios were below 1.19:1 at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the end
of February 2003. Such failure constitutes an event of default under the
notes, although any enforcement rights are subject to a 90-day grace period
as well as the terms and conditions of certain intercreditor arrangements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Drax group of companies (Drax) has been operating under standstill
arrangements with certain of its senior creditors since 12 December 2002.
The purpose of the standstill arrangements is to provide Drax and the
senior creditors with a period of stability during which discussions
regarding consensual restructuring of Drax can take place. The bank
lenders and the senior bondholders have agreed to waive certain events of
default under the Eurobonds or the senior bonds, as applicable, not to
accelerate payment of the obligations and would not seek to enforce
security during the standstill period. Although the standstill period
under the original standstill agreement terminated on 31 May 2003, Drax had
reached agreement on three further standstill agreements, which have now
expired, and is currently operating under a long term standstill agreement,
agreed with the steering
committee representing the senior banks (the Steering Committee) and the the Ad Hoc Committee formed by
holders of Drax Holdings Limiteds senior bonds (the Ad Hoc Committee).
This agreement became effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the companys lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The directors of the company believe that the standstill arrangements will
facilitate an agreed restructuring of Drax. On this basis, the directors
of the company consider it appropriate to prepare the financial statements
on the going concern basis. The financial statements do not include any
adjustments that would result from a withdrawal of support by the companys
lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-7



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Accounting policies
| |  | -------------------



| |  | The financial statements are prepared in accordance with applicable United
Kingdom accounting standards. The particular accounting policies adopted
are described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------



| |  | Basis of consolidation
| |  | ----------------------



| |  | The group consolidates the accounts of the company and all its subsidiary
undertakings up to 31 December 2002.
| |  | --------------------------------------------------------------------------------------------------------------



| |  | Intangible fixed assets
| |  | -----------------------



| |  | Goodwill represents the excess of the fair value of the consideration given
over the fair value of the identifiable net assets acquired. Acquired
goodwill is capitalised and amortised over 20 years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tangible fixed assets
| |  | ---------------------



| |  | Freehold land and assets in the course of construction are not depreciated.
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The estimated useful lives are:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Freehold buildings, plant and machinery
    
    30-40 yearsPlant spares
    
    30-40 yearsFixtures and fittings
    
    3-5   years




| |  | Stocks
| |  | ------



| |  | Stocks are stated at the lower of cost, inclusive of appropriate overheads,
and net realisable value. Net realisable value is based on estimated
selling price less all further costs to completion and all relevant
marketing, selling and distribution costs.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxation
| |  | --------



| |  | Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the groups taxable
profits and its results as stated in the financial statements that arise
from the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not there will be suitable taxable profits
from which the future reversal of the underlying timing differences can be
deducted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leased assets
| |  | -------------



| |  | Operating lease rentals are charged to income in equal annual amounts over
the lease term.
| |  | ------------------------------------------------------------------------------------------

D-8



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Pension costs
| |  | -------------



| |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs
are recognised immediately in the profit and loss account if the benefits
have vested. If the benefits have not vested immediately, the costs are
recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs
or credits adjacent to interest. Actuarial gains and losses are recognised
immediately in the statement of total recognised gains and losses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are
measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and
are updated at each balance sheet date. The resulting defined benefit asset
or liability, net of the related deferred tax, is presented separately
after other net assets on the face of the balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The group has adopted the transitional disclosure requirements of FRS 17.
| |  | -------------------------------------------------------------------------



| |  | Revenue recognition
| |  | -------------------



| |  | Revenues from the sale of electricity are recorded based upon output
delivered and capacity provided at rates specified under contract terms or
prevailing market rates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivatives
| |  | -----------



| |  | Investments or financial derivative instruments accounted for as hedges are
structured so as to reduce the market risk associated with the underlying
transaction being hedged and are designated as hedges at the inception of
the contract. Gains and losses on hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriate hedged rate.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred finance costs
| |  | ----------------------



| |  | Financing costs are deferred and amortised over the related financing
period using the effective interest method of amortisation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | TURNOVER
|-- |  | --------



| |  | Turnover comprises primarily sales to the electricity trading market in
England and Wales of electricity generated by the group. Most of the power
plants revenue relies on sales contracts with a few large customers. One
customer accounted for 65.1% of revenues in the year to 31 December 2002.
Two customers accounted for 67.9% and 9.0% of revenues in 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-9



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|3. |  | OPERATING (LOSS) / PROFIT
|-- |  | -------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit is stated after
charging / (crediting):Depreciation of owned assets
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )




|4. |  | EXCEPTIONAL ITEMS
|-- |  | -----------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bad debt expense
    
    
    136,801
    
    
    
    
    
    
    
    Provision against intercompany debtor
    
    
    53,446Impairment loss (note 9 & 10)
    
    
    579,000
    
    
    
    
    
    
    
    769,247
    
    
    
    
    
    
    
    




| |  | On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
TXU Group. As a consequence of this, on 18 November 2002, Drax
Power Limited terminated the Hedging Contract with TXU Europe, a subsidiary of TXU Group,
to minimise financial exposure. On 19 November 2002, TXU Group filed a
petition on behalf of itself, TXU UK Limited and TXU Europe, seeking
protection from its creditors, which was approved, putting the three
companies into temporary administration. As a result, the company has made
100% provision against all amounts owed by TXU Europe in respect of the
Hedging Contract and the termination of that contract, as at 18 November
2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included within administrative expenses is an exceptional item of £579
million in respect of an impairment loss on goodwill and fixed assets. The
impairment loss was measured by reference to the value in use of the assets
using a discount rate of 7.9% which reflects the risks inherent in the
forecast cash flows.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The tax effect of the bad debt expense is £41 million. The impairment of
goodwill and fixed assets is non-deductible and so has no tax effect.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | INTEREST RECEIVABLE AND SIMILAR INCOME
|-- |  | --------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest receivable
    
    
    23,626
    
    
    
    14,836
    
    
    
    11,405


D-10



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|6. |  | INTEREST PAYABLE AND SIMILAR CHARGES
|-- |  | ------------------------------------

As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest and other loans
    
    
    1,354
    
    
    
    3,919
    
    
    
    




|7. |  | TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES
|-- |  | ---------------------------------------------



| | a) |  | Analysis of charge in the year
| | -- |  | ------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000United Kingdom corporation tax at 30%  current year
    
    
    
    
    
    
    4,643
    
    
    
    13,970 prior year
    
    
    
    
    
    
    35
    
    
    
    458Group relief
    
    
    21,534
    
    
    
    50,125
    
    
    
    45,89221,534
    
    
    
    54,803
    
    
    
    60,320Deferred tax  Timing differences, origination and reversal
    
    
    (662
    )
    
    
    6,207
    
    
    
    7,953 Adjustment in respect of prior years
    
    
    152
    
    
    
    
    
    
    
    54(510
    )
    
    
    6,207
    
    
    
    8,00721,024
    
    
    
    61,010
    
    
    
    68,327




| | b) |  | Factors affecting tax charge for the current year
| | -- |  | -------------------------------------------------



| |  | The tax assessed for the period is higher than that resulting from applying
the standard rate of corporation tax in the UK (30%) (2001: 30%) (2000:
30%). The differences are explained below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000(Loss) / profit on ordinary activities before tax
    
    
    (625,506
    )
    
    
    159,280
    
    
    
    190,928Tax on profit on ordinary activities at 30%
(2001: 30%) (2000: 30%)
    
    
    (187,652
    )
    
    
    47,784
    
    
    
    57,278Effects of:Expenses not deductible for tax purposes
    
    
    208,524
    
    
    
    13,191
    
    
    
    10,537Capital allowances in excess of depreciation
    
    
    662
    
    
    
    (6,207
    )
    
    
    (7,953
    )Adjustment in respect of prior years
    
    
    
    
    
    
    35
    
    
    
    458Current tax charge for the year
    
    
    21,534
    
    
    
    54,803
    
    
    
    60,320


D-11



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|8. |  | DIVIDENDS
|-- |  | ---------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Dividend paid on
ordinary shares
of nil pence
(2001: 24.8
pence restated)
(2000: 24.1
pence restated)
per share
    
    
    
    
    
    
    125,384
    
    
    
    121,836




|9. |  | INTANGIBLE FIXED ASSETS
|-- |  | -----------------------



| |  | The intangible fixed assets comprise of goodwill which arose on the
acquisition of Drax Power Limited.
| |  | ------------------------------------------------------------------------------------------------------

Goodwill£000CostAt 1 January 2002
    
    
    665,185Reclassification
    
    
    (11,206
    )At 31 December 2002
    
    
    653,979AmortisationAt 1 January 2002
    
    
    70,575Charge for the year
    
    
    33,876Impairment (note 4)
    
    
    549,528At 31 December 2002
    
    
    653,979Net book valueAt 31 December 2002
    
    
    At 31 December 2001
    
    
    594,610




| |  | The reclassification above was in respect of an amount relating to the VAT
on certain transactions which occurred at the time of the acquisition of
Drax Power Station by the AES Corporation in November 1999. These
transactions related to the acquisition of the opening coal stock and the
purchase of intellectual property. The transactions were recorded gross
rather than net of VAT in the calculation of the goodwill arising upon
acquisition. The company has subsequently adjusted both goodwill and the
VAT creditor.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-12



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|10. |  | TANGIBLE FIXED ASSETS
|--- |  | ---------------------

Plant,Freehold
    
    machinery,land and
    
    fixtures &buildings
    
    fittings
    
    Plant spares
    
    Total£000
    
    £000
    
    £000
    
    £000CostAt 1 January 2002
    
    
    132,181
    
    
    
    1,081,136
    
    
    
    21,011
    
    
    
    1,234,328Additions
    
    
    
    
    
    
    2,794
    
    
    
    2,430
    
    
    
    5,224Disposals
    
    
    
    
    
    
    (2,414
    )
    
    
    
    
    
    
    (2,414
    )Issues
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )At 31 December 2002
    
    
    132,181
    
    
    
    1,081,516
    
    
    
    23,417
    
    
    
    1,237,114Accumulated depreciationAt 1 January 2002
    
    
    9,735
    
    
    
    83,342
    
    
    
    1,006
    
    
    
    94,083Charge for the year
    
    
    3,209
    
    
    
    29,143
    
    
    
    502
    
    
    
    32,854Disposals
    
    
    
    
    
    
    (2,413
    )
    
    
    
    
    
    
    (2,413
    )Impairment (note 4)
    
    
    
    
    
    
    29,472
    
    
    
    
    
    
    
    29,472At 31 December 2002
    
    
    12,944
    
    
    
    139,544
    
    
    
    1,508
    
    
    
    153,996Net book valueAt 31 December 2002
    
    
    119,237
    
    
    
    941,972
    
    
    
    21,909
    
    
    
    1,083,118At 31 December 2001
    
    
    122,446
    
    
    
    997,794
    
    
    
    20,005
    
    
    
    1,140,245




| |  | Freehold land amounting to £1,060,000 (2001: £1,060,000) has not been
depreciated.
| |  | ----------------------------------------------------------------------------------



|11. |  | STOCKS
|--- |  | ------

2002
    
    2001£000
    
    £000Raw materials and consumables
    
    
    31,327
    
    
    
    62,563




|12. |  | DEBTORS
|--- |  | -------

2002
    
    2001£000
    
    £000Trade debtors
    
    
    52,462
    
    
    
    104,849Amounts due from fellow subsidiary undertakings
    
    
    94,516
    
    
    
    41,061Prepayments and other debtors
    
    
    10,709
    
    
    
    22,137157,687
    
    
    
    168,047




| |  | Included within other debtors is VAT receivable of £Nil (2001: £1.8
million), an insurance debtor of £0.2 million (2001: £0.5 million) and a
swap advance debtor of £1.4 million (2001: swap advance creditor £23.5
million).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Included within prepayments and other debtors is an amount outstanding from
the employee share ownership plan (ESOP) totalling £2,858,000, loaned for
the purchase of 129,029 shares in the common stock of The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | CASH AT BANK AND IN HAND
|--- |  | ------------------------



| |  | Included within the total cash balance are restricted cash deposits
amounting to £44,790,000 (2001: £9,689,000). These comprise part of a
required balance which needs to be in place on each repayment date.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included is restricted cash of £13,400,000 (2001: £Nil) over which
National Westminster Bank plc has a charge.
| |  | -------------------------------------------------------------------------------------------------------------------

D-13



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|14. |  | CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
|--- |  | ----------------------------------------------

As restated2002
    
    2001£000
    
    £000Trade creditors
    
    
    15,222
    
    
    
    2,679Amounts owed to fellow subsidiary undertakings
    
    
    7,575
    
    
    
    6,695Amounts owed to ultimate parent
    
    
    7,265
    
    
    
    5,012Corporation tax
    
    
    1,204
    
    
    
    1,556Other creditors and accruals
    
    
    13,837
    
    
    
    82,30145,103
    
    
    
    98,243




| |  | Included within other creditors is VAT payable of £9.8 million (2001: £28.2
million).
| |  | -------------------------------------------------------------------------------------



|15. |  | CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
|--- |  | -------------------------------------------------------

As restated2002
    
    2001£000
    
    £000Retentions
    
    
    368
    
    
    
    644Amounts owed to fellow subsidiary undertakings
    
    
    1,200,001
    
    
    
    1,389,0011,200,369
    
    
    
    1,389,645




| |  | Amounts owed to fellow subsidiary undertakings have no fixed repayment
dates, however the directors of the immediate parent company have indicated
that payments will not be requested within one year. No interest is
payable on these amounts.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There has been a reclassification of share capital of £1,200 million for
the prior year, which is now classified as an intercompany loan as this
reflects the true nature of the transaction that occurred.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | All retentions are payable within 1 to 2 years.
| |  | -----------------------------------------------



|16. |  | PROVISIONS FOR LIABILITIES AND CHARGES
|--- |  | --------------------------------------

At 1 January
    
    Current year
    
    At 31 December2002
    
    credit
    
    2002£000
    
    £000
    
    £000Deferred taxation
    
    
    17,278
    
    
    
    (510
    )
    
    
    16,768Reinstatement provision
    
    
    110
    
    
    
    
    
    
    
    11017,388
    
    
    
    (510
    )
    
    
    16,878




| |  | The amounts of deferred taxation provided in the financial statements is:
| |  | -------------------------------------------------------------------------

2002
    
    2001£000
    
    £000GroupCapital allowances in excess of depreciation
    
    
    16,768
    
    
    
    17,278


D-14



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|17. |  | CALLED UP SHARE CAPITAL
|--- |  | -----------------------

As restated2002
    
    2001£000
    
    £000Authorised2,000,000,000 ordinary shares of £1 each
    
    
    2,000,000
    
    
    
    2,000,000Called up, allotted and fully paid505,000,000 ordinary shares of £1 each
    
    
    505,000
    
    
    
    505,000




| |  | There has been a reclassification of share capital of £1,200 million for
the prior year, which is now classified as an intercompany loan as this
reflects the true nature of the transaction that occurred.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|18. |  | RESERVES
|--- |  | --------

As restated
    
    Profit and lossCapital reserve
    
    account
    
    Total£000
    
    £000
    
    £000At 1 January 2002
    
    
    
    
    
    
    (4,995
    )
    
    
    (4,995
    )Retained loss for the financial year
    
    
    
    
    
    
    (646,530
    )
    
    
    (646,530
    )Other reserve movement (note 19)
    
    
    
    
    
    
    189,000
    
    
    
    189,000Capital contribution in the year
    
    
    52,250
    
    
    
    
    
    
    
    52,250At 31 December 2002
    
    
    52,250
    
    
    
    (462,525
    )
    
    
    (410,275
    )




| |  | The other reserve movement relates to a group reorganisation during the
year ended 31 December 2002. As a consequence, an amount previously
recorded as due to a fellow subsidiary of £189,000,000 was credited to
reserves.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|19. |  | RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS
|--- |  | --------------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Loss for the financial year
    
    
    (646,530
    )
    
    
    (27,114
    )Capital contribution in the year
    
    
    52,250
    
    
    
    Other reserve movement (note 18)
    
    
    189,000
    
    
    
    Net reduction in shareholders funds
    
    
    (405,280
    )
    
    
    (27,114
    )Opening shareholders funds
    
    
    500,005
    
    
    
    527,119Closing shareholders funds
    
    
    94,725
    
    
    
    500,005


D-15



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|20. |  | RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
|--- |  | -------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit
    
    
    (647,778
    )
    
    
    148,363
    
    
    
    179,523Depreciation
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Loss on disposal of fixed assets
    
    
    
    
    
    
    19
    
    
    
    Plant spares issues
    
    
    24
    
    
    
    155
    
    
    
    Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )Decrease / (increase) in stocks
    
    
    31,236
    
    
    
    (2,617
    )
    
    
    (7,413
    )Decrease / (increase) in debtors
    
    
    63,861
    
    
    
    40,332
    
    
    
    (107,657
    )(Decrease) / increase in creditors
    
    
    (41,860
    )
    
    
    (55,275
    )
    
    
    67,661Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Harich Swap interest
    
    
    19,395
    
    
    
    10,265
    
    
    
    2,45270,608
    
    
    
    189,832
    
    
    
    175,191




| |  | The restatement of the cashflows for the years ended 31 December 2002, 2001
and 2000 relates to a reclassification of the amounts generated under a
financing hedging swap (note 27).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The decrease in debtors during the year ended 31 December 2002 is after
reflecting the exceptional bad debt expense of £136,801,000 recorded in the
year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|21. |  | RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
|--- |  | --------------------------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Decrease in cash in the year
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Movement in net funds in the year
    
    
    45,127
    
    
    
    (268
    )
    
    
    (13,401
    )Net funds brought forward
    
    
    39,816
    
    
    
    40,084
    
    
    
    53,485Net funds carried forward
    
    
    84,943
    
    
    
    39,816
    
    
    
    40,084




|22. |  | PENSION SCHEME FUNDING
|--- |  | ----------------------



| |  | Pension schemes operated
| |  | ------------------------



| |  | Within the UK the Group principally operates an approved defined benefit
scheme, on behalf of the AES Drax Power Group of the Electricity Supply
Pension Scheme (ADPG ESPS).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular pension costs  SSAP 24
| |  | -------------------------------



| |  | Pensions costs for the ADPG ESPS in the year were £1,648,000 (2001:
£2,248,000), comprising a regular cost of £1,475,000 (2001: £1,484,000)
plus variations totalling £173,000 (2001: £764,000). A variation of
£(114,000) has arisen due to £800,000 of the valuation surplus being
carried forward unutilised, which is being spread as a level percentage of
salaries over the average remaining working life of the membership
(approximately 11 years). A further variation of £(113,000) has arisen due
to the application of reduced contributions from 1 January 2002 to 31 March
2002 from the valuation surplus. The remaining variation of £400,000 has
arisen due to certain special events, generating additional liabilities and
triggering employer contributions. In the year, redundancies have resulted
in an additional pension cost of £400,000, which has been partially offset
by additional employer contributions of £173,000.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-16



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
Consultants, assessed the ESPS in respect of the AES Drax Power Group as at
31 December 2002 using the projected unit method and a market based
valuation approach to ascertain its cost to the Group. The principal
financial assumptions were that the rate of return would be 4.5% per annum
higher than the rate of price inflation, that increases in past and future
pensions would be in line with price inflation, and that future salary
growth would exceed price inflation by 2.75% per annum, depending on salary
levels at the valuation date. Following the actuarial valuation it was
agreed that the Group would pay an average contribution rate of 12% of
annual salaries, subject to review at future valuations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the date of the latest actuarial valuation the market value of the
assets of the ADPG ESPS was £44.6 million and the actuarial value of the
assets was sufficient to cover between 115% and 120% of the benefits that
had accrued to members, after allowing for expected increases in future
earnings. The next scheduled actuarial valuation of the ADPG ESPS will be
as at 31 March 2004.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | FRS 17
| |  | ------



| |  | In November 2000 the Accounting Standards Board issued FRS 17 Retirement
Benefits replacing SSAP 24 Accounting for Pensions Costs. Certain
disclosures are required in the transition period before full adoption of
FRS 17 for periods ending on or after 22 June 2001. These further
disclosures are included below.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The principal actuarial assumptions used as at 31 December 2002 are shown
below:
| |  | --------------------------------------------------------------------------------

2002
    
    2001Rate of increase in salaries
    
    
    3.8
    %
    
    
    4.0
    %Rate of increase of pensions in payment and deferment
    
    
    2.5
    %
    
    
    2.6
    %Discount rate
    
    
    5.4
    %
    
    
    5.8
    %Inflation assumption
    
    
    2.3
    %
    
    
    2.5
    %




| |  | The following contributions were made to the ADPG ESPS during 2002:
| |  | -------------------------------------------------------------------

Year ended31 December2002£millionsCompany contributions
    
    
    1.6Member contributions
    
    
    0.6




| |  | Analysis of amount charged to operating profit:
| |  | -----------------------------------------------

Year ended31 December2002£ millionsCurrent service cost
    
    
    1.9Past service cost
    
    
    Early retirement deficiency cost
    
    
    0.4Total operating cost
    
    
    2.3


D-17



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount credited to other finance income:
| |  | ----------------------------------------------------

Year ended31 December2002£ millionsExpected return on pension plan assets
    
    
    3.3Less: Interest on pension plan liabilities
    
    
    (3.2
    )Net return
    
    
    0.1




| |  | The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
shown below:
| |  | -----------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsEquities
    
    
    29.5
    
    
    
    36.1Bonds
    
    
    5.9
    
    
    
    6.6Other
    
    
    0.4
    
    
    
    0.7Market value of assets
    
    
    35.8
    
    
    
    43.4Actuarial value of liabilities
    
    
    (60.8
    )
    
    
    (53.9
    )Deficit in the scheme
    
    
    (25.0
    )
    
    
    (10.5
    )Related deferred tax asset (assumed 30% rate)
    
    
    7.5
    
    
    
    3.2Net pension liability
    
    
    (17.5
    )
    
    
    (7.3
    )




| |  | Analysis of movement in deficit during the year:
| |  | ------------------------------------------------

Year ended31 December2002£ millionsDeficit in scheme at 1 January 2002
    
    
    (10.5
    )Current service cost
    
    
    (1.9
    )Contributions
    
    
    2.2Early retirement deficiency cost
    
    
    (0.4
    )Actuarial loss
    
    
    (14.4
    )Deficit in scheme at 31 December 2002
    
    
    (25.0
    )


D-18



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|22. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount recognised in Statement of Total Recognised Gains and
Losses:
| |  | --------------------------------------------------------------------------------

Year ended31 December2002£ millionsActual return less expected return on pension scheme assets
    
    
    (11.8
    )Experience gains arising on the scheme liabilities
    
    
    0.1Changes in assumptions underlying the present value of the scheme liabilities
    
    
    (2.7
    )Actuarial loss recognised in STRGL
    
    
    (14.4
    )




| |  | Had the company adopted FRS 17 early, Group profit and loss reserves would
have been stated as follows:
| |  | -------------------------------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsProfit and loss reserve in the financial statements as at year end
    
    
    (462.5
    )
    
    
    (5.0
    )Deficit in relation to the ADPG ESPS, net of related deferred tax asset
    
    
    (17.5
    )
    
    
    (7.3
    )Profit and loss reserve as adjusted
    
    
    (480.0
    )
    
    
    (12.3
    )




|23. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



| |  | Guaranteed Secured Bonds amounting to £1,725 million are guaranteed on an
unlimited, unconditional and irrevocable basis by each of Drax Power
Limited, Drax Limited, Drax Electric Limited, AES Drax Financing Limited
and AES Drax Acquisition Limited and each such entity has granted security
over all their assets as security for, inter alia, the Guaranteed Secured
Bonds and certain related swaps, finance documents and guarantees (note 6).
Repayment of the Guaranteed Secured Bonds is further secured by direct
agreements from certain of the major project parties and other security
arrangements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|24. |  | ULTIMATE PARENT COMPANY
|--- |  | -----------------------



| |  | The immediate parent company is Drax Holdings Limited (formerly AES Drax
Holdings Limited), a company incorporated in the Cayman Islands.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | The parent undertaking of the smallest group, which includes the company
and for which group accounts are prepared, is AES UK Power Holdings
Limited, a company incorporated in England and Wales. Copies of the group
accounts of AES UK Power Holdings Limited can be obtained from Companies
House, Crown Way, Cardiff CF14 3UZ.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at 31 December 2002, the ultimate parent company and controlling entity,
and largest group for which group accounts are prepared, was The AES
Corporation, a company incorporated in the State of Delaware, USA. Copies
of the parent groups financial statements can be obtained from the
Securities and Exchange Commission, 450, 5th Street NW, Washington DC
20549, USA.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 September 2003, notices were issued to the Company and the other
companies in the group by JP Morgan Chase Bank in its role of Security
Trustee in respect of the Guaranteed Secured Bonds in respect of an event
of default as a result of the non-payment of coupons as at 31 December 2002
and 30 June 2003. A further notice was also issued to AES Drax
Acquisitions Holdings Limited, the immediate parent of AES Drax Acquisition
Limited, stating that AES Drax Acquisition Limited would be prevented from
exercising any voting rights or other powers in respect of the ordinary
shares that it holds in AES Drax Acquisition Limited. The effect of this
notice is that The AES Corporation, who remains the ultimate parent
company, is unable to exercise any control over AES Drax Acquisition
Limited or any of its subsidiaries and that control of the group lies with
the senior creditors of the group.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-19



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|25. |  | NATURE OF BUSINESS
|--- |  | ------------------



| |  | The principal activity of the group is the ownership and operation of the
Drax Power Station, a 3,960 megawatt (gross) coal-fired power station based
in the North of England.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
|--- |  | ---------------------------------------------



| |  | This note is provided in addition to the previous financial information for
US users of the accounts.
| |  | -----------------------------------------------------------------------------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect on net income,
shareholders equity, the cash flow statement and comprehensive income is
shown in the tables on pages 22 to 23.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred taxation is provided at the anticipated tax rates
on timing differences arising from the inclusion of items of income and
expenditure in taxation computations in periods different from those in
which they are included in the financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, deferred taxation is provided on all temporary differences
between tax and book bases of assets and liabilities under the liability
method, subject to a valuation allowance where applicable in respect of
deferred taxation assets, in accordance with SFAS 109, Accounting for
Income Taxes. As a result certain items that are treated as permanent
items under UK GAAP are treated as temporary differences under US GAAP. In
addition, deferred tax is also provided on certain of the other adjustments
between UK and US GAAP described herein. Such amounts are reported in the
profit and loss account except where the adjustment is recorded directly to
shareholders equity; for example, in relation to the additional minimum
pension liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pensions
| |  | --------



| |  | Under UK GAAP, where pensions are provided by means of a funded defined
benefits scheme, annual contributions are based on actuarial advice. The
expected cost of providing pensions is recognised on a systematic basis
over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining
service lives of current employees on a straight-line basis.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 87, Employers Accounting for Pensions, prescribes the
method of actuarial valuation, which includes differences from certain
assumptions used for the UK GAAP actuarial computation. In addition, assets
are assessed at current settlement rates. Certain variations from regular
cost are allocated in equal amounts over the average remaining service
lives of current employees. An additional minimum pension liability equal
to the excess of the accumulated benefit obligation over the plan assets
must be recognised at the balance sheet date with a corresponding entry
recorded as an intangible asset, to the extent of unamortised prior service
cost, and the balance, if any, in other comprehensive income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Push down interest
| |  | ------------------



| |  | Under US GAAP the £1,300 million senior secured bank facility used to
finance the acquisition of Drax Power Limited would be pushed down to the
company acquired and the related interest expense would be recorded. The
other side of the entry would be to shareholders equity. Interest
attributable to the acquisition debt, net of any corresponding tax benefit,
is recorded in the statement of operations. Interest on the bank facility
accrues at LIBOR + 1.8%.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Although the company was not incorporated until 11 July 2000, these
financial statements have been prepared as if the company had been
incorporated as at 30 November 1999 for comparative purposes and include
the acquisition of AES Drax Power Limited on 30 November 1999 and its
subsequent trading to date, together with the consolidated results of the
directly and indirectly owned subsidiaries. The consideration for the
shares in Drax Limited was financed through an intercompany loan. Since
the outstanding balance of acquisition debt pushed down was lower than this
inter-company loan, no adjustments to shareholders equity have been made.
However, push down interest has been recorded in the reconciliation of net
income because the intercompany loan was interest free.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under UK GAAP, such entries are not recorded.
| |  | ---------------------------------------------

D-20



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Goodwill and tangible fixed assets
| |  | ----------------------------------



| |  | Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over the
fair value of the identifiable net assets acquired. Goodwill is
capitalised under the heading, Intangible assets, and amortised over its
expected useful economic life, subject to a maximum of twenty years. Such
goodwill is subject to a review for impairment in accordance with FRS 11,
Impairment of Fixed Assets and Goodwill, which allows testing for
impairment at the income generating unit level. In the year ended 31
December 2002, the company has recorded an impairment loss under UK GAAP,
based on a discounted cash flow calculation, of £579 million.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, the acquisition has been treated as an acquisition of assets
and accordingly the entire purchase price, including certain liabilities
assumed, has been allocated to tangible fixed assets and depreciated over
the estimated useful lives of the assets, being thirty five years.
Furthermore, additional net deferred tax liabilities recorded at the
acquisition date under US GAAP resulted in an increase in the amount
allocated to tangible fixed assets resulting in additional depreciation
expense.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-lived Assets, an impairment loss shall be recognized only if the
carrying amount of a long-lived asset exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. No impairment was recognised under US GAAP.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivative Instruments and Hedging Activities
| |  | ---------------------------------------------



| |  | Under UK GAAP, investments or financial derivative instruments accounted
for as hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as hedges
at the inception of the contract. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amounts of those assets
or liabilities and are ultimately recognized in the profit and loss account
as part of those carrying amounts. Gains and losses on qualifying hedges
of firm commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated hedged rate.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, requires all derivative financial instruments to be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings unless specific hedge
accounting criteria are met. Where the derivative instrument qualifies for
hedge accounting, changes in fair value of the instrument are recorded in
earnings or other comprehensive income (a separate component of equity)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction and whether or not
the hedge is effective. For fair value hedge transactions in which a
company is hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative will generally be
offset in the income statement by changes in the hedged items fair value.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For cash flow hedge transactions, in which a company is hedging the
variability of cash flows related to a variable-rate asset, liability or a
forecasted transaction, changes in the fair value of the derivative
instrument are initially reported in other comprehensive income and
then
reclassified as earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The ineffective
portion of all hedges are recognised in current-period earnings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to qualify for hedge accounting under SFAS 133, a company must
formally document, designate and assess, periodically, the effectiveness of
transactions that qualify for hedge accounting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactions, contracts, assets and liabilities denominated in foreign
currencies are recorded at the exchange rate prevailing on the date of the
transaction, and assets and liabilities are recorded at the period end
date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-21



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Severance accrual and unfavourable IT contract
| |  | ----------------------------------------------



| |  | Under UK GAAP only those liabilities that existed in the acquired business
may be reflected in the purchase price allocation. Liabilities arising
from the acquirers intentions may not be recognised. Therefore under UK
GAAP it is not permissible to record a severance accrual for the costs
associated with terminating employees of the acquired business or for the
unfavourable IT contract. Instead such amounts must be provided for and
expensed in the post-acquisition financial statements of the acquirer.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, such amounts may be recorded as part of the acquisition of
Drax Power Limited in accordance with EITF 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Recently issued but not yet adopted accounting pronouncements
| |  | -------------------------------------------------------------



| |  | Asset retirement obligations.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective 1 January 2003, requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the
costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The company will adopt SFAS No. 143 effective 1 January 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has completed a detailed assessment of the specific
applicability and implications of SFAS No. 143. The scope of SFAS No. 143
includes primarily active ash landfills, water treatment basins and the
removal or dismantlement of certain plant and equipment. As of 31 December
2002, the company had a recorded liability of approximately £0.1 million
related to asset retirement obligations. Upon adoption of SFAS No. 143, the
company is not required to record any additional liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Exit or disposal activities.In June 2002, the Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior to
issuance of SFAS No. 146, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after 31 December 2002. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-based compensation.In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the
adoption of this pronouncement to have a material impact on our financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Guarantor accounting.We will apply the initial recognition and
measurement provisions of FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others, on a prospective basis for all
guarantees issued after 31 December 2002. Under FIN 45, at the inception of
guarantees issued after 31 December 2002, we will record the fair value of
the guarantee as a liability, with the offsetting entry being recorded
based on the circumstances in which the guarantee was issued. We will
account for any fundings under the guarantee as a reduction of the
liability. After funding has ceased, we will recognize the remaining
liability in the income statement on a straight-line basis over the
remaining term of the guarantee. In general, we enter into various
agreements providing financial performance assurance to third parties on
behalf of certain subsidiaries.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-22



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Such agreements include guarantees, letters of credit and surety bonds. FIN
45 does not encompass guarantees issued either between parents and their
subsidiaries or between corporations under common control, a parents
guarantee of its subsidiarys debt to a third party (whether the parent is
a corporation or an individual), a subsidiarys guarantee of the debt owed
to a third party by either its parent or another subsidiary of that parent,
nor guarantees of a companys own future performance. Adoption of FIN 45
will have no impact to our historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The
company does not expect adoption of the liability recognition provisions of
FIN 45 to have a material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Variable interest entities.FIN 46, Consolidation of Variable Interest
Entities, is effective immediately for all enterprises with variable
interests in variable interest entities created after 31 January 2003. FIN
46 provisions must be applied to variable interests in variable interest
entities created before 1 February 2003 as at 31 December 2003. If an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur and/or receives a majority of the entitys
expected residual returns if they occur. If significant variable interests
are held in a variable interest entity, the company must disclose the
nature, purpose, size and activity of the variable interest entity and the
companys maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after 31
January 2003. We do not believe that the adoption of FIN 46 will result in
our consolidation of any previously unconsolidated entities or material
additional disclosure.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | DIG Issue C11.In connection with the January 2003 FASB Emerging Issues
Task Force (EITF) meeting, the FASB was requested to reconsider an
interpretation of SFAS No. 133. The interpretation, which is contained in
the Derivatives Implementation Groups C11 guidance, relates to the pricing
of contracts that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that contains broad
market indices (e.g. CPI) could qualify as a normal purchase or sale. The
company is currently re-evaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial instruments with characteristics of both liabilities and equity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with characteristics of both liabilities and equity.
SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects an issuers
accounting for 3 types of freestanding financial instruments, namely:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1 |  | Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | 2 |  | Instruments, other than outstanding shares, that do or may
not require the issuer to buy back some of its shares in exchange
for cash or other assets. These instruments include put options and
forward purchase contracts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 |  | Obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | SFAS No. 150 does not apply to features in embedded financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after 31 May 2003 and
otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement
is not permitted. This would apply to the £425 million forward purchase of
preference shares that is disclosed in AES Drax Acquisition Limiteds
financial statements, note 15. The company is currently evaluating the
effects that this guidance will have on its results of operations and
financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-23



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under UK GAAP
    
    
    (646,530
    )
    
    
    98,270
    
    
    
    122,601US GAAP adjustments:Additional depreciation on tangible fixed assets
    
    
    (39,676
    )
    
    
    (39,676
    )
    
    
    (39,676
    )Severance pay expensed under UK GAAP
    
    
    
    
    
    
    
    
    
    
    12,053Unfavourable IT contract
    
    
    
    
    
    
    
    
    
    
    1,995Deferred taxation
    
    
    20,869
    
    
    
    17,813
    
    
    
    12,303Push down interest
    
    
    (8,610
    )
    
    
    (56,543
    )
    
    
    (66,201
    )Derivative instruments and hedging activities
    
    
    6,942
    
    
    
    (9,449
    )
    
    
    Goodwill amortisation
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Net (loss) / income under US GAAP
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951


As restated
    
    As restated31 December
    
    31 December2002
    
    2001£000
    
    £000Shareholders equity under UK GAAP
    
    
    94,725
    
    
    
    500,005US GAAP adjustments:Tangible fixed assets, cost
    
    
    1,408,909
    
    
    
    796,033Additional depreciation on tangible fixed assets
    
    
    (122,379
    )
    
    
    (82,703
    )Deferred taxation
    
    
    (637,363
    )
    
    
    (669,568
    )Derivative instruments and hedging activities
    
    
    (67,520
    )
    
    
    (47,478
    )Additional minimum pension liability
    
    
    (10,800
    )
    
    
    Shareholders equity under US GAAP
    
    
    665,572
    
    
    
    496,289




| |  | In addition to the recognition and measurement differences set out in the
reconciliation tables above there are a number of classification
differences between UK and US GAAP. These are described below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred tax liabilities are presented net within
Provisions for liabilities and charges. Under US GAAP deferred taxes are
presented as current or long term based upon the term of the item to which
they relate. Deferred tax assets and liabilities may only be offset to the
extent that they are both classified as short or long term.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-24



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|26. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Cash flow statement
| |  | -------------------



| |  | A reconciliation of the consolidated cash flow statement prepared under UK
GAAP to a statement of cash flows prepared under US GAAP is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    70,608
    
    
    
    189,832
    
    
    
    175,191Returns on investments and servicing of finance
    
    
    (50,624
    )
    
    
    659
    
    
    
    8,626Taxation
    
    
    (21,883
    )
    
    
    (59,285
    )
    
    
    (68,889
    )Net cash flows (used in) / provided by operating
activities per US GAAP
    
    
    (1,899
    )
    
    
    131,206
    
    
    
    114,928Capital expenditure
    
    
    (5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Increase in restricted cash deposits
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )Net cash used in investing activities per US GAAP
    
    
    (53,725
    )
    
    
    (6,538
    )
    
    
    (15,734
    )Equity dividends paid
    
    
    
    
    
    
    (125,384
    )
    
    
    (121,836
    )Capital contribution
    
    
    52,250
    
    
    
    
    
    
    
    Net cash provided by / (used in) financing
activities per US GAAP
    
    
    52,250
    
    
    
    (125,384
    )
    
    
    (121,836
    )Decrease in cash
    
    
    (3,374
    )
    
    
    (716
    )
    
    
    (22,642
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Cash brought forward
    
    
    39,816
    
    
    
    40,084
    
    
    
    53,485Cash carried forward
    
    
    84,943
    
    
    
    39,816
    
    
    
    40,084




| |  | Comprehensive income/ (loss) under US GAAP is as follows:
| |  | ---------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under US GAAP
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951Derivative instruments and hedging activities
    
    
    (18,889
    )
    
    
    (26,620
    )
    
    
    Minimum pension obligation
    
    
    (7,560
    )
    
    
    
    
    
    
    Comprehensive (loss)/ income
    
    
    (80,578
    )
    
    
    17,671
    
    
    
    76,951


D-25



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | RESTATEMENT
|--- |  | -----------



| |  | These financial statements supersede and replace the original financial
statements of the company dated 14 May 2003 included on the Form 20-F of
the company filed on 16 May 2003. The financial statements have been
amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
company subsequent to the date of the original filing. The financial
statements have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments
to disclosure and for other presentational changes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the restatements, equity shareholders funds has been
increased by £52.25 million as at 31 December 2002 and by nil as at 31
December 2001. The restatements have no effect on the consolidated net
loss, net assets or net cashflows in the years ended 31 December 2002, 2001
and 2000.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An amount of £53.4 million has been reclassified from interest payable to
exceptional administrative expenses in the year ended 31 December 2002,
being the provision against an intercompany debtor. The restatement has no
effect on the consolidated net loss, net assets or net cashflows as at 31
December 2002, 2001 or 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP the net impact of the restatements is to increase
shareholders equity by £36.9 million and £14.2 million at 31 December 2002
and 2001 respectively and to increase the net loss by £2.1 million in the
year ended 31 December 2002 and to reduce the net loss by £128.2 million
and £121.8 million in the years ended 31 December 2001 and 2000
respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The change in equity shareholders funds as at 31 December 2002 relates to
the reclassification of an amount previously included within intercompany
creditors of £52.25 million. This related to a draw down made by the
company in December 2002 under the terms of a letter of credit established
by The AES Corporation. The AES Corporation has subsequently confirmed
that it had waived any rights to repayment against the company in respect
of the draw down in a letter dated 25 January 2002. Accordingly, the
amount has been reclassified into a capital reserve. This change has
reduced the liabilities and increased the net assets of the company by
£52.25 million each respectively. The effect of the restatement is as
follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As previously
    
    Restate-reported
    
    ment
    
    As restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2002Fixed assets
    
    
    1,083,118
    
    
    
    
    
    
    
    1,083,118Current assets
    
    
    273,957
    
    
    
    
    
    
    
    273,957Creditors: amounts falling due within one year
    
    
    (97,353
    )
    
    
    52,250
    
    
    
    (45,103
    )Creditors: amounts falling due after more
than one year
    
    
    (1,200,369
    )
    
    
    
    
    
    
    (1,200,369
    )Provisions
    
    
    (16,878
    )
    
    
    
    
    
    
    (16,878
    )Net assets
    
    
    42,475
    
    
    
    52,250
    
    
    
    94,725Equity shareholders funds
    
    
    42,475
    
    
    
    52,250
    
    
    
    94,725Profit and loss account for the year ended
31 December 2002Turnover
    
    
    524,831
    
    
    
    
    
    
    
    524,831Cost of sales
    
    
    (219,462
    )
    
    
    
    
    
    
    (219,462
    )Administrative expenses
    
    
    (316,297
    )
    
    
    (53,446
    )
    
    
    (369,743
    )Interest receivable and similar income
    
    
    23,548
    
    
    
    
    
    
    
    23,548Interest payable and similar charges
    
    
    (54,800
    )
    
    
    53,446
    
    
    
    (1,354
    )Tax on (loss) / profit on ordinary activities
    
    
    (21,024
    )
    
    
    
    
    
    
    (21,024
    )Loss on ordinary activities after taxation
    
    
    (63,127
    )
    
    
    
    
    
    
    (63,127
    )


D-26



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | RESTATEMENT (continued)
|--- |  | -----------------------



| |  | The restatement of cash flows for the years ended 31 December 2002, 2001
and 2000 relates to an adjustment to interest received in respect of the
timing of cash flows under a financing hedging swap of £19.4 million, £10.3
million and £2.5 million respectively. In addition, an adjustment has been
made for the year ended 31 December 2002 to reclassify the payment of a
guarantee payment of £53.4 million by Drax Power Limited as interest
payable. These adjustments are offset by corresponding changes to the
reported net cash inflows from operating activities and there was no effect
on the consolidated net cashflows in either the current or prior years.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The financial statements of the company as previously reported already
included a restatement of the 31 December 2001 balance sheet. This
restatement reclassified £1,200 million from share capital to intercompany
loans payable, reflecting the true nature of the transaction that occurred.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Restatement of US GAAP reconciliations
| |  | --------------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net loss under US GAAPAs previously reported
    
    
    (52,046
    )
    
    
    (83,928
    )
    
    
    (44,885
    )US GAAP adjustmentsDividends paid (i)
    
    
    
    
    
    
    125,384
    
    
    
    121,836Deferred taxation (ii)
    
    
    (2,083
    )
    
    
    2,835
    
    
    
    As restated
    
    
    (54,129
    )
    
    
    44,291
    
    
    
    76,951


2002
    
    2001£000
    
    £000Shareholders equity under US GAAPAs previously reported
    
    
    628,681
    
    
    
    482,046Increase in equity shareholders funds under UK GAAP
as described above
    
    
    52,250
    
    
    
    US GAAP adjustmentsDeferred taxation (ii)
    
    
    23,496
    
    
    
    14,243Additional minimum pension liability (iii)
    
    
    (10,800
    )
    
    
    Adjustment to push down of acquisition debt (iv)
    
    
    (28,055
    )
    
    
    As restated
    
    
    665,572
    
    
    
    496,289




|(vii) |  | Under UK GAAP, dividends are shown as a deduction on the face of
the profit and loss account, whereas under US GAAP, dividends are
deducted directly from shareholders equity. As previously reported,
the US GAAP reconciliation had started with the net income/(loss) as
reported under UK GAAP, after deducting dividends. This adjustment is
necessary to start the reconciliation with net income/(loss) before
dividends, in order to conform with standard US practice.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(viii) |  | These adjustments are necessary to reflect the deferred tax effect of
the US GAAP adjustments made in respect of derivative instruments and
hedging activities and the additional minimum pension liability.
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ix) |  | The additional minimum pension liability had been previously
reported in the US GAAP reconciliation disclosures, but had been
omitted from the reconciliation of shareholders equity.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(x) |  | Following the group re-organisation in 2000, subsequent adjustments
to shareholders equity have been nil as inter-company loans exceed the
amount of push down debt. This adjustment reverses an entry in respect
of principal repayments on the push down debt.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-27



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | POST BALANCE SHEET EVENTS
|--- |  | -------------------------



| |  | Standstill arrangements with certain senior creditors
| |  | -----------------------------------------------------



| |  | Drax has been operating under standstill arrangements with certain of its
senior creditors since 12 December 2002. The purpose of the standstill
arrangements is to provide Drax and the senior creditors with a period of
stability during which discussions regarding consensual restructuring of
Drax can take place (the Restructuring). The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period. Although the standstill period under the original
standstill agreement terminated on 31 May 2003, Drax had reached agreement
on three further standstill agreements, which have now expired, and is
currently operating under a long term standstill agreement, agreed with the
Steering Committee and the Ad Hoc Committee. This agreement became
effective on 9 October 2003 and will expire on 31 December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This matter is discussed more fully in note 1, Basis of Preparation and
Accounting Policies.
| |  | --------------------------------------------------------------------------------------------



| |  | The AES Corporation
| |  | -------------------



| |  | Based on negotiations through the end of June 2003, the steering committee
representing the syndicate of banks (the Senior Lenders) which financed
the Eurobonds issued by Drax Holdings Limited to finance the acquisition of
the Drax Power Station, and the Ad Hoc Committee (together with the
Steering Committee, the Senior Creditors Committees), reached agreement
on more detailed terms of the Restructuring, and each of the Senior
Creditors Committees, the Drax Companies and The AES Corporation indicated
their support for a Restructuring to be implemented based upon the proposed
restructuring terms (the Restructuring Proposal).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 23 July 2003, Drax received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the
Restructuring and to purchase certain debt to be issued in the
Restructuring described in the Restructuring Proposal (the International
Power Proposal).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 28 July 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring
unless each member of the Senior Creditors Committees met certain
conditions by no later than 5 August 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 July 2003, the directors of Drax Holdings Limited and Drax Power
Limited appointed Gordon Horsfield and Gerald Wingrove as directors of Drax
Holdings Limited and Drax Power Limited. They, together with Lord Taylor
of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On the evening of 5 August 2003 The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
| |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of Drax Holdings Limited and Drax Power
Limited and stated their intention to resign as directors from the boards
of the other Drax companies (other than AES Drax Power Finance Holdings
Limited and AES Drax Energy Limited). They resigned from AES Drax
Acquisition Limited, Drax Electric Limited and Drax Limited on 8 August
2003. Accordingly, the boards of each of Drax Holdings Limited and Drax
Power Limited now comprise Lord Taylor of Blackburn, Gordon Horsfield and
Gerald Wingrove, the boards of each of Drax Electric Limited and Drax
Limited comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald
Wingrove and the board of AES Drax Acquisition Limited comprises Gordon
Horsfield and Gerald Wingrove.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-28



---



##### 



DRAX ELECTRIC LIMITED (formerly AES Drax Electric Limited)

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | As a consequence of the withdrawal of support by The AES Corporation, the
company has written down amounts due from another group company of £68.5
million in the third quarter of 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 14 August 2003, Drax received a letter from Goldman Sachs International,
pursuant to which it proposed to participate in the Restructuring in place
of The AES Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 19 August 2003, Drax received a letter from International Power plc,
pursuant to which it revised the International Power Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | On 21 August 2003, Drax received a letter from BHP Billiton in respect of
the Restructuring.
| |  | --------------------------------------------------------------------------------------------



| |  | On 30 August 2003, Drax announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman
Sachs International, and having noted the letter received from Miller,
McConville, Christen, Hutchison and Waffel, and following discussions with
the senior creditors of Drax, Drax entered into an exclusive arrangement
with International Power plc on the basis of a revised offer received from
International Power plc on 30 August 2003 to participate in the
Restructuring.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 3 October 2003, AES Drax Power Limiteds name was changed to Drax Power
Limited, AES Drax Limiteds name was changed to Drax Limited, AES Drax Electric
Limiteds name was changed to Drax Electric Limited and AES Drax Holdings
Limiteds name was changed to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D-29



---



##### 



Company Registration
No.  3834878











AES DRAX ACQUISITION LIMITED



Financial Statements
31 December 2002
(As restated, see note 28)







E-1



---



##### 



AES DRAX ACQUISITION LIMITED

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent Auditors Report
    
    
    E-3Consolidated Profit and Loss Account
    
    
    E-4Statement of Total Recognised Gains and Losses
    
    
    E-4Consolidated Balance Sheet
    
    
    E-5Consolidated Cash Flow Statement
    
    
    E-6Notes to the Accounts
    
    
    E-7


E-2



---



##### 



INDEPENDENT AUDITORS REPORT TO THE DIRECTORS OF AES DRAX ACQUISITION LIMITED

We have audited the accompanying balance sheets of AES Drax Acquisition Limited
as of 31 December 2002 and 2001, and the related consolidated profit and loss
accounts, statements of total recognised gains and losses and cash flows for
each of the three years in the period ended 31 December 2002. These financial
statements are the responsibility of the companys directors. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the company at 31 December 2002 and 2001,
and the results of its operations and its cash flows for each of the three
years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in note 27.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in note 28, the financial statements have been restated.

Deloitte & Touche LLP
Chartered Accountants

Leeds
6 November 2003

E-3



---



##### 



AES DRAX ACQUISITION LIMITED

CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002 (As restated, see note 28)

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 DecemberNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000TURNOVER  continuing operations
    
    
    2
    
    
    
    524,831
    
    
    
    586,103
    
    
    
    622,776Cost of sales
    
    
    
    
    
    
    (219,462
    )
    
    
    (267,204
    )
    
    
    (278,218
    )GROSS PROFIT
    
    
    
    
    
    
    305,369
    
    
    
    318,899
    
    
    
    344,558Administrative expenses  normal
    
    
    
    
    
    
    (184,079
    )
    
    
    (171,019
    )
    
    
    (166,146
    ) exceptional
    
    
    4
    
    
    
    (715,801
    )
    
    
    
    
    
    
    (899,880
    )
    
    
    (171,019
    )
    
    
    (166,146
    )OPERATING (LOSS) / PROFIT  continuing
operations
    
    
    3
    
    
    
    (594,511
    )
    
    
    147,880
    
    
    
    178,412Interest receivable and other income
    
    
    5
    
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862Interest payable and similar charges
    
    
    6
    
    
    
    (105,658
    )
    
    
    (124,660
    )
    
    
    (140,919
    )(LOSS) / PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION
    
    
    
    
    
    
    (676,621
    )
    
    
    38,157
    
    
    
    49,355Tax on (loss) / profit on ordinary activities
    
    
    7
    
    
    
    166
    
    
    
    (11,241
    )
    
    
    (19,807
    )(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION
    
    
    
    
    
    
    (676,455
    )
    
    
    26,916
    
    
    
    29,548Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,000
    )RETAINED (LOSS) / PROFIT FOR THE FINANCIAL
YEAR TRANSFERRED (FROM) / TO RESERVES
    
    
    19, 20
    
    
    
    (676,455
    )
    
    
    26,916
    
    
    
    15,548




| |  | STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
| |  | -----------------------------------------------



| |  | There are no recognised gains and losses for the years ended 31 December 2002,
2001 and 2000 other than as stated in the profit and loss account. Therefore,
no statement of total recognised gains and losses has been presented.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-4



---



##### 



AES DRAX ACQUISITION LIMITED

CONSOLIDATED BALANCE SHEET
As at 31 December 2002 (As restated, see note 28)

As restated
    
    As restatedNote
    
    2002
    
    2001£000
    
    £000FIXED ASSETSIntangible assets
    
    
    8
    
    
    
    
    
    
    
    594,610Tangible assets
    
    
    9
    
    
    
    1,083,118
    
    
    
    1,140,2451,083,118
    
    
    
    1,734,855CURRENT ASSETSStocks
    
    
    10
    
    
    
    31,327
    
    
    
    62,563Debtors
    
    
    11
    
    
    
    132,396
    
    
    
    196,408Cash at bank and in hand
    
    
    12
    
    
    
    85,020
    
    
    
    40,796248,743
    
    
    
    299,767CREDITORS: amounts falling due
within one year
    
    
    13
    
    
    
    (1,252,145
    )
    
    
    (150,112
    )NET CURRENT (LIABILITIES)/ASSETS
    
    
    
    
    
    
    (1,003,402
    )
    
    
    149,655TOTAL ASSETS LESS CURRENT
LIABILITIES
    
    
    
    
    
    
    79,716
    
    
    
    1,844,510CREDITORS: amounts falling due
after more than one year
    
    
    14
    
    
    
    (368
    )
    
    
    (1,369,792
    )PROVISIONS FOR LIABILITIES AND
CHARGES
    
    
    17
    
    
    
    (14,950
    )
    
    
    (15,116
    )NET ASSETS
    
    
    
    
    
    
    64,398
    
    
    
    499,602CAPITAL AND RESERVESCalled up share capital
    
    
    18
    
    
    
    445,050
    
    
    
    445,050Capital reserve
    
    
    19
    
    
    
    52,250
    
    
    
    Profit and loss account
    
    
    19
    
    
    
    (432,902
    )
    
    
    54,552TOTAL EQUITY SHAREHOLDERS FUNDS
    
    
    20
    
    
    
    64,398
    
    
    
    499,602




| |  | The financial information set out above does not constitute the companys
statutory accounts for the years ended 31 December 2002 or 31 December 2001.
Statutory accounts for 2001 have been delivered to the Registrar of Companies
and those for 2002 will be delivered in due course. The auditors have reported
on those accounts; their reports were unqualified and did not contain
statements under Section 237(2) or (3) of the Companies Act 1985.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-5



---



##### 



AES DRAX ACQUISITION LIMITED

CONSOLIDATED CASHFLOW STATEMENT
Year ended 31 December 2002 (As restated, see note 28)

As restated
    
    As restated
    
    As restatedNote
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    21
    
    
    
    138,120
    
    
    
    174,131
    
    
    
    172,616Returns on investments and servicing of financeInterest received
    
    
    
    
    
    
    4,098
    
    
    
    4,679
    
    
    
    9,083Interest paid
    
    
    
    
    
    
    (116,617
    )
    
    
    (146,399
    )
    
    
    (126,380
    )Net cash outflow from returns on investments and servicing of finance
    
    
    
    
    
    
    (112,519
    )
    
    
    (141,720
    )
    
    
    (117,297
    )Taxation
    
    
    
    
    
    
    (348
    )
    
    
    (9,160
    )
    
    
    (19,104
    )Capital expenditurePayments to acquire tangible fixed assets
    
    
    
    
    
    
    (5,224
    )
    
    
    (6,119
    )
    
    
    (11,993
    )Receipts from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    5,500(5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,000
    )Cash inflow before use of liquid resources and financing
    
    
    
    
    
    
    20,029
    
    
    
    17,161
    
    
    
    15,722Management of liquid resourcesIncrease in restricted cash deposits
    
    
    
    
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )FinancingNew borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400,000Issue costs on new borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,207
    )Coupon payments in excess of finance costs
    
    
    
    
    
    
    (28,055
    )
    
    
    (31,675
    )
    
    
    (397,715
    )Capital contribution
    
    
    28
    
    
    
    52,250
    
    
    
    
    
    
    
    24,195
    
    
    
    (31,675
    )
    
    
    (13,922
    )Decrease in cash in the year
    
    
    22,23
    
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )


E-6



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES
|-- |  | --------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU Europe Energy
Trading Limited (TXU Europe) and the appointment of joint administrators
of TXU Europe and TXU Europe Group plc (TXU Group) on 18 and 19 November
2002, respectively, the company entered discussions with its senior lenders
in order to address the potential defaults under the senior financing
documents arising from the TXU situation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at 30
June 2002, were below the threshold required to permit distributions. As a
result, Drax Power Limited was not permitted to make distributions to AES
Drax Energy Limited to permit interest due on the high yield notes to be
paid on 30 August 2002. The AES Corporation, however, made a contribution
to AES Drax Energy Limited which together with amounts then held in the
high yield note debt service reserve account was sufficient to make the
payments then due. At the time The AES Corporation stated that there were
no assurances that it would agree to make any similar payments in the
future. Any improvements in the forward looking ratios were dependent on a
favourable change in the forward curve for electricity prices during the
period from 30 June to 31 December 2002. Such improvements did not occur
and the ratios were below 1.19:1 at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy
Limited was unable to pay the interest due on the notes on time at the end
of February 2003. Such failure constitutes an event of default under the
notes, although any enforcement rights are subject to a 90-day grace period
as well as the terms and conditions of certain intercreditor arrangements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Drax group of companies (Drax) has been operating under standstill
arrangements with certain of its senior creditors since 12 December 2002.
The purpose of the standstill arrangements is to provide Drax and the
senior creditors with a period of stability during which discussions
regarding consensual restructuring of Drax can take place. The bank
lenders and the senior bondholders have agreed to waive certain events of
default under the Eurobonds or the senior bonds, as applicable, not to
accelerate payment of the obligations and would not seek to enforce
security during the standstill period. Although the standstill period
under the original standstill agreement terminated on 31 May 2003, Drax had
reached agreement on three further standstill agreements, which have now
expired, and is currently operating under a long term standstill agreement,
agreed with the steering
committee representing the senior banks (the Steering Committee) and the Ad Hoc Committee formed by
holders of Drax Holdings Limiteds senior bonds (the Ad Hoc Committee).
This agreement became effective on 9 October 2003 and will
expire on 31 December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the companys lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The directors of the company believe that the standstill arrangements will
facilitate an agreed restructuring of Drax. On this basis, the directors
of the company consider it appropriate to prepare the financial statements
on the going concern basis. The financial statements do not include any
adjustments that would result from a withdrawal of support by the companys
lenders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-7



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Accounting policies
| |  | -------------------



| |  | The financial statements are prepared in accordance with applicable United
Kingdom accounting standards. The particular accounting policies adopted
are described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------



| |  | Basis of consolidation
| |  | ----------------------



| |  | The group consolidates the accounts of the company and all its subsidiary
undertakings up to 31 December 2002.
| |  | --------------------------------------------------------------------------------------------------------------



| |  | Intangible fixed assets
| |  | -----------------------



| |  | Goodwill represents the excess of the fair value of the consideration given
over the fair value of the identifiable net assets acquired. Acquired
goodwill is capitalised and amortised over 20 years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Tangible fixed assets
| |  | ---------------------



| |  | Freehold land and assets in the course of construction are not depreciated.
Depreciation is provided on cost in equal annual instalments over the
estimated useful lives of the assets. The estimated useful lives are:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Freehold buildings, plant and machinery
    
    30-40 yearsPlant spares
    
    30-40 yearsFixtures and fittings
    
    3-5   years




| |  | Stocks
| |  | ------



| |  | Stocks are stated at the lower of cost, inclusive of appropriate overheads,
and net realisable value. Net realisable value is based on estimated
selling price less all further costs to completion and all relevant
marketing, selling and distribution costs.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Taxation
| |  | --------



| |  | Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a
right to pay less tax in the future have occurred at the balance sheet
date. Timing differences are differences between the groups taxable
profits and its results as stated in the financial statements that arise
from the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the financial
statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A net deferred tax asset is regarded as recoverable and therefore
recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not there will be suitable taxable profits
from which the future reversal of the underlying timing differences can be
deducted.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leased assets
| |  | -------------



| |  | Operating lease rentals are charged to income in equal annual amounts over
the lease term.
| |  | ------------------------------------------------------------------------------------------

E-8



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | BASIS OF PREPARATION AND ACCOUNTING POLICIES (continued)
|-- |  | --------------------------------------------------------



| |  | Pension costs
| |  | -------------



| |  | For defined benefit schemes the amounts charged to operating profits are
the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs
are recognised immediately in the profit and loss account if the benefits
have vested. If the benefits have not vested immediately, the costs are
recognised over the period until vesting occurs. The interest cost and the
expected return on assets are shown as a net amount of other finance costs
or credits adjacent to interest. Actuarial gains and losses are recognised
immediately in the statement of total recognised gains and losses.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Defined benefit schemes are funded, with the assets of the scheme held
separately from those of the group, in separate trustee administered funds.
Pension scheme assets are measured at fair value and liabilities are
measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high
quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and
are updated at each balance sheet date. The resulting defined benefit asset
or liability, net of the related deferred tax, is presented separately
after other net assets on the face of the balance sheet.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The group has adopted the transitional disclosure requirements of FRS 17.
| |  | -------------------------------------------------------------------------



| |  | Revenue recognition
| |  | -------------------



| |  | Revenues from the sale of electricity are recorded based upon output
delivered and capacity provided at rates specified under contract terms or
prevailing market rates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivatives
| |  | -----------



| |  | Investments or financial derivative instruments accounted for as hedges are
structured so as to reduce the market risk associated with the underlying
transaction being hedged and are designated as hedges at the inception of
the contract. Gains and losses on hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in the profit and loss account as part of those
carrying amounts. Gains and losses on qualifying hedges of firm
commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriate hedged rate.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred finance costs
| |  | ----------------------



| |  | Financing costs are deferred and amortised over the related financing
period using the effective interest method of amortisation. Deferred
financing costs are presented as deductions from the associated loan
balances.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the company to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-9



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|2. |  | TURNOVER
|-- |  | --------



| |  | Turnover comprises primarily sales to the electricity trading market in
England and Wales of electricity generated by the group. Most of the power
plants revenue relies on sales contracts with a few large customers. One
customer accounted for 65.1% of revenues in the year to 31 December 2002.
Two customers accounted for 67.9% and 9.0% of revenues in 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | OPERATING (LOSS) / PROFIT
|-- |  | -------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit is stated after
charging/(crediting):Depreciation of owned assets
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )




|4. |  | EXCEPTIONAL ITEMS
|-- |  | -----------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bad debt expense
    
    
    136,801
    
    
    
    
    
    
    
    Impairment loss (note 8 & 9)
    
    
    579,000
    
    
    
    
    
    
    
    715,801
    
    
    
    
    
    
    
    




| |  | On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
TXU Group. As a consequence of this, on 18 November 2002, Drax
Power Limited terminated the Hedging Contract with TXU Europe, a subsidiary of TXU Group,
to minimise financial exposure. On 19 November 2002, TXU Group filed a
petition on behalf of itself, TXU UK Limited and TXU Europe, seeking
protection from its creditors, which was approved, putting the three
companies into temporary administration.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a result, the company has made 100% provision against all amounts owed
by TXU Europe in respect of the Hedging Contract and the termination of
that contract, as at 18 November 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also included within administrative expenses is an exceptional item of £579
million in respect of an impairment loss on goodwill and fixed assets. The
impairment loss was measured by reference to the value in use of the assets
using a discount rate of 7.9% which reflects the risks inherent in the forecast
cash flows.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-10



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|4. |  | EXCEPTIONAL ITEMS (continued)
|-- |  | -----------------------------



| |  | The tax effect of the bad debt expense is £41 million. The impairment of
goodwill and fixed assets is non-deductible and so has no tax effect.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | INTEREST RECEIVABLE AND SIMILAR INCOME
|-- |  | --------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest receivable
    
    
    23,548
    
    
    
    14,937
    
    
    
    11,862




|6. |  | INTEREST PAYABLE AND SIMILAR CHARGES
|-- |  | ------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Bank interest and other loans
    
    
    102,160
    
    
    
    121,071
    
    
    
    128,201Amortisation of other assets
    
    
    404
    
    
    
    
    
    
    
    Amortisation of deferred financing costs
    
    
    3,094
    
    
    
    3,589
    
    
    
    3,331105,658
    
    
    
    124,660
    
    
    
    131,532Write-off of deferred finance costs on
early repayment of debt
    
    
    
    
    
    
    
    
    
    
    9,387105,658
    
    
    
    124,660
    
    
    
    140,919




|7. |  | TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES
|-- |  | ---------------------------------------------



| | a) |  | Analysis of charge in the year
| | -- |  | ------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000United Kingdom corporation tax at 30%  current year
    
    
    
    
    
    
    4,643
    
    
    
    13,970 prior year
    
    
    
    
    
    
    35
    
    
    
    458
    
    
    
    4,678
    
    
    
    14,428Deferred tax  Timing differences, origination and reversal
    
    
    (318
    )
    
    
    6,563
    
    
    
    5,325 Adjustment in respect of prior years
    
    
    152
    
    
    
    
    
    
    
    54(166
    )
    
    
    6,563
    
    
    
    5,379(166
    )
    
    
    11,241
    
    
    
    19,807


E-11



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|7. |  | TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES (continued)
|-- |  | ---------------------------------------------------------



| | b) |  | Factors affecting tax charge for the current year
| | -- |  | -------------------------------------------------



| |  | The tax assessed for the period is higher than that resulting from applying
the standard rate of corporation tax in the UK (30%) (2001: 30%) (2000:
30%). The differences are explained below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000(Loss) / profit on ordinary activities before tax
    
    
    (707,391
    )
    
    
    38,157
    
    
    
    49,355Tax on profit on ordinary activities at 30%
(2001 & 2000: 30%)
    
    
    (212,217
    )
    
    
    11,447
    
    
    
    14,806Effects of:Expenses not deductible for tax purposes
    
    
    195,814
    
    
    
    (241
    )
    
    
    4,489Capital allowances in excess of depreciation
    
    
    662
    
    
    
    (6,207
    )
    
    
    (7,953
    )Other timing differences
    
    
    (344
    )
    
    
    (356
    )
    
    
    2,628Tax losses not utilised
    
    
    16,085
    
    
    
    
    
    
    
    Adjustment in respect of prior years
    
    
    
    
    
    
    35
    
    
    
    458Current tax charge for the year
    
    
    
    
    
    
    4,678
    
    
    
    14,428




|8. |  | INTANGIBLE FIXED ASSETS
|-- |  | -----------------------



| |  | The intangible fixed assets comprise of goodwill which arose on the
acquisition of Drax Power Limited.
| |  | ------------------------------------------------------------------------------------------------------

Goodwill£000CostAt 1 January 2002
    
    
    665,185Reclassification
    
    
    (11,206
    )At 31 December 2002
    
    
    653,979AmortisationAt 1 January 2002
    
    
    70,575Charge for the year
    
    
    33,876Impairment (note 4)
    
    
    549,528At 31 December 2002
    
    
    653,979Net book valueAt 31 December 2002
    
    
    At 31 December 2001
    
    
    594,610




| |  | The reclassification above was in respect of an amount relating to the VAT
on certain transactions which occurred at the time of the acquisition of
Drax Power Station by the AES Corporation in November 1999. These
transactions related to the acquisition of the opening coal stock and the
purchase of intellectual property. The transactions were recorded gross
rather than net of VAT in the calculation of the goodwill arising upon
acquisition. The company has subsequently adjusted both goodwill and the
VAT creditor.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-12



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|9. |  | TANGIBLE FIXED ASSETS
|-- |  | ---------------------

Plant,Freehold
    
    machinery,land and
    
    fixtures &buildings
    
    fittings
    
    Plant spares
    
    Total£000
    
    £000
    
    £000
    
    £000CostAt 1 January 2002
    
    
    132,181
    
    
    
    1,081,136
    
    
    
    21,011
    
    
    
    1,234,328Additions
    
    
    
    
    
    
    2,794
    
    
    
    2,430
    
    
    
    5,224Disposals
    
    
    
    
    
    
    (2,414
    )
    
    
    
    
    
    
    (2,414
    )Issues
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )At 31 December 2002
    
    
    132,181
    
    
    
    1,081,516
    
    
    
    23,417
    
    
    
    1,237,114Accumulated depreciationAt 1 January 2002
    
    
    9,735
    
    
    
    83,342
    
    
    
    1,006
    
    
    
    94,083Charge for the year
    
    
    3,209
    
    
    
    29,143
    
    
    
    502
    
    
    
    32,854Disposals
    
    
    
    
    
    
    (2,413
    )
    
    
    
    
    
    
    (2,413
    )Impairment (note 4)
    
    
    
    
    
    
    29,472
    
    
    
    
    
    
    
    29,472At 31 December 2002
    
    
    12,944
    
    
    
    139,544
    
    
    
    1,508
    
    
    
    153,996Net book valueAt 31 December 2002
    
    
    119,237
    
    
    
    941,972
    
    
    
    21,909
    
    
    
    1,083,118At 31 December 2001
    
    
    122,446
    
    
    
    997,794
    
    
    
    20,005
    
    
    
    1,140,245




| |  | Freehold land amounting to £1,060,000 (2001: £1,060,000) has not been
depreciated.
| |  | ----------------------------------------------------------------------------------



|10. |  | STOCKS
|--- |  | ------

2002
    
    2001£000
    
    £000Raw materials and consumables
    
    
    31,327
    
    
    
    62,563




|11. |  | DEBTORS
|--- |  | -------

As restated
    
    As restated2002
    
    2001£000
    
    £000Trade debtors
    
    
    52,462
    
    
    
    104,849Amounts owed by immediate parent
    
    
    536
    
    
    
    531Amounts owed by other group companies
    
    
    68,500
    
    
    
    68,500Prepayments and other debtors
    
    
    10,898
    
    
    
    22,528132,396
    
    
    
    196,408




| |  | Included within other debtors is VAT receivable of £Nil (2001: £1.8
million), a swap advance debtor of £1.4 million (2001: swap advance
creditor £23.5 million) and an insurance debtor of £0.2 million (2001: £0.5
million). Subsequent to 31 December 2002, the company has written-off
amounts owed by other group companies of £68.5 million as a consequence of
the withdrawal of support by The AES Corporation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-13



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|11. |  | DEBTORS (continued)                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Included within prepayments and other debtors is an amount outstanding from
the employee share ownership plan (ESOP) totalling £2,858,000, loaned for
the purchase of 129,029 shares in the common stock of The AES Corporation.                                                                                               
|   
|12. |  | CASH AT BANK AND IN HAND                                                                                                                                                                                                                                                                                                         
|   
|    |  | Included within the total cash balance are restricted cash deposits
amounting to £44,970,000 (2001: £9,689,000). These comprise part of a
required balance which needs to be in place on each repayment date. Also
included is restricted cash of £13,400,000 (2001: £Nil) over which National
Westminster Bank plc has a charge.
|   
|13. |  | CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR                                                                                                                                                                                                                                                                                   

As restated
    
    As restated2002
    
    2001£000
    
    £000Trade creditors
    
    
    15,222
    
    
    
    2,679Corporation tax
    
    
    1,204
    
    
    
    1,556Amounts owed to fellow subsidiary
    
    
    1,702
    
    
    
    822Amounts owed to ultimate parent
    
    
    7,367
    
    
    
    5,125Other creditors and accruals
    
    
    13,833
    
    
    
    82,300Other loans (note 15)
    
    
    1,212,817
    
    
    
    57,6301,252,145
    
    
    
    150,112




| |  | Included within other creditors is VAT payable of £9.8 million (2001: £28.2
million).
| |  | -------------------------------------------------------------------------------------



|14. |  | CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
|--- |  | -------------------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Other loans (note 15)
    
    
    
    
    
    
    1,180,148Retentions
    
    
    368
    
    
    
    643Amounts owed to fellow subsidiary undertakings
    
    
    
    
    
    
    189,001368
    
    
    
    1,369,792




| |  | All retentions are payable within 1 to 2 years.
| |  | -----------------------------------------------



|15. |  | BORROWINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The borrowings at 31 December 2002 consist of Guaranteed Secured Bonds.
There are two tranches of bonds, the Original Bonds issued on 30 November,
1999 to finance the acquisition of Drax Power Station by AES and a second
tranche issued on 2 August 2000, the net proceeds from which were used to
prepay £383.6 million of interest. The Original Bonds are guaranteed on an unlimited, unconditional
and irrevocable basis by each of Drax Power Limited, AES Drax Acquisition
Limited, Drax Holdings Limited, AES Drax Financing Limited and Drax Limited
and each such entity has granted security over all their assets as security
for, inter alia, the Original Bonds and certain related swaps, finance
documents and guarantees. The New Bonds are guaranteed on an unlimited,
unconditional and irrevocable basis by each of Drax Power Limited, AES Drax
Acquisition Limited, Drax Holdings Limited, AES Drax Financing Limited,
Drax Limited and Drax Electric Limited and each such entity has granted
security over all their assets as security for, inter alia, the New Bonds
and certain related swaps, finance documents and guarantees.
|   
|    |  | Repayment of all of the Guaranteed Secured Bonds is further secured by
direct agreements from certain of the major project parties and other
security arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

E-14



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|15. |  | BORROWINGS (continued)
|--- |  | ----------------------



| |  | The Original Bonds bear a fixed rate of interest of 8.86% and interest is
payable semi-annually over 15 years. The New Bonds comprise of
$302,400,000 of 10.41% senior secured bonds and £200,000,000 of 9.07%
senior secured bonds, maturing on 31 December 2020 and 31 December 2025
respectively. Interest on the New Bonds is payable semi-annually commencing
31 December 2000 for 20 years on the dollar bonds and 25 years on the
sterling bonds.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated2002
    
    2001£000
    
    £000Analysis of loan repayments are:Within one year (note 29)Original Bonds
    
    
    827,204
    
    
    
    57,630New Bonds
    
    
    385,610
    
    
    
    1,212,814
    
    
    
    57,630After five yearsOriginal Bonds
    
    
    
    
    
    
    795,291New Bonds
    
    
    
    
    
    
    384,857
    
    
    
    1,180,148




| |  | Borrowings are stated after deducting an amount paid for the forward
purchase of preference shares in Drax Holdings Limited. The shares will be
purchased by AES Drax Acquisition Limited when the senior secured debt is
repaid in 2015. Borrowings are also stated after deducting coupon payments
in excess of finance costs and deferred finance costs as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

BorrowingForward
    
    
    
    
    
    beforeNominal
    
    purchase of
    
    
    
    
    
    deferred
    
    Deferredvalue of
    
    preference
    
    Coupon
    
    finance
    
    finance
    
    Netborrowings
    
    shares
    
    payments
    
    costs
    
    costs
    
    borrowings£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000As at 31 December 2002Original Bonds
    
    
    1,725,000
    
    
    
    (425,000
    )
    
    
    (457,445
    )
    
    
    842,555
    
    
    
    (15,351
    )
    
    
    827,204New Bonds
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    (14,390
    )
    
    
    385,6102,125,000
    
    
    
    (425,000
    )
    
    
    (457,445
    )
    
    
    1,242,555
    
    
    
    (29,741
    )
    
    
    1,212,814As at 31 December 2001Original Bonds
    
    
    1,725,000
    
    
    
    (425,000
    )
    
    
    (429,390
    )
    
    
    870,610
    
    
    
    (17,689
    )
    
    
    852,921New Bonds
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    (15,143
    )
    
    
    384,8572,125,000
    
    
    
    (425,000
    )
    
    
    (429,390
    )
    
    
    1,270,610
    
    
    
    (32,832
    )
    
    
    1,237,778




|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
|--- |  | -------------------------------------------



| |  | The group issues or holds financial instruments for two purposes.
| |  | -----------------------------------------------------------------



| |  |  | Financial instruments relating to the operations, financing and
risks of the operating company, Drax Power Limited.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Financial instruments relating to the financing and risks of the
debt holding company, Drax Holdings Limited and the consolidated risks
of the Group.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

E-15



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | The Group finances its operations by a mix of retained profits, senior
secured bank debt and senior secured bonds. The Groups financial
instruments comprise borrowings, cash and liquid resources, items that
arise directly from its operations and derivative transactions. The main
risks arising from the Groups financial instruments are interest rate
risk, currency risk and liquidity risk.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest Rate Risk
| |  | ------------------



| |  | The Group is partly financed by borrowings at both fixed and floating rates
of interest.
| |  | ----------------------------------------------------------------------------------------



| |  | The Original Bonds require that we enter into hedges against interest rate
fluctuations on a two-year rolling basis in an amount equal to at least 50%
of the principal amount of the loans under the Bank Facility. The interest
amounts due with respect to the remaining principal are thus subject to
fluctuations in the London interbank offered rate (LIBOR). We currently
have hedged £565 million of our floating rate exposure and such hedging
arrangements satisfy the requirements under the Original Bonds.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the New Bonds, we currently have £132 million of floating rate
exposure.
| |  | ----------------------------------------------------------------------------



| |  | Currency Risk
| |  | -------------



| |  | The Group is partly financed by borrowings in US Dollars. The Group also
holds certain US Dollar denominated bank accounts.
| |  | ---------------------------------------------------------------------------------------------------------------------------



| |  | The Group has eliminated the currency risk via cross-currency swaps for the
$302,400,000 New Bonds issued by Drax Holdings Limited in August 2000. At
31 December 2002, currency swaps covered 100% (2001: 100%) of the nominal
amount of the US Dollar borrowings and 100% of the interest cost of these
borrowings (2001: 100%).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There are no material currency risks in the operating company, Drax Power
Limited.
| |  | ----------------------------------------------------------------------------------



| |  | Liquidity Risk
| |  | --------------



| |  | The Group requires access to sufficient liquidity to enable it to meet its
obligations as they fall due and to provide adequately for contingencies.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the operating company, Drax Power Limited, short-term liquidity is
provided by a committed bank facility of £15 million (2001: £15 million).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the holding company, Drax Holdings Limited, short-term liquidity was
provided by a £52 million letter of credit from Bank of America, which
comprises part of the Required Balance on the Debt Service Account as
stated in the Facility Agreement with the senior banks. The cash balance
on these Debt Service Accounts at 31 December 2002 totalled £44.8 million
(2001: £9.7 million).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Generation Business
| |  | -----------------------



| |  | Hedging
| |  | -------



| |  | The operating company, Drax Power Limited, earned a significant proportion
of its revenues from a Hedging Contract with TXU, before the termination of
the contract in November 2002. This allowed Drax Power Limited to hedge
the risks associated with sales of electricity as a purely merchant
facility, into the Pool, where generators are subject to market-related
risks, including general economic conditions, electricity demand, weather,
increasing competition and other circumstances beyond their control.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Numerical Disclosures
| |  | ---------------------



| |  | The numerical disclosures below deal with financial assets and liabilities
as defined in Financial Reporting Standard 13 Derivatives and Other
Financial Instruments: Disclosures(FRS13). Certain financial assets and
liabilities, such as investments in subsidiary companies, are excluded from
the scope of these disclosures. As permitted by FRS13, short-term debtors
and creditors have been excluded from the disclosures.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-16



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Interest rate risk profile of financial assets and financial liabilities
| |  | ------------------------------------------------------------------------



| |  | Financial assets 
The interest rate profile of the Groups financial assets was:
| |  | --------------------------------------------------------------------------------

Floating rateCurrency
    
    Total
    
    financial assets31 December
    
    31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2002
    
    2001£000s
    
    £000s
    
    £000s
    
    £000sSterling
    
    
    84,947
    
    
    
    40,690
    
    
    
    84,947
    
    
    
    40,690Dollar
    
    
    73
    
    
    
    106
    
    
    
    73
    
    
    
    106Total
    
    
    85,020
    
    
    
    40,796
    
    
    
    85,020
    
    
    
    40,796




| |  | The Groups financial assets comprise of deposits bearing interest at the
rate agreed between the Group and its banks.
| |  | ----------------------------------------------------------------------------------------------------------------------



| |  | Financial liabilities
| |  | ---------------------



| |  | After taking account of the various currency and interest rate swaps
entered into by the Group, the interest rate profile of the Groups
financial liabilities (excluding deferred finance costs) was:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Floating rate
    
    Fixed rateCurrency
    
    Total
    
    financial liabilities
    
    financial liabilities31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2002
    
    2001
    
    2002
    
    2001£000s
    
    £000s
    
    £000s
    
    £000s
    
    £000s
    
    £000sSterling
    
    
    1,242,555
    
    
    
    1,270,610
    
    
    
    866,775
    
    
    
    808,815
    
    
    
    375,780
    
    
    
    461,795Total
    
    
    1,242,555
    
    
    
    1,270,610
    
    
    
    866,775
    
    
    
    808,815
    
    
    
    375,780
    
    
    
    461,795


Currency
    
    Fixed rate financial liabilitiesWeighted average
    
    Weighted average period
    
    Weighted average periodinterest rate
    
    for which rate is fixed
    
    until maturity31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2002
    
    2001
    
    2002
    
    2001%
    
    %
    
    Years
    
    Years
    
    Years
    
    YearsSterling
    
    
    8.951
    
    
    
    8.945
    
    
    
    16.1
    
    
    
    16.6
    
    
    
    16.1
    
    
    
    16.6




| |  | The floating rate liabilities comprise Original Bonds of £734,775,000
(2001: £676,815,000) and New Bonds of £132,000,000 (2001: £132,000,000)
that bear interest at rates based upon LIBOR for terms of up to six months.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fixed rate liabilities comprise Original Bonds of £107,780,000 (2001:
£193,795,000) and New Bonds of £268,000,000 (2001: £268,000,000) that bear
interest rates set under the terms of the bonds.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-17



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Maturity of financial liabilities
| |  | ---------------------------------



| |  | The maturity profile of the Groups financial liabilities was as follows:
| |  | -------------------------------------------------------------------------

Borrowings excluding deferred finance costs31 December
    
    31 December2002
    
    2001£000s
    
    £000sIn one year or less, or on demand
    
    
    79,640
    
    
    
    58,825In more than one year but not more than two years
    
    
    53,395
    
    
    
    48,870In more than two years but not more than five years
    
    
    156,565
    
    
    
    153,850In more than five years
    
    
    952,955
    
    
    
    1,009,065Total
    
    
    1,242,555
    
    
    
    1,270,610




| |  | Drax has been operating under Standstill Arrangements since 12 December
2002. Borrowings have therefore been presented as falling due within one
year.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fair Value Disclosures
| |  | ----------------------



| |  | Set out below is a comparison of book values and fair values of the Groups
financial assets and liabilities.
| |  | -------------------------------------------------------------------------------------------------------------

31 December 2002
    
    31 December 2001Book
    
    Fair
    
    Book
    
    FairValue
    
    Value
    
    Value
    
    Value£000s
    
    £000s
    
    £000s
    
    £000sFinancial assetsBank deposits
    
    
    85,020
    
    
    
    85,020
    
    
    
    40,796
    
    
    
    40,796Primary financial
instruments issued
to finance the
Groups operationsNet borrowings
    
    
    1,212,634
    
    
    
    940,971
    
    
    
    1,237,778
    
    
    
    1,021,087Derivative
financial
instruments held to
manage the interest
rate and currency
profileInterest rate swaps
    
    
    
    
    
    
    (75,870
    )
    
    
    
    
    
    
    (46,982
    )Currency swaps
    
    
    
    
    
    
    7,812
    
    
    
    
    
    
    
    13,518




| |  | The fair values of financial assets have been determined by reference to
quoted market prices where available. The estimated difference between the
book and fair value of such assets is not material.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of the long-term borrowings have been determined by
reference to either a quoted market value or, the fair values of the
unquoted debt have been calculated by discounting the estimated cash flows
for each instrument at the appropriate market discount rate, in effect at
the balance sheet date.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of the currency swaps and Sterling and US Dollar denominated
bonds have been determined by reference to prices available from the
markets on which these instruments or similar instruments are traded.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of CFDs have been calculated by reference to managements
estimates of future electricity pool prices and potential impact of NETA.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Gains and losses on financial assets and financial liabilities held or
issued for trading
| |  | -----------------------------------------------------------------------------------------



| |  | No gains or losses have been recognised which relate to trading in
financial assets and financial liabilities.
| |  | --------------------------------------------------------------------------------------------------------------

E-18



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|16. |  | DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)
|--- |  | -------------------------------------------------------



| |  | Gains and losses on hedges
| |  | --------------------------



| |  | The Group enters into CFDs, EFAs and similar contracts to hedge against
fluctuations in the selling price for electricity obtained from the Pool.
It also uses interest rate swaps and currency swaps to manage its interest
rate profile and currency risk. Changes in the fair value of instruments
used as hedges are not recognised in the financial statements until the
hedged position matures. An analysis of unrecognised gains and losses is
as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gains
    
    Losses
    
    Total Net£000s
    
    £000s
    
    £000sUnrecognised gains and
losses on hedges at 1
January 2002
    
    
    13,518
    
    
    
    (46,982
    )
    
    
    (33,464
    )Gains and losses
arising in previous
years that were
recognised in the year
    
    
    (13,518
    )
    
    
    46,982
    
    
    
    33,464Gains and losses
arising before 1
January 2002 that were
not recognised in the
year
    
    
    
    
    
    
    
    
    
    
    Gains and losses
arising in the year
that were not
recognised in the year
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )Unrecognised gains and
losses at 31 December
2002
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )Gains and losses
expected to be
recognised in the next
financial year
    
    
    
    
    
    
    
    
    
    
    Gains and losses
expected to be
recognised after the
next financial year
    
    
    7,812
    
    
    
    (75,870
    )
    
    
    (68,058
    )




|17. |  | PROVISIONS FOR LIABILITIES AND CHARGES
|--- |  | --------------------------------------

At
    
    
    
    At1 January
    
    Current year
    
    31 December2002
    
    credit
    
    2002£000
    
    £000
    
    £000Deferred taxation
    
    
    15,006
    
    
    
    (166
    )
    
    
    14,840Reinstatement provision
    
    
    110
    
    
    
    
    
    
    
    11015,116
    
    
    
    (166
    )
    
    
    14,950




| |  | The amount of deferred taxation provided in the financial statements is:
| |  | ------------------------------------------------------------------------

2002
    
    2001£000
    
    £000Capital allowances in excess of
depreciation
    
    
    16,768
    
    
    
    17,278Other timing differences
    
    
    (1,927
    )
    
    
    (2,272
    )14,841
    
    
    
    15,006


E-19



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|18. |  | CALLED UP SHARE CAPITAL
|--- |  | -----------------------

2002
    
    2001£000
    
    £000Authorised1,000,000,000 ordinary shares of £1 each
    
    
    1,000,000
    
    
    
    1,000,000Called up, allotted and fully paid445,050,001 ordinary shares of £1 each
    
    
    445,050
    
    
    
    445,050




|19. |  | RESERVES
|--- |  | --------

As restated
    
    Profit andCapital
    
    loss
    
    Totalreserve
    
    account£000
    
    £000
    
    £000At 1 January 2002
    
    
    
    
    
    
    54,552
    
    
    
    54,552Retained loss for the financial year
    
    
    
    
    
    
    (676,455
    )
    
    
    (676,455
    )Other reserve movement
    
    
    
    
    
    
    189,001
    
    
    
    189,001Capital contribution in the year
    
    
    52,250
    
    
    
    
    
    
    
    52,250At 31 December 2002
    
    
    52,250
    
    
    
    (432,902
    )
    
    
    (380,652
    )




| |  | The other reserve movement relates to a group reorganisation during the
year ended 31 December 2002. As a consequence, an amount previously
recorded as due to a fellow subsidiary of £189,001,000 was credited to
reserves.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|20. |  | RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS
|--- |  | --------------------------------------------------

As restated2002
    
    2001£000
    
    £000(Loss) / profit for the financial year
    
    
    (676,455
    )
    
    
    26,916Capital contribution in the year
    
    
    52,250
    
    
    
    Other reserve movement
    
    
    189,001
    
    
    
    Net (reduction) / increase in shareholders funds
    
    
    (435,204
    )
    
    
    26,916Opening shareholders funds
    
    
    499,602
    
    
    
    472,686Closing shareholders funds
    
    
    64,398
    
    
    
    499,602


E-20



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002

21. RECONCILIATION OF OPERATING (LOSS) / PROFIT TO NET CASH INFLOW FROM
OPERATING ACTIVITIES

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Operating (loss) / profit
    
    
    (594,511
    )
    
    
    147,880
    
    
    
    178,412Depreciation
    
    
    32,854
    
    
    
    32,503
    
    
    
    31,937Amortisation of goodwill
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Loss on disposal of fixed assets
    
    
    
    
    
    
    19
    
    
    
    Plant spares issues
    
    
    24
    
    
    
    155
    
    
    
    Utilisation of unfavourable contract provision
    
    
    
    
    
    
    (17,789
    )
    
    
    (25,188
    )Decrease / (increase) in stocks
    
    
    31,236
    
    
    
    (2,617
    )
    
    
    (7,413
    )Decrease / (increase) in debtors
    
    
    78,116
    
    
    
    20,622
    
    
    
    (91,052
    )(Decrease) / increase in creditors
    
    
    (41,870
    )
    
    
    (50,783
    )
    
    
    49,592Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Harich swap interest
    
    
    19,395
    
    
    
    10,265
    
    
    
    2,452138,120
    
    
    
    174,131
    
    
    
    172,616




|22. |  | RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
|--- |  | -------------------------------------------------------

As restated
    
    As restated
    
    As restated2002
    
    2001
    
    2000£000
    
    £000
    
    £000Decrease in cash in the year
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )Net financing cash flow
    
    
    28,055
    
    
    
    31,675
    
    
    
    13,922Amortisation of deferred finance costs
    
    
    (3,094
    )
    
    
    (3,589
    )
    
    
    (3,331
    )Write-off of deferred finance costs on
early repayment of debt
    
    
    
    
    
    
    
    
    
    
    (9,387
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Movement in net debt in the year
    
    
    69,185
    
    
    
    13,572
    
    
    
    3,004Net debt brought forward
    
    
    (1,196,982
    )
    
    
    (1,210,554
    )
    
    
    (1,213,558
    )Net debt carried forward
    
    
    (1,127,797
    )
    
    
    (1,196,982
    )
    
    
    (1,210,554
    )




|23. |  | ANALYSIS OF CHANGES IN NET DEBT
|--- |  | -------------------------------

At 1 January
    
    
    
    
    
    Non-cash
    
    At 31 December2002
    
    Cash flow
    
    movements
    
    2002£000
    
    £000
    
    £000
    
    £000Cash at bank and in hand
    
    
    31,107
    
    
    
    (4,277
    )
    
    
    
    
    
    
    26,830Restricted cash deposits
    
    
    9,689
    
    
    
    48,501
    
    
    
    
    
    
    
    58,19040,796
    
    
    
    44,224
    
    
    
    
    
    
    
    85,020Other loans
    
    
    (1,237,778
    )
    
    
    28,055
    
    
    
    (3,094
    )
    
    
    (1,212,817
    )(1,196,982
    )
    
    
    72,279
    
    
    
    (3,094
    )
    
    
    (1,127,797
    )


E-21



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING
|--- |  | ----------------------



| |  | Pension schemes operated
| |  | ------------------------



| |  | Within the UK the Group principally operates an approved defined benefit
scheme, on behalf of the AES Drax Power Group of the Electricity Supply
Pension Scheme (ADPG ESPS).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular pension costs  SSAP 24
| |  | -------------------------------



| |  | Pensions costs for the ADPG ESPS in the year were £1,700,000 (2001:
£1,469,000), comprising a regular cost of £1,500,000 (2001: £1,200,000)
plus variations totalling £200,000 (2001: £(200,000)). A variation of
£(100,000) has arisen due to £800,000 of the valuation surplus being
carried forward unutilised, which is being spread as a level percentage of
salaries over the average remaining working life of the membership
(approximately 11 years). A further variation of £(100,000) has arisen due
to the application of reduced contributions from 1 January 2002 to 31 March
2002 from the valuation surplus. The remaining variation of £400,000 has
arisen due to certain special events, generating additional liabilities and
triggering employer contributions. In the year, redundancies have resulted
in an additional pension cost of £400,000, which has been partially offset
by additional employer contributions of £200,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
Consultants, assessed the ESPS in respect of the AES Drax Power Group as at
31 December 2002 using the projected unit method and a market based
valuation approach to ascertain its cost to the Group. The principal
financial assumptions were that the rate of return would be 4.5% per annum
higher than the rate of price inflation, that increases in past and future
pensions would be in line with price inflation, and that future salary
growth would exceed price inflation by 2.75% per annum, depending on salary
levels at the valuation date. Following the actuarial valuation it was
agreed that the Group would pay an average contribution rate of 12% of
annual salaries, subject to review at future valuations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At the date of the latest actuarial valuation the market value of the
assets of the ADPG ESPS was £44.6 million and the actuarial value of the
assets was sufficient to cover between 115% and 120% of the benefits that
had accrued to members, after allowing for expected increases in future
earnings. The next scheduled actuarial valuation of the ADPG ESPS will be
as at 31 March 2004.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | FRS 17
| |  | ------



| |  | In November 2000 the Accounting Standards Board issued FRS 17 Retirement
Benefits replacing SSAP 24 Accounting for Pensions Costs. Certain
disclosures are required in the transition period before full adoption of
FRS 17 for periods ending on or after 22 June 2001. These further
disclosures are included below.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The principal actuarial assumptions used as at 31 December 2002 are shown
below:
| |  | --------------------------------------------------------------------------------

2002
    
    2001Rate of increase in salaries
    
    
    3.8
    %
    
    
    4.0
    %Rate of increase of pensions in payment and deferment
    
    
    2.5
    %
    
    
    2.6
    %Discount rate
    
    
    5.4
    %
    
    
    5.8
    %Inflation assumption
    
    
    2.3
    %
    
    
    2.5
    %




| |  | The following contributions were made to the ADPG ESPS during 2002:
| |  | -------------------------------------------------------------------

Year
ended31 December2002£millionsCompany contributions
    
    
    1.6Member contributions
    
    
    0.6


E-22



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount charged to operating profit:
| |  | -----------------------------------------------

Year ended31 December2002£ millionsCurrent service cost
    
    
    1.9Past service cost
    
    
    Early retirement deficiency cost
    
    
    0.4Total operating cost
    
    
    2.3




| |  | Analysis of amount credited to other finance income:
| |  | ----------------------------------------------------

Year ended31 December2002£ millionsExpected return on pension plan assets
    
    
    3.3Less: Interest on pension plan liabilities
    
    
    (3.2
    )Net return
    
    
    0.1




| |  | The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
shown below:
| |  | -----------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsEquities
    
    
    29.5
    
    
    
    36.1Bonds
    
    
    5.9
    
    
    
    6.6Other
    
    
    0.4
    
    
    
    0.7Market value of assets
    
    
    35.8
    
    
    
    43.4Actuarial value of liabilities
    
    
    (60.8
    )
    
    
    (53.9
    )Deficit in the scheme
    
    
    (25.0
    )
    
    
    (10.5
    )Related deferred tax asset (assumed 30% rate)
    
    
    7.5
    
    
    
    3.2Net pension liability
    
    
    (17.5
    )
    
    
    (7.3
    )




| |  | Analysis of movement in deficit during the year:
| |  | ------------------------------------------------

Year ended31 December2002£ millionsDeficit in scheme at 1 January 2002
    
    
    (10.5
    )Current service cost
    
    
    (1.9
    )Contributions
    
    
    2.2Early retirement deficiency cost
    
    
    (0.4
    )Actuarial loss
    
    
    (14.4
    )Deficit in scheme at 31 December 2002
    
    
    (25.0
    )


E-23



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|24. |  | PENSION SCHEME FUNDING (continued)
|--- |  | ----------------------------------



| |  | Analysis of amount recognised in Statement of Total Recognised Gains and
Losses:
| |  | --------------------------------------------------------------------------------

Year ended31 December2002£ millionsActual return less expected return on pension scheme assets
    
    
    (11.8
    )Experience gains arising on the scheme liabilities
    
    
    0.1Changes in assumptions underlying the present value of the scheme liabilities
    
    
    (2.7
    )Actuarial loss recognised in STRGL
    
    
    (14.4
    )




| |  | Had the company adopted FRS 17 early, Group profit and loss reserves would
have been stated as follows:
| |  | -------------------------------------------------------------------------------------------------------

2002
    
    2001£ millions
    
    £ millionsProfit and loss reserve in the financial statements as at year end
    
    
    (463.7
    )
    
    
    54.6Deficit in relation to the ADPG ESPS, net of related deferred tax asset
    
    
    (17.5
    )
    
    
    (7.3
    )Profit and loss reserve as adjusted
    
    
    (481.2
    )
    
    
    47.3




|25. |  | ULTIMATE PARENT COMPANY
|--- |  | -----------------------



| |  | The immediate parent company is AES Drax Acquisition Holdings Limited, a
company registered in England and Wales.
| |  | -----------------------------------------------------------------------------------------------------------------



| |  | The parent undertaking of the smallest group, which includes the company
and for which group accounts are prepared, is AES UK Power Holdings
Limited, a company incorporated in England and Wales. Copies of the group
accounts of AES UK Power Holdings Limited can be obtained from Companies
House, Crown Way, Cardiff CF14 3UZ.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at 31 December 2002, the ultimate parent company and controlling entity,
and largest group for which group accounts are prepared, was The AES
Corporation, a company incorporated in the State of Delaware, USA. Copies
of the parent groups financial statements can be obtained from the
Securities and Exchange Commission, 450, 5th Street NW, Washington DC
20549, USA.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 September 2003, notices were issued to the Company and the other
companies in the group by JP Morgan Chase Bank in its role of Security
Trustee in respect of the Guaranteed Secured Bonds in respect of an event
of default as a result of the non-payment of coupons as at 31 December 2002
and 30 June 2003. A further notice was also issued to AES Drax
Acquisitions Holdings Limited, the immediate parent of AES Drax Acquisition
Limited, stating that AES Drax Acquisition Limited would be prevented from
exercising any voting rights or other powers in respect of the ordinary
shares that it holds in AES Drax Acquisition Limited. The effect of this
notice is that The AES Corporation, who remains the ultimate parent
company, is unable to exercise any control over AES Drax Acquisition
Limited or any of its subsidiaries and that control of the group lies with
the senior creditors of the group.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|26. |  | NATURE OF BUSINESS
|--- |  | ------------------



| |  | The principal activity of the group is the ownership and operation of the
Drax Power Station, a 3,960 megawatt (gross) coal-fired power station based
in the North of England.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-24



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
|--- |  | ---------------------------------------------



| |  | This note is provided in addition to the previous financial information for
US users of the accounts.
| |  | -----------------------------------------------------------------------------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect on net income and
shareholders equity is shown in the tables on pages 27 to 28.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred taxation is provided at the anticipated tax rates
on timing differences arising from the inclusion of items of income and
expenditure in taxation computations in periods different from those in
which they are included in the financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, deferred taxation is provided on all temporary differences
between tax and book bases of assets and liabilities under the liability
method, subject to a valuation allowance where applicable in respect of
deferred taxation assets, in accordance with SFAS 109, Accounting for
Income Taxes. As a result certain items that are treated as permanent
items under UK GAAP are treated as temporary differences under US GAAP. In
addition, deferred tax is also provided on certain of the other adjustments
between UK and US GAAP described herein. Such amounts are reported in the
profit and loss account except where the adjustment is recorded directly to
shareholders equity; for example, in relation to the additional minimum
pension liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pensions
| |  | --------



| |  | Under UK GAAP, where pensions are provided by means of a funded defined
benefits scheme, annual contributions are based on actuarial advice. The
expected cost of providing pensions is recognised on a systematic basis
over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining
service lives of current employees on a straight-line basis.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 87, Employers Accounting for Pensions, prescribes the
method of actuarial valuation, which includes differences from certain
assumptions used for the UK GAAP actuarial computation. In addition, assets
are assessed at current settlement rates. Certain variations from regular
cost are allocated in equal amounts over the average remaining service
lives of current employees. An additional minimum pension liability equal
to the excess of the accumulated benefit obligation over the plan assets
must be recognised at the balance sheet date with a corresponding entry
recorded as an intangible asset, to the extent of unamortised prior service
cost, and the balance, if any, in other comprehensive income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Goodwill and tangible fixed assets
| |  | ----------------------------------



| |  | Under UK GAAP, goodwill arising on the acquisition of subsidiaries
represents the excess of the fair value of the consideration given over the
fair value of the identifiable net assets acquired. Goodwill is
capitalised under the heading, Intangible assets, and amortised over its
expected useful economic life, subject to a maximum of twenty years. Such
goodwill is subject to review for impairment in accordance with FRS 11,
Impairment of Fixed assets and Goodwill, which allows testing for
impairment at the income generating unit level. In the year ended 31
December 2002 the Company has recorded an impairment loss, based on a
discounted cash flow calculation, of £579 million.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-25



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Under US GAAP, the acquisition has been treated as an acquisition of assets
and accordingly the entire purchase price, including certain liabilities
assumed, has been allocated to tangible fixed assets and depreciated over
the estimated useful lives of the assets, being thirty five years.
Furthermore, additional net deferred tax liabilities recorded at the
acquisition date under US GAAP result in an increase in the amount
allocated to tangible fixed assets resulting in an additional depreciation
expense. In accordance with SFAS 144, Accounting for the impairment or
disposal of long-lived assets, an impairment loss shall be recognized only
if the carrying amount of a long-lived asset exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. No impairment was recognised under US GAAP.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Derivative Instruments and Hedging Activities
| |  | ---------------------------------------------



| |  | Under UK GAAP, investments or financial derivative instruments accounted
for as hedges are structured so as to reduce the market risk associated
with the underlying transaction being hedged and are designated as hedges
at the inception of the contract. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amounts of those assets
or liabilities and are ultimately recognized in the profit and loss account
as part of those carrying amounts. Gains and losses on qualifying hedges
of firm commitments or anticipated transactions are also deferred and are
recognized in the profit and loss account or as adjustments of carrying
amounts when the hedged transaction occurs. Commercial activities
denominated in foreign currencies are recorded in sterling at actual
exchange rates as at the date of the transaction or at the contracted rate
if the transaction is covered by a forward foreign exchange contract or
other hedging instrument. Monetary assets and liabilities denominated in
foreign currencies at the year end are reported at the rates of exchange
prevailing at the year end or, if hedged, at the appropriated hedged rate.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP, SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, requires all derivative financial instruments to be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings unless specific hedge
accounting criteria are met. Where the derivative instrument qualifies for
hedge accounting, changes in fair value of the instrument are recorded in
earnings or other comprehensive income (a separate component of equity)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction and whether or not
the hedge is effective. For fair value hedge transactions in which a
company is hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative will generally be
offset in the income statement by changes in the hedged items fair value.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For cash flow hedge transactions, in which a company is hedging the
variability of cash flows related to a variable-rate asset, liability or a
forecasted transaction, changes in the fair value of the derivative
instrument are initially reported in other comprehensive income and
then reclassified as earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The ineffective
portion of all hedges are recognised in current-period earnings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to qualify for hedge accounting under SFAS 133, a company must
formally document, designate and assess, periodically, the effectiveness of
transactions that qualify for hedge accounting.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactions, contracts, assets and liabilities denominated in foreign
currencies are recorded at the exchange rate prevailing on the date of the
transaction, and assets and liabilities are recorded at the period end
date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-26



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Severance accrual and unfavourable IT contract
| |  | ----------------------------------------------



| |  | Under UK GAAP only those liabilities that existed in the acquired business
may be reflected in the purchase price allocation. Liabilities arising
from the acquirers intentions may not be recognised. Therefore under UK
GAAP it is not permissible to record a severance accrual for the costs
associated with terminating employees of the acquired business or for the
unfavourable IT contract. Instead such amounts must be provided for and
expensed in the post-acquisition financial statements of the acquirer.
Under US GAAP, such amounts may be recorded as part of the acquisition of
Drax Power Limited in accordance with EITF 95-3, Recognition of Liabilities
in Connection with a Purchase Business Combination.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Recently issued but not yet adopted accounting pronouncements
| |  | -------------------------------------------------------------



| |  | Asset retirement obligations.In June 2001, the Financial Accounting
Standards Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective 1 January 2003, requires
entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the
costs of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The company will adopt SFAS No. 143 effective 1 January 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The company has completed a detailed assessment of the specific
applicability and implications of SFAS No. 143. The scope of SFAS No. 143
includes primarily active ash landfills, water treatment basins and the
removal or dismantlement of certain plant and equipment. As of 31 December
2002, the company had a recorded liability of approximately £0.1 million
related to asset retirement obligations. Upon adoption of SFAS No. 143, the
company is not required to record any additional liability.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Exit or disposal activities.In June 2002, the Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Prior to
issuance of SFAS No. 146, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after 31 December 2002. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-based compensation.In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the
adoption of this pronouncement to have a material impact on our financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Guarantor accounting.We will apply the initial recognition and
measurement provisions of FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Direct
Guarantees of Indebtedness of Others, on a prospective basis for all
guarantees issued after 31 December 2002. Under FIN 45, at the inception of
guarantees issued after 31 December 2002, we will record the fair value of
the guarantee as a liability, with the offsetting entry being recorded
based on the circumstances in which the guarantee was issued. We will
account for any fundings under the guarantee as a reduction of the
liability. After funding has ceased, we will recognize the remaining
liability in the income statement on a straight-line basis over the
remaining term of the guarantee. In general, we enter into various
agreements providing financial performance assurance to third parties on
behalf of certain subsidiaries.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-27



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Such agreements include guarantees, letters of credit and surety bonds. FIN
45 does not encompass guarantees issued either between parents and their
subsidiaries or between corporations under common control, a parents
guarantee of its subsidiarys debt to a third party (whether the parent is
a corporation or an individual), a subsidiarys guarantee of the debt owed
to a third party by either its parent or another subsidiary of that parent,
nor guarantees of a companys own future performance. Adoption of FIN 45
will have no impact to our historical financial statements as existing
guarantees are not subject to the measurement provisions of FIN 45. The
company does not expect adoption of the liability recognition provisions of
FIN 45 to have a material impact on our financial position or results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Variable interest entities.FIN 46, Consolidation of Variable Interest
Entities, is effective immediately for all enterprises with variable
interests in variable interest entities created after 31 January 2003. FIN
46 provisions must be applied to variable interests in variable interest
entities created before 1 February 2003 as at 31 December 2003. If an
entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entitys
expected losses if they occur and/or receives a majority of the entitys
expected residual returns if they occur. If significant variable interests
are held in a variable interest entity, the company must disclose the
nature, purpose, size and activity of the variable interest entity and the
companys maximum exposure to loss as a result of its involvement with the
variable interest entity in all financial statements issued after 31
January 2003. We do not believe that the adoption of FIN 46 will result in
our consolidation of any previously unconsolidated entities or material
additional disclosure.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | DIG Issue C11.In connection with the January 2003 FASB Emerging Issues
Task Force (EITF) meeting, the FASB was requested to reconsider an
interpretation of SFAS No. 133. The interpretation, which is contained in
the Derivatives Implementation Groups C11 guidance, relates to the pricing
of contracts that include broad market indices. In particular, that
guidance discusses whether the pricing in a contract that contains broad
market indices (e.g. CPI) could qualify as a normal purchase or sale. The
company is currently re-evaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Financial instruments with characteristics of both liabilities and equity.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with characteristics of both liabilities and equity.
SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
statement requires that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 affects an issuers
accounting for 3 types of freestanding financial instruments, namely:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1 |  | Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | 2 |  | Instruments, other than outstanding shares, that do or may
not require the issuer to buy back some of its shares in exchange
for cash or other assets. These instruments include put options and
forward purchase contracts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3 |  | Obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | SFAS No. 150 does not apply to features in embedded financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after 31 May 2003 and
otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement
is not permitted. This would apply to the £425 million forward purchase of
preference shares that is disclosed in AES Drax Acquisition Limiteds
financial statements, note 15. The company is currently evaluating the
effects that this guidance will have on its results of operations and
financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-28



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under UK GAAP
    
    
    (676,455
    )
    
    
    26,916
    
    
    
    15,548US GAAP adjustments:Dividends
    
    
    
    
    
    
    
    
    
    
    14,000Additional depreciation on tangible fixed assets
    
    
    (39,676
    )
    
    
    (39,676
    )
    
    
    (39,676
    )Severance pay expensed under UK GAAP
    
    
    
    
    
    
    
    
    
    
    12,053Unfavourable IT contract
    
    
    
    
    
    
    
    
    
    
    1,995Deferred taxation
    
    
    23,027
    
    
    
    18,507
    
    
    
    12,303Derivative instruments and hedging activities
    
    
    (251
    )
    
    
    (11,762
    )
    
    
    Goodwill amortisation
    
    
    33,876
    
    
    
    33,876
    
    
    
    33,876Impairment of fixed assets
    
    
    579,000
    
    
    
    
    
    
    
    Net (loss) / profit under US GAAP
    
    
    (80,479
    )
    
    
    27,861
    
    
    
    50,099


As restated
    
    As restated31 December
    
    31 December2002
    
    2001£000
    
    £000Shareholders equity under UK GAAP
    
    
    64,398
    
    
    
    499,602US GAAP adjustments:Tangible fixed assets, cost
    
    
    1,408,909
    
    
    
    796,033Additional depreciation on tangible fixed assets
    
    
    (122,379
    )
    
    
    (82,703
    )Deferred taxation
    
    
    (641,239
    )
    
    
    (669,131
    )Derivative instruments and hedging activities
    
    
    (54,601
    )
    
    
    (48,932
    )Additional minimum pension liability
    
    
    (10,800
    )
    
    
    Shareholders equity under US GAAP
    
    
    644,288
    
    
    
    494,869




| |  | In addition to the recognition and measurement differences set out in the
reconciliation tables above there are a number of classification
differences between UK and US GAAP. These are described below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred financing costs
| |  | ------------------------



| |  | Under UK GAAP the direct costs of obtaining finance are offset against the
related borrowing. Under US GAAP financing costs are reported as a
separate asset.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

E-29



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|27. |  | SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)
|--- |  | ---------------------------------------------------------



| |  | Deferred taxation
| |  | -----------------



| |  | Under UK GAAP, deferred tax liabilities are presented net with Provisions
for liabilities and charges. Under US GAAP deferred taxes are presented
as current or long term based upon the term of the item to which they
relate. Deferred tax assets and liabilities may only be offset to the
extent that they are both classified as short or long term.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cash flow statement
| |  | -------------------



| |  | A reconciliation of the consolidated cash flow statement prepared under UK
GAAP to a statement of cash flows prepared under US GAAP is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net cash inflow from operating activities
    
    
    138,120
    
    
    
    174,131
    
    
    
    172,616Returns on investments and servicing of finance
    
    
    (112,519
    )
    
    
    (141,720
    )
    
    
    (117,297
    )Taxation
    
    
    (348
    )
    
    
    (9,160
    )
    
    
    (19,104
    )Net cash flows provided by operating activities per US GAAP
    
    
    25,253
    
    
    
    23,251
    
    
    
    36,215Capital expenditure
    
    
    (5,224
    )
    
    
    (6,090
    )
    
    
    (6,493
    )Increase in restricted cash deposits
    
    
    (48,501
    )
    
    
    (448
    )
    
    
    (9,241
    )Net cash used in investing activities per US GAAP
    
    
    (53,725
    )
    
    
    (6,538
    )
    
    
    (15,734
    )Equity dividends paid
    
    
    
    
    
    
    
    
    
    
    (14,000
    )Coupon payments in excess of finance costs
    
    
    (28,055
    )
    
    
    (31,675
    )
    
    
    (397,715
    )Issue costs on new borrowings
    
    
    
    
    
    
    
    
    
    
    (16,207
    )New borrowings
    
    
    
    
    
    
    
    
    
    
    400,000Capital contribution
    
    
    52,250
    
    
    
    
    
    
    
    Net cash provided by / (used in) financing activities per US GAAP
    
    
    24,195
    
    
    
    (31,675
    )
    
    
    (27,922
    )Decrease in cash
    
    
    (4,277
    )
    
    
    (14,962
    )
    
    
    (7,441
    )Increase in restricted cash deposits
    
    
    48,501
    
    
    
    448
    
    
    
    9,241Cash brought forward
    
    
    40,796
    
    
    
    55,310
    
    
    
    53,510Cash carried forward
    
    
    85,020
    
    
    
    40,796
    
    
    
    55,310




| |  | Comprehensive (loss) / income under US GAAP is as follows:
| |  | ----------------------------------------------------------

As restated
    
    As restated
    
    As restatedYear ended
    
    Year ended
    
    Year ended31 December
    
    31 December
    
    31 December2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net (loss) / income under US GAAP
    
    
    (62,879
    )
    
    
    71,735
    
    
    
    95,019Derivative loss
    
    
    (3,793
    )
    
    
    (26,019
    )
    
    
    Minimum pension obligation
    
    
    (7,560
    )
    
    
    
    
    
    
    Comprehensive (loss) / income
    
    
    (74,232
    )
    
    
    45,716
    
    
    
    95,019


E-30



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT
|--- |  | -----------



| |  | These financial statements supersede and replace the original financial
statements of the company dated 14 May 2003 included on the Form 20-F of
the company filed on 16 May 2003. The financial statements have been
amended to reflect changes in the status of certain transactions and
balances as at 31 December 2002 in the light of information provided to the
company subsequent to the date of the original filing. The financial
statements have also been amended to reflect post balance sheet events
which have occurred since the original filing, for consequential amendments
to disclosure and for other presentational changes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a consequence of the restatements, equity shareholders funds has been
increased by £190.1 million as at 31 December 2002 and by £63.8 million as
at 31 December 2001. The net (loss)/profit for the years ended 31 December
2002 has been reduced/increased by £74.1 million, £45.8 million and £18.0
million respectively. The restatements have no effect on the consolidated
net cashflows in the years ended 31 December 2002, 2001 and 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under US GAAP the net impact of the restatements is to increase
shareholders equity by £59.0 million and to decrease shareholders equity
£13.5 million at 31 December 2002 and 2001 respectively and to
increase/(reduce) the net loss by £(43.4) million, £49.3 million and £32.0
million in the years ended 31 December 2002, 2001 and 2000.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The first change in equity shareholders funds as at 31 December 2002
relates to the reclassification of an amount previously included within
intercompany creditors of £52.25 million. This related to a draw down made
in December 2002 under the terms of a letter of credit established by The
AES Corporation. The AES Corporation has subsequently confirmed that it
had waived any rights to repayment against the company in respect of the
draw down in a letter dated 25 January 2002. Accordingly, the amount has
been reclassified into a capital reserve. This change has reduced the
liabilities and increased the net assets of the company by £52.25 million
each respectively as at 31 December 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The other change in equity shareholders funds as at 31 December 2002 of
£137.9 million relates to a change in accounting policy with respect to
finance costs recorded in respect of debt in order to better reflect the
financing structure of the group. This change in accounting policy results
in a prior period adjustment, which changes equity shareholders funds as
at 31 December 2001 by £63.8 million. The net (loss)/profit for the years
ended 31 December 2002, 2001 and 2000 has been reduced/increased by £74.1
million, £45.8 million and £18.0 million respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The balance sheet as at 31 December 2002 has also been amended to reflect
the reclassification of loans from due after more than one year to due
within one year (note 15).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The presentation of deferred finance costs and prepaid interest has been
changed to reclassify these amounts from prepayments and other debtors to
be deductions from the associated loans in the balance sheet as at 31
December 2002 and 2001. In the profit and loss account the amortisation of
deferred financing costs has been reclassified from administrative expenses
to interest payable and similar charges. The classification of cash flows
has also been amended for the years ended 31 December 2002, 2001 and 2000
to reflect this change in presentation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The effect of the restatements on the balance sheets as of 31 December 2002
and 2001 and of the profit and loss accounts for the years ended 31
December 2002, 2001 and 2000 is as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As previously
    
    Restate-
    
    Asreported
    
    ments
    
    restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2002Fixed assets
    
    
    1,083,118
    
    
    
    
    
    
    
    1,083,118Current assets
    
    
    1,055,738
    
    
    
    (806,995
    )
    
    
    248,743Creditors: amounts falling due within one year
    
    
    (122,352
    )
    
    
    (1,129,793
    )
    
    
    (1,252,145
    )Creditors: amounts falling due after more
than one year
    
    
    (2,125,368
    )
    
    
    2,125,000
    
    
    
    (368
    )Provisions
    
    
    (16,878
    )
    
    
    1,928
    
    
    
    (14,950
    )Net (liabilities)/assets
    
    
    (125,742
    )
    
    
    190,140
    
    
    
    64,398Deficit on equity shareholders funds
    
    
    (125,742
    )
    
    
    190,140
    
    
    
    64,398


E-31



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT (continued)
|--- |  | -----------------------

As previously
    
    Restate-
    
    Asreported
    
    ments
    
    restated£000
    
    £000
    
    £000Balance sheet as of 31 December 2001Fixed assets
    
    
    1,734,855
    
    
    
    
    
    
    
    1,734,855Current assets
    
    
    1,125,458
    
    
    
    (825,691
    )
    
    
    299,767Creditors: amounts falling due within one year
    
    
    (92,483
    )
    
    
    (57,629
    )
    
    
    (150,112
    )Creditors: amounts falling due after
more than one year
    
    
    (2,314,644
    )
    
    
    944,852
    
    
    
    (1,369,792
    )Provisions
    
    
    (17,388
    )
    
    
    2,272
    
    
    
    (15,116
    )Net assets
    
    
    435,798
    
    
    
    63,804
    
    
    
    499,602Equity shareholders funds
    
    
    435,798
    
    
    
    63,804
    
    
    
    499,602Profit and loss account for the year ended 31 December
2002Turnover
    
    
    524,831
    
    
    
    
    
    
    
    524,831Cost of sales
    
    
    (219,462
    )
    
    
    
    
    
    
    (219,462
    )Administrative expenses
    
    
    (904,526
    )
    
    
    4,646
    
    
    
    (899,880
    )Interest receivable and similar income
    
    
    23,548
    
    
    
    
    
    
    
    23,548Interest payable and similar charges
    
    
    (175,442
    )
    
    
    69,784
    
    
    
    (105,658
    )Tax on (loss) / profit on ordinary activities
    
    
    510
    
    
    
    (344
    )
    
    
    166(Loss) / profit on ordinary activities after taxation
    
    
    (750,541
    )
    
    
    74,086
    
    
    
    (676,455
    )Profit and loss account for the year ended 31 December
2001Turnover
    
    
    586,103
    
    
    
    
    
    
    
    586,103Cost of sales
    
    
    (267,204
    )
    
    
    
    
    
    
    (267,204
    )Administrative expenses
    
    
    (175,795
    )
    
    
    4,776
    
    
    
    (171,019
    )Interest receivable and similar income
    
    
    14,937
    
    
    
    
    
    
    
    14,937Interest payable and similar charges
    
    
    (166,011
    )
    
    
    41,351
    
    
    
    (124,660
    )Tax on (loss) / profit on ordinary activities
    
    
    (10,885
    )
    
    
    (356
    )
    
    
    (11,241
    )(Loss) / profit on ordinary activities after taxation
    
    
    (18,855
    )
    
    
    45,771
    
    
    
    26,916Profit and loss account for the year ended 31 December
2000Turnover
    
    
    622,776
    
    
    
    
    
    
    
    622,776Cost of sales
    
    
    (278,218
    )
    
    
    
    
    
    
    (278,218
    )Administrative expenses
    
    
    (170,105
    )
    
    
    3,959
    
    
    
    (166,146
    )Interest receivable and similar income
    
    
    11,862
    
    
    
    
    
    
    
    11,862Interest payable and similar charges
    
    
    (152,365
    )
    
    
    11,446
    
    
    
    (140,919
    )Tax on (loss) / profit on ordinary activities
    
    
    (22,435
    )
    
    
    2,628
    
    
    
    (19,807
    )Profit on ordinary activities after taxation
    
    
    11,515
    
    
    
    18,033
    
    
    
    29,548


E-32



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|28. |  | RESTATEMENT (continued)
|--- |  | -----------------------



| |  | The restatement of cash flows for the years ended 31 December 2002, 2001
and 2000 relates to an adjustment to interest received in respect of the
timing of cash flows under a financing hedging swap of £19.4 million, £10.3
million and £2.5 million respectively and to the reclassification of issue
costs on new borrowings of £16.2 million for the year ended 31 December
2000. These adjustments are offset by corresponding changes to the
reported net cash inflows from operating activities. In addition, coupon
payments in excess of finance costs recorded of £28.1 million, £31.7
million and £24.2 million respectively were reclassified as financing flows
with a corresponding reduction in interest paid. There was no effect on
the consolidated net cashflows in either the current or prior years from
these adjustments.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | US GAAP reconciliations restatement
| |  | -----------------------------------

2002
    
    2001
    
    2000£000
    
    £000
    
    £000Net income / (loss)As previously reported
    
    
    (106,270
    )
    
    
    22,435
    
    
    
    62,986UK GAAP adjustments
    
    
    74,086
    
    
    
    45,771
    
    
    
    18,033US GAAP adjustmentsDividends paid (i)
    
    
    
    
    
    
    
    
    
    
    14,000Deferred taxation (ii)
    
    
    75
    
    
    
    3,529
    
    
    
    Interest adjustment (iv)
    
    
    (48,370
    )
    
    
    (43,874
    )
    
    
    (44,920
    )As restated
    
    
    (80,479
    )
    
    
    27,861
    
    
    
    50,099


2002
    
    2001£000
    
    £000Shareholders equityAs previously reported
    
    
    585,690
    
    
    
    508,377UK GAAP adjustments (see above)
    
    
    190,140
    
    
    
    63,804US GAAP adjustmentsDeferred taxation (ii)
    
    
    19,620
    
    
    
    14,680Additional minimum pension liability (iii)
    
    
    (10,800
    )
    
    
    Interest adjustment (iv)
    
    
    (140,362
    )
    
    
    (91,992
    )As restated
    
    
    644,288
    
    
    
    494,869




|(xi) |  | Under UK GAAP, dividends are shown as a deduction on the face of
the profit and loss account, whereas under US GAAP, dividends are
deducted directly from shareholders equity. As previously reported
the US GAAP reconciliation had started with the net income/(loss) as
reported under UK GAAP, after deducting dividends. This adjustment is
necessary to start the reconciliation with net income/(loss) before
dividends, in order to conform with standard US practice.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(xii) |  | These adjustments are necessary to reflect the deferred tax effect
of the US GAAP adjustments made in respect of derivative instruments
and hedging activities and the additional minimum pension liability.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(xiii) |  | The additional minimum pension liability had been previously reported
in the US GAAP reconciliation disclosures, but had been omitted from
the reconciliation of shareholders equity.
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(xiv) |  | This adjustment reverses entries in respect of the differences in
the interest charge under US GAAP which are no longer required
following the change in accounting policy in the UK GAAP treatment of
debt and finance costs.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-33



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|29. |  | POST BALANCE SHEET EVENTS
|--- |  | -------------------------



| |  | Standstill arrangements with certain senior creditors
| |  | -----------------------------------------------------



| |  | Drax has been operating under standstill arrangements with certain of its
senior creditors since 12 December 2002. The purpose of the standstill
arrangements is to provide Drax and the senior creditors with a period of
stability during which discussions regarding consensual restructuring of
Drax can take place (the Restructuring). The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period. Although the standstill period under the original
standstill agreement terminated on 31 May 2003, Drax had reached agreement
on three further standstill agreements, which have now expired, and is
currently operating under a long term standstill agreement, agreed with the
Steering Committee and the Ad Hoc Committee. This agreement became
effective on 9 October 2003 and will expire on 31
December 2003, unless terminated earlier or extended in
accordance with its terms.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the standstill arrangements, Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits Drax to have access to at
least £40,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
Steering Committee and the Ad Hoc Committee, are available to provide
credit support to electricity counterparties and for working capital needs.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This matter is discussed more fully in note 1, Basis of Preparation and
Accounting Policies.
| |  | --------------------------------------------------------------------------------------------



| |  | The AES Corporation
| |  | -------------------



| |  | Based on negotiations through the end of June 2003, the steering committee
representing the syndicate of banks (the Senior Lenders) which financed
the Eurobonds issued by Drax Holdings Limited to finance the acquisition of
the Drax Power Station, and the Ad Hoc Committee (together with the
Steering Committee, the Senior Creditors Committees), reached agreement
on more detailed terms of the Restructuring, and each of the Senior
Creditors Committees, the Drax Companies and The AES Corporation indicated
their support for a Restructuring to be implemented based upon the proposed
restructuring terms (the Restructuring Proposal).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 23 July 2003, Drax received a letter from International Power plc,
pursuant to which it offered to replace The AES Corporation in the
Restructuring and to purchase certain debt to be issued in the
Restructuring described in the Restructuring Proposal (the International
Power Proposal).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 28 July 2003, The AES Corporation sent a letter to the Senior Creditors
Committees and to Drax Holdings Limited indicating that The AES Corporation
would withdraw its support for, and participation in, the Restructuring
unless each member of the Senior Creditors Committees met certain
conditions by no later than 5 August 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 30 July 2003, the directors of Drax Holdings Limited and Drax Power
Limited appointed Gordon Horsfield and Gerald Wingrove as directors of Drax
Holdings Limited and Drax Power Limited. They, together with Lord Taylor
of Blackburn, formed a subcommittee of independent directors, primarily
responsible for the consideration and evaluation of the International Power
Proposal, compared with the Restructuring Proposal, and any other similar
proposals which would be made to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On the evening of 5 August 2003 The AES Corporation withdrew its support
for, and participation in, the Restructuring Proposal.
| |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | On the same date Neil Hopkins, Naveed Ismail, Garry Levesley and John
Turner resigned as directors of Drax Holdings Limited and Drax Power
Limited and stated their intention to resign as directors from the boards
of the other Drax companies (other than AES Drax Power Finance Holdings
Limited and AES Drax Energy Limited). They resigned from AES Drax
Acquisition Limited, Drax Electric Limited and Drax Limited on 8 August
2003. Accordingly, the boards of each of Drax Holdings Limited and Drax
Power Limited now comprise Lord Taylor of Blackburn, Gordon Horsfield and
Gerald Wingrove, the boards of each of Drax Electric Limited and Drax
Limited comprise Lord Taylor of Blackburn, Gordon Horsfield and Gerald
Wingrove and the board of AES Drax Acquisition Limited comprises Gordon
Horsfield and Gerald Wingrove.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-34



---



##### 



AES DRAX ACQUISITION LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|29. |  | POST BALANCE SHEET EVENTS (continued)
|--- |  | -------------------------------------



| |  | As a consequence of the withdrawal of support by The AES Corporation, the
company has written down amounts due from another group company of £68.5
million in the third quarter of 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 14 August 2003, Drax received a letter from Goldman Sachs International,
pursuant to which it proposed to participate in the Restructuring in place
of The AES Corporation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 19 August 2003, Drax received a letter from International Power plc,
pursuant to which it revised the International Power Proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | On 21 August 2003, Drax received a letter from BHP Billiton in respect of
the Restructuring.
| |  | --------------------------------------------------------------------------------------------



| |  | On 30 August 2003, Drax announced that, following a period of intensive
discussions with International Power plc, BHP Billiton plc and Goldman
Sachs International, and having noted the letter received from Miller,
McConville, Christen, Hutchison and Waffel, and following discussions with
the senior creditors of Drax, Drax entered into an exclusive arrangement
with International Power plc on the basis of a revised offer received from
International Power plc on 30 August 2003 to participate in the
Restructuring.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On 3 October 2003, AES Drax Power Limiteds name was changed to Drax Power
Limited, AES Drax Limiteds name was changed to Drax Limited, AES Drax
Electric Limiteds name was changed to Drax Electric Limited and AES Drax
Holdings Limiteds name was changed to Drax Holdings Limited.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-35



---



##### 





Company Registration No. 3834874











AES DRAX FINANCING LIMITED



Financial Statements
31 December 2002

Deloitte & Touche
Leeds

F-1



---



##### 



AES DRAX FINANCING LIMITED

FINANCIAL STATEMENTS 2002

CONTENTS

PageIndependent Auditors Report
    
    
    F-3Profit and Loss Account
    
    
    F-4Statement
of Total Recognised Gains and Losses
    
    
    F-4Balance Sheet
    
    
    F-5Notes to the Accounts
    
    
    F-6


F-2



---



##### 





| |  | AUDITORS REPORT TO THE DIRECTORS OF
AES DRAX FINANCING LIMITED
| |  | ---------------------------------------------------------------



| |  | We have audited the accompanying balance sheets of AES Drax Financing Limited
as of 31 December 2002 and 2001, and the related Profit and Loss accounts and
Statement of total recognised gains and losses for the three years in the
period ended 31 December 2002. The profit and loss account for the three
months ended 31 December 2002 and 2001 has not been subject to audit. These
financial statements are the responsibility of the Companys Directors. Our
responsibility is to express an opinion on these financial statements based on
our audits.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the Directors, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at 31 December, 2002 and 2001,
and the results of its operations and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
Kingdom.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected
the determination of net income for each of the three years in the period ended
31 December 2002 and the determination of stockholders equity and financial
position at 31 December 2002 and 2001, to the extent summarised in Note 7.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
Companys lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deloitte & Touche
Chartered Accountants and Registered Auditors
| |  | ---------------------------------------------------------------

F-3



---



##### 



AES DRAX FINANCING LIMITED

PROFIT AND LOSS ACCOUNT
Year ended 31 December 2002

Three months ended
    
    Year ended31 December
    
    31 December
    
    31 December
    
    31 December
    
    31 DecemberNote
    
    2002
    
    2001
    
    2002
    
    2001
    
    2000£000
    
    £000
    
    £000
    
    £000
    
    £000OPERATING PROFIT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of investment
    
    
    2
    
    
    
    (189,000
    )
    
    
    
    
    
    
    (189,000
    )
    
    
    
    
    
    
    RETAINED LOSS FOR THE
FINANCIAL PERIOD / YEAR
TRANSFERRED FROM RESERVES
    
    
    4
    
    
    
    (189,000
    )
    
    
    
    
    
    
    (189,000
    )
    
    
    
    
    
    
    




| |  | STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
| |  | ----------------------------------------------



| |  | There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-4



---



##### 



AES DRAX FINANCING LIMITED

BALANCE SHEET
31 December 2002

Note
    
    2002
    
    2001£000
    
    £000FIXED ASSETSInvestments
    
    
    2
    
    
    
    
    
    
    
    189,000
    
    
    
    189,000CAPITAL AND RESERVESCalled up share capital
    
    
    3
    
    
    
    189,000
    
    
    
    189,000Profit and loss account
    
    
    4
    
    
    
    (189,000
    )
    
    
    EQUITY SHAREHOLDERS FUNDS
    
    
    
    
    
    
    
    
    
    
    189,000


F-5



---



##### 



AES DRAX FINANCING LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|1. |  | ACCOUNTING POLICIES
|-- |  | -------------------



| |  | The financial statements are prepared in accordance with applicable UK
accounting standards. The particular accounting policies adopted are
described below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Basis of preparation of financial statements
| |  | --------------------------------------------



| |  | Following the termination of the Hedging Contract with TXU and the
appointment of joint administrators for TXU Energy and TXU Europe on
November 18 and 19, 2002, respectively, the company entered discussions
with its senior lenders in order to address the potential defaults under
the senior financing documents arising from the TXU situation.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, certain of the forward looking debt service cover ratios at
June 30, 2002, were below the threshold required to permit distributions.
As a result, AES Drax Power was not permitted to make distributions to AES
Drax Energy to permit interest due on the high yield notes to be paid on
August 30, 2002. The AES Corporation, however, made a contribution to AES
Drax Energy which together with amounts then held in the high yield note
debt service reserve account was sufficient to make the payments then due.
At the time the AES Corporation stated that there were no assurances that
it would agree to make any similar payments in the future. Any improvement
in the forward looking ratios were dependent on a favourable change in the
forward curve for electricity prices during the period from June 30 to
December 31, 2002. Such improvements did not occur and the ratios were
below 1.19:1 at December 31, 2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Moreover, there were insufficient funds remaining in the high yield note
debt service reserve account to cover such payments. AES Drax Energy was
unable to pay the interest due on the notes on time at the end of February
2003. Such failure constitutes an event of default under the notes,
although any enforcement rights are subject to a 90-day grace period as
well as the terms and conditions of certain intercreditor arrangements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On December 13, 2002, AES Drax signed an agreement regarding certain
standstill arrangements with the steering committee representing the bank
lenders and an ad hoc committee formed by holders of the senior bonds. The
purpose of the standstill is to provide AES Drax and the senior creditors
with a period of stability during which discussions regarding consensual
restructuring of AES Drax can take place. The standstill period will
expire on May 31, 2003, unless extended. The bank lenders and the senior
bondholders have agreed to waive certain events of default under the
Eurobonds or the senior bonds, as applicable, not to accelerate payment of
the obligations and would not seek to enforce security during the
standstill period.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the Standstill Agreement, AES Draxs bank lenders and senior
bondholders have agreed to certain amendments and waivers to their
respective financing documents which permits AES Drax to have access to at
least £30,000,000 of funds currently unavailable under the financing
documentation. These funds, subject to certain consent rights of the
steering committee of the bank lenders and the ad hoc committee of senior
bondholders, are available to provide credit support to electricity
counterparties and suppliers and for working capital needs.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to effect a satisfactory restructuring of AES Drax could lead to an
event of default under the senior financing documents and the withdrawal of
support by the Companys lenders.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Directors believe that the standstill agreement will facilitate an
agreed restructuring of AES Drax. On this basis, the Directors consider it
appropriate to prepare the financial statements on the going concern basis.
The financial statements do not include any adjustments that would result
from a withdrawal of support by the Companys lenders.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accounting convention
| |  | ---------------------



| |  | The financial statements are prepared under the historical cost convention.
| |  | ---------------------------------------------------------------------------

F-6



---



##### 



AES DRAX FINANCING LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|2. |  | INVESTMENTS HELD AS FIXED ASSETS
|-- |  | --------------------------------

Interests insubsidiaryundertaking£000CostAt 1 January 2002
    
    
    189,000Disposal
    
    
    (189,000
    )At 31 December 2002
    
    
    




| |  | The investment of 100% of the ordinary shares of AES Drax Limited was sold
on November 18, 2002, for the sum of £1, to another group company, AES Drax
Electric Limited.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | CALLED UP SHARE CAPITAL
|-- |  | -----------------------

2002
    
    2001£000
    
    £000Authorised1,000,000,000 ordinary shares of £1 each
    
    
    1,000,000
    
    
    
    1,000,000Called up, allotted and fully paid189,000,000 ordinary shares of £1 each
    
    
    189,000
    
    
    
    189,000




|4. |  | PROFIT AND LOSS ACCOUNT
|-- |  | -----------------------

£000At 1 January 2002
    
    
    Retained loss for the financial year
    
    
    (189,000
    )At 31 December 2002
    
    
    (189,000
    )




|5. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------



| |  | The company is party to a cross-guarantee in relation to the
borrowings of the group. The borrowings at 31 December 2002 consist
of Guaranteed Secured Bonds. There are two tranches of bonds, the
Original Bonds issued on 30 November 1999 to finance the acquisition
of Drax Power Station by AES and a second tranche issued on 2 August
2000, the proceeds from which were used to prepay £370 million of
interest and the remainder for general corporate purposes. The
Original Bonds are guaranteed on an unlimited, unconditional and
irrevocable basis by each of AES Drax Power Limited, AES Drax
Acquisition Limited, AES Drax Holdings Limited, AES Drax Financing
Limited and AES Drax Limited and each such entity has granted security
over all their assets as security for, inter alia, the Original Bonds
and certain related swaps, finance documents and guarantees. The New
Bonds are guaranteed on an unlimited, unconditional and irrevocable
basis by each of AES Drax Power Limited, AES Drax Acquisition Limited,
AES Drax Holdings Limited, AES Drax Financing Limited, AES Drax
Limited and AES Drax Electric Limited and each such entity has granted
security over all their assets as security for, inter alia, the New
Bonds and certain related swaps, finance documents and guarantees.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Repayment of all of the Guaranteed Secured Bonds is further secured by
direct agreements from certain of the major project parties and other
security arrangements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7



---



##### 



AES DRAX FINANCING LIMITED

NOTES TO THE ACCOUNTS
Year ended 31 December 2002



|6. |  | ULTIMATE PARENT COMPANY
|-- |  | -----------------------



| |  | The immediate parent company is AES Drax Investments Limited, a company
registered in England and Wales.
| |  | --------------------------------------------------------------------------------------------------------



| |  | The ultimate parent company and controlling entity is The AES Corporation,
a company incorporated in the State of Delaware, USA. Copies of the parent
companys financial statements can be obtained from the Securities and
Exchange Commission, 450 5th Street NW, Washington DC 20549, USA.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. |  | DIFFERENCES BETWEEN UK AND US GAAP
|-- |  | ----------------------------------



| |  | The financial statements are prepared in accordance with UK GAAP. There are
no significant differences between UK GAAP and US GAAP that would affect
these financial statements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8



---



##### 



EXHIBIT 7.1

DRAX HOLDINGS LIMITED
Ratio of Earnings to Fixed Charges

2002(2)
    
    2002(2)
    
    2001(2)
    
    2001(2)
    
    2000(2)
    
    2000(2)
    
    1999(1)
    
    1999(1)UK GAAP
    
    US GAAP
    
    UK GAAP
    
    US GAAP
    
    UK GAAP
    
    US GAAP
    
    UK GAAP
    
    US GAAP£,000
    
    £,000
    
    £,000
    
    £,000
    
    £,000
    
    £,000
    
    £,000
    
    £,000(Loss)/income from
continuing operations before income taxes
    
    
    (751,051
    )
    
    
    (116,577
    )
    
    
    (7,970
    )
    
    
    12,789
    
    
    
    33,950
    
    
    
    87,118
    
    
    
    17,638
    
    
    
    20,308Fixed Charges:Interest on long-term
and
short-term debt including
amortization of debt
expense
    
    
    180,088
    
    
    
    131,718
    
    
    
    170,787
    
    
    
    126,913
    
    
    
    156,324
    
    
    
    111,405
    
    
    
    13,158
    
    
    
    16,356Total fixed charges
    
    
    180,088
    
    
    
    131,718
    
    
    
    170,787
    
    
    
    126,913
    
    
    
    156,324
    
    
    
    111,405
    
    
    
    13,158
    
    
    
    16,356Earnings before income
taxes and fixed charges
    
    
    (570,963
    )
    
    
    15,141
    
    
    
    162,817
    
    
    
    139,702
    
    
    
    190,275
    
    
    
    198,523
    
    
    
    30,796
    
    
    
    36,664Ratio of earnings to
fixed charges(3)
    
    
    (3.17
    )
    
    
    0.11
    
    
    
    0.95
    
    
    
    1.10
    
    
    
    1.22
    
    
    
    1.78
    
    
    
    2.34
    
    
    
    2.24




|(1) |  | Seven week period to 31 December 1999
|--- |  | -------------------------------------



|(2) |  | Year ended 31 December
|--- |  | ----------------------



|(3) |  | The deficit in earnings for the year ended December 31, 2002 under UK GAAP
is £751,051,000
|--- |  | ------------------------------------------------------------------------------------------



| |  | The deficit in earnings for the year ended December 31, 2001 under UK GAAP
is £7,970,000
| |  | ----------------------------------------------------------------------------------------



| |  | The deficit in earnings for the year ended December 31, 2002 under US GAAP
is £116,577,000
| |  | ------------------------------------------------------------------------------------------





---



##### 



EXHIBIT 12.1

CERTIFICATION

I, Gerald Wingrove, certify that:



| | 1. |  | I have reviewed this annual report on Form 20-F/A of Drax Holdings
Limited;
| | -- |  | ---------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The companys other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and
have:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period
in which this report is being prepared;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the companys disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | disclosed in this report any change in the companys internal
control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is
reasonably likely to materially affect, the companys internal
control over financial reporting; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The companys other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the companys auditors and the audit committee of the
companys board of directors (or persons performing the equivalent
functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the companys
ability to record, process, summarize and report financial
information; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the companys
internal control over financial reporting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: November 10, 2003



/s/ Gerald Wingrove
Gerald Wingrove
Finance Director






---



##### 



CERTIFICATION

I, Gordon Horsfield, certify that:



| | 1. |  | I have reviewed this annual report on Form 20-F/A of Drax Holdings
Limited;
| | -- |  | ---------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The companys other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and
have:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period
in which this report is being prepared;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the companys disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | disclosed in this report any change in the companys internal
control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is
reasonably likely to materially affect, the companys internal
control over financial reporting; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The companys other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the companys auditors and the audit committee of the
companys board of directors (or persons performing the equivalent
functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the companys
ability to record, process, summarize and report financial
information; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the companys
internal control over financial reporting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: November 10, 2003



/s/ Gordon Horsfield
Gordon Horsfield
Chairman






---



##### 



EXHIBIT 13.1

CERTIFICATION
PURSUANT TO 18 UNITED STATES CODE SS. 1350

The undersigned hereby certifies that to his knowledge the Form 20-F/A of
Drax Holdings Limited (the Company) filed with the Securities and Exchange
Commission on the date hereof fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the
information contained in such report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date: November 10, 2003

/s/ Gerald Wingrove
Gerald Wingrove
Finance Director


A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002, or other document authenticating,acknowledging, or
otherwise adopting the signature that appears in typed form within the
electronic version of this written statement requiredby Section 906 of the
Sarbanes-Oxley Act of 2002, has been provided to Drax Holdings Limited and will
be furnished to the Securities andExchange Commission or its staff upon
request.





---



##### 



CERTIFICATION
PURSUANT TO 18 UNITED STATES CODE SS. 1350

The undersigned hereby certifies that to his knowledge the Form 20-F/A of
Drax Holdings Limited (the Company) filed with the Securities and Exchange
Commission on the date hereof fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the
information contained in such report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date: November 10, 2003

/s/ Gordon Horsfield
Gordon Horsfield
Chairman


A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002, or other document authenticating,acknowledging, or
otherwise adopting the signature that appears in typed form within the
electronic version of this written statement requiredby Section 906 of the
Sarbanes-Oxley Act of 2002, has been provided to Drax Holdings Limited and will
be furnished to the Securities andExchange Commission or its staff upon
request.