08:56 MTR CORPORATION<00066> - Results Announcement (4) 8. SUBSEQUENT EVENTS A. On 24 January 2005, the Company accepted an offer from the Government to allow the Company to proceed with the proposed development on Site F of Tseung Kwan O Town Lot No. 70, Area 86, at an assessed land premium of HK$2,319 million together with other ancillary terms and conditions as specified in the modification letter to be entered into between the Company and the Government. On 8 February 2005, a Development Agreement was entered into between the Company and City Investments Limited, a subsidiary of Cheung Kong (Holdings) Ltd. to jointly develop this site under which the Company will pay half of the land premium. The site involves accommodation and facilities with a total gross floor area of not less than 136,540 square metres comprising 2,096 residential flats, a 31,000-square metre home for the aged and about 500 square metres of retail space. The development is expected to be completed in 2008. B. On 7 February 2005, the Company and its Public-Private-Partnership partners initialed a Concession Agreement for the Beijing Metro Line 4 project (details of which are described in the "Management Review and Outlook" of the full version of results announcement posted onto the Stock Exchange's website) with the Beijing Municipal People's Government. 9. RECENTLY ISSUED ACCOUNTING STANDARDS The Hong Kong Institute of Certified Public Accountants has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards ("new HKFRSs") which are effective for accounting periods beginning on or after 1 January 2005. The Group did not apply early adoption of these new HKFRSs to its financial statements for the year ended 31 December 2004. However, the Group has been carrying out an assessment of the impact of these new HKFRSs and has so far concluded that the adoption of the revised standards may have significant impact to its consolidated accounts as described below: A. Hong Kong Accounting Standard 40 ("HKAS 40") on Investment Property The adoption of HKAS 40 would require all revaluation gains or losses of investment properties to be taken directly to the Profit and Loss Account ("P&L"), whereas under the old standards such changes are generally taken to the revaluation reserve account on a portfolio basis. The volatility of property prices therefore could have significant impact on the level and consistency of the Company's future operating profits. B. Hong Kong Accounting Standards 32 & 39 ("HKASs 32 & 39") on Financial Instruments The adoption of HKASs 32 and 39 would require all financial instruments which the Company is using to hedge the interest rate and currency risks of its borrowings to be marked to market, with change in their fair values recognised in the P&L directly. The standard allows the application of hedge accounting, that is, to use the change in fair value of the underlying hedged items to offset this impact. Should there be inefficiency in the hedging relationship to the extent that the opposing impacts do not cancel each other out, there will be a net residual impact to the P&L. Given that hedge efficiency is affected by a number of factors including the nature of the hedge relationship, direction of interest rates and changes in foreign exchange rates, it is difficult to forecast and control this residual impact. It should be noted, however, that both of these accounting changes are non-cash items and hence do not affect cash flow. The Group will continue to assess the impact of other new HKFRSs and other changes may be identified as a result. However, it is not expected that these will have a significant impact on the Group's consolidated accounts. 6. NET ASSETS The Group's net assets as at 31 December 2004 and 2003 comprised: HK$ Million As at As at 31 December 31 December 2004 2003 Assets Fixed assets 100,313 96,921 Railway construction in progress 962 181 Property development in progress 2,088 2,309 Other assets 3,042 2,579 Cash and cash equivalents 269 376 ------- --------------- 106,674 102,366 ------- --------------- Liabilities Creditors, accruals and other liabilities 8,159 7,988 Borrowings 30,378 32,025 Deferred income 4,638 5,061 --------- --------- 43,175 45,074 Net assets 63,499 57,292 ------- --------------- 7. LIQUIDITY, FINANCIAL RESOURCES AND BORROWINGS During the year, the Group raised a total of HK$5.2 billion in new financings, comprising a 10-year US$600 million fixed rate bond and HK$500 million in medium term notes with maturities of 12 to 15 years for general corporate purposes, including working capital, capital expenditures, refinancing and repayment of existing debts. As at 31 December 2004, the Group had HK$5.8 billion in undrawn committed banking facilities with final maturities ranging from approximately 3 to 6 years, which is sufficient to cover our anticipated funding needs into the second quarter of 2006. Over the next three years, the Group expects capital expenditure on committed projects and programmes of HK$6.8 billion, comprising both maintenance capital expenditures and existing committed projects (but excluding uncommitted projects such as possible overseas investments and West Island Line and South Island Line). These requirements will be met by cash from operations and a well-diversified funding programme, utilising a variety of financing instruments in Hong Kong and other major financial markets. The Group's major cash outflows for the year ended 31 December 2004 amounted to HK$6.9 billion and were related to the capital expenditures for the Disneyland Resort Line, Tung Chung Cable Car and other capital projects, net loan repayments as well as interest and dividends paid. These payments were financed partly by the net cash inflow from operating activities of HK$4.5 billion, and partly by the receipts from property developers and purchasers of HK$2.6 billion. As a result of the decrease in borrowings during 2004, total debts outstanding as at 31 December 2004 declined from HK$32.0 billion to HK$30.4 billion. With shareholders' funds at year-end increasing from HK$57.3 billion as at the last year-end to HK$63.5 billion, the Group's gross gearing ratio improved from 55.9% to 47.8% and the net gearing ratio decreased from 55.2% to 47.4%. The Group's debt portfolio is managed with reference to a well-established Preferred Financing Model so as to achieve a balanced debt profile with adequate risk diversification and forward financing coverage. As at 31 December 2004, the Group's outstanding borrowings had a well-balanced spread of maturities, with 25% due within 2 years, 30% between 2 and 5 years, and 45% after 5 years. 73% of the Group's borrowings were at fixed interest rates. Over 99% of the Group's borrowings were either denominated in or hedged into Hong Kong dollars, with less than 1% held in US dollars. The Group manages its currency and interest rate exposures using derivative instruments for hedging purposes only.