Stagecoach Group plc
Annual Report 2011

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Winning New Customers Stagecoach Group Annual Report and Financial Statements 2011 SMART INNOVATION VALUE TRAVEL £1 MEGA NEW TECHNOLOGY CUSTOMER FOCUS i Stagecoach Group overview Stagecoach Group is a leading international public transport company with bus and rail operations in the UK and North America. We employ around 35,000 people and run nearly 13,000 buses and trains. Budget travel Total megabus.com brand revenues in UK and North America, 2003-04 to 2010-11. £m 90 80 70 60 50 40 30 20 10 0 UK Bus UK Rail North America employees 23,000 8,100 980m buses and coaches journeys a year employees 7,200 2,200 250m train services a day journeys a year employees 3,800 2,700 100m buses and coaches vehicle miles a year Note: all figures are approximate. Total megabus.com revenue, 2010-11. 4.8% North America UK megabus.com UK megatrain.com 33.0% 62.2% 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 The chart includes all revenues from megabus.com branded services in the UK and North America, including 100% of megabus.com branded services within the Scottish Citylink joint venture. Operational performance Customer service UK rail punctuality South Western Trains East Midlands Trains Virgin Trains National Rail UK rail customer satisfaction South Western Trains East Midlands Trains Virgin Trains National Rail 95 90 85 80 90 85 80 75 2008-09 2009-10 2010-11 Spring 2009 Spring 2010 Spring 2011 Source: Network Rail, Public Performance Measure Moving Annual Average. Source: National Passenger Survey, Spring Wave, 2009, 2010, 2011. Note: figures used refer to the measure of train punctuality – also known as PPM (public performance measure) – which is commonly used throughout Europe. For long distance operators, such as East Midlands Trains and Virgin Trains, this shows the percentage of trains arriving within 10 minutes of timetabled arrival at final destination. London and South East operators (including South Western Trains), and regional operators show the percentage arriving within five minutes of the timetabled arrival. Data covers the period 1 April 2008 to 31 March 2011. National Rail average is for all franchised train operating companies. Note: data extracted from National Passenger Survey, Spring Wave, 2009, 2010 and 2011. Percentages are for overall satisfaction. The National Passenger Survey (NPS) is conducted twice a year from a representative sample of passenger journeys across the UK. It surveys passengers’ overall satisfaction and satisfaction with 30 individual aspects of service for each individual train operating company (TOC). Passenger ratings are totalled for all TOCs across the country to provide a National Rail average. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 1 Highlights (cid:486)(cid:3) (cid:22)(cid:153)(cid:151)(cid:148)(cid:147)(cid:140)(cid:3)(cid:10)(cid:151)(cid:148)(cid:154)(cid:149)(cid:3)(cid:149)(cid:138)(cid:151)(cid:139)(cid:148)(cid:151)(cid:146)(cid:134)(cid:147)(cid:136)(cid:138)(cid:3)(cid:137)(cid:138)(cid:145)(cid:142)(cid:155)(cid:138)(cid:151)(cid:142)(cid:147)(cid:140)(cid:3)(cid:140)(cid:148)(cid:148)(cid:137)(cid:3)(cid:151)(cid:138)(cid:153)(cid:154)(cid:151)(cid:147)(cid:152)(cid:3)(cid:3) (cid:139)(cid:148)(cid:151)(cid:3)(cid:152)(cid:141)(cid:134)(cid:151)(cid:138)(cid:141)(cid:148)(cid:145)(cid:137)(cid:138)(cid:151)(cid:152)(cid:3) (cid:486)(cid:3) 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revenue (cid:489)(cid:135)(cid:158)(cid:3)(cid:137)(cid:142)(cid:155)(cid:142)(cid:152)(cid:142)(cid:148)(cid:147)(cid:490) UK Bus regions UK Bus London UK Rail North America 00% 12.3% 00% 00% 44.8% Operating profit (cid:489)(cid:135)(cid:158)(cid:3)(cid:137)(cid:142)(cid:155)(cid:142)(cid:152)(cid:142)(cid:148)(cid:147)(cid:490) UK Bus regions UK Rail North America Other (incl JVs) 00% 10.3% 00% 7.8% 00% 19.7% 62.2% 00% 37.3% 00% 5.6% Adjusted earnings per share (cid:489)(cid:28)(cid:138)(cid:134)(cid:151)(cid:3)(cid:138)(cid:147)(cid:137)(cid:138)(cid:137)(cid:3)(cid:542)(cid:539)(cid:3)(cid:4)(cid:149)(cid:151)(cid:142)(cid:145)(cid:490) Dividend per ordinary share (cid:489)(cid:28)(cid:138)(cid:134)(cid:151)(cid:3)(cid:138)(cid:147)(cid:137)(cid:138)(cid:137)(cid:3)(cid:542)(cid:539)(cid:3)(cid:4)(cid:149)(cid:151)(cid:142)(cid:145)(cid:490) 07 08 09 10 11 11.7p 20.3p 22.9p 18.7p 23.8p 07 08 09 10 11 4.1p 5.4p 6.0p 6.5p 7.1p Total shareholder return (cid:489)(cid:9)(cid:142)(cid:155)(cid:138)(cid:3)(cid:158)(cid:138)(cid:134)(cid:151)(cid:3)(cid:136)(cid:148)(cid:146)(cid:149)(cid:134)(cid:151)(cid:134)(cid:153)(cid:142)(cid:155)(cid:138)(cid:3)(cid:149)(cid:138)(cid:151)(cid:139)(cid:148)(cid:151)(cid:146)(cid:134)(cid:147)(cid:136)(cid:138)(cid:3)(cid:153)(cid:148)(cid:3)(cid:542)(cid:539)(cid:3)(cid:4)(cid:149)(cid:151)(cid:142)(cid:145)(cid:3)(cid:541)(cid:539)(cid:540)(cid:540)(cid:490) -5.2% -4.3% -35.0% 3.9% 39.6% 157.7% Stagecoach Group First Group Go-Ahead National Express FTSE 350 Travel and Leisure FTSE 250 Notes 1. Group revenue: Revenue is for the year ended 30 April 2011, excluding joint ventures. See Note 2 to the consolidated financial statements. 2. Operating profit: The chart shows the breakdown of total operating profit for the year ended 30 April 2011, excluding intangible asset expenses and exceptional items.UK Bus (London) reported an operating loss of £5.9m for the year ended 30 April 2011, and is excluded from the chart. See Note 2 to the consolidated financial statements. 3. Adjusted earnings per share: See Note 10 to the consolidated financial statements. 4. Dividend per ordinary share: See Note 9 to the consolidated financial statements. 5. Total shareholder return: The graph compares the performance of the Stagecoach Group Total Shareholder Return (‘TSR’) (share value movement plus reinvested dividends) over the 5 years to 30 April 2011 compared with that of First Group, Go-Ahead, National Express, the FTSE Travel and Leisure All-Share Index, and the FTSE 250 Index. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 2 Contents Chairman’s statement Chief Executive’s review Operating and Financial Review 1 2 3 18 Directors’ biographies 20 Directors’ report 24 Corporate governance report 29 Audit Committee report 30 Nomination Committee report 31 Health, Safety and Environmental Committee report STAGECOACH GROUP PLC Company No. SC100764 YEAR ENDED 30 APRIL 2011 32 Directors’ remuneration report 39 Responsibility statement 40 Group independent auditors’ report 41 Consolidated financial statements Notes to the consolidated financial 46 statements 102 Company independent auditors’ report 103 Company financial statements 104 Notes to the Company financial statements 109 Shareholder information 110 Five year financial summary Financial summary Year ended 30 April Revenue (£m) Total operating profit (£m) Non-operating exceptional items (£m) Net finance costs (£m) Profit before taxation from continuing operations (£m) Discontinued operations (£m) Profit before taxation (£m) Earnings per share (pence) Proposed final dividend (pence) Full year dividend (pence) *See definitions in Note 36 to the consolidated financial statements. Results excluding intangible asset expenses and exceptional items* Reported results 2011 2010 2011 2010 2,398.8 2,164.4 2,398.8 2,164.4 240.2 – (34.5) 205.7 – 205.7 23.8p 4.9p 7.1p 192.0 – (30.7) 161.3 – 161.3 18.7p – 6.5p 225.0 0.7 (34.5) 191.2 18.5 209.7 24.6p 4.9p 7.1p 179.1 (2.0) (51.2) 125.9 3.9 129.8 15.6p – 6.5p Stagecoach Group plc | page 2 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 1 1. Chairman’s statement I am delighted to report that the Group has continued its good performance. We have achieved revenue growth in all of our divisions in the UK and North America as a result of our focus on safe, good value, high quality bus and rail travel. The Group’s success is underpinned by the quality and breadth of its management team, which as well as reducing costs in responding to changing circumstances has continued to pursue new opportunities whether those be new, fast-growing services such as megabus.com or acquisitions such as the October 2010 purchase of the under-performing East London bus business. At the same time, management has maintained a focus on strong operational delivery and customer satisfaction. We took forward-looking decisions during the economic downturn to continue to invest heavily in our services, and to maintain our focus on operational performance, customer service and offering value-for-money travel options to our passengers. This has supported organic growth across our transport operations as economic conditions have improved. Positive trends in the first half of the year have continued and the Group has achieved good revenue and profit growth in the full year. Revenue for the year to 30 April 2011 was £2,389.8m (2010: £2,164.4m). Total operating profit (before intangible asset expenses and exceptional items) was up 25.1% at £240.2m (2010: £192.0m), reflecting increased profit in all divisions. Earnings per share before intangible asset expenses and exceptional items were 27.3% higher at 23.8p (2010: 18.7p). In line with the Group’s good performance, the Directors have proposed a final dividend of 4.9p per share, giving a total dividend per share for the year up 9.2% at 7.1p (2010: 6.5p). The proposed final dividend is payable to shareholders on the register at 2 September 2011 and will be paid on 5 October 2011. The Group is well funded and its net debt has reduced during the year ended 30 April 2011. This is a further tangible sign of the Group's success. We are completing our review of the Group's capital structure and we expect to announce the conclusions of our review at or before the Group's Annual General Meeting at the end of August 2011. Stagecoach has made a good start to the financial year ending 30 April 2012 and current trading remains in line with our expectations. I would like to pay tribute to our former Chairman, Bob Speirs, who retired from the Board on 31 December 2010 after almost 16 years as a director. His insight, experience and wise advice have been invaluable to the business and I would like to extend to him the gratitude and best wishes of the Board for the future. In May 2011, Will Whitehorn joined the Board as a non-executive director of the Company. His background in brand development, together with his wide-ranging experience across a range of business sectors will bring valuable insight as we look to expand the reach of our products and services. On behalf of the Board, I would like to congratulate Sir Brian Souter, the Group's Chief Executive, on being awarded a knighthood in the recent Queen's Birthday honours list for his service to transport and the voluntary sector. Political support and the environment for public transport are strong, and the Group is in a good position to benefit from significant opportunities ahead. Our employees, who serve the millions of customers we welcome on board our bus and rail services every day, are a key part of our success and are critical to our future. I would like to thank them for their strong contribution over the past year and I am confident the Group will continue to deliver for our customers and shareholders. Sir George Mathewson Chairman 29 June 2011 * Exceptional items are defined in note 4 to the consolidated financial statements on page 58 of this Annual Report Stagecoach Group plc | page 1 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 2 2. Chief Executive’s review The Group has achieved continued strong financial and operational performance in the year ended 30 April 2011. All divisions have reported increased revenue and operating profit. The Group has had a good year, attracting more people to our greener, smarter bus and rail services. We are seeing growing evidence of modal shift as consumers look for better value and more convenient transport alternatives to the rising cost of motoring and increasing road congestion. We are focused on providing value-for-money products, continuing to invest in our networks, and harnessing the power of the Internet, new technology and social media to attract new customers and make it easier for people to access our services. The strong growth of megabus.com highlights the potential to continue to grow the market for public transport. The skill and commitment of our people at all levels of the business have been key to our success. Across the Group, we are progressing well with our sustainability strategy to deliver more energy and carbon efficient businesses. Our investment in environmental management systems, regenerative braking on trains, our leading position on hybrid electric buses, and the introduction of eco-driving bus technology are reducing our carbon footprint and supporting our focus on cost control. The core strength of our business means we have been able to manage the impact of reduced public spending on transport, ensuring we continue to offer attractive fares and networks. At the heart of our success are our core UK Bus operations, which are now responsible for nearly 1 billion passenger journeys a year. We continue to deliver both good value travel to customers and sector- leading profit margins for our business. The growth in the UK Bus business is founded on continued investment in greener buses, market-leading value fares, internet retailing, sophisticated marketing, customer insight, the roll-out of smartcard technology, and product innovation. We have recently joined a loyalty card scheme for sustainable products, which allows consumers to collect and spend points across a range of participating companies. We believe this will open up opportunities to attract new customers, as well as gathering data to further understand what drives consumer choices and help design new products. We have made good progress with the restructuring of our London contracted bus operations since we re- entered the market in October 2010. In May 2011, the Competition Commission issued the Provisional Findings and Possible Remedies from its inquiry into the local bus market in the UK (excluding London and Northern Ireland) and is not proposing any fundamental change to the regulatory structure of the industry. We will work closely with the Commission in the months ahead on any initiatives that will benefit customers. At the same time, we hope this will act as a springboard for action by local and national government on the issues that matter to customers, such as bus priority and park and ride. Positive revenue trends are continuing in our commuter and long- distance UK rail businesses. Our South Western Trains and East Midlands Trains franchises have again delivered strong operating performance and high levels of customer satisfaction. In particular, we have achieved further improvement in passenger perception on value for money, as well as other key passenger priorities. This follows our investment in passenger improvements on trains, at stations and online, delivering better information and a better overall travel experience. The Group is pleased to have been shortlisted for the Greater Anglia rail franchise and, in partnership with Virgin, for the new Inter-city West Coast franchise. These are very different franchises, each with their own specific challenges, priorities and opportunities. We are focused on developing sustainable bids to deliver the Government’s specification, improve rail services for customers, and ensure value for money for taxpayers. The recent reviews on the way forward for the rail industry, including the final report by Sir Roy McNulty published in May 2011, present opportunities to unlock further growth in the years ahead and deliver a more efficient, more passenger-focused railway. We will actively work with the Government to bring the benefits of our experience to its plans. The growth engine of our North American business is our budget inter- city coach brand, megabus.com. We have expanded our network of successful transport hubs and destination cities in North America and now cover more than 60 locations in the United States and Canada, with scope for further growth. I firmly believe the improving trends mean the Group can look forward with confidence to the year ahead. We will continue to consider opportunities in the transport sector to create value for our shareholders. The strong fundamentals of the Group ensure we are well positioned to take advantage of emerging opportunities for growth. Public transport is central to supporting economic growth and meeting the global challenge of climate change. In the UK, high quality public transport will be at the heart of the successful delivery of the London 2012 Olympic and Paralympic Games. We believe the outlook for our bus and rail services is positive. I believe we have the people, the products and the passion for public transport that will deliver for our customers and our shareholders. Sir Brian Souter Chief Executive 29 June 2011 page 2 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 3 3. Operating and Financial Review Introduction 3.1 The Directors are pleased to present their report on the Group for the year ended 30 April 2011. This section 3 contains the Operating and Financial Review, which includes the information that the Group is required to produce to meet the need for a business review in accordance with the Companies Act 2006. The Operating and Financial Review also provides significant information over and above the statutory minimum. Biographies of each director are contained in section 4 of this Annual Report and the remainder of the Directors’ report is set out in section 5. The Operating and Financial Review that follows is intended largely to reflect the recommendations of the Accounting Standards Board’s reporting statement of best practice on the Operating and Financial Review. Cautionary statement 3.2 The Operating and Financial Review has been prepared for the shareholders of the Company, as a body, and no other persons. Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Company and the potential for those strategies to succeed and for no other purpose. This Operating and Financial Review contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. No assurances can be given that the forward-looking statements in this Operating and Financial Review will be realised. The forward-looking statements reflect the knowledge and information available at the date of preparation. 3.3 Description of the business Stagecoach Group is a leading international public transportation group, with extensive operations in the UK, United States and Canada. The Group employs around 34,000 people, and operates bus, coach, train and tram services. The Group has four main divisions – UK Bus (regional operations), UK Bus (London), North America and UK Rail. Stagecoach Group plc is a public limited company that is incorporated, domiciled and has its registered office in Scotland. Its ordinary shares are publicly traded and it is not under the control of any single shareholder. Throughout this Annual Report, Stagecoach Group plc is referred to as “the Company” and the group headed by it is referred to as “Stagecoach” and/or “the Group”. 3.3.1 UK Bus (regional operations) Our UK Bus (regional operations) division connects communities in more than 100 towns and cities across the UK on networks stretching from the Highlands of Scotland to south west England. These include major city bus operations in Liverpool, Newcastle, Hull, Manchester, Oxford, Sheffield, Cambridge and Exeter. The current structure of the bus market in Great Britain (outside London) was established by the Transport Act 1985. This is essentially a deregulated structure: any holder of a Public Service Vehicle operator’s license may operate bus services, having first registered various details with the relevant traffic commissioner. The traffic commissioners are responsible for enforcing compliance with these registered details, including standards of maintenance, reliability and punctuality. Our UK Bus (regional operations) division operates a fleet of around 7,000 buses and coaches across a number of regional operating units. Each regional operating unit is managed independently and is led by a managing director, reporting directly to the head of the UK Bus division. In addition to local bus services in towns and cities, Stagecoach operates express interurban services linking major towns within its regional operating company areas. The Group also runs the budget inter-city coach service, megabus.com. Stagecoach’s bus and coach services in the UK are operated on a commercial basis in a largely deregulated market. We also operate tendered services, including schools contracts, on behalf of local authorities. Around 11% of the UK Bus (regional operations) division’s revenue is receivable from local authorities in respect of such tendered and school services. Around 26% of the UK Bus (regional operations) division’s revenue is earned from concessionary fare schemes, whereby the Group is reimbursed by public authorities for carrying the elderly and disabled free of charge. 3.3.2 UK Bus (London) We are the third largest operator in the London bus market, with an estimated 15% share of that market. The UK Bus (London) business operates bus services under contract to Transport for London, receiving a fixed fee (subject to adjustment for certain inflation indices) and taking the cost and capital risk. The business operates from 10 depots and has a fleet of around 1,250 buses serving routes in and around east and south-east London. 3.3.3 North America The Group provides transport services in North America. Our businesses include commuter/transit services, inter-city services, tour and charter, sightseeing and school bus operations. The North America business is headed by a Chief Operating Officer. Stagecoach (excluding its joint ventures) operates approximately 2,700 vehicles in the United States and Canada where our operations are mainly in the states of New York, New Jersey, Pennsylvania, West Virginia, Ohio, Indiana, Illinois and Wisconsin and the provinces of Quebec and Ontario. Our services operate in major cities such as New York City, Newark, Pittsburgh, Chicago and Milwaukee. megabus.com operates budget inter-city coach services in North America and represents a growing proportion of the Division’s revenue. 3.3.4 UK Rail Stagecoach Group has major rail operations in the UK. The UK train operating market is split into a number of separate franchises, which are awarded by the Government for set time periods to a specification set by the Department for Transport (“DfT”) on the basis of competitive bids. Train operating companies operate passenger trains on the UK rail network. The UK railway infrastructure is owned and operated by Network Rail, a “not for dividend” company that invests any profits into improving the railway. Network Rail runs, maintains and develops tracks, signalling systems, bridges, tunnels, level crossings and key stations. Our principal wholly owned rail businesses are South Western Trains and East Midlands Trains. South Western Trains incorporates the South West Trains and Island Line networks. South West Trains runs around 1,700 train services a day in south west England out of London Waterloo railway station, while Island Line operates on the Isle of Wight. The South Western franchise is expected to run until February 2017. From 11 November 2007, we have operated the East Midlands Trains franchise. The franchise comprises main line train services running to London St Pancras, regional rail services in the East Midlands area and inter-regional services between Norwich and Liverpool. The East Midlands Trains franchise is expected to run until 31 March 2015. We also operate Supertram, a 28km light rail network incorporating three routes in the city of Sheffield, on a concession running until 2024. In May 2007, we signed a contract with Greater Manchester Passenger Transport Executive (“GMPTE”) to operate and maintain the Manchester Metrolink tram network and commenced operations under the 10-year contract in July 2007. South Western Trains, East Midlands Trains and the tram operations each have a managing director. Virgin Rail Group 3.3.5 Joint Ventures 3.3.5.1 Stagecoach Group has a 49% shareholding in Virgin Rail Group, which operates the West Coast Trains rail franchise. The current West Coast Trains rail franchise runs until March 2012. The other shareholder in Virgin Rail Group is the Virgin Group of Companies. Stagecoach’s Group Finance Director is Joint Chairman of Virgin Rail Group. Virgin Rail Group has a Chief Executive, who reports to the Virgin Rail Group board, which includes Stagecoach Group and Virgin Group representatives. Scottish Citylink Coaches Limited 3.3.5.2 In Scotland, Stagecoach has a joint venture (Scottish Citylink Coaches Limited) with international transport group, ComfortDelGro, to operate megabus.com and Scottish Citylink coach services. Stagecoach owns 35% of the share capital of Scottish Citylink Coaches Limited and ComfortDelGro owns the remaining 65%. The joint venture is the leading provider of express coach services in Scotland. Stagecoach is responsible for the day-to-day operational management of the business, which is overseen by a joint board. New York Splash Tours 3.3.5.3 In North America, Stagecoach has a joint venture, New York Splash Tours LLC, with Port Imperial Duck Charters LLC. Splash Tours ceased operations in March 2010. Twin America 3.3.5.4 In North America, Stagecoach began operating a joint venture, Twin America LLC, with CitySights NY on 31 March 2009. The joint venture operates sightseeing services in New York under both the Gray Line and CitySights brands. The Group holds 60% of the economic rights and 50% of the voting rights in the joint venture. Twin America LLC is headed by a Chief Executive and overseen by a joint Board. Stagecoach Group plc | page 3 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 4 Operating and Financial Review 3.4 Resources and relationships 3.4.1 Resources Stagecoach Group has a range of resources that underpin its business and support its strategy. These assist in giving the Group a competitive advantage in the markets in which it operates. 3.4.1.1 Employees Stagecoach Group’s most important resource is its employees. We seek to recruit and retain the best employees in our sector, offering an excellent package of benefits, which allows us to deliver good customer service to our passengers. The Group’s individual divisions invest significantly in the training and development of our people and we operate a successful graduate training scheme which provides one source of training for the managers of the future. We also encourage our people to give something back to their local community and many are regularly involved in fundraising, payroll giving and in-kind support to a wide range of good causes. Further information about our commitment to corporate social responsibility is set out on pages 16 and 17. 3.4.1.2 Market research An important element of the Group’s success in growing its customer base lies in a track record of product innovation and new ideas on developing effective public transport systems. The Group has an ongoing programme of market research. We have a dedicated telemarketing unit in the UK that communicates with current customers and non-users to build a detailed profile of what attracts people to use our services. 3.4.1.3 Corporate reputation, brand strength, and market position Stagecoach is one of the best-known public transport operators in the UK and is consistently rated highly for the quality of its services in research by Government and other independent organisations. We value our reputation, both as a public transport provider and as a key part of the communities in which we operate. Stagecoach has a strong set of brands that support our strategy of organic growth in our business and that help maintain our leading market position. 3.4.1.4 Natural resources and manufacturing technology Operating our bus and rail services requires considerable use of natural resources, including diesel and electricity. We have arrangements in place to ensure that these resources are sourced as efficiently as possible and that our supplies are maintained to ensure the smooth functioning of our business. A number of experienced manufacturers supply our buses, coaches, trains and trams, which are produced to detailed specifications relevant to the individual markets in which they are required. 3.4.1.5 Licences Various licences are held by Stagecoach giving authority to operate our public transport services and these are maintained up to date as required. 3.4.2 Contractual and other relationships Stagecoach Group works closely with a range of bodies in each of the markets where we provide public transport services. Our stakeholders include: • Our People – we have established strong working relationships with trade unions and work in partnership with them on a range of issues, including training and development, occupational health matters, pensions and other employee benefits. We also communicate with our people face to face and through a number of internal publications. • Investors and the Financial Community – our shareholders and lenders are critical to our business success. We have a regular programme of meetings with investors and provide frequent updates to the markets and financial community on our performance. We are a constituent of the FTSE4Good index, which sets standards and tracks the performance of the leading socially responsible companies around the globe. • Customers – millions of people use our services every day. We conduct extensive customer research to monitor our performance and to determine how we can improve the delivery and accessibility of our services. • Customer Interest Groups – our businesses have a regular and ongoing dialogue with bus and rail user groups. This includes presentations from managers on detailed aspects of our service as well as consultation and information sharing on particular issues. • Government – our managers have an ongoing dialogue with national and local government in all our countries of operation to ensure the effective delivery of government transport policy and to assist in meeting wider objectives. In the UK, we work closely with the DfT, the Scottish Executive, Transport Scotland, the Welsh Assembly, and Transport for London (“TfL”). • Transport Authorities – we work closely with local authorities, including passenger transport executives, regional transport committees and transit authorities, in the delivery and planning of bus and rail services. Many of our businesses have partnership agreements in place to improve the delivery of public transport in their areas. • Government Advisory Bodies and Lobbying Groups – we have constructive dialogue with organisations such as the Commission for Integrated Transport, which provides advice to the UK Government, and lobbying groups such as the Campaign for Better Transport. • Transport and Industry Representation Groups – we are active members of industry groups, such as the Confederation of Passenger Transport UK page 4 | Stagecoach Group plc (which covers buses and light rail), the Association of Train Operating Companies and the American Bus Association. • Suppliers – we rely on a range of suppliers to provide goods and services linked to our bus and rail operations. These include vehicle and rolling stock manufacturers, fuel suppliers, IT companies and clothing manufacturers. We have contractual relationships with a number of parties which are essential to the business of the Group, including: • The operation of our rail franchises depends upon a number of contractual relationships, the most critical of which include: contracts with the DfT governing the terms of the franchises; contracts with Network Rail governing station and track access arrangements; leases with rolling stock companies for the lease of trains and; maintenance contracts for the maintenance of trains. • All of our businesses have various contractual relationships including purchase contracts with fuel suppliers, vehicle suppliers, IT companies and spare part suppliers. • We have contracts with local authorities, government bodies and other parties for the supply of bus services on a contracted or tendered basis. • We have contractual arrangements with banks and other finance providers for the provision of funds and financial products to the Group. We are committed to conducting business in a socially responsible way and we believe this to be consistent with our business objectives and strategy. Indeed, by taking a responsible approach towards the environment and the wider community, we believe we will enhance our objective to deliver organic growth. 3.5 Group business objectives and long-term strategy 3.5.1 Business objectives and long-term strategy The key elements of Stagecoach Group’s business strategy to deliver long-term shareholder value are: • To deliver organic growth across all of the Group’s operations; • To acquire businesses that are complementary to the Group’s existing operations, in areas where the Group’s management has proven expertise and which offer prospective returns on capital in excess of the Group’s weighted average cost of capital; • In addition to organic and acquisition growth, to maintain and grow the Group’s Rail business by bidding for selected rail franchises and to seek to secure new franchises where the risk/return trade-off is acceptable. A fundamental objective underlying this strategy is the continued provision of safe and reliable services to passengers. Stagecoach Group has demonstrated particular strength in managing bus and coach businesses that operate scheduled services in a relatively deregulated environment, although it also operates more regulated bus services where it believes it can deliver good returns for shareholders. The Group’s focus is on operations with critical mass in their own local markets. In rail, Stagecoach’s skill centres on organic revenue and passenger volume growth, the management of significant change projects, the delivery of improved operational performance, and driving up customer satisfaction. Our overall business strategy is supported by a financial strategy whereby we seek to maintain a long-term efficient capital structure. 3.5.2 Business model The Group’s business model varies to some extent by division. The business model is intended to deliver the business objectives and long-term strategy explained above in that it is designed to add value through organic growth, targeted acquisitions and rail franchise wins. The overall model of the Group is based on a relatively decentralised management structure with short chains of command and close monitoring and direction from the centre. Across the Group, there is an emphasis on achieving strong operational performance as an underpin of strong financial performance. The business model for the Group’s UK Bus (regional operations) and North America Divisions is designed to be sufficiently flexible to respond to developments in the markets in which they operate and to changes in demand. The key features of this business model are: • • • A decentralised management structure enabling local management to quickly identify and respond to developments in each local market; An emphasis on lightly regulated bus operations enabling management to vary prices, operating schedules and timetables in response to developments in each local market without significant hindrance from regulation; A flexible cost base whereby operating mileage and operating costs can be flexed in response to changes in demand. The business model of the UK Bus (London) and UK Rail Divisions is different. The businesses are more highly regulated and their cost base is less flexible so there is greater management focus on agreeing the right contractual arrangements, including appropriate risk-sharing arrangements, and ensuring these are appropriately managed for the duration of each contract. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 5 3.5.3 Key Performance Indicators The Group uses a wide range of key performance indicators (“KPIs”) across its various businesses and at a Group level. The most important of these KPIs at a Group level focus on five key areas: • Safety • Profitability • Organic growth • Service delivery • Staff retention KPIs are also shown below for the Group’s largest joint venture, Virgin Rail Group. 3.5.3.1 Safety The safety of our passengers, staff and others is our first priority. Safety is monitored in various ways, including through a range of KPIs. Businesses acquired or disposed of in the year are excluded from the safety KPIs. Five of the more important safety KPI’s are reported below: UK Bus (regional operations) – number of blameworthy accidents per 1 million miles travelled US – number of blameworthy accidents per 1 million miles travelled South West Trains – workforce lost time injuries per 1,000 staff East Midlands Trains – workforce lost time injuries per 1,000 staff Virgin Rail Group – West Coast – workforce lost time injuries per 1,000 staff Target Year ended 30 April 2011 Year ended 30 April 2010 Year ended 30 April 2009 21.4 21.9 see below To decrease each year – ultimate target is zero To decrease each year – ultimate target is zero 7.3 1.8 1.5 2.1 8.8 2.0 1.6 1.9 9.3 1.7 2.6 1.6 Due to development of our safety reporting systems to standardise and enhance the reporting of safety indicators, certain KPIs are not presented above as they would not be comparable to later years. 3.5.3.2 Profitability The Group seeks to increase long-term value to its shareholders. While the Group aims to take a long-term perspective on shareholder value, it also monitors the financial performance of each of its businesses in the shorter term. For the Group as a whole, the key measure of short-term financial performance is earnings per share before exceptional items and intangible asset expenses (“Adjusted EPS”). Adjusted EPS is calculated based on the profit attributable to equity shareholders (adjusted to exclude exceptional items and intangible asset expenses) divided by the weighted average number of ordinary shares ranking for dividend during the relevant period. Adjusted EPS was as follows: Adjusted EPS To increase in excess of inflation Target Year ended 30 April 2011 pence 23.8p 2010 pence 18.7p 2009 pence 22.9p 3.5.3.3 Organic growth A key element underpinning the Group’s strategy is to deliver organic growth in revenue. Organic growth KPIs are not reported for businesses acquired or disposed of in the year. The following measures of organic growth are monitored in respect of three of the Group’s divisions: • UK Bus (regional operations) – growth in passenger journeys measured as the percentage increase in the number of passenger journeys relative to the equivalent period in the previous year. • Rail – growth in passenger miles measured as the percentage increase in the number of miles travelled by passengers relative to the equivalent period in the previous year. • North America – growth in constant currency revenue from continuing operations measured as the percentage increase in revenue relative to the equivalent period in the previous year. The measures vary by division reflecting differences in the underlying businesses – for example, a significant proportion of the revenue in North America is not determined on a “per passenger” basis. Throughout this Annual Report, references to passenger volume growth for UK Bus or Rail businesses mean growth determined on the basis set out here. All of these growth KPIs involve a degree of estimation in respect of passenger volumes and are normalised to exclude businesses that have not been held by the Group for the whole of both periods. Stagecoach Group plc | page 5 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 6 Operating and Financial Review The organic growth KPIs were as follows: Target Year ended 30 April 2011 Growth % Year ended 30 April 2010 Growth % Year ended 30 April 2009 Growth % UK Bus (regional operations) passenger journeys UK Rail passenger miles – South West Trains – East Midlands Trains – Virgin Rail Group – West Coast Trains North America revenue Positive growth each year 0.9% 4.1% 6.9% 9.3% 8.5% (0.4)% (1.1)% (0.4)% 20.4% (3.4)% 3.2% 2.2% 1.6% (1.5)% 7.2% During the year ended 30 April 2009, Virgin Rail Group experienced numerous Network Rail possessions, over-runs and days of poor performance and this is reflected in the decline in passenger miles shown above for that year. The declines in passenger volumes at UK Bus (regional operations) and UK Rail, and the decline in North America revenue, in the year ended 30 April 2010 shows the impact of the tough economic conditions during the year. At Virgin Rail Group the impact has been offset by the increase in services following a new timetable being introduced in December 2008. 3.5.3.4 Service delivery We aim to provide a reliable service to support our organic growth strategy. Our measures of service delivery include: • UK Bus (regional operations) – reliability measured as the percentage of planned miles to be operated that were operated. • Rail – punctuality measured on the basis of the DfT’s Public Performance Measure (moving annual average) being the percentage of trains that arrive at their final destination within 5 minutes (or 10 minutes for inter-city services) of their scheduled arrival time having called at all scheduled stations. References to rail punctuality throughout this Annual Report refer to punctuality calculated on this basis. Due to the nature of the North American business, there is no single measure of service delivery for the North American division as a whole. Service delivery KPIs are not reported for businesses acquired or disposed of in the year. The service delivery KPIs were as follows: UK Bus (regional operations) reliability UK Rail punctuality – South West Trains – East Midlands Trains – Virgin Rail Group – West Coast Trains Target >99.0% >90.0% >85.0% >85.0% 2011 % 99.1% 93.3% 92.0% 86.3% Year ended 30 April 2010 % 99.3% 93.0% 92.5% 85.3% 2009 % 99.5% 93.3% 89.3% 79.7% Service delivery at our UK businesses for the year ended 30 April 2011 was adversely affected by the severe winter weather in November and December 2010. 3.5.3.5 Staff retention The strength of our business is built on the quality of our employees. We monitor staff turnover which is measured as the number of employees who left the Group (other than through business disposals) during the period as a proportion of the total average employees during the period. Staff retention KPIs are not reported for businesses acquired or disposed of in the year. Staff turnover for the last three years in our continuing businesses was as follows: UK Bus (regional operations) staff turnover UK Rail staff turnover – South West Trains – East Midlands Trains – Virgin Rail Group – West Coast North America staff turnover Target To decrease each year 2011 % 15.0% 7.4% 4.4% 2.6% 16.5% Year ended 30 April 2010 % 15.0% 7.4% 7.3% 3.6% 20.1% 2009 % 18.3% 11.3% 8.3% 5.3% 20.2% page 6 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 7 3.6 Overview of financial results Stagecoach Group has achieved continued strong financial and operational performance for the year ended 30 April 2011. Revenue by division is summarised below: REVENUE 2011 2010 2011 2010 Continuing Group operations UK Bus (regional operations) UK Bus (London) North America UK Rail Intra-Group revenue Group revenue £m Functional currency Functional currency (m) Growth % 893.6 133.6 295.1 1,070.0 (2.5) 875.4 Nil 266.1 1,026.7 (3.8) £ £ US$ £ £ 893.6 133.6 461.7 1,070.0 (2.5) 875.4 Nil 426.3 1,026.7 (3.8) 2.1% –% 8.3% 4.2%% (34.2)% 2,389.8 2,164.4 Operating profit by division is summarised below: OPERATING PROFIT 2011 2010 2011 2010 £m % margin £m % margin Functional Functional currency currency (m) 14.4% – 3.4% 4.1% £ £ US$ £ 153.1 (5.9) 30.2 48.4 126.1 Nil 14.6 41.6 Continuing Group operations UK Bus (regional operations) UK Bus (London) North America UK Rail Group overheads Restructuring costs Total operating profit from continuing Group operations Joint ventures – share of profit/(loss) after tax Virgin Rail Group Citylink New York Splash Tours Twin America Total operating profit before intangible asset expenses and exceptional items Intangible asset expenses Exceptional items Total operating profit: Group operating profit and share of joint ventures’ profit after taxation 153.1 (5.9) 19.3 48.4 (11.3) (2.9) 200.7 28.4 1.8 Nil 9.3 240.2 (15.2) Nil 225.0 17.1% (4.4)% 6.5% 4.5% 126.1 Nil 9.1 41.6 (11.6) (1.2) 164.0 19.2 1.2 (0.9) 8.5 192.0 (11.1) (1.8) 179.1 Stagecoach Group plc | page 7 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 8 Operating and Financial Review 3.7 Divisional Performance 3.7.1 UK Bus (regional operations) Financial performance The financial performance of the UK Bus (regional operations) division for the year ended 30 April 2011 is summarised below: Revenue Like-for-like revenue* Operating profit* Operating margin 2011 £m 893.6 883.0 153.1 2010 £m 875.4 864.7 126.1 Change 2.1% 2.1% 21.4% 17.1% 14.4% 270bp Revenue from our UK Bus regional operations for the year ended 30 April 2011 was up 2.1% to £893.6m, compared to £875.4m in the prior year. Like-for-like revenue growth was 2.1%. Operating profit was up 21.4% at £153.1m (2010: £126.1m) which includes the benefit of a £14.3m year-on-year reduction in fuel costs. Operating margin was 17.1%, compared to 14.4% in 2010. Passenger revenue growth We have delivered further revenue and passenger volume growth at our UK Bus regional operations. Over many years, our UK Bus (regional operations) volume growth and profit margins have been amongst the best in the sector and we also offer the best value fares of any major operator. We have seen increasing signs of modal shift from car to local bus services as road congestion, the high price of fuel and Government “green taxes” impact on the cost of motoring. Consumers are seeing the convenience and financial benefits of switching to a better value and more sustainable mode of transport. Revenue growth in the year was consistent with our plan for modest fare rises. Like-for-like passenger volume growth for the year was 0.9%. Our value fares strategy and focus on organic growth has ensured we have a vibrant bus business in the UK and we believe the environment for public transport will support continued modal shift to bus and coach travel. Cost control Reduced public sector spending is resulting in reductions in concessionary revenue, and cuts by local authorities in tendered services. All bus operators have also faced increasing pressure on fuel and energy costs and from April 2012, will see a reduction in Bus Service Operators’ Grant (BSOG). However, we have maintained a strong commercial bus network through a mixture of fare increases at or below inflation and some limited mileage reductions. We will continue to manage the impact on our business proactively and take these factors into account in future decisions on bus services, tenders and fares, while working hard to minimise the effect on our passengers. Investment We are driving up the quality of travel for our customers by investing in greener vehicles, better facilities and improved services. In January 2011, we announced that we were investing £52m in 360 new Euro 5 buses and coaches for our regional bus networks across the UK in year to 30 April 2012, further improving the standard of travel for passengers. This is in addition to the purchase of more than 60 hybrid electric buses, which was announced in late 2010. It means the UK Bus Division’s investment in new vehicles outside London over four years will reach nearly £290m. Stagecoach is leading the way on investing in new greener buses using state-of-the-art hybrid electric technology. More than 20% of the 542 vehicles supported by the Department for Transport’s Green Bus Fund are being purchased by Stagecoach in what is the biggest investment in low carbon buses outside London. Across our regional operations, we have placed orders for 142 hybrid electric vehicles, at a cost of £26.9m. We are also making a multi-million-pound investment in a hi- tech eco-driving system for our regional bus operations, which will help reduce fuel consumption and carbon emissions, improve passenger comfort and cut the risk of accidents. A key element of the initiative is an EcoDriver incentive scheme giving employees the chance to earn “green points” that are converted into financial benefits from a potential £900,000 annual bonus pot. Pricing strategy Stagecoach has been independently recognised as offering the best value bus fares of any major UK bus operator. We are continuing to focus on our value fares strategy to support organic passenger growth, offering our customers good value travel options through our multi-journey megarider discounted travel tickets. Investment in smartcard technology is a key part of our ticketing * See definitions in note 36 to the consolidated financial statements. page 8 | Stagecoach Group plc plans for the future and Stagecoach was the first major UK bus operator to complete the installation of Government-standard smartcard ticket machines on its entire UK bus fleet outside London. In London, all of the Group’s buses accept Transport for London’s Oyster card. We have launched our own smartcard, StagecoachSmart, which can be used by passengers to store their tickets electronically. Customers also have the option to pay for their travel through automatic monthly payments. We are rolling out StagecoachSmart travel cards across our regional bus operations, offering potential for further integration with other operators’ services where infrastructure and commercial agreements are in place. Regulatory developments The Group continues to respond to the Competition Commission on its consideration of the local bus market in the UK (excluding London and Northern Ireland). The Commission published its Provisional Findings and Possible Remedies in May 2011. Local bus services in the UK have been subject to detailed and unprecedented scrutiny by the competition authorities for more than eighteen months and we note that the Commission is not proposing any fundamental change to the regulatory structure of the industry. At this stage, the Commission has ruled out both price controls and forced divestments of bus operations. In addition, the Commission has acknowledged that there are existing agencies, mechanisms and legislation, which can address a number of its recommendations. We have consistently attracted more passengers by investing in our buses and networks, providing innovative products and offering good value fares. We will engage with the Commission on measures that we believe will deliver further improvements to bus passengers, while retaining the many positive existing initiatives that benefit our customers as a result of the competitive market in which we operate. At the same time, we will continue to press local and national government for action on the issues that matter to customers. We believe the Commission’s report should be a starting point for serious, consistent and extensive measures to tackle road congestion and deliver more bus priority. Business development Stagecoach has been awarded a major contract to provide transport at the London 2012 Olympic and Paralympic Games. The contract will involve transferring the world’s athletes and media between their accommodation and various Olympic and Paralympic venues in London, as well as transporting them to and from airports as they arrive and leave the Games. Stagecoach will be responsible for managing two depots in London, with a total of 1,100 buses and coaches in operation throughout the event. Around half of the buses and coaches required will be provided by Stagecoach with the remainder being supplied by other UK and Irish bus operators. We are building further on our successful direct marketing and telemarketing campaigns to attract new customers and retain existing business. We have built up a database of more than one million customers and targeted specific demographic groups, such as commuters and mothers, with tailored campaigns to encourage them to switch from driving to taking public transport. We are joining the Ice loyalty card scheme for sustainable products, which brings together companies with superior ethical and environmental credentials and allows consumers to collect and spend points across a range of businesses. In addition, we have launched pilot projects in Scotland and Oxford using social media channels to inform passengers about marketing promotions and assist the management of customer service, including issues affecting service reliability. Our budget services are continuing to attract more and more people looking for an affordable, reliable and greener travel alternative. In April 2011, we announced a further expansion of our budget transport services across the UK. megabus.com added five new locations and now serves over 60 locations across the UK. Outlook UK Bus operators undoubtedly face a number of challenges in the months ahead. We forecast that in the year ending 30 April 2012, concessionary revenue and tendered revenue will reduce by around £15m and that fuel costs will increase. However, we remain positive on the prospects for the Division. The flexibility we have on fares and service patterns, the rising cost of running a private car and the strength of our management team, mean that the Division is well positioned to at least deliver operating profit in the year to 30 April 2012 at a level similar to that of the year to 30 April 2011. Whilst fares will increase at a higher average rate than the previous year, our services will remain good value. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 9 3.7.2 UK Bus (London) The financial performance of UK Bus (London) since the Group acquired it in October 2010 to 30 April 2011 is summarised below: Financial performance 3.7.3 North America Financial performance The financial performance of the North America division and North America joint ventures for the year ended 30 April 2011 is summarised below: Revenue Operating loss Operating margin 14 October 2010 to 30 April 2011 £m 133.6 (5.9) (4.4)% The reported operating loss of £5.9m is after taking account of (i) a £3.2m release from the provision that was recorded as at acquisition in respect of acquired customer contracts and (ii) £9.9m of costs in relation to rebasing of staff terms and conditions. In October 2010, the Group completed the acquisition of the bus business formerly owned by East London Bus Group Limited (in administration), acquiring four companies that together operate the business. The cash paid in respect of the acquisition was £59.5m, inclusive of amounts to settle inter- company liabilities payable by the acquired business to its former parent company. The closing enterprise value (being the aggregate of the consideration paid and the net debt assumed with the acquisition) on the date of completion was £56.0m, taking account of the cash in the acquired business at completion. We operated a successful and profitable bus business in London for several years and are pleased to re-enter the London bus market at an attractive price. We have made significant progress in restructuring the acquired business to both maximise synergies with the wider Group and tackle the structurally high cost base. Our first step was to put in place a new management team, comprising Stagecoach personnel from other areas and also incumbent members of the London management team. The head office accounting and administration structure of the business was then reduced, with all accounting functions being integrated with our Shared Service Centre in Stockport. We have held discussions with the employee trade union representatives and are pleased with the constructive response to our plans to improve employee productivity and reduce unit costs significantly, and in doing so secure the business and jobs for the future. The results include the financial cost of implementing these changes in working terms and conditions and we will see material reduction in future payroll costs. We have also undertaken a full review of the integrity of the financial models supporting the contract costing and budgeting for bids and set a realistic return criteria for future tenders. As we have previously reported, it will take some time for the existing low margin contracts to work through to re-tender, and the business has already lost some sizeable contracts which will impact from the year to 30 April 2012. We have recently announced the planned closure of one of the ten bus depots from which the business operates. This property rationalisation plan recognises the significant extra capacity the business has, and will allow us to improve efficiency by better spreading overheads, yet still leaves sufficient capacity for future requirements. In the next six months our focus remains on the cost base of the business, in particular fleet maintenance costs and working practices, where we anticipate further economies and efficiency improvements can be achieved. As a sign of our confidence in the future of the business, in January 2011 we announced plans to lease more than 160 new state-of-the-art vehicles for our London operations. Our long-term aspirations are for mid to upper single- digit operating margins. While we do not underestimate the challenges we face in improving the financial performance of the acquired business, our plans are firmly on track and we remain confident we can deliver a good return to shareholders from the acquisition. Outlook As we anticipated when we acquired the London Bus Division, the annual rate of revenue is likely to fall in the year ending 30 April 2012 but there is good potential to generate a small operating profit by reducing costs and relinquishing some under-performing contracts. Revenue Wholly owned Share of joint ventures Total Like-for-like revenue Operating profit Wholly owned Share of joint ventures Total Operating margin 2011 US$m 461.7 67.7 529.4 457.0 30.2 15.2 45.4 2010 US$m Change % 426.3 64.1 490.4 421.1 14.6 12.8 27.4 8.3% 5.6% 8.0% 8.5% 106.8% 18.8% 65.7% 300bp 8.6% 5.6% Revenue from our wholly owned North American operations for the year to 30 April 2011 was up 8.3% at US$461.7m (2010: US$426.3m), and the equivalent like-for-like revenue was up by 8.5%. Operating profit was US$30.2m (2010: US$14.6m), resulting in an operating margin of 6.5%, compared to 3.4% the previous year. The increased profit and margin reflects the benefits of revenue growth and reduced fuel costs. Converted to sterling, revenue for the 12 months to 30 April 2011 was £295.1m (2010: £266.1m). Operating profit for the 12 months was £19.3m (2010: £9.1m). megabus.com megabus.com revenue in the year ended 30 April 2011 was US$75.4m (2010: US$45.1m) and it continues to be the growth engine of our business in North America. Passenger demand is strong and we are continuing to expand our range of destinations. megabus.com now covers around 60 cities from hubs in Chicago, New York, Philadelphia, Washington D.C. and Pittsburgh. Our strategy of using transport hubs has helped support the rapid expansion of the product, maximise the productivity of our fleet and control start-up costs. The market for budget travel has bucked the trend of the wider economy and we have created more than 250 jobs over the past two years. Moving forward, we expect megabus.com to account for an increasing proportion of our North American business and we are now focusing on the best strategy to exploit further growth opportunities in other parts of North America. Other operations We continue to take steps to match services to demand in the non- megabus.com parts of our business, as well as focusing on cost control. We have a flexible business model and have taken action to reduce costs and miles operated, with vehicles in charter operations redeployed as part of our megabus.com growth strategy. The economic environment has improved and in the second half of the year, we have seen positive revenue trends. Outlook We are looking to grow megabus.com revenue from US$75.4m in the year ended 30 April 2011 to over US$110m in the year to 30 April 2012. This will still largely be served by our existing depot infrastructure but we are already working on the further expansion of megabus.com beyond April 2012, which might involve new partnerships and/or infrastructure. New megabus.com routes are expected to be loss-making initially, which partly masks the success of the established routes. Although megabus.com offers the greatest potential to grow the North American business, the remainder of the business is well positioned to offset higher fuel costs. The rate at which megabus.com is rolled out to new locations will have a bearing on the North America operating profit for the year to 30 April 2012 with a more rapid roll-out resulting in higher start-up losses. Overall, however, the Division remains well placed to deliver a good operating profit in the year ending 30 April 2012. Stagecoach Group plc | page 9 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 10 Operating and Financial Review 3.7.4 UK Rail Financial performance The financial performance of the UK Rail division for the year ended 30 April 2011 is summarised below: Revenue Like-for-like revenue, excluding tram Operating profit Operating margin 2011 £m 1,070.0 1,026.9 48.4 4.5% 2010 £m 1,026.7 968.9 41.6 Change 4.2% 6.0% 16.3% 4.1% 40bp Revenue from our UK Rail subsidiaries for the year to 30 April 2011 was up by 4.2% to £1,070.0m (2010: £1,026.7m). On a like-for-like basis, revenue excluding our tram operations is up 6.0%. Operating profit was £48.4m (2010: £41.6m), giving an operating margin of 4.5% (2010: 4.1%). We have benefitted from improving passenger volume trends at our South Western Trains and East Midlands Trains franchises. South Western Trains, which makes premium payments to the DfT, qualifies for revenue support payment under the terms of its contract as revenues remain below that forecast when the contract was originally awarded. The first revenue support payment was received in March 2011, which covered the period from 1 April 2010. As expected, East Midlands Trains has made a loss during the year. It qualifies for revenue support from November 2011. Operational performance Operational performance at our East Midlands Trains and South Western Trains franchises is consistently amongst the highest of the UK train operators. East Midlands Trains continues to run the most punctual trains of any long distance franchised train operator in the UK. For the year to 31 March 2011, punctuality on East Midlands Trains was 92.1%, compared to 87.7% for long- distance operators. Following the improvements made on its regional routes, East Midlands Trains has also been named as the UK’s most improved regional train operator. South Western Trains recorded a record punctuality figure of 93.7% for the same period. The average for London and South East operators was 91.1% and was 90.9% for all UK franchised rail operators. Customer satisfaction Satisfaction amongst our passengers also remains high. The latest National Passenger Survey, carried out during Autumn 2010, shows South West Trains passengers are amongst the most satisfied in the London and South East region. Overall satisfaction was 87% compared to the London and South East average of 83%. At East Midlands Trains, satisfaction is at its highest ever level, with 88% of passengers satisfied, compared to a long-distance average of 87%, marking the biggest improvement of any UK rail operator. Satisfaction with punctuality continues to be rated highly on both franchises. Value travel Our marketing strategy continues to focus on acquiring new customers through the promotion of value for money fares and on-board services. Our budget megatrain.com and megabusplus.com tickets, priced from just £1 (plus 50p booking fee), are continuing to prove popular. We have also launched successful promotions, such as the Red Dot Days at East Midlands Trains, which have seen almost 20,000 passengers travelling for £5, £10 or £15. In May 2011, we rolled out a new competitively priced on board catering offer at East Midlands Trains, where our new online Best Fare Finder and the introduction of WiFi on board all London services is also having a positive impact on passenger perception and volumes. The latest National Passenger Survey found that the perception of value for money has increased by 9% and 4% year-on-year respectively for East Midlands Trains and South West Trains. Passenger improvements We are continuing to progress investment of more than £22m to improve stations across the East Midlands Trains and South West Trains networks. We are making rail travel better for our customers through a package of accessibility enhancements, additional car parking spaces and refurbished toilets and waiting rooms. At East Midlands Trains, we are currently in the process of a £2.2m project to install new Customer Information Screens (CIS) at a number of stations. At South West Trains, we have invested in an industry-leading software innovation at London Waterloo to improve passenger information during times of major disruption. Passengers are also benefitting from improvements to our fleet. East Midlands Trains is investing more than £30m to improve every single train in passenger service across the franchise. The £10m refurbishment of the Class 158 trains, which are used to operate services on the busy Liverpool to Norwich route, has now been completed, as has the £9m refurbishment of the High Speed Trains used on our main line services to London. We have received a positive response from passengers to the improved levels of comfort and on-board benefits, such as the WiFi now available on all trains to London. The refurbishment of the Meridian fleet is now well underway, and includes luxury leather seats and improvements to the luggage space as a result of feedback from passengers. At South West Trains, we are also carrying out an interior refresh of our Class 458 trains to deliver an improved travelling environment. Policy & Regulatory Developments The Group has engaged extensively with the Department for Transport and Sir Roy McNulty on the way forward for reform of the rail industry. The final report by Sir Roy McNulty on value for money in the UK Rail industry was published in May 2011, and we believe its recommendations are a major opportunity to unlock further growth in the years ahead and deliver a more efficient, more passenger-focused railway. We are supportive of efforts to reduce industry costs and we believe our achievements at our own franchises demonstrate our ability to drive out efficiencies in areas under our control, whilst maintaining high levels of performance and customer satisfaction. We would welcome radical reform to deliver greater alignment of track and train, which we believe would benefit all stakeholders in the UK rail network. Our vision of vertical integration does not necessarily envisage the train operator taking ownership of the infrastructure or delivering major infrastructure projects but rather it foresees the train operator having responsibility for infrastructure maintenance and renewals thereby improving accountability and efficiency. We would relish the opportunity to participate in a pilot of such vertical integration. We look forward to working with the Government to improve the railway for the benefit of passengers, taxpayers and our shareholders. As part of the Comprehensive Spending Review, the Government retained the Retail Price Index (“RPI”) +1% formula for regulated fare increases for January 2011. However, this will change to RPI +3% from January 2012 as part of a wider policy to shift the funding of the railways more towards the passenger, so that the taxpayer pays less. All additional income raised by the decision will be passed through by train operating companies to Government. Regulated fares account for roughly half of all rail journeys and we will continue to offer a range of good value fares to suit the different budgets of our customers. Rail franchising The Government announced in December 2010 its early thoughts on rail franchise reform and its intention for the tendering of specific franchises. We will continue to evaluate franchise opportunities as they emerge in light of these policy decisions. As a major rail operator with a good track record of delivery, we were pleased to have been shortlisted for the Greater Anglia rail franchise and, in partnership with Virgin, for the new West Coast franchise. The Greater Anglia franchise is expected to commence in February 2012 and will run for between 17 and 29 months. The current West Coast franchise is due to end on 31 March 2012. However, the start of the new West Coast franchise has been delayed until 9 December 2012. Virgin Rail Group (“VRG”) has entered into bilateral negotiations with the DfT to agree acceptable terms for the extension of the current franchise to 8 December 2012. The new West Coast franchise is expected to commence in December 2012 and will run for 14 years (expiring in March 2026) with an option to extend for a further year. Greater Anglia and West Coast are very different franchises, each with their own specific challenges, priorities and opportunities. We will continue to work with local communities and other stakeholders to develop sustainable bids to deliver the Government’s specification, improve rail services for customers, and ensure value for money for taxpayers. The new Greater Anglia franchisee will not take significant passenger revenue risk, consistent with the short-term nature of the franchise. It will, however, take cost risk and will operate the train service during the London 2012 Olympics. The new West Coast franchise will likely include a risk-sharing mechanism based on GDP rather than revenue and will give the train operator some increased flexibility to change timetables and fares. Tram Stagecoach is Britain’s biggest tram operator and the light rail systems we operate in Manchester and Sheffield are important to their local communities. The new management team we appointed for our light rail operations last year has helped deliver further improvements and is continuing to work successfully with our Passenger Transport Executive partners. Supertram continues to deliver exceptional levels of service reliability and has achieved good revenue growth. At Metrolink, trams now serve the major employment centre at Media City in Salford Quay and further track extensions are scheduled to be completed later in 2011. page 10 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 11 Outlook Operating profit in the UK Rail Division has been expected for some time to reduce in the year ending 30 April 2012 and this remains the case given the change in the premium payments to Government. Thereafter, the availability of revenue support should help limit the risk of profit falling short of expectations but the scope to significantly increase UK Rail profit (new franchise wins excepted) is already recognised as being limited. 3.7.5 Joint Ventures 3.7.5.1 Virgin Rail Group Financial performance The Group's share of the financial performance of Virgin Rail Group for the year ended 30 April 2011 is summarised below: 49% share of Revenue Operating profit Net finance income Taxation Profit after tax Operating margin 2011 £m 392.7 39.5 0.2 (11.3) 28.4 10.1% 2010 £m 355.3 25.5 0.2 (6.5) 19.2 7.2% Change 10.5% 54.9% - 73.8% 47.9% 290bp Our share of VRG’s profit after tax for the 12-month period was £28.4m (2010: £19.2m). Our share of operating profit was £39.5m (2010: £25.5m), our share of finance income was £0.2m (2010: £0.2m) and our share of taxation charges was £11.3m (2010: £6.5m). Passenger revenue growth VRG has continued to achieve strong passenger revenue growth. Improved journey times, more frequent services, and good value deals, have all had a positive impact on passenger trends. Passenger volume growth has been well ahead of other long-distance train operators, and Business and First Class traffic has grown in particular as the economy has improved and better infrastructure performance has delivered more reliable services. Virgin is winning further market share from domestic airlines as passengers turn their back on out of town airports and opt instead for city-centre to city-centre travel. Figures issued by the Association of Train Operating Companies in April 2011 show that on London to Manchester, rail’s market share rose from 69% in 2008 to 79% in 2010. Passenger improvements Investment has continued to improve the Virgin Trains website, provide more fast ticket machines and increase the number of car parking spaces at stations to meet the growing demand. As a result, Virgin West Coast continues to be rated highly by its passengers, with 90% of passengers satisfied in the latest National Passenger Survey. Business development VRG has a proven track record over the last 14 years of providing better rail services for customers, including the renewal of the entire train fleet and the introduction of a high-frequency timetable. In the last six years alone, annual passenger numbers have doubled from 14 million to over 28 million and Virgin is now delivering industry-leading levels of customer satisfaction. VRG is negotiating an extension to its existing West Coast franchise and has been shortlisted for the new West Coast franchise, as explained in section 3.7.4. VRG is committed to submitting a strong bid to retain the West Coast franchise, building on the investment and customer improvements made in recent years and working with local communities along the route, as well as other stakeholders, to develop these plans. Outlook VRG’s profit in the year ended 30 April 2011 benefited from some contractual settlements with Network Rail that will not repeat in the year to 30 April 2012. While this might mean a fall in short-term profit, the main strategic focus of VRG is now on the opportunities presented by the new franchise which VRG is bidding for. 3.7.5.2 Twin America Financial performance 60% share of Revenue Operating profit Taxation Profit after tax Operating margin 2011 US$m 67.7 15.2 (0.6) 14.6 2010 US$m 63.6 14.2 (0.6) 13.6 22.5% 22.3% Change 6.4% 7.0% – 7.4% 20bp We are pleased by the strong financial performance of our Twin America joint venture in the year ended 30 April 2011. The business has benefited from an increased number of visitors to New York City. Our share of operating profit for the year increased to US$15.2m (2010: US$14.2m). The tax treatment of our share of profit is such that the joint venture’s own profit is partially taxed but an additional tax charge falls on the joint venture partners and the effect of that on the Group is included within “taxation” in the consolidated income statement. TwinAmerica was notified by the United States Surface Transportation Board ("STB") in February 2011 that its application for formal approval of the joint venture had not been approved. The STB confirmed that the joint venture, as currently structured, did require its approval and therefore, having decided not to approve the joint venture, the STB gave Twin America the option of separating the business, assets and management of the joint venture. Alternatively, the joint venture could divest its interstate services, which account for around 1% of the joint venture's revenues. The latter option would remove the transaction from STB jurisdiction and place it within the authority of the New York State Attorney General. The Chairman of the STB agreed on 9 March 2011 to grant an application for a stay of the February decision pending a forthcoming decision by the STB on Twin America's request to undertake a further detailed review of the case. Twin America believes customers have benefitted from good quality, high value, and better co-ordinated services, while the joint venture has achieved cost savings and other synergies. We will continue to assist the STB should it move forward with a fresh consideration of this matter and are prepared to present any further evidence as appropriate to help inform any future decision. Twin America continues to look for opportunities to expand both in its current market and beyond New York. On 17 May 2011, Twin America commenced a joint venture in Los Angeles offering open top double deck, hop on hop off, sightseeing bus services and on 1 June 2011, it started to offer sightseeing tours by boat on the River Hudson around Manhattan. We believe the outlook for Twin America remains positive and we are confident of further growth in its revenue and profit. 3.8 Other financial matters 3.8.1 Depreciation and intangible asset expenses Earnings before interest, taxation, depreciation, intangible asset expenses and exceptional items (pre-exceptional EBITDA) amounted to £330.5m (2010: £283.9m) including the Group’s share of its joint ventures’ profit after tax. Depreciation, including non-exceptional impairment charges, for the year was £90.3m (2010: £91.9m). The income statement charge for intangible assets increased from £11.1m to £15.2m, of which £5.1m (2010: £5.1m) related to joint ventures. The year on year increase reflects amortisation of intangible assets acquired during the year, primarily as part of acquiring the East London bus business. 3.8.2 Exceptional items The following exceptional items, before taxation, arose in the year ended 30 April 2010: • A loss of £0.1m in relation to the disposal of land and buildings across the Group. • A gain of £4.6m being the revision to the estimated insurance provision in relation to pre-acquisition liabilities. • A loss of £0.6m being expenses incurred in relation to the acquisition of our UK Bus (London) operations. • A loss of £3.2m in relation to the disposal of certain operations in the United Kingdom. • A gain of £18.5m on the release of a liability related to previous disposals of businesses. The net effect of exceptional items was a pre-tax profit of £19.2m (2010: loss of £20.4m), of which a gain of £18.5m (2010: £3.9m) was reported as profit from discontinued operations. A tax charge of £1.3m (2010: credit of £7.4m) arose in respect of exceptional items resulting in a net after-tax gain from exceptional items of £17.9m (2010: loss of £13.0m). 3.8.3 Net finance costs Pre-exceptional net finance costs increased from £30.7m to £34.5m. The ratio of pre-exceptional EBITDA to net finance costs was 9.6 times for the year ended 30 April 2011 (2010: 9.2 times), reflecting increased profit. Stagecoach Group plc | page 11 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 12 Operating and Financial Review 3.8.4 Taxation The tax charge is analysed in Table A below: Net cash from operating activities before tax for the year ended 30 April 2011 was £252.2m (2010: £217.1m) and can be further analysed as follows: 3.8.5 Earnings per share Earnings per share before intangible asset expenses and exceptional items were 23.8p, compared to 18.7p in 2010. Basic earnings per share increased from 15.6p to 24.6p. 3.8.6 Fuel Costs The Group’s operations as at 30 April 2011 consume approximately 370m litres of diesel fuel per annum. As a result, the Group’s profit is exposed to movements in the underlying price of fuel. The proportion of the Group’s projected fuel usage that is currently hedged using fuel swaps is as follows: Year ending 30 April 2012 2013 2014 2015 UK Bus (regional operations) UK Bus (London) North America UK Rail 96% 50% 77% 76% 51% 38% 28% 61% – 25% – 5% – 13% – – The Group has no fuel hedges in place for periods beyond 30 April 2015. The Group’s fuel costs include the costs of delivery and duty as well as the costs of the underlying product. Accordingly, not all of the cost varies with movements in oil prices. The Group’s like-for-like diesel fuel costs for the year ending 30 April 2012 are likely to be higher than for the year ended 30 April 2011 because after taking account of the fuel hedges in place, the average fuel cost per litre will be higher. Further information on the Group’s exposure to movements in fuel prices is provided in note 27 to the consolidated financial statements. 3.8.7 Cash flows The strong cash generative nature of the Group is once again highlighted by net cash from operating activities after tax of £231.8m (2010: £216.4m). Net cash outflows from investing activities were £198.2m (2010: £37.2m) and net cash used in financing activities was £49.7m (2010: £79.9m). 3.8.8 Net debt Net debt (as analysed in note 31 to the consolidated financial statements) reduced from £296.7m at 30 April 2010 to £280.9m at 30 April 2011. The Group’s net debt at 30 April 2011 is further analysed below: Unrestricted cash Cash held within train operating companies Restricted cash Fixed rate £m Nil Nil Nil Total cash and cash equivalents Sterling bond* Sterling hire purchase US dollar finance leases Canadian dollar finance leases Loan notes Preference shares Nil (244.8) (8.4) (40.4) (3.4) Nil Nil Floating rate £m 174.9 163.1 20.3 358.3 (150.0) (168.5) Nil Nil (21.1) (2.6) Total £m 174.9 163.1 20.3 358.3 (394.8) (176.9) (40.4) (3.4) (21.1) (2.6) Net debt (297.0) 16.1 (280.9) * The split between fixed rate and floating rate sterling bonds is after taking account of the effect of interest rate derivates that synthetically convert £150.0m of fixed rate debt to floating rate debt. Operating profit of Group companies Depreciation Intangible asset expenses Impairment of plant and equipment EBITDA of Group companies Loss on disposal of plant and equipment Equity–settled share based payment expense Working capital movements Net interest paid Dividends from joint ventures Net cash from operating activities before excess pension contributions Pension contributions in excess of pension costs Net cash inflow from operating activities before taxation 2011 £m 190.6 90.3 10.1 Nil 291.0 0.9 4.7 (22.7) (30.1) 28.8 2010 £m 156.2 77.2 6.0 14.7 254.1 2.0 6.3 (10.7) (53.1) 35.7 272.6 234.3 (20.4) (17.2) 252.2 217.1 The impact of purchases of property, plant and equipment for the year on net debt was £164.4m (2010: £154.9m). This comprised cash outflows of £156.3m (2010: £89.2m) and new hire purchase and finance lease debt of £8.1m (2010: £65.7m). £14.7m (2010: £53.0m) was received from the disposal of property, plant and equipment. 3.8.9 Liquidity The Group has comfortably complied with all of its banking covenants throughout the financial year. The Group is subject to certain market standard banking covenants, which include a limit on the level of net debt compared to EBITDA and a minimum level of EBITDA to interest, in each case as defined in the relevant agreements. Our strong financial position is evidenced by: • The ratio of net debt at 30 April 2011 to pre-exceptional EBITDA for the year ended 30 April 2011 was 0.8 times (2010: 1.0 times). • Pre-exceptional EBITDA for the year ended 30 April 2011 was 9.6 times (2010: 9.2 times) pre-exceptional net finance costs. • Undrawn, committed bank facilities analysed below totalled £491.5m at 30 April 2011 (2010: £345.9m). This included £67.9m (2010: £24.9m) that is only available for non-cash utilisation. In addition, the Group continues to secure new asset finance. • In February 2011, the Group saw strong appetite from banks for the re- financing of its core bank facilities and entered into £510.0m of new five- year, committed facilities. • The three main credit rating agencies continue to assign investment grade credit ratings to the Group. • The Group is cash generative and has the flexibility to vary capital expenditure and other cash outflows where appropriate. The Group’s principal lines of credit have been arranged on a bi-lateral basis with a group of relationship banks which provide bank facilities for general corporate purposes. These arranged lines of credit allow cash drawdowns to finance the Group and also include facilities which are dedicated to issuing performance/season ticket bonds, guarantees and letters of credit. TABLE A SUMMARY OF TAX ON PROFIT Excluding intangible asset expenses and exceptional items Intangible asset expenses Exceptional items Reclassify joint venture taxation for reporting purposes Reported in income statement Year ended 30 April 2011 Year ended 30 April 2010 Pre-tax profit £m 218.1 (15.2) 202.9 0.7 203.6 (12.4) 191.2 Tax £m (47.5) 3.1 (44.4) (1.3) (45.7) 12.4 (33.3) Rate % 21.8% 20.4% 21.9% 185.7% 22.4% n/a Pre-tax profit £m 168.7 (11.1) 157.6 (24.3) 133.3 (7.4) 17.4% 125.9 Tax £m (34.6) 1.7 (32.9) 7.4 (25.5) 7.4 (18.1) Rate % 20.5% 15.3% 20.9% 30.5% 19.1% n/a 14.4% page 12 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 13 The Group’s committed bank facilities and related surety arrangements as at 30 April 2011 are analysed below: 717.8m), with a further 2.2m (2010: 2.3m) of ordinary shares held by employee trusts and not ranking for dividend. Expiring in MAIN GROUP FACILITIES – 2016 – 2014 – 2013 – 2012 LOCAL & SHORT-TERM FACILITIES – Various Performance Available for bonds, guarantees etc. drawn £m non-cash Available for utilisation only £m cash drawings £m (66.9) (34.8) (70.8) (51.8) (33.0) (7.2) (9.9) (17.8) 410.1 Nil Nil Nil Facility £m 510.0 42.0 80.7 69.6 702.3 (224.3) (67.9) 410.1 15.7 (2.2) Nil 13.5 718.0 (226.5) (67.9) 423.6 The Group’s main bank facilities are committed through to 2016. The Group issued a £400m 5.75% bond in December 2009, which matures in December 2016. The Group also maintains facilities in relation to asset finance (“Asset Finance Facilities”). Asset Finance Facilities are typically agreed in principle one year in advance and are arranged for the purpose of funding bus vehicle expenditure and for specific UK Rail operating assets. Asset Finance Facilities include finance leases, hire purchase agreements and operating leases. The terms of Asset Finance Facilities are dependent on the underlying assets and typically range between five and ten years. Although there is an element of seasonality in the Group’s bus and rail operations, the overall impact of seasonality on working capital and liquidity is not considered significant. The rail operations maintain cash balances to meet working capital requirements and the franchise agreements restrict the transfer of this cash. Unless DfT consent is obtained, cash can only be transferred by loan or dividend to the extent that the relevant train operating company has distributable profits, and the franchise is compliant with the liquidity covenants specified in its franchise agreement. 3.8.10 Capital expenditure Additions to property, plant and equipment for the year were: UK Bus (regional operations) UK Bus (London) North America UK Rail Other 2011 £m 85.1 17.0 31.4 34.2 0.1 2010 £m 97.1 Nil 14.5 45.1 Nil 167.8 156.7 3.8.11 Business combinations On 14 October 2010, Stagecoach Bus Holdings Limited ("SBHL"), a Group subsidiary, completed the acquisition of the bus business formerly owned by East London Bus Group Limited (in administration). SBHL acquired 100% of the voting equity interests in four companies that together operate the acquired business. The cash paid in respect of the acquisition was £59.5m, comprising £5.4m for the entire share capital of the acquired companies and £54.1m to settle inter-company liabilities payable by the acquired companies to their former parent company. Further details are given in note 16 to the consolidated financial statements. The Group has made no other material acquisitions in the year ended 30 April 2011. 3.8.12 Shares in issue The weighted average number of ordinary shares during the year used to calculate basic earnings per share was 717.5m (2010: 716.2m). The number of ordinary shares ranking for dividend at 30 April 2011 was 717.9m (2010: 3.8.13 Net assets Net assets at 30 April 2011 were £246.2m (2010: £12.7m) with the increase primarily reflecting the strong results for the year, movements on cash flow hedges of £23.4m after tax and actuarial gains on Group defined benefit pension schemes of £52.5m after tax. 3.8.14 Retirement benefits The reported net assets of £246.2m (2010: £12.7m) that are shown on the consolidated balance sheet are after taking account of net retirement benefit liabilities of £97.1m (2010: £202.1m) as analysed in note 26 to the consolidated financial statements. The Group recognised pre-tax actuarial gains of £76.5m (2010: losses of £138.7m) on Group defined benefit pension schemes in the year ended 30 April 2011. 3.8.15 Capital The Group regards its capital as comprising its equity, cash, gross debt and any similar items. As at 30 April 2011, the Group’s capital comprised: 2011 £m 2010 £m Market value of ordinary shares in issue 1,778.0 1,418.6 Cash Gross debt 358.3 (639.2) 375.7 (672.4) Net debt (see section 3.8.8) (280.9) (296.7) The Group manages its capital centrally. Its objective in managing capital is to optimise the returns to its shareholders whilst safeguarding the Group’s ability to continue as a going concern and as such its ability to continue to generate returns for its shareholders. The Group also takes account of the interests of other stakeholders when making decisions on its capital structure. The capital structure of the Group is kept under regular review and will be adjusted from time to time to take account of changes in the size or structure of the Group, economic developments and other changes in the Group’s risk profile. The Group will adjust its capital structure from time to time by any of the following: issue of new shares, dividends, return of value to shareholders and borrowing/repayment of debt. There are a number of factors that the Group considers in evaluating capital structure. The principal ratios that the Directors consider are (1) Net Debt to EBITDA, (2) EBITDA to interest and (3) Net Debt to market capitalisation. It is a matter of judgement as to what the optimal levels are for these ratios. 3.8.16 Treasury policies and objectives Risk management is carried out by a treasury committee and a central treasury department (“Group Treasury”) under policies approved by the Board. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall treasury risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investing excess liquidity. The funding policy is to finance the Group through a mixture of bank, lease and hire purchase debt, capital markets issues and cash generated by the business. See note 27 to the consolidated financial statements, for details of • the Group’s treasury risk management; • the Group’s management of interest rate risk; • the Group’s fuel hedging; • the Group’s management of foreign currency risk; and • the Group’s management of credit risk. Major financing transactions During the year, the Group entered into various hire purchase and finance lease arrangements for new assets as described in note 31(f) to the consolidated financial statements. Stagecoach Group plc | page 13 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 14 Operating and Financial Review The following new financing arrangements were put in place during the year ended 30 April 2011 and subsequently: • In May 2010, a new c.£20m 3.5-year rail bonding arrangement was agreed to replace a bank facility that was due to expire in November 2010. • In February 2011, the Group entered into £510m of new, unsecured bi- lateral bank facilities that are committed for five years to February 2016. These new facilities replaced the bank facilities that were due to expire in March 2012. • In February 2011, two new one-year rail bonding arrangements of c.£63m and c.£7m were entered into to replace two arrangements that were due to expire in March 2011. • In June 2011, the Group sold vehicles to a bank for c.£8m and leased them back on an operating lease. 3.8.17 Critical accounting policies and estimates The Group’s material accounting policies are set out in note 1 to the consolidated financial statements. Preparation of the consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union requires directors to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual outcomes could differ from those estimated. The Directors believe that the accounting policies and estimation techniques discussed below represent those that require the greatest exercise of judgement. The Directors have used their best judgement in determining the estimates and assumptions used in these areas but a different set of judgements could result in material changes to the Group's reported financial performance and/or financial position. The discussion below should be read in conjunction with the full statement of accounting policies. Taxation The Group’s tax charge is based on the pre-tax profit for the year and tax rates in force. Estimation of the tax charge requires an assessment to be made of the potential tax consequences of certain items that will only be resolved when agreed by the relevant tax authorities. Assessment of the likely outcome is based on historical experience, professional advice from external advisors, and the current status of any judgmental issues. However, the final tax cost to the Group may differ from the estimates. Acquired customer contracts and onerous contracts The Group has a number of contractual commitments, most significantly in respect of its rail franchises and its acquired East London bus business. In certain circumstances, IFRS requires a provision to be recorded for a contract that is “onerous” or when acquired as part of a business combination, that is unfavourable to market terms. A contract is considered onerous where it is probable that the future economic benefits to be derived from the contract are less than the unavoidable costs under the contract. Determining the amount of any contract provision necessitates forecasting future cash flows and applying an appropriate discount rate to determine a net present value. There is uncertainty over future cash flows. Estimates of cash flows are consistent with management’s plans and forecasts. The estimate of future cash flows and the discount rate involves a significant degree of judgment. Actual results can differ from those assumed and there can be no absolute assurance that the assumptions used will hold true. Goodwill and impairment In certain circumstances, IFRS requires property, plant, equipment and intangible assets to be reviewed for impairment. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of the expected future cash flows of the relevant cash generating unit (“CGU”) or net realisable value, if higher. The discount rate applied in determining the present value of future cash flows is based on the Group’s estimated weighted average cost of capital with appropriate adjustments made to reflect the specific risks associated with the CGU. Estimates of cash flows are consistent with management’s plans and forecasts. The estimation of future cash flows and the discount rate involves a significant degree of judgement. Actual results can differ from those assumed and there can be no absolute assurance that the assumptions used will hold true. Insurance The Group receives claims in respect of traffic incidents and employee incidents. The Group protects against the cost of such claims through third party insurance policies. An element of the claims is not insured as a result of the “excess” or “deductible” on insurance policies. Provision is made for the estimated cost to the Group (net of insurance recoveries) to settle claims for incidents occurring prior to the balance sheet date. The estimation of the balance sheet insurance provisions is based on an assessment of the expected settlement on known claims together with an estimate of settlements that will be made in respect of incidents occurring prior to the balance sheet date but for which claims have not been reported to the Group. The eventual settlements on such claims may differ from the amounts provided for at the balance sheet date. This is of greater risk in “younger” operations with a shorter claims history from which to make informed estimates of provisions. Pensions The determination of the Group’s pension benefit obligation and expense for defined benefit pension plans is dependent on the selection by the Directors of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in note 26 to the consolidated financial statements and include among others, the discount rate, expected long-term rate of return on plan assets, annual rate of increase in future salary levels and mortality rates. A portion of the plan assets is invested in equity securities. Equity markets have experienced volatility, which has affected the value of the pension plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. The Directors’ assumptions are based on actual historical experience and external data. While we believe that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension obligation and future expense. Property, plant and equipment Property, plant and equipment, other than land, are depreciated on a straightline basis to write off the cost or valuation less estimated residual value of each asset over their estimated useful lives. Useful lives are estimated based on a number of factors, including the expected usage of the asset, expected deterioration and technological obsolescence. If another depreciation method (for example, reducing balance) was used or different useful lives or residual values were applied, this could have a material effect on the Group’s depreciation charge and net profit. Rail contractual positions The UK Rail industry is subject to a complex matrix of contractual relationships. The Group’s train operating companies are party to contractual relationships with, amongst others, the DfT, Network Rail and rolling stock lessors. The nature of these contracts is such that there can be uncertainty and/or disagreement as to amounts receivable or payable by the Group in accordance with the contracts. The Group makes estimates of the amounts receivable or payable taking account of the available, relevant information. Actual outcomes can differ from the estimates made by the Group and there can be no absolute assurance that the assumptions made by the Group will hold true. 3.9 Current trading and outlook Current trading remains in line with our expectations. The improving trends mean the Group can look forward with confidence to the year ahead. We will continue to consider opportunities in the transport sector to create value for our shareholders. The strong fundamentals of the Group ensure we are well positioned to take advantage of emerging opportunities for growth. Public transport is central to supporting economic growth and meeting the global challenge of climate change. In the UK, high quality public transport will be at the heart of the successful delivery of the London 2012 Olympic and Paralympic Games. We believe the outlook for our bus and rail services is positive. We have the people, the products and the passion for public transport that will deliver for our customers and our shareholders. 3.10 Principal risks and uncertainties Like most businesses, there are a range of risks and uncertainties facing the Group and the matters described below are not intended to be an exhaustive list of all possible risks and uncertainties. Generally, the Group is subject to risk factors both internal and external to its businesses. External risks include global political and economic conditions, competitive developments, supply interruption, regulatory changes, foreign exchange, materials and consumables (including fuel) prices, pensions funding, environmental risks, industrial action, litigation and the risk of terrorism. Internal risks include risks related to capital expenditure, acquisitions, regulatory compliance and failure of internal controls. Details of risk management procedures are given on page 27. The focus below is on those specific risks and uncertainties that the Directors believe are the most significant to the Group, taking account of the likelihood of occurrence of each risk and the potential effect on the Group. page 14 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 15 3.10.1 Catastrophic events There is a risk that the Group is involved (directly or indirectly) in a major operational incident resulting in significant human injuries or damage to property. This could have a significant impact on claims against the Group, the reputation of the Group and its chances of winning and retaining contracts or franchises. Our UK Rail businesses are subject to complex contractual arrangements. Contractual management is an important part of our rail activities because the way in which contracts are managed can be a significant determinant of financial performance. Compliance with franchise conditions is closely managed and monitored and procedures are in place to minimise the risk of non-compliance. The Group has a proactive culture that puts health and safety at the top of its agenda in order to mitigate the potential for major incidents. In the unlikely event that a major incident did occur, the Group has procedures in place for responding to such incidents. 3.10.2 Terrorism There have been multiple acts of terrorism on public transport systems and other terrorist attacks that whilst not directly targeting public transport have discouraged travel. There is a risk that the demand for the Group’s services could be adversely affected by a significant terrorist incident. Such a fall in demand would have a negative effect on the Group’s revenue and financial performance. The Group has plans in place designed to reduce the financial impact of a terrorist incident and these plans take account of the Group’s experience of managing the North American business during the period of depressed demand following the major terrorist attack on 11 September 2001. 3.10.3 Economy The economic environment in the geographic areas in which the Group operates affects the demand for the Group’s bus and rail services. In particular, the revenue of the Group’s UK rail operations is historically correlated with factors such as UK GDP and Central London Employment. In North America, a greater proportion of the revenue is derived from tour, charter and sightseeing services than in the UK and these services tend to be more susceptible to economic changes. The revenue and profit of the Group could therefore be positively or negatively affected by changes in the economy. Management monitors actual and projected economic trends in order to match capacity to demand and where possible, minimise the impact of adverse economic trends on the Group. 3.10.4 Rail cost base A substantial element of the cost base in the Group’s UK Rail Division is essentially fixed because under its UK rail franchise agreements, the Group is obliged to provide a minimum level of train services and is therefore unable to flex supply in response to short-term changes in demand. In addition, a significant part of the cost base is comprised of payments to the infrastructure provider, Network Rail, and payments under train operating leases which are committed and do not vary with revenue. Accordingly, a significant proportion of any change in revenue (for example, arising as a result of the risks described in sections 3.10.2 and 3.10.3) will impact profit in the UK Rail Division. This risk is taken account of when bidding for new rail franchises (see 3.10.5) and for current franchises we look to closely manage those variable costs that we can control. 3.10.5 Sustainability of rail profits A significant element of the Group’s revenue and profit is generated by UK rail franchises. There is a risk that the Group’s revenue and profit could be significantly affected (either positively or negatively) as a result of the Group winning new franchises, failing to retain its existing franchises or winning new franchises on unattractive terms. In order to manage the risks, the Group has devoted significant management resource and financial investment to bidding for new rail franchises. Appropriately experienced personnel are retained to work on rail bids and third party consultants are engaged to provide additional expertise. The Board approves the overall rail bidding strategy and the key parameters for each bid. 3.10.6 Breach of franchise The Group is required to comply with certain conditions as part of its rail franchise agreements. If it fails to comply with these conditions, it may be liable to penalties including the potential termination of one or more of the rail franchise agreements. This would result in the Group losing the right to continue operating the affected operations and consequently, the related revenues and cash flows. The Group may also lose some or all of the amounts set aside as security for the shareholder loan facilities, the performance bonds and the season ticket bonds. The Group can do more to prevent breaches of franchise where it has sole control than where it has joint control. As the holder of a 49% joint venture interest in Virgin Rail Group, the Group has less control over the joint venture’s operations and that means the Group’s management may be less able to prevent a breach of the Virgin Rail Group franchise agreement. 3.10.7 Pension scheme funding The Group participates in a number of defined benefit pension schemes. There is a risk that the cash contributions required to these schemes increases or decreases due to changes in factors such as investment performance, the rates used to discount liabilities and life expectancies. Any increase in contributions will reduce the Group’s cash flows. Decisions on pension scheme funding, asset allocation and benefit promises are taken by management and/or pension scheme trustees in consultation with trade unions and suitably qualified advisors. A Pensions Oversight Committee has been established comprising the Finance Director, a Non- Executive Director and other senior executives, to oversee the Group’s overall pensions strategy. The Board participates in major decisions on the funding and design of pension schemes. 3.10.8 Insurance and claims environment The Group receives claims in respect of traffic incidents and employee claims. The Group protects itself against the cost of such claims through third party insurance policies. An element of the claims is not insured as a result of the “excess” on insurance policies. There is a risk that the number or magnitude of claims are not as expected and that the cost to the Group of settling these claims is significantly higher or lower than expected. In the US, in particular, there is a risk that given the size of the “excess”, that a small number of large-value claims could have a material impact on the Group’s financial performance and/or financial position. The Group has a proactive culture that puts health and safety at the top of its agenda and this helps mitigate the potential for claims arising. Where claims do arise, they are managed by dedicated insurance and claims specialists in order to minimise the cost to the Group. Where appropriate, legal advice is obtained from appropriately qualified advisors. The balance between insured and retained risks is re-evaluated at least once a year and insurance and claims activity is monitored closely. 3.10.9 Regulatory changes and availability of public funding Public transport is subject to varying degrees of regulation across the locations in which the Group operates. There is a risk that changes to the regulatory environment could impact the Group’s prospects. Similarly, many of the Group’s businesses benefit from some form of financial support from government including direct financial support, the provision of equipment, government contracts and concessionary fare schemes. There is a risk that the availability of sufficient government financial support changes due to regulatory or other reasons. The UK Government’s stated policy to reduce spending has increased the likelihood of this risk crystallising. The UK Bus (regional operations) profit for the year ended 30 April 2011 included £78.7m (2010: £80.m) of Bus Services Operators Grant, £231.4m (2010: £230.0m) of concessionary revenue and £101.8m (2010: £106.3m) of tendered and school bus revenue. In the UK, the study of the UK bus market by the competition authorities is an example of a regulatory matter affecting our business. Whilst at this stage, we do not expect this to have a material impact on the Group’s financial performance or financial position, we continue to monitor developments closely. Management closely monitors relevant proposals for changes in the regulatory environment and communicates the Group’s views to key decision makers and bodies. The Group actively participates in various industry and national trade bodies along with domestic and international government forums. The Group seeks to maintain good, co-operative relationships with all levels of government, by developing and promoting ideas that offer cost effective ways of improving public transport. 3.10.10 Management and Board succession The Group values the continued services of its senior employees, including its Directors and management who have operational, marketing, engineering, technical, project management, financial and administrative skills that are important to the operation of the Group’s business. Stagecoach Group plc | page 15 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 16 Operating and Financial Review Succession planning for the Directors and senior management is an important issue and as such is considered by the Nomination Committee (as described in section 8.3) and the Board. The appropriate level of management deals with recruitment and retention of other staff. 3.10.11 Disease There have been concerns in recent years about the risk of a swine flu pandemic, which follows previous concerns over bird flu and SARS. There is a risk that demand for the Group’s services could be adversely affected by a significant outbreak of disease. Such a fall in demand would have a negative impact on the Group’s revenue and financial performance. The Group has plans in place to respond to any significant outbreak of disease. 3.10.12 Information technology The Group is reliant on information technology for sales, operations and back office functions. Information technology failures or interruptions could adversely affect the Group. An increasing proportion of the Group's sales are made via the Internet. There is a risk that the Group's capability to make Internet sales either fails or cannot meet levels of demand and the time taken to implement restorative actions is unacceptably long due to insufficient resource being available and/or over reliance on a small number of service providers. This risk could result in significant levels of lost revenue at a time when the Group is investing in megabus.com coach operations in North America, of which Internet sales is a fundamental part. A significant and ongoing megabus.com website failure could severely affect the megabus.com brand and also give a competitor an advantage during the time of the failure. The Group is continually investing in its information technology systems, people and suppliers to ensure the robustness of its information technology. It is developing new Internet sales platforms and continues to look to ensure that it secures reliable service provision. 3.10.13 Treasury risks Details of the Group’s treasury risks are discussed in note 27 to the consolidated financial statements, and include the risks arising from movements in fuel prices. 3.11 Corporate social responsibility Responsible business remains central to what we do every day – from the principles that underpin our business, to the way we support our employees and the steps we take to engage with our stakeholders. The Group has published separate documents outlining its sustainability strategy and its approach to corporate social responsibility. These documents and additional information and case studies are provided on our website at http://www.stagecoachgroup.com/scg/csr. As a result, this section includes examples of our initiatives to illustrate our approach to these issues. We are a key part of communities in the UK and North America, providing lifeline transport services and significant job opportunities. People and partnership are central to the success of our approach. Our focus is on growing our business sustainably, enhancing the communities in which we operate, delivering value to our shareholders and helping to meet the global challenge of climate change. Stagecoach Group is consistently rated highly against the other UK major transport groups in comparative studies examining social, environmental and ethical policies and performance. For the second time in three years, the Group headed the transport sector in the Britain’s Most Admired Companies awards. Stagecoach was rated in the top 20 companies in 2010 out of the full survey of more than 200 businesses assessed. The Group was ranked first in the transport sector for the quality of goods and services, community and environmental responsibility, and use of corporate assets. Our corporate responsibility strategy focuses on a number of specific key areas: • Our people and our customers • Safety and security • Accessibility and affordability • Environmental performance • Building community relationships • Corporate governance Many stakeholders are involved in the success of our business and information on how we build relationships with them can be found on our website at http://www.stagecoachgroup.com/scg/csr/stakeholders During the past year, we have undertaken further initiatives to improve and make a difference in many of these areas. The information below provides just a few highlights of our commitment in action. 3.11.1 New Code of Business Conduct Stagecoach Group has a set of core values and policies in a number of areas: how we deal with our employees, suppliers, customers, competitors, and the wider communities in which we work. These values apply to every director and employee in all our companies across our global operations. The Board of Directors remains committed to ensuring the correct processes, controls, governance and culture exist to support the maintenance of these values and behaviours. The Group will shortly finalise a new Code of Conduct setting out these key principles and providing practical examples and advice to act as a guide to employees’ corporate behaviour. The Code of Conduct will include information on Stagecoach’s anti-corruption policy and programme, which is supported by its Board of Directors and overseen by the Group Company Secretary. The Board of Directors does not tolerate bribery or corruption and periodically assesses the risk of bribery and corruption. The new Code of Conduct will be supported by a communications programme to raise awareness among employees of the importance of living up to the Company's values. 3.11.2 Supporting and recognising our people Our Healthy Heart Bus initiative – the first of its kind in the UK – is continuing to benefit employees across the country. The voluntary heart health screening programme for employees in our UK Bus division is delivered in partnership with the UK's largest independent hospital provider, BMI Healthcare. A bus refurbished as a mobile cardio-screening unit is touring our bus depots, providing free heart health check-ups for thousands of staff. During the year, we have extended the scope of the scheme to cover all UK Bus employees regardless of length of service. Employees receive individual advice on ways to improve their heart health and access further medical tests through their GP if required. We also believe it is important to recognise the excellent work our employees do across our operations in the UK and North America. This year, we extended the scope of our Stagecoach Champions recognition awards to cover new categories. Gold, Silver and Bronze awards were presented for excellence in the areas of safety, environment, community, health, customer service and innovation. 3.11.3 Promoting safety A commitment to the highest standards of safety is at the heart of our business. Public transport remains the safest way to travel and we have a good safety record. We have a proactive culture across the Group that ensures the health and safety of our customers and our employees is our top priority and goes beyond strict adherence to legislative regulations. Health and safety is monitored and reported on across Stagecoach Group and immediate action is taken to address issues in our business processes. Our Health, Safety and Environmental Committee, chaired by a non-Executive director, considers these issues and monitors a range of relevant performance indicators. It reports to the Board on these matters. Our employees are provided with appropriate health and safety training and encouraged to report any concerns. We expect our suppliers and contractors to have a similar commitment to complying with appropriate regulations in this area. In the UK, we have in place an engineering maintenance regime which is stricter than legal requirements and this is bolstered by a rolling programme of operational and engineering audits at our depots. Trials have been conducted in North America of a device to support existing processes to promote safety among drivers on overnight duties. The “Nap- Zapper” device is clipped to the ear of a driver and emits a loud buzz if it detects signs of driver fatigue. We have also undertaken analysis of lifestyle risks to drivers, including irregular sleep or work hours and poor exercise and diet. We were one of a number of bus operators who took part in a multi-agency exercise in November 2010 to simulate the evacuation of New Jersey residents from New York City during a man-made or natural disaster. page 16 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:38 Page 17 • installing new energy efficient hand-driers in facility toilets in the United States, as well as water coolers which cut landfill waste by removing the need for bottles. • introducing energy saving lighting and schemes to recycle oil filters and aerosol cans at our Canadian operations. The Group is working with industry partners and the UK Government on climate change issues, including contributing to the development of policies on adapting infrastructure to mitigate the impacts of climate change. Stagecoach is also seeking more pro-bus and coach policies through the Greener Journeys campaign (www.greenerjourneys.com) and highlighting the need to tackle energy security risks through its work as part of the UK Industry taskforce on Peak Oil and Energy Security (www.peakoiltaskforce.net). We continue to report annually through our website on our carbon footprint and our progress in reaching our carbon reduction targets. In addition, we disclose details of our strategy and performance through the Carbon Disclosure Project ("CDP"), the world’s largest corporate greenhouse gas emissions database. The Group is the only UK public transport group in the FTSE350 selected for the CDP’s Carbon Disclosure Leadership Index. Stagecoach has received further independent recognition in the past year for its environmental initiatives. It won the Travel and Transport category at the 2010 Green Business Awards for its innovative Bio-bus scheme in Kilmarnock where a fleet of buses run on 100% sustainable biofuel made from used cooking oil and other food industry by-products. Stagecoach was also a finalist in the Company of the Year category at the 2011 BusinessGreen Leaders Awards, while while the Chief Executive, Sir Brian Souter, was shortlisted as Leader of the Year. 3.11.6 Supporting community projects We help local people share in our success by funding the vital work of local, national and international charities. During the year ended 30 April 2011, £0.6m (2010: £0.6m) was donated by the Group to help many worthwhile causes, including many health charities and local community projects. The Group has provided financial support for the road safety charity, Brake, as well as the Railway Children, which works for runaway and abandoned children who live in or around the world's railway stations. Our funding is also helping support the work of the National Rail Chaplaincy Service, whose welfare support is available to all current and retired rail staff members, their families and the travelling public. During the year, we have made significant donations to Marie Curie Cancer Care’s Big Build Appeal, Down’s Syndrome Scotland and Help for Heroes, which raises money to support members of the Armed Forces who have been wounded in the service of their country. We have also provided backing for dozens of smaller initiatives, as well as offering match funding to complement many fund-raising activities by our employees for national campaigns or local good causes. 3.11.7 Corporate Governance Stagecoach Group is committed to the principles of good corporate governance, as described in section 6. 3.11.8 Further information Full details of our corporate social responsibility strategy and further case studies can be found on the Stagecoach Group website at http://www.stagecoachgroup.com/scg/media/publications/policydocs/ csr-strategy.pdf A copy of the Group’s sustainability strategy is available online at http://www.stagecoachgroup.com/scg/media/publications/policydocs/ sustainability_strategy_v2.pdf. Annual updates on our environmental measures and performance are available at http://www.stagecoachgroup.com/scg/csr/environment/performance/. 3.11.4 Affordable travel We believe promoting affordable travel is a key part of driving modal shift from the private car to greener, smarter public transport. During the year ended 30 April 2011, Stagecoach has extended the footprint of its budget travel services in the UK and North America.megabus.com, our low-cost inter- city coach service, now covers around 60 locations in the UK and around a further 60 locations in the United States and Canada. megabus.com in North America won the Leading Provider of Outstanding Car Rental and Bus Deals category at the Travelzoo awards for the second year in a row, beating off competition from major global brands. Passengers can also use our discount rail service, megatrain.com, to travel for as little as £1 (plus booking fee) to around 30 locations in the UK on the South West Trains, East Midlands Trains and Virgin Trains networks. megabusplus.com, our innovative budget coach and rail service, has also expanded during the year. We continue to focus on offering value-for-money local bus travel in our regional networks across through the UK. The Group is also investing in technology to make it easier for customers to find good travel deals. East Midlands Trains’ award-winning online Best Fare Finder provides a quick and easy way for passengers to access the cheapest available fare for around 450 different UK train journeys. 3.11.5 Sustainable business The Group’s five-year sustainability strategy, launched in April 2010, is progressing well and we have made further progress towards reaching our goals. We are investing £11m in a range of measures and have set specific targets for each of our businesses. The Group is targeting an overall reduction of 8% in buildings CO2e (carbon dioxide equivalent) emissions and a cut of 3% in annual fleet transport CO2e emissions by April 2014. It follows significant reductions already achieved in previous years. As well as ensuring we meet our regulatory obligations, we believe our initiatives can help improve efficiency, cut costs and contribute to the growth of our business. We held our third annual Green Week in May 2011 to drive forward awareness of environmental issues in the UK and North America among employees and customers. As well as demonstrating the measures we are taking across the Group, Green Week highlighted the environmental and financial benefits of using public transport. Green roadshows, events, competitions and demonstrations were held at a number of the Group's bus and rail operations. Employees were also given the chance to put forward their own green suggestions, while proceeds from fund-raising initiatives were donated to environmental charities. Stagecoach Group continues to take steps to ensure compliance with its obligations under the Carbon Reduction Commitment Energy Efficiency Scheme. The Group’s achievement of the prestigious Carbon Trust Standard, which covers all of its UK operations, will give the business a higher ranking in the performance league table. The Group intends to apply for recertification for the Standard or an alternative standard certified by the Department of Energy and Climate Change during the year ending 30 April 2012. During the year ended 30 April 2011, the Group’s initiatives to reduce the impact of its businesses on the environment have included: • a multi-million-pound investment in a hi-tech eco-driving system in the UK designed to reduce fuel consumption and improve safety.The scheme also offers employees the chance to earn “green points” that are converted into financial benefits from a potential £900,000 annual bonus pot. • leading the way on investing in greener vehicles, placing orders for more than 140 hybrid electric buses which deliver a 30% reduction in carbon emissions compared to standard vehicles. • launching a fleet of greener buses powered by household rubbish and animal waste converted into biomethane. • installing new ‘intelligent’ lighting systems at bus depots and at railway stations, which use movement sensors to determine the amount of light required. • issuing bus drivers across the UK with fleece jackets made from recycled plastic bottles. • investing £2.2m in a major regenerative braking project at South West Trains. The technology, being installed on to more than 200 trains, returns electricity to the third rail system, allowing trains in close proximity to draw on the electrical supply. • using an innovative fuel additive to reduce fuel consumption at East Midlands Trains, as well as testing an energy-saving train engine standby mode. • introducing energy wardens and greener driver training measures at East Midlands Trains. Stagecoach Group plc | page 17 Executive Directors 4.1 Sir Brian Souter Position: Chief Executive Appointment to the Board: n/a (co-founder) Age: 57 Committee Membership: None. External appointments: Chairman, Souter Investments. Previous experience: A Chartered Accountant, Sir Brian co-founded Stagecoach, Scottish plc of the year 2008. Sir Brian was named Businessman of the year at the Insider Elite Awards 2004. Executive responsibilities: Sir Brian is the architect of the Group’s strategy and philosophy. He has extensive knowledge of the ground transportation industry around the world and is responsible for managing all of the Group’s operations. 4.2 Martin Griffiths Position: Finance Director Appointment to the Board: 2000 Age: 45 Committee Membership: Pension Oversight and Health, Safety and Environmental. External appointments: Virgin Rail Group (Co-Chairman), Robert Walters plc (Senior Independent Non-Executive Director), AG Barr plc (Non-Executive Director). Previous experience: A Chartered Accountant, Martin Griffiths is a member and former Chairman of the Group of Scottish Finance Directors and former Director of Troy Income & Growth Trust plc, Trainline Holdings Limited, RoadKing Infrastructure (HK) Limited and Citybus (HK) Limited. He was young Scottish Finance Director of the year in 2004. Executive responsibilities: Martin Griffiths is responsible for the Group’s overall financial policy, taxation, treasury, employee benefits and pensions management. He supports the Chief Executive in all aspects of the management of the Group’s operations and new business development. o o o a ( u N a i a 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 18 4 Directors’ biographies Details of corporate governance, including the operation of the Board of Directors, are given in section 6 of this Annual Report. A brief biography of each director is given below. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 page 18 | Stagecoach Group plc o s o c S R i a o 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 19 Non-Executive Directors 4.3 Sir George Mathewson Position: Non-Executive Chairman Appointment to the Board: 2006 Age: 71 Committee Membership: Nomination. External Appointments: Cheviot Asset Management (Chairman), Arrow global Ltd (Chairman), DBRS Inc (Board member). Previous Experience: Former Chairman of the Royal Bank of Scotland Group plc. Former Chief Executive of the Scottish Development Agency (now Scottish Enterprise). Former Director of Scottish Investment Trust plc. Former member of the Board of Directors of the Institute of International Finance. Former member of the Financial Reporting Council. Former Chairman of Wood Mackenzie Limited. Former Chairman of Council of Economic Advisors, Past President of the International Monetary Conference. 4.4 Ewan Brown CBE Position: Non-Executive Director Appointment to the Board: 1988 Age: 69 Committee Membership: Pension Oversight (Chair) and Nomination. External appointments: Noble Grossart Holdings Ltd (Non-Executive Director), Royal Society of Edinburgh (Treasurer) Senior Governor of St Andrew University, Deputy Chair of the Edinburgh International Festival. Previous experience: Executive Director of Noble Grossart until 2003, a former Chairman of TIE and Lloyds TSB Scotland, Non-Executive Director of the Wood Group and Lloyds Banking Group plc, Chairman of Creative Scotland 2009 Limited. 4.5 Ann Gloag OBE Position: Non-Executive Director Appointment to the Board: n/a (co-founder) Age: 68 Committee Membership: Health, Safety and Environmental. External appointments: Mercy Ships (International Board Member). Previous experience: Ann Gloag co-founded Stagecoach and served as executive director until 2000. 4.6 Garry Watts MBE Position: Non-Executive Director (Senior Independent) Appointment to the Board: 2007 Age: 54 Committee Membership: Audit (Chair), Remuneration and Nomination. External appointments: Spire Healthcare Limited (Executive Chairman), Coca-Cola Enterprises, Inc (Non-Executive Director). Previous experience: A Chartered Accountant, Garry Watts is a former Chief Executive of SSL International plc, Non-Executive Director of the Medicines and Healthcare Products Regulatory Agency and Protherics plc and Executive Director of Celltech plc, Finance Director of Medeva plc and partner with KPMG. 4.7 Helen Mahy Position: Non-Executive Director Appointment to the Board: 2010 Age: 50 Committee Membership: Health, Safety and Environmental (Chair), Audit. External appointments: National Grid plc (Group Company Secretary and General Counsel, member of Executive Committee); advisory Board member of Opportunity Now. Previous experience: Former Non-Executive Director of Aga Rangemaster Group plc and Group General Counsel and Company Secretary of Babcock International Group PLC. 4.8 Phil White CBE Position: Non-Executive Director Appointment to the Board: 2010 Age: 61 Committee Membership: Audit, Remuneration (Chair) and Health, Safety and Environmental. External appointments: Lookers plc (Non-Executive Chairman), Kier Group plc (Non-Executive Chairman), Unite Group plc (Non-Executive Chairman). Previous experience: A Chartered Accountant, Phil White served as Chief Executive of National Express Group plc from 1997 to 2006. 4.9 Will Whitehorn Position: Non-Executive Director Appointment to the Board: 2011 Age: 51 Committee Membership: Remuneration, Nomination. External Appointments: Loewy Group Ltd (Chairman), Scottish Exhibition Centre Ltd (Non-Executive Director), ILN Group Limited (Non-Executive Director). Member of the Science Technology Facilities Council and member of the First Minister of Scotland’s ‘GlobalScot’ business mentoring network. Previous Experience: Former President of Virgin Galactic and Brand Development and Corporate Affairs Director at Virgin Group. Former Non-Executive Chairman of Next Fifteen Communications Group plc. Stagecoach Group plc | page 19 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 20 5. Directors’ report Principal activity 5.1 The Group’s principal activity is the provision of public transport services in the UK and North America. A fuller description of the Group’s business is provided in section 3.3 of this Annual Report. Business review 5.2 The Group is required to produce a business review complying with the requirements of the Companies Act 2006. The Group has complied with these minimum requirements as part of the Operating and Financial Review, which also provides significant information over and above the statutory minimum. The Operating and Financial Review, which forms part of the Directors’ report, is contained in section 3 of this Annual Report. 5.3 Group results and dividends The results for the year are set out in the consolidated income statement on page 41. An interim dividend of 2.2p per ordinary share was paid on 9 March 2011. The Directors recommend a final dividend of 4.9p per share, making a total dividend of 7.1p per share in respect of the year ended 30 April 2011. Subject to approval by shareholders, the final dividend will be paid on 5 October 2011 to those shareholders on the register on 2 September 2011. 5.4 Directors and their interests The names, responsibilities and biographical details of the current members of the Board of Directors appear on pages 18 and 19. Janet Morgan and Iain Duffin left the Board on 30 June 2010. Bob Speirs left the Board on 31 December 2010. Will Whitehorn joined the Board on 1 May 2011. The participation in full Board meetings and meetings of committees for all directors who served during the year is provided on page 26. Table A shows the current directors' interests in the Company’s shares. Following the introduction of the Financial Reporting Council’s UK Corporate Governance Code in 2010, all members of the Board shall stand for election or re-election at every Annual General Meeting, including the Annual General Meeting to be held in 2011: The Board reviews its development plans at least annually as part of its performance evaluation. The assessment involves a consideration of the balance of skills, knowledge and experience of the Directors. The Board also considers whether the Directors have sufficient time to properly discharge their duties, which includes a consideration of any other appointments that each director has. The Board believes that the performance of each director continues to be effective and that they continue to demonstrate commitment to their respective roles. The Board therefore considers it is appropriate that each of the directors be elected or re-elected at the 2011 Annual General Meeting. TABLE A Sir Brian Souter Martin Griffiths Ewan Brown Ann Gloag Sir George Mathewson Helen Mahy Garry Watts Phil White Will Whitehorn (holding on appointment on 1 May 2011 and 29 June 2011) Number of ordinary shares 30 April and 29 June 2011 30 April and 24 June 2010 108,625,564 202,337 See below 78,192,161 35,800 5,749 20,000 5,088 108,574,304 200,160 See below 78,125,900 35,800 5,691 20,000 5,088 90,361 n/a Ewan Brown has an indirect interest in the share capital of the Company. He and his connected parties own approximately 22% (2010: 22%) of the ordinary shares of Noble Grossart Holdings Limited, which in turn through its subsidiary, Noble Grossart Investments Limited, held 4,084,999 shares in the Company at 30 April and 29 June 2011 (2010: 4,084,999). The Listing Rules of the Financial Services Authority (LR 9.8.6 R(1)) require listed companies to disclose in their Annual Reports the interests of each director. The Directors’ interests set out in Table A above have been determined on the same basis as in previous years and are intended to comply with the requirements of LR 9.8.6 R(1), which is not the basis used to determine voting rights for the purposes of notifying major interests in shares in accordance with the Disclosure and Transparency Rules of the Financial Services Authority. Accordingly, the interests of Sir Brian Souter and Ann Gloag shown below do not represent their voting rights determined in accordance with the Disclosure and Transparency Rules which as at 30 April 2011 were 99,757,689 (2010: 99,651,620) and 66,477,292 (2010: 66,426,031) respectively. Full details of options and other share based awards held by the Directors at 30 April 2011 are contained in the Directors’ remuneration report on pages 32 to 38. No Non-Executive Director had an interest in share options or the Executive Participation Plan at 30 April 2010, 23 June 2010, 30 April 2011 and 29 June 2011. In addition to their individual interests in shares, Sir Brian Souter and Martin Griffiths are potential beneficiaries of the Stagecoach Group Employee Benefit Trust 2003, which held 1,854,213 (2010: 2,003,075) ordinary shares of 56/57th pence each as at 30 April 2011. Martin Griffiths is also a potential beneficiary of the Stagecoach Group Qualifying Employee Share Trust (“QUEST”), which held 333,372 (2010: 333,372) ordinary shares of 56/57th pence each as at 30 April 2011. No director had a material interest in the loan stock or share capital of any subsidiary company. Indemnification of directors and officers 5.5 The Company maintains Directors’ and Officers’ Liability Insurance in respect of legal action that might be brought against its directors and officers. In accordance with the Company’s Articles of Association, and as permitted by law, the Company has indemnified each of its directors and other officers of the Group against certain liabilities that may be incurred as a result of their positions with the Group. In May 2010, the indemnities were extended to the fullest extent permitted by law. 5.6 Substantial shareholdings By 29 June 2011 (being the latest practical date prior to the date of this report), the Company had been notified of the following major interests in voting rights in the Company (other than certain Directors’ shareholdings details of which are set out in section 5.4 of this report): Standard Life Investments Ltd Aegon UK Group of Companies Blackrock Inc JPMorgan Chase & Co Legal & General Group plc 6.15% 5.04% 4.90% 4.74% 3.99% 5.7 Employment policies The Group employs around 34,000 people. The Group strives to meet its business objectives by motivating and encouraging its employees to be responsive to the needs of its customers and to maintain and, where possible, improve operational performance. The Group is also committed to providing equality of opportunity to employees. This applies to appropriate training, career development and promotion opportunities for all employees regardless of physical disability, gender, sexual orientation, religion, belief, age, nationality, race or ethnic origin. The Group gives full consideration to applications for employment from disabled persons where a disabled person can adequately fulfil the requirements of the job. Where existing employees become disabled, it is the Group’s policy wherever practicable to provide continuing employment under normal terms and conditions and to provide training, career development and promotion to disabled employees wherever appropriate. The Group is committed to employee participation and uses a variety of methods to inform, consult and involve its employees. Employees participate directly in the success of the business through the Group’s bonus and other remuneration schemes and are encouraged to invest through participation in share option schemes. page 20 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 21 The Group periodically arranges meetings that bring together representatives from management and trade unions. Discussions take place regularly with the trade unions representing the vast majority of the Group’s employees on a wide range of issues. The Group also produces a range of internal newsletters and information circulars that keep employees abreast of developments. Employees are encouraged to discuss matters of interest to them and subjects affecting day-to-day operations of the Group with management. The Group is committed to developing a culture of openness across all its businesses and ensuring the highest standards of probity and accountability. The Board actively encourages employees with serious concerns about the interests of others or the Group to come forward. The Group has a policy in place called ‘‘Speaking Up” which is designed to ensure processes exist whereby employees can raise serious concerns constructively without fear of victimisation, subsequent discrimination or disadvantage. 5.8 Statement of Directors’ responsibilities in respect of the Annual Report, the Directors’ remuneration report and the financial statements The Directors are responsible for preparing the Annual Report, the Directors’ remuneration report and the consolidated and the parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union, and the parent company financial statements and the Directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether IFRSs as adopted by the European Union, and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the consolidated and parent company financial statements respectively; and • prepare the consolidated and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Group or as the case may be, the Company, will continue in business The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of financial information on the Company’s corporate website, www.stagecoachgroup.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the Directors, whose names and functions are listed in section 4 of the annual report confirm that, to the best of their knowledge: • the consolidated financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and • the Directors’ report contained in sections 3 to 5 of this Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. 5.9 Conflicts of interest Under the Companies Act 2006, a director has a statutory duty to avoid a situation where he or she has, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the relevant company’s interests. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts where appropriate, if the relevant company’s articles of association contain a provision to this effect. The Company’s articles of association give the Directors authority to approve conflict situations including other directorships held by the Directors. There are safeguards in place that apply when the Directors decide whether to authorise a conflict or potential conflict. Firstly, only the Directors who have no interest in the matter being considered are able to take the relevant decision and secondly, in taking any decision, the Directors must act in a way that they consider, in good faith, will be most likely to promote the Company’s success. The Directors are able to impose limits or conditions when giving authorisation if they think that this is appropriate. From the period from 1 May 2010 until the date of this report, the Board considers that the Directors’ powers of authorisation of conflicts have operated effectively and those procedures set out above have been properly followed. 5.10 Suppliers payment policy and practice It is the Group’s policy to agree appropriate terms of payment with suppliers for each transaction or series of transactions, and to abide by those terms based on the timely submission of satisfactory invoices. The policies followed by each of the major UK operating subsidiaries are disclosed in the financial statements of those companies. The Company normally settles trade creditors on 30 to 45 day terms. For the Group as a whole, the trade creditors outstanding at the year end represented 36 days’ purchases (2010: 35 days). 5.11 Land and buildings In the opinion of the Directors, there is no material difference between the open market value of the Group’s interest in land and buildings and its net book value. 5.12 Financial risk management Information regarding the Group’s use of financial instruments, financial risk management objectives and policies and exposure to price, credit, liquidity and cash flow risks can be found in note 27 to the consolidated financial statements. 5.13 Charitable and political contributions The Group made charitable donations of £0.6m (2010: £0.6m) during the year. It is the Group’s policy not to make political contributions and, accordingly, there were no contributions for political purposes during the year (2010: £Nil). 5.14 Authority for company to purchase its own shares At the 2010 Annual General Meeting, the Company was granted authority by its shareholders to repurchase up to 72,006,618 of its ordinary shares. During the year, no ordinary shares were repurchased. Under the existing authority, the Company may therefore repurchase up to 72,006,618 ordinary shares. This authority will expire at the conclusion of the 2011 Annual General Meeting unless revoked, varied or renewed prior to this date. A resolution will be proposed at the next Annual General Meeting that the Company be authorised to repurchase up to approximately 10% of its ordinary shares at the Directors’ discretion. If passed, the resolution will replace the authority granted at the 2010 Annual General Meeting and will lapse at the conclusion of the 2012 Annual General Meeting. Stagecoach Group plc | page 21 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 22 Directors’ report 5.15 Shareholder and control structure At 30 April 2011, the Company’s issued share capital comprised two classes of shares, referred to as “ordinary shares” and “B shares”. As at 30 April 2011, there were 720,124,950 (2010: 720,066,186) ordinary shares in issue with a nominal value of 56/57th pence each. The ordinary shares are admitted to trading on the London Stock Exchange. On a show of hands at a general meeting of the Company, every holder (and proxy) of ordinary shares present in person and entitled to vote shall have one vote (except that in certain circumstances a proxy may have one vote “for” and one vote “against”) and on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of a general meeting will specify any deadlines for exercising voting rights in respect of the meeting concerned. The holders of ordinary shares are entitled to be paid the profits of the Company available for distribution and determined to be distributed pro-rata to the number of ordinary shares held. There are no restrictions on the transfer of ordinary shares other than: • certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); • pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the Group require the approval of the Company to deal in the Company’s securities; and • shares held by employee benefit trusts may only be transferred by those trusts in accordance with the relevant trust deeds. None of the ordinary shares in issue provide the holders with special control rights. As at 30 April 2011, there were 4,087,302 (2010: 5,187,055) B shares in issue with a nominal value of 63 pence each. On 31 May 2011 all of the remaining B Shares were redeemed at their nominal value of 63p per share. Section 5.6 of this Directors’ report gives details of any shareholders (other than the Directors) that hold major interests in the voting rights in the Company. Details of each director’s interests in the share capital of the Company are given in section 5.4 of this Directors’ report. Two directors of the Company, Sir Brian Souter and Ann Gloag, who are siblings were interested in 25.9% of the ordinary shares in issue as at 30 April 2011 (2010: 25.9%). The other directors of the Company held less than 0.1% of the ordinary shares in issue as at 30 April 2011 (2010: less than 0.1%). In addition to the Directors’ individual interests in shares, two employee benefit trusts held a further 0.3% of the ordinary shares in issue as at 30 April 2011 (2010: 0.3%). The shares held by the trusts are for the benefit of employees of the Group, and the voting rights are exercised by the trustees. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. Directors are elected by ordinary resolution at a general meeting of holders of ordinary shares. The Directors have the power to appoint a director but any person so appointed by the Directors shall hold office only until the next annual general meeting and shall then be eligible for election by ordinary resolution at that meeting. The Company’s Articles of Association may only be amended by special resolution at a general meeting of holders of ordinary shares. The powers of the Directors to issue or repurchase ordinary shares are set by an ordinary resolution at a general meeting of holders of ordinary shares. Section 5.14 of this Directors’ report sets out the current authority for the Company to purchase its own shares. There are a number of agreements that take effect, alter or terminate on a change of control of the Company such as commercial contracts, bank loan agreements and employee share plans. The most significant of these are: • The Group operates the South Western Trains and East Midlands Trains rail franchises. The Group’s joint venture, Virgin Rail Group, operates the West Coast Trains franchise. The franchise agreements in respect of these three franchises each contain provisions that would enable the Department for Transport to terminate the franchises on a change of control of the franchise. • Each of the three rail franchises referred to above lease trains. The leases generally contain termination rights for the benefit of the lessor on a change of control of the Group. • The Group’s bank facilities (including asset finance) contain provisions that would require repayment of outstanding borrowings and other drawings under the facilities following a change of control of the Group. • The Group’s arrangements with surety companies for the issue of rail performance bonds and season ticket bonds would terminate following a change of control of the Group. • The Company’s £400m 5.750% Guaranteed Bonds due 2016 contain provisions that would require repayment of the outstanding bonds following a change of control of the Group that was accompanied by a specified downgrade of certain of the Company’s credit ratings. The impact of a change of control of the Group on remuneration arrangements is explained in section 10.19. page 22 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 23 5.16 Disapplication of pre-emption rights The Company seeks approval at least annually from its shareholders for the disapplication of pre-emption rights. The approval sought is generally to disapply pre-emption rights in respect of the issue of equity securities for cash up to approximately 5% of those in issue. The following ordinary shares have been issued on a non pre-emptive basis over the last five years: Year ended 30 April 2011 2010 2009 Total last 3 years 2008 2007 Total last 5 years Shares issued on a non pre-emptive basis in connection with employeee share schemes Shares in issue at start of year Shares issued on a non pre-emptive basis as a percentage of shares in issue 58,764 587,752 1,333,135 1,979,651 10,360,416 7,398,394 19,738,461 720,066,186 719,478,434 718,145,299 1,100,998,707 1,093,600,313 <0.1% 0.1% 0.2% 0.3% 0.9% 0.7% 1.9% At 30 April 2011, the Company had 720,124,950 ordinary shares in issue. The cumulative shares issued on a non pre-emptive basis as a percentage of the ordinary shares in issue at 30 April 2011 were: Year ended 30 April 2011 Three years ended 30 April 2011 Five years ended 30 April 2011 <0.1% 0.3% 2.7% During the year ended 30 April 2008, the ordinary shares of the Company were consolidated with 9 shares issued for every 14 shares previously held. No adjustments have been made to the shares issued as shown in the table above to take account of the consolidation. 5.17 Post balance sheet events On 31 May 2011, all of the remaining 4,087,302 redeemable ‘B’ preference shares were redeemed at their nominal value of 63p per share. No redeemable ‘B’ preference shares remain in issue. 5.18 Going concern On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for the foreseeable future and, accordingly, consider it appropriate to adopt the going concern basis in preparing the financial statements. As part of the assessment of going concern, executive management provided a paper to the Audit Committee covering matters such as financial projections, sensitivity analysis, available debt facilities, credit ratings, financial risk management and bank covenants. The Board’s assessment of going concern takes account of its view of the principal business risks facing the Group. Section 3.8.9 of this Annual Report comments on liquidity, a key element of the Directors’ assessment of going concern. 5.19 Auditors In the case of each of the persons who were directors of the Company at the date when this report was approved: • so far as each of the Directors is aware, there is no relevant audit information (as defined in section 418 of the Companies Act 2006) of which the Company’s auditors are unaware; and • each of the Directors has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information (as defined) and to establish that the Company’s auditors are aware of that information. A resolution to re-appoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the next Annual General Meeting. A resolution will also be proposed that the Directors be authorised to fix the remuneration of the auditors. By order of the Board Ross Paterson Company Secretary 29 June 2011 Stagecoach Group plc | page 23 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 24 6. Corporate governance report 6.1 Introduction The Stagecoach Board is accountable to shareholders for the Group’s activities and is responsible for the effectiveness of corporate governance practices within the Group. This section of the report sets out Stagecoach Group’s corporate governance arrangements. It also includes the disclosures recommended by the Financial Reporting Council (“FRC”) Combined Code on Corporate Governance (the “Combined Code”), and describes how the principles of good corporate governance that are set out in the Combined Code have been applied. In line with best practice, separate reports are provided from each of the Audit Committee, Nomination Committee, Health, Safety and Environmental Committee and Remuneration Committee. The Stagecoach Board is committed to maintaining a corporate governance structure appropriate to the Group and its strategy. Good corporate governance remains central to delivering the Group’s objectives. As explained later in this report, we have again reviewed the effectiveness of the Board and its Committees and we consider the corporate governance structure to remain appropriate for the Group. Compliance with the Combined Code 6.2 The FRC issued the current edition of the Combined Code in June 2008, which applies to accounting periods beginning on or after 29 June 2008 and is available on the FRC’s website at http://www.frc.org.uk/corporate/combinedcode.cfm. The Directors believe that throughout the year ended 30 April 2011 the Group complied with all of the recommendations of the Combined Code. The Group also complies with the corporate governance requirements of the Financial Services Authority’s Listing Rules, and Disclosure and Transparency Rules. In May 2010, the FRC renamed the Combined Code as the UK Corporate Governance Code and made changes to it. This new edition of the Code (the “2010 Code”) applies to the Company’s financial year that began on 1 May 2011. Where appropriate, this report sets out changes made to comply with the 2010 Code. 6.3 Composition of the Board The Company’s Board now comprises the following directors: Date of appointment if later than 1 May 2010 Independent Non- Executive Director Other Director Independent Chairman 3 Sir George Mathewson Chairman Ewan Brown Non-Executive Director Helen Mahy Non-Executive Director Garry Watts Senior Independent Non-Executive Director Phil White Non-Executive Director 1 June 2010 Will Whitehorn Non-Executive Director 1 May 2011 Ann Gloag Non-Executive Director Sir Brian Souter Chief Executive Martin Griffiths Finance Director 3 3 3 3 3 3 3 3 Janet Morgan and Iain Duffin left the Board on 30 June 2010. Robert Speirs left the board on 31 December 2010. page 24 | Stagecoach Group plc The Combined Code suggests that independent non-executive directors should make up at least half of the Board (excluding the Chairman). Throughout the period from 1 May 2010 to 30 April 2011, the Board considers that it complied with this Combined Code requirement. The current position is shown in the above table. In determining the independence of non-executive directors, the Board considers a number of factors. In particular the Board satisfies itself on the following questions: • Does the director provide a robust and effective challenge to executive management? • Is the director prepared to challenge others’ beliefs, assumptions and viewpoints for the overall good of the Group and its shareholders? • Does the director effectively contribute to constructive debate by the Board and its Committees? • Is the director willing to defend his or her own beliefs and viewpoints for the overall good of the Group and its shareholders? • Does the director have a sufficiently sound and detailed knowledge of the Group’s business that enables him or her to effectively question strategy and executive management’s running of the business? Ewan Brown, one of the five independent non-executive directors shown in the above table, has served on the Board since 1988 and is a non-executive director of Noble Grossart, which is an advisor to the Company. The Company recognises and understands investor concerns over longer-serving non- executive directors but nevertheless continues to regard Ewan Brown as independent. Ewan Brown’s long association with the Group enables him to provide a robust and effective challenge to management because of the sound and detailed knowledge of the Group’s business that he has developed. The Board believes that Ewan Brown’s length of service, when taken in the context of the Board as a whole, enhances his effectiveness as a non- executive director and that he remains independent in character and judgement. During the period from the resignation of Bob Speirs as Chairman on 31 December 2010 until the appointment of Will Whitehorn as a non-executive director on 1 May 2011 the Board, excluding the Chairman, comprised seven directors of whom four, including Ewan Brown, were considered by the Board to be independent. Without the inclusion of Ewan Brown as independent, the majority of the Board would not have been independent during this period. Following the appointment of Will Whitehorn on 1 May 2011, five of the eight of the members of the Board, excluding the Chairman, are considered by the Board to be independent. . In recognition of the factors suggested by the Combined Code for determining independence, Ewan Brown does not serve on the Remuneration Committee or the Audit Committee and stood for annual election in 2010. Following the introduction of the 2010 Code, all directors will stand for election or re-election at the 2011 Annual General Meeting. 6.4 Operation of the Board The Board is generally scheduled to meet six times each year. Additional meetings of the Board are held to consider matters arising between scheduled Board meetings, where a decision of the Board is required prior to the next scheduled meeting. In addition to the formal meetings of the Board and its Committees, the Directors are in more frequent but less formal contact with each other and with the Group’s management on a range of matters. The Chairman ensures that meetings of the Board and shareholders are properly conducted and is responsible for setting and moving forward the Board’s agenda. Leadership of the Board (by the Chairman) is not the same as the leadership required (from the Group Chief Executive) to turn the Board’s strategic and policy decisions into actions. The Group Chief Executive has day- to-day responsibility for all business of the Group and carries out the agreed strategy and policies of the Board. The split of the Chairman’s and Chief Executive’s responsibilities is in writing and has been approved by the Board. The Directors’ biographies appear on pages 18 and 19 of this Annual Report and illustrate the Directors’ range of experience, which ensures an effective Board to lead and control the Group. The Non-Executive Directors bring an independent viewpoint and create an overall balance. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 25 The Executive and Non-Executive Directors have a complementary range of experience that ensures no one director or viewpoint is dominant in the decision-making process. The Chairman and the Non-Executive Directors periodically meet without the Executive Directors being present. In addition, the Non-Executive Directors, led by the Senior Independent Non-Executive Director, meet without the Chairman at least annually. All the Directors meet regularly with other senior management and staff of the Group, have access to confidential advice from the Company Secretary and may take independent legal or other professional advice at the Group’s expense where it is considered necessary for the proper discharge of their duties as directors. The Company Secretary, whose appointment and removal is a matter for the Board as a whole, is responsible to the Board for ensuring the Board procedures are complied with. All the Directors submit themselves for election by shareholders at the Annual General Meeting following their appointment. Following the introduction of the 2010 Code, all directors will stand for election or re- election at the 2011 Annual General Meeting and future Annual General Meetings. Each director receives induction training on appointment and subsequently such training, briefings and site visits as are considered necessary to keep abreast of matters affecting their roles as directors. Training can encompass health, safety, environmental, social and governance matters. The Chairman endeavours to ensure that all the Directors attend the Annual General Meeting, providing an opportunity for shareholders to meet the Directors and to address questions to them. The number of full Board meetings during the year was six. The full Board typically meets once a year at an operational location and regular communication is maintained by the Chairman with other directors between meetings to ensure all directors are well informed on strategic and operational issues. In May 2011, the Board visited the Group’s North American operations. Some of the Directors also attended health and safety meetings of operating companies during the year. The Health, Safety and Environmental Committee visits operating locations around the Group to gain greater understanding of the how the Group addresses health, safety and environmental matters. The Board has a number of matters reserved for its consideration, with principal responsibilities being to agree the overall strategy and investment policy, to approve major capital expenditure, to monitor performance and risk management procedures of senior management, to ensure that there are proper internal controls in place and to consider major acquisitions or disposals. The Directors have full and timely access to information with Board papers distributed in advance of meetings. Notable matters that the Board considered during the year ended 30 April 2011 included: • The acquisition of the East London Bus Group, completed in October 2010; • Approval of the new bank facilities committed to February 2016, completed in February 2011; • Consideration of the ongoing Greater Anglia and West Coast rail franchise bids; • Assessing the Group’s overall strategy in light of developments in the bus and rail sector; • Reviewing the composition of the Board and agreeing the appointment of new directors; • Evaluating the Group’s capital structure. The Board keeps the roles and contribution made by each director under review and changes in responsibilities are made where necessary to improve the Board’s effectiveness. To provide a more manageable process and better control, certain of the Board’s powers have been delegated to committees. Minutes are taken of each meeting of the Board and its Committees. Where any director has significant concerns that cannot be resolved about the running of the Group or a proposed action, these concerns are recorded in the minutes. It is also the Group’s policy that where a director resigns, the director is asked to provide a written statement to the Chairman of any concerns leading to his or her resignation. 6.5 Operational management of the Group The Board delegates the operational management of the Group to the Group Chief Executive and Group Finance Director (“Executive Directors”). The Executive Directors maintain day-to-day contact and meet regularly face-to- face or in video conferences with non-board senior management. There are three principal operating divisions (UK Bus: headed by a Managing Director, North America: headed by a Chief Operating Officer and UK Rail: headed by the Executive Directors,) which each comprise a varying number of autonomous business units, each headed by a chairman or managing director who is responsible for the day-to-day performance of the business unit. Each chairman or managing director is supported by his/her own management teams. Two of the joint ventures in which the Group has an interest, Virgin Rail Group and Twin America LLC, are managed independently of the Group. Each is headed by its own Chief Executive. The Group has two representatives on the Board of Virgin Rail Group and three representatives on the Board of Twin America LLC. The other trading joint venture in which the Group has an interest, Scottish Citylink Coaches Limited, has a joint board. The Group is responsible for the day-to-day management of that business. 6.6 Performance evaluation The Board assesses its own performance and the performance of each individual Board members; this assessment is co-ordinated and directed by the Chairman with the support of the Company Secretary. The Senior Independent Non-Executive Director co-ordinates the Board’s assessment of the performance of the Chairman. As part of the assessment process, the Non- Executive Directors meet without the Executive Directors being present. The Non-Executive Directors also meet without the Chairman being present. The Chairman obtains feedback from each individual director on the performance of the Board and other Board members – this involves the completion of a questionnaire and a follow-up discussion. In the same way, the Senior Independent Non-Executive Director obtains feedback from each individual director on the performance of the Chairman. A similar process is undertaken to assess the performance of each of the Board’s committees. From the effective date of the 2010 Code, the Group plans to use external facilitation of its performance evaluation no less frequently than every third year. The Directors have reviewed the effectiveness of the Board as a whole and its committees. Each director has assessed the effectiveness of the Board and each committee of which he or she is a member. The assessment of effectiveness included consideration of: • The effectiveness of the formal Board and committee meetings; • The nature and extent of the Board’s interaction with the management of the Group; • The timeliness, relevance and accuracy of the information provided to the Board and its committees; • The allocation of the Board’s time between differing priorities including the time spent on strategic considerations relative to other matters; and • The composition of the Board and its committees. The Board has considered the results of these assessments and has concluded that overall the Board and its committees continue to operate in an effective and constructive manner. Succession planning for the Chairman was identified as an important area and the Nomination Committee oversaw the retirement of Bob Speirs, the appointment of George Mathewson as Chairman and the appointment of Will Whitehorn as an additional Non-Executive Director. Stagecoach Group plc | page 25 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 26 Corporate governance report Composition of Committees 6.7 The composition of the various Board Committees has been updated to reflect the changes in the composition of the Board, as summarised below: Audit Committee Number of members of Committee: 3 All members are independent Non-Executive Directors. Chairman and designated member with recent and relevant financial experience Garry Watts Other members Helen Mahy Phil White Remuneration Committee Number of members of Committee: 3 All members are independent Non-Executive Directors. Chairman Phil White Other members Garry Watts Will Whitehorn Nomination Committee Health, Safety and Environmental Committee Number of members of Committee: 4 Number of members of Committee: 4 All members are independent Non-Executive except Sir George Mathewson who is Chairman of the Company Chairman Sir George Mathewson Other members Ewan Brown Garry Watts Will Whitehorn Chairman Helen Mahy Other members Martin Griffiths Ann Gloag Phil White 6.8 Reports from the Committees Reports from each of the Committees of the Board are set out on pages 29 to 38 of this Annual Report. 6.9 Individual director participation at meetings The following is a table of participation in full Board meetings, meetings of committees and the Annual General Meeting by director during the year ended 30 April 2011: PARTICIPATION IN MEETINGS Full Board meetings Audit Committee Remuneration Committee Health, Safety and Environmental Committee Nomination Committee Annual General Meeting Actual Possible Actual Possible Actual Possible Actual Possible Actual Possible Actual Possible Robert Speirs Sir Brian Souter Martin Griffiths Ewan Brown Iain Duffin Ann Gloag Helen Mahy Sir George Mathewson Janet Morgan Garry Watts Phil White 5 6 6 6 2 5 6 6 2 6 5 5 6 6 6 2 6 6 6 2 6 5 n/a n/a n/a n/a 2 n/a 3 n/a 2 4 2 n/a n/a n/a n/a 2 n/a 3 n/a 2 4 2 n/a n/a n/a n/a 2 n/a n/a 4 n/a 4 2 n/a n/a n/a n/a 2 n/a n/a 4 n/a 4 2 n/a n/a 5 n/a 1 5 5 n/a 1 n/a 3 n/a n/a 5 n/a 1 5 5 n/a 1 n/a 4 1 n/a n/a 1 n/a n/a n/a 1 0 1 1 n/a n/a 1 n/a n/a n/a 1 1 1 n/a n/a 1 1 1 1 0 1 1 1 0 1 1 1 1 1 1 0 1 1 1 0 1 1 page 26 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 27 6.10 Relations with shareholders The Board endeavours to present a balanced and understandable assessment of the Group’s position and prospects in communications with shareholders. The Group holds periodic meetings with representatives of major institutional shareholders, other fund managers and representatives of the financial media. The programme of investor relations includes presentations in London of the full-year and interim results and meetings with institutional investors in the UK and overseas. Investor and analyst feedback is sought after presentations to ensure key strategies, market trends and actions being taken are being effectively communicated and shareholder objectives are known. Written responses are given to letters or e-mails received from shareholders. The annual report is published in hard copy and on the Group’s website. The Board receives regular updates on the views of shareholders through briefings from the Chairman and the Executive Directors, reports from the Company’s brokers and reports from the Company’s Financial PR consultants. The Senior Independent Non-Executive Director is available to shareholders where contact through the normal channels is inappropriate, or has failed to resolve concerns. All shareholders are welcome to attend and participate at the Annual General Meeting and any other general meetings. The Group aims to ensure that all the Directors are available at the Annual General Meeting to answer questions. The Annual General Meeting provides an opportunity for shareholders to question the Chairman and other directors on a variety of topics and further information is provided at the Annual General Meeting on the Group’s principal business activities. It is the Company’s policy to propose a separate resolution at the Annual General Meeting for each substantially separate issue. Resolutions are taken on a show of hands and details of all proxy votes lodged forand against, or withheld, in respect of each resolution are given to the meeting. Details of the proxy votes are also published on the Group’s website at http://www.stagecoachgroup.com/scg/ir/shareholder/agm/. The Company and its registrars have established procedures to ensure that votes cast are properly received and recorded. 6.11 Risk management The Group has an ongoing process for identifying, evaluating and managing the significant risks that it faces. The Board regularly reviews the process. The principal risks and uncertainties facing the Group are discussed on pages 14 to 16. The Board considers acceptance of appropriate risks to be an integral part of business and unacceptable levels of risk are avoided or reduced and, in some cases, transferred to third parties. Internal controls are used to identify and manage risk. The Directors acknowledge their responsibility for establishing and maintaining the Group’s system of internal control, and for reviewing its effectiveness. The Group’s system cannot provide absolute assurance but is designed to provide the Directors with reasonable assurance that any risks or problems are identified on a timely basis and dealt with appropriately. The Group has established an ongoing process of risk review and certification by the business heads of each operating unit. Certain of the Group’s businesses are subject to significant risk. Each identified business risk is assessed for its probability of occurrence and its potential severity of occurrence. Where necessary, the Board considers whether it is appropriate to accept certain risks that cannot be fully controlled or mitigated by the Group. The Group’s risk management process was embedded throughout the businesses for the whole of the financial year ended 30 April 2011 and up to the date of the approval of this report. The Board has carried out a review of the effectiveness of the Group’s internal control environment and such reviews are supported on an ongoing basis by the work of the Audit Committee. The Board is satisfied that processes are in place to ensure that risks are appropriately managed. The Board has designated specific individuals to oversee the internal control and risk management processes, while recognising that it retains ultimate responsibility for these. The Board believes that it is important that these processes remain rooted throughout the business and the managing director of each operating unit is responsible for the internal control framework within that unit. Self-assessment of risk conducted by the Directors and senior management is ongoing and has been considered at several levels, with each division maintaining a separate risk profile. The Group Risk Assurance (or internal audit) function, which is outsourced to and managed by Deloitte LLP, reports to the Audit Committee and is utilised in monitoring risk management processes to determine whether internal controls are effectively designed and properly implemented. A risk-based approach is applied to the implementation and monitoring of controls. The monitoring process also forms the basis for maintaining the integrity and improving where possible the Group’s risk management process in the context of the Group’s overall goals. The Audit Committee reviews Group Risk Assurance plans, as well as external audit plans and any business improvement opportunities that are recommended by the external auditors. The Group’s risk management process does not specifically cover joint ventures, but the Group maintains an overview of joint ventures' business risk management processes through representation on the boards and in the case of Virgin Rail Group, its audit committee. Stagecoach management representatives also meet regularly with representatives of joint ventures to ensure that they follow appropriate risk management procedures. 6.12 Internal control The wider process described above and the key procedures noted below, enable the Directors to confirm that they have reviewed the effectiveness of the system of internal control of the Group during the year. The key procedures, which the Directors have established, are as follows: • an annual budgeting process with periodic re-forecasting of out-turn, identifying key risks and opportunities. All budgets are presented to a panel consisting of executive directors and/or senior managers by each business unit’s management team, before being approved by the Board. • reporting of financial information to the Board encompassing income statement, cash flow, balance sheet and key performance indicators. Group management monitors the results throughout each financial year. • a Risk Assurance function which reviews key business processes and business controls, reporting directly to the Audit Committee. • third party reviews commissioned periodically by the Group of areas where significant inherent risks have been identified, such as health and safety, treasury management, insurance provisioning, pensions strategy and competition policy. • a decentralised organisational structure with clearly defined limits of responsibility and authority to promote effective and efficient operations. • control over the activities of joint ventures through Stagecoach representation on the boards of the entities together with regular contact between Stagecoach management and the management of the relevant entities. • a performance management appraisal system, which covers the Group’s senior management based on agreed financial and other performance objectives, many of which incorporate managing risk. • significant emphasis on cash flow management. Bank balances are reviewed on a daily basis and cash flows are compared to budget on a four- weekly basis. • reporting to the Board and/or its Committees on specific matters including updated key risks, taxation, pensions, insurance, treasury management, foreign exchange, interest and commodity exposures. The Board regulates treasury management policies and procedures. Stagecoach Group plc | page 27 • The Audit Committee and the Board review the draft consolidated financial statements. The Audit Committee receives reports from management and the external auditors on significant judgements, changes in accounting policies, changes in accounting estimates and other pertinent matters relating to the consolidated financial statements. • The financial statements of all material business units are subject to external audit. The Group uses the same firm of auditors to audit all Group companies. The Group auditors review the audit work papers for material joint ventures that are audited by a different firm of auditors. 6.14 Pension schemes The assets of the Group’s pension schemes are held under trust, separate from the assets of the Group and are invested with a number of independent fund managers. There are eleven trustees for the principal UK scheme of whom three are employee representatives nominated by the members on a regional basis and two are pensioner trustees. The chairman of the trustees of the principal UK scheme is a professional trustee who served for eight years as a fund member elected representative on the National Association of Pension Funds’ investment council. He also sits independently as an elected representative of all railway employers on the board of the Railways Pension Scheme, of which he is the Trustee Chairman of the Railways Pension Scheme trustees. The other trustees of the principal UK scheme include senior Group and UK Bus executives. A Pensions Oversight Committee was in operation throughout the year. This Committee is chaired by a non-executive director, Ewan Brown, and also comprises one executive director and other members of senior management. The Committee operates at a strategic level and its remit covers all matters affecting the Group’s pension schemes from the perspective of the Group’s shareholders and other stakeholders, and it will consider, develop and propose recommendations to the Board in respect of such issues as may arise. The Committee reviews pension scheme funding, investment strategy, risk management, internal controls surrounding pension matters and the related administration for all of the employee pension schemes of the Group. 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 28 Corporate governance report • defined capital expenditure and other investment approval procedures, including due diligence requirements where material businesses are being acquired or divested. • each operating unit maintains internal controls and procedures appropriate to the business. A written certificate is provided at least annually by the management of each business confirming that they have reviewed the effectiveness of the system of internal control during the year. • a competition compliance programme, which the Board has approved and which is subject to regular monitoring. Any control weaknesses that these procedures identify are monitored and addressed in the normal course of business. None of the weaknesses identified in the year to 30 April 2011 have resulted in any material losses, contingencies or uncertainties that would require disclosure in the Group’s Annual Report. This process is considered to be an integral part of the maintenance and improvement of our risk management procedures. 6.13 Process for preparing consolidated financial statements The Group has established internal control and risk management systems in relation to the process for preparing consolidated financial statements. The key features of these internal control and risk management systems are: • The Risk Assurance function and management conducts various checks on internal financial controls periodically. • Management regularly monitors and considers developments in accounting regulations and best practice in financial reporting, and where appropriate, reflects developments in the consolidated financial statements. Appropriate briefings and/or training are provided to key finance personnel on relevant developments in accounting and financial reporting. The Audit Committee is also kept appraised of such developments. • A written certificate is provided annually by the management of each business unit confirming that the internal financial controls have been reviewed and highlighting any departures from the controls system that the Group has determined to be appropriate practice. • The financial statements of each business unit are subject to review by a local finance manager prior to being submitted to the Group Finance function. • The financial statements of each business unit are subject to review by the Group Finance function for unusual items, unexplained trends and completeness. Any unexplained items are referred back to local management to explain. • The Group Finance function compares the financial statements of each business unit to the management accounts received during the year and obtains explanations for any material differences. • The Group’s consolidation, which consolidates the results of each business unit and makes appropriate adjustments, is subject to various levels of review by the Group Finance function. • The draft consolidated financial statements are reviewed by an individual independent from those individuals who were responsible for preparing the financial statements. The review includes checking internal consistency, consistency with other statements, consistency with internal accounting records and arithmetical accuracy. page 28 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 29 7. Audit Committee report 7.1 Composition of the Audit Committee The membership of the Audit Committee is summarised in section 6.7. Garry Watts is the current Chairman of the Audit Committee and is a Chartered Accountant, a former audit partner, a former Finance Director and Chief Executive of FTSE 350 companies and is also a member of the audit committee of a large quoted (NYSE listed) company. He is competent in both accounting and auditing matters. The designated Committee member with recent and relevant financial experience is therefore Garry Watts. Phil White is a former Finance Director and former Chief Executive of a FTSE 350 company and is also a Chartered Accountant. 7.2 Operation of the Audit Committee The Audit Committee met four times during the year and has also met a further time in June 2011. The Committee retains discretion as to who from outside the Committee should attend its meetings but generally invites the following to attend: • The Group Finance Director; • The Director of Finance & Company Secretary; • The Deputy Company Secretary, who is Secretary to the Committee; • Representatives from the external auditors; • Representatives from the Risk Assurance Function. In addition, the Group Tax Director is expected to present to the Committee at least annually. Other directors, including the Chairman of the Company, are also welcome to attend meetings of the Committee and do so from time to time. The Committee receives reports from major business functions including the Risk Assurance Function (internal audit), which is outsourced and managed by Deloitte. It also receives reports from the external auditors. It considers the scope and results of the audit, the half-year and annual financial statements and the accounting and internal control systems in place throughout the Group. The Audit Committee reviews the cost effectiveness, independence and objectivity of the internal and external auditors. The terms of reference of the Audit Committee are available on the Group’s website at http://www.stagecoachgroup.com/scg/csr/corpgov/committees/audit.pdf Review of External Auditors 7.3 The Audit Committee has responsibility delegated from the Board for making recommendations on the appointment, reappointment, removal and remuneration of the external auditors. There have been no instances of disagreements between the Board and the Audit Committee relating to the external auditors. Subject to the annual appointment of auditors by the shareholders, the Audit Committee conducts a continuous review of the relationship between the Group and the auditors. This review includes: • the consideration of audit fees that should be paid and advance approval of any other fees in excess of £50,000 per annum which are payable to auditors or affiliated firms in respect of non-audit activities; • the consideration of the auditors’ independence and objectivity; • the nature and scope of the external audit and the arrangements which have been made to ensure co-ordination where more than one audit firm or offices of the same firm are involved; and • discussions on such issues as compliance with accounting standards. The Committee formally assesses the effectiveness of the external audit process on an annual basis. Whilst the Group has no set frequency for tendering the external audit, the Group’s external audit was last tendered in 2002 and resulted in a change of external auditors. The audit engagement partner last changed in 2006 and will change again in 2011. The Group is not aware of any restrictions that would limit its choice of external auditors. The Audit Committee, having considered the external auditors’ performance during their period in office, recommends re-appointment. The audit fees of £0.8m (2010: £0.7m) for PricewaterhouseCoopers LLP and non-audit related fees of less than £0.1m (2010: £0.4m) were discussed by the Audit Committee and considered appropriate given the current size of the Group and the level of corporate activity undertaken during the year. The Committee believes that the level and scope of non-audit services does not impair the objectivity of the auditors and that there is a clear benefit obtained from using professional advisors who have a good understanding of the Group’s operations. Other accounting or consulting firms have been used where the Group recognises them as having particular areas of expertise or where potential conflicts of interest for the auditors are identified. 7.4 Policy on the Auditors Providing Non-Audit Services Procedures in respect of other services provided by the auditors are: • Audit related services – These are services that the auditors must undertake or are best placed to undertake by virtue of their role as auditors. Such services include formalities relating to bank financing, regulatory reports, and certain shareholder circulars. The auditors would generally provide all such services. • Tax consulting – It is the Group’s policy to select the advisor for each specific piece of tax consulting work who has the most appropriate skills and experience for the work required. The Group uses a range of advisors for tax consulting, including the auditors where they are best suited to the work being undertaken. • General consulting – For other consulting work, the Group will select an advisor after taking account of the skills and experience required and the expected cost of the work. The Group uses a range of advisors for general consulting, including the auditors where they are best suited to the work being undertaken. The auditors are only permitted to provide general consulting when the Group, the Audit Committee and the auditors are satisfied that there are no circumstances that would lead to a threat to the audit team’s independence or a conflict of interest that could not be effectively mitigated. Review of Risk Assurance Function 7.5 The Audit Committee has the responsibility for making recommendations on the appointment, reappointment, removal and remuneration of the Group Risk Assurance Function (internal auditors). There have been no instances of disagreements between the Board and the Audit Committee relating to the Risk Assurance Function. The Audit Committee conducts a continuous review of the relationship between the Group and the Risk Assurance Function. This review includes a consideration of independence and objectivity, the overall level of fees, the quality of the risk assurance process, and the role of the function in the context of the broader sources of risk assurance. The Committee formally assesses the effectiveness of the risk assurance function on an annual basis. “Speaking Up” Policy 7.6 The Audit Committee reviews the Group’s “Speaking Up” policy, which provides a mechanism for employees with serious concerns about the interests of others or the Group to come forward. The Committee ensures that appropriate arrangements are in place to receive and act proportionately upon a complaint about malpractice. The Committee takes a particular interest in any reports of possible improprieties in financial reporting. Any known instances of fraud affecting the Group are reported to the Audit Committee. Garry Watts Chairman of the Audit Committee 29 June 2011 Stagecoach Group plc | page 29 The succession of Sir George Mathewson as the Chairman of the Company, taking the place of Robert Speirs with effect from 1 January 2011, was considered by the Committee and recommended to the Board. In the light of Sir George’s experience with and knowledge of the Group, the Committee considered that he was the best candidate for the role. The Committee also recognises that as co-founder of the Company, the Chief Executive has had a long and integral association with the Company. This close association of Chief Executive and Company brings different challenges in planning for the succession of the Chief Executive. Whilst the Committee recognises that the Chief Executive remains committed to his role for the foreseeable future, it nevertheless reviews the succession plans for the Chief Executive and other executive management. Given the importance of succession planning, the views of all directors are considered and not just the views of the members of the Committee. Sir George Mathewson Chairman of the Nomination Committee 29 June 2011 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:39 Page 30 8. Nomination Committee report 8.1 Composition of the Nomination Committee The membership of the Nomination Committee is summarised in section 6.7. The Committee also includes, by invitation, the other Non-Executive Directors, as necessary. 8.2 Operation of the Nomination Committee The Nomination Committee is responsible for evaluating the balance of skills, knowledge and experience of the Board, and where appropriate suggesting new appointments. Based on its assessment, the Committee will prepare a description of the role and the required attributes for each particular appointment. The description will include a job specification, the estimate of the time commitment expected, and the Group’s policy on directors having other significant commitments. Potential candidates will be asked to disclose their other commitments and confirm that they will have sufficient time to meet what is expected of them. The Directors are also required to report any significant changes in their other commitments as they arise. The Committee will identify suitable candidates and make proposals for each appointment, although final appointments are the responsibility of the Board as a whole. Potential new non-executive directors are chosen based on a shortlist compiled by the Nomination Committee taking account of known candidates and candidates suggested by the Group’s advisors. For example, the selection of the directors appointed to the Board over the last two years were made following a recruitment process that involved the use of external recruitment consultants and the consideration of a number of candidates. Non-executive directors receive a letter of appointment. For any new appointments, the letter of appointment sets out the expected time commitment. No Director of the Company is currently a chairman of a FTSE 100 company. The terms of reference of the Nomination Committee are available on the Group’s website at http://www.stagecoachgroup.com/scg/csr/corpgov/committees/nom.pdf Following the retirement of Robert Speirs as Chairman and his replacement as Chairman by Sir George Mathewson, one of the Company’s independent non- executive directors, the appointment of Will Whitehorn as an additional non- executive director to the Board helps maintain the balance of skills and experience of the Board. Will brings with him a background in brand development and wide-ranging experience across a range of business sectors that will bring valuable insight to the Board. 8.3 Succession Planning Arrangements The Board and the Nomination Committee recognise the importance of succession planning to ensure that the Group continues to prosper in the longer term. The Group operates a decentralised organisational structure with clearly defined limits of responsibility and authority, and oversight from head office. This structure provides the opportunity for managers to develop in some of the Group’s smaller business units before progressing to wider and more responsible roles. The Group has a history of developing good managers who have progressed to take on senior positions within the Group. The Group operates a graduate recruitment programme, and some of the graduates recruited have gone on to become managing directors of individual business units, both in the UK and North America. The Nomination Committee is mindful of the need to ensure appropriate succession arrangements are in place for the Directors. The Nomination Committee and the Board seeks to identify new directors and senior managers to ensure succession of directors is conducted in a managed way, without significant disruption to the ongoing business of the Group. page 30 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 31 9. Health, Safety and Environmental Committee report The Committee reviews the Group’s analysis of health, safety and environmental risks and its strategies to address those risks. The Committee receives reports on trends in health and safety indicators across the Group as well as information on significant incidents involving the Group. Key performance indicators are provided and reviewed in respect of each major operating division. Training is provided to the Committee on health, safety and environmental matters. The Committee liaises with the Remuneration Committee in determining any health and safety objectives to form part of the Executive Directors’ personal objectives. The safety and security of our customers, our people and others is fundamental to our business. Public transport is the safest way to travel and health and safety is at the top of our agenda. Helen Mahy Chairman of the Health, Safety and Environmental Committee 29 June 2011 9.1 Composition of the Health, Safety and Environmental Committee The membership of the Health, Safety and Environmental Committee is summarised in section 6.7. The terms of reference of the Health, Safety and Environmental Committee are available on the Group’s website at http://www.stagecoachgroup.com/ scg/csr/corpgov/committees/health07.pdf 9.2 Operation of the Health, Safety and Environmental Committee The Committee considers health, safety and environmental issues across the Group and reports to the Board on these matters. The Committee also approves the Group’s overall strategic safety framework. It has access to internal safety executives and also external consultants, where required. Executive management is responsible for ensuring that local health and safety policies and procedures are consistent with the overall framework. Managers from each of the Group’s key divisions attend meetings of the Committee, providing the Committee with an opportunity to question and challenge management on health, safety and environmental matters. The Committee also receives reports from the Group’s Environmental Strategy Group, which comprises a number of managers and is responsible for overseeing the development and implementation of the Group’s environmental strategy. The Committee and its members visit operational locations to observe health, safety and environmental management in practice. Committee members attend meetings of the Safety Committees of individual business units from time to time, such as the East Midlands Trains Board Safety Sub Committee. Stagecoach Group plc | page 31 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 32 10. Directors’ remuneration report The Board supports the principles of good corporate governance relating to directors’ remuneration and has applied them as described below. Those paragraphs that have been audited have been highlighted as such. 10.1 Composition of the Remuneration Committee The membership of the Remuneration Committee is summarised in section 6.7. The Committee has responsibility for approving the remuneration and terms of employment for the Executive Directors and the Chairman, including pensions rights and any compensation payments for loss of office. The Remuneration Committee also monitors and makes appropriate recommendations with respect to the remuneration of other senior management. The Committee retained Addleshaw Goddard LLP as its remuneration consultant to provide access to independent research and advice. Addleshaw Goddard LLP provided no other services to the Group. Both the constitution and operation of the Remuneration Committee comply with the principles and provisions incorporated in the Combined Code. In preparing the Directors’ remuneration report, the Remuneration Committee has followed the provisions of the Combined Code. The terms of reference of the Remuneration Committee are available on the Group’s website at http://www.stagecoachgroup.com/scg/csr/corpgov/committees/remun.pdf. 10.2 Remuneration of Non-Executive Directors Other than the Chairman, each non-executive director generally receives the same level of fixed annual fee. The fee for each non-executive director is set out in Table 2 on page 34. The Board balances the responsibilities of each non-executive director (for example, Chairmanship and/or membership of Committees) such that over the medium-term each non-executive director has a similar level of workload and commitment. The Board of Directors as a whole, having given due regard to the required time commitment and responsibilities, sets the fees and expenses payable to the non-executive directors. Non-executive directors do not hold any share options, nor do they participate in any incentive plans or pension schemes with the exception of Ann Gloag who receives a pension accrued when she was an executive director. The members of the Remuneration Committee have no personal interest in the matters to be decided by the Committee other than as shareholders, have no conflicts of interest arising from cross- directorships and no day-to-day involvement in running the businesses of the Stagecoach Group. 10.3 Performance graph The graph below charts the performance of the Stagecoach Group Total Shareholder Return (‘‘TSR’’) (share value movement plus reinvested dividends) over the 5 years to 30 April 2011 compared with that of the FTSE Travel and Leisure All-Share Index, and the FTSE 250 Index. The FTSE 250 Index has been selected for this comparison because it is the index used by the Company for the performance criterion for the 2005 LTIP Scheme, while the FTSE Travel and Leisure All-Share Index is shown as the Company and a number of its peers make up a significant element of that index. We have included a further graph to highlight the Company’s more recent performance, charting TSR for the year up to 30 April 2011. Stagecoach 5-Year TSR Comparative Performance to 30 April 2011 400 350 300 250 200 150 100 50 0 Apr 06 Stagecoach TSR FTSE Travel & Leisure TSR FTSE 250 TSR Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Stagecoach 1-Year TSR Comparative Performance to 30 April 2011 130 125 120 115 110 105 100 90 85 80 Apr 10 Stagecoach TSR FTSE Travel & Leisure TSR FTSE 250 TSR May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 page 32 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 33 10.4 Remuneration Policy The Remuneration Policy was approved by our shareholders at the 2010 Annual General Meeting. The Remuneration Committee follows the Combined Code in designing performance-related remuneration schemes. In determining appropriate levels of remuneration for the Executive Directors, the Remuneration Committee aims to provide overall packages of terms and conditions that are competitive in the UK and will attract, retain and motivate high quality executives capable of achieving the Group’s objectives and to ensure that they are fairly rewarded for their individual responsibilities and contributions to the Group’s overall performance. The Remuneration Committee believes that packages for Executive Directors should contain significant performance-related elements and that these performance-related elements should be designed to align the interests of the Executive Directors and other senior managers with the interests of shareholders. The Remuneration Committee is able to consider all relevant factors when setting Executive Directors’ remuneration, including environmental, social and governance matters. Performance targets are established to achieve consistency with the interests of shareholders, with an appropriate balance between short-term and long-term targets. Performance targets can include financial measures as well as personal targets, such as successful investment, innovation, staff development, customer satisfaction, regulatory requirements and achievement of health, safety and environmental targets. The incentive arrangements for the Executive Directors are structured so as not to unduly increase environmental, social and governance risks by inadvertently motivating irresponsible behaviour. A separate Health, Safety and Environmental Committee report is included in section 9 of this annual report. The Remuneration Committee regularly reviews the remuneration of the Executive Directors, in consultation with the Chief Executive, making comparisons with peer companies of similar size and complexity and with other companies in the public transport industry. Proposals for the forthcoming year are then discussed in the light of the prospects for the Group. The Remuneration Committee is also kept informed of the salary levels of other senior executives employed by the Group. With regard to pensions, the Remuneration Committee has access to reports from pension scheme trustees and scheme actuaries regarding the cost of pension obligations. 10.5 Intended balance of remuneration package The total remuneration for each Executive Director includes meaningful elements of performance related pay. It is intended that the balance of the overall remuneration package of the Executive Directors is broadly structured as shown in Figure 1, with the proportions shown being based on the expected value of awards. For example, where the Remuneration Committee has made awards of Incentive Units under the Long Term Incentive Plan to the Executive Directors equivalent to say 150% of basic salary, the expected value of the Incentive Units at the time of award to a director is less than 150% of basic salary because of the challenging performance conditions that apply. Likewise, while Executive Directors can earn a cash settled annual bonus of up to 50% of basic salary, the maximum award is only earned to the extent that the challenging performance objectives are met. Figure 1: Balance of Executive Directors’ expected remuneration package Basic salary and other benefits/allowances Cash–settled performance- related bonus Deferred shares settled performance-related bonus Long term incentive plan Pension benefits accrued in year (excluding inflation) Figure 2 provides a further analysis of the intended balance of Executive Directors’ pay between fixed elements (for example, basic salary and pension benefits), variable short-term elements (for example, annual cash bonuses) and variable long-term elements (for example, awards under share based incentive schemes). Shareholders are invited specifically to approve all new long-term remuneration plans (whether equity-settled or cash-settled plans) and any significant changes to existing plans, except where changes are otherwise permitted by the Listing Rules. The current arrangements were approved by shareholders at the 2005 Annual General Meeting and the Committee considers that they remain appropriate. Figure 2: Balance of Executive Directors’ remuneration package 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Elements of pay Elements of pay Variable - long-term Variable - short-term Fixed The Remuneration Committee believes that remuneration packages should reward the efforts of all staff since a motivated workforce is a key element of Group performance. The Committee recognises that the Executive Directors bear the greatest responsibility for delivering corporate strategy that underpins long-term sustainable performance. So while the Remuneration Committee’s report focuses on the incentive schemes for Executive Directors and senior executives, there are also a number of other performance-related bonus schemes of more general application within Group companies not discussed in this report. 10.6 Remuneration of Executive Directors and other executives (audited) The remuneration of the Executive Directors and other executives may comprise a number of elements from the following: • Basic salary; • Performance-related annual cash bonuses; • The Executive Participation Plan (“EPP”); • Benefits in kind and other allowances; • Pension arrangements; • Share options (no awards made since 2004); and • The Long Term Incentive Plan (“LTIP”). The participation of the two Executive Directors in the above arrangements during the year ended 30 April 2011 is summarised in Table 1 on page 34. The Executive Directors have not received executive share options since December 2004. Each Executive Director’s remuneration package is tailored to the individual to ensure an appropriate balance of reward for responsibilities, motivation, retention and share participation, whilst ensuring the overall packages are appropriate to recruit and retain high quality executives capable of achieving the Group’s objectives. Directors’ remuneration for the year ended 30 April 2011 is shown in Table 2 and Table 3 on page 34, along with information on share options and LTIP awards in sections 10.12 and 10.14 respectively. Stagecoach Group plc | page 33 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 34 Directors’ remuneration report TABLE 1 – DIRECTORS’ PARTICIPATION Basic Salary/Annual bonus EPP Benefits in kind Pension Share Options YES Sir Brian Souter Martin Griffiths YES *The Executive Directors have not received awards of executive share options following the approval of the EPP and LTIP at the 2005 AGM. NO* NO* YES YES YES YES YES YES LTIP YES YES TABLE 2 – DIRECTORS’ REMUNERATION (amounts in £000) Salary/fees Performance related bonus (cash)** Performance related bonus - deferred shares (EPP)** Benefits in kind Non-pensionable allowances† Total 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Executive directors Sir Brian Souter Martin Griffiths Non-Executive Directors Ewan Brown Iain Duffin (resigned 30 June 2010) Ann Gloag Helen Mahy Sir George Mathewson Janet Morgan (resigned 30 June 2010) Robert Speirs (retired 31 December 2010) Garry Watts Phil White (appointed 1 June 2010) 564 382 47 8 47 47 84 8 207 47 43 553 374 44 44 44 15 44 44 150 44 Nil 129 172 96 187 129 172 96 187 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Total 1,484 1,356 301 283 301 283 22 23 Nil Nil Nil Nil Nil Nil Nil Nil Nil 45 17 19 Nil Nil Nil Nil Nil Nil Nil Nil Nil 36 Nil 87 Nil Nil Nil Nil Nil Nil Nil Nil Nil 87 Nil 85 Nil Nil Nil Nil Nil Nil Nil Nil Nil 85 844 836 47 8 47 47 84 8 207 47 43 762 852 44 44 44 15 44 44 150 44 Nil 2,218 2,043 † Non-pensionable allowances represent additional taxable remuneration paid to provide pension benefits. The non-pensionable allowance for Martin Griffiths above of £87,080 (2010: £84,660) is stated gross of notional pension contributions under the salary sacrifice arrangements, which is in practice deducted from the allowance that is made to him, so he actually received £78,107 (2010: £73,824). ** Sir Brian Souter waived elements of his remuneration, with the amounts waived being used to support funding medical screening for the employees of the UK Bus division. The amounts shown in Table 2 for Sir Brian Souter therefore reflect reductions of £250,000 for both 2010 and 2011 apportioned equally to the cash and deferred shares bonus.The salary for Sir Brian Souter above of £564,000 (2010: £553,000) is stated gross of notional pension contributions that are deducted as part of participating in the pension salary sacrifice arrangement. His notional pension contributions during the year were £49,605 (2010: £49,522). These contributions are shown within the increase in transfer value less pension contributions in Table 3. TABLE 3 – DIRECTORS’ PENSION BENEFITS (amounts in £000) Additional accrued benefits in the year Excluding Including inflation inflation Accrued pension Accrued lump sum Transfer value of increase (excluding inflation) Increase in transfer value less Directors’ contributions Transfer value of pension 2011 2010 2011 2010 2011 2010 2007 2006 2011 2010+ Executive directors 705 Sir Brian Souter* 135 Martin Griffiths* *Sir Brian Souter and Martin Griffiths participated in pension salary sacrifice arrangements during the year. The Directors’ contributions set against the increase in transfer value in the table above include salary sacrificed by the directors and paid directly to the pension scheme by the employer. 5,817 443 5,673 415 761 149 369 50 144 28 348 45 300 30 77 19 44 14 94 17 +The transfer value of pension for 2010 has been updated to reflect market conditions at 30 April 2011. Martin Griffiths was subject to the statutory pensionable earnings cap that existed until 5 April 2006 and since then the Company has continued to impose a notional pensionable earnings cap. The Company makes cash contributions to Martin Griffiths for the part of his salary that exceeds the notional earnings cap. Only basic salary is pensionable. The additional cash contribution equates to one-third of the excess above the notional earnings cap. Sir Brian Souter joined the pension scheme prior to the application of the statutory pensionable earnings cap and was therefore not subject to such cap and is therefore not subject to the notional earnings cap. Directors who are members of the Stagecoach Group Pension Scheme have the option to pay additional voluntary contributions (‘‘AVCs’’). Neither the contributions nor the resulting benefits of any AVCs are included in the tables above. Each of the elements of remuneration is discussed further below. 10.7 Basic salary The salary of each Executive Director is reviewed at 1 May each year. Account is taken of individual achievements, together with any changes in responsibilities that may have occurred and, as stated above, the salaries for similar roles in comparable companies. The Remuneration Committee also takes into account pay conditions throughout the Group. In recognition of the challenging macro-economic environment and the need for strong cost controls and restraint on pay settlements across the Group, the pay review performed as of 1 May 2010 determined that there should be a 2% increase to basic salaries of the Executive Directors and other senior executives. 10.8 Performance-related annual cash bonuses At the start of each financial year, the Committee agrees specific objectives for each Executive Director. Following the end of each financial year, the Remuneration Committee determines the performance-related annual bonus for each Executive Director for the year just ended. This is based on the Director’s performance in achieving the objectives agreed. These comprise both financial objectives for the Group and personal objectives for each director. For each Executive Director, the Group financial objectives for the year ended 30 April 2011 were to better the Group’s financial targets with respect to measures of earnings before interest and taxation, earnings per share, and net debt. The personal objectives are specific to each Executive Director and may cover matters such as safety targets, environmental targets, page 34 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 35 successful investment, innovation, staff development, customer satisfaction, successful business acquisitions/disposals and regulatory requirements. For the year ended 30 April 2011, Sir Brian Souter and Martin Griffiths each had a maximum potential bonus of up to 100% of basic salary, 70% for meeting demanding financial objectives and 30% for meeting personal objectives. In accordance with the rules of the EPP, 50% of any actual bonus will be deferred as shares under the EPP. In making its judgement of performance for the last financial year, the Remuneration Committee had particular regard to the results as recorded elsewhere in the Annual Report, and relative total return to shareholders over the year, as well as other strategic developments and operating improvements. Performance related bonuses awarded to the Executive Directors in respect of the year ended 30 April 2011 are shown in Table 4 below. TABLE 4 – DIRECTORS’ BONUSES Director Sir Brian Souter Martin Griffiths Actual bonus as a percentage of basic salary Cash Shares 23%* 45% 23%* 45% Maximum potential bonus as a percentage of basic salary Cash 50% 50% Shares 50% 50% *As noted in Table 2, Sir Brian Souter waived entitlement to cash and deferred shares bonus awards during the year. Save for the waiver, he would have been entitled to a bonus of 90% of basic salary divided equally between cash and deferred shares. 10.9 Executive Participation Plan The 2005 Executive Participation Plan (‘‘EPP’’) was approved at the 2005 Annual General Meeting. The intention of the EPP is to further align the interests of managers with shareholders by ensuring managers have a greater direct interest in the performance of the Group’s shares purchased out of an element of their bonus awards. The EPP is such that the executives can benefit from both capital growth (i.e. increases in share price) and dividend yield. The EPP is also designed to provide an incentive for managers to remain with the Group and forms a core part of the Group’s succession and management development plans. Awards under the EPP can be made to Executive Directors and other managers. Participants are required to sacrifice part of their actual annual bonus award and are awarded deferred shares with an initial market value approximately equal to the amount of the actual cash bonus foregone. Absolute and full entitlement to the shares is deferred for three years. There are no specific performance conditions attaching to the release of deferred shares because the annual bonus is already subject to performance conditions and there are no awards of matching shares in respect of annual bonuses - the EPP requires executives to invest an element of their annual bonus (normally a minimum of 50% of any annual bonus award) in the Company’s shares. The EPP is an effective retention programme in that participants would lose their entitlement to the deferred shares if they left of their own volition during the three-year deferral period. Where an individual receives an award under the EPP, he or she generally does not also receive an award of executive share options in the same financial year. Awards made to the Executive Directors under the EPP, are shown in Table 5. 10.10 Benefits in kind and other allowances The benefits in kind shown in Table 2 on page 34 for the year ended 30 April 2011 are made up as follows: • Sir Brian Souter received £21,600 (2010: £17,200) of cash allowance in lieu of company car and £256 (2010: £252) in re-imbursement of home telephone expenses. • Martin Griffiths received £21,670 (£2010: £18,000) of cash allowance in lieu of company car, £995 (2010: £884) of healthcare benefits and £530 (2010: £556) in re-imbursement of home telephone expenses. 10.11 Pension arrangements Under the terms of their service agreements Executive Directors are entitled to become members of one of the Stagecoach Group’s defined benefit pension schemes or, if preferred, to receive payment of a proportion of salary for personal pension schemes. For pension purposes, the Executive Directors have a normal retirement age of 60. The Stagecoach Group pension schemes were designed to provide a pension for Executive Directors equivalent to up to two-thirds of final pensionable salary completed up to normal retirement age. Following the new pensions regime introduced in the UK by the Pensions Act 2004, the Group introduced a notional pensionable earnings cap to replace the previous statutory pensionable earnings cap in the Group’s main pension scheme. Further to this, during the year ended 30 April 2007, the Group also introduced an annual cap of 3.5% on pensionable salary growth under the scheme and this cap also applies to the notional pensionable earnings cap. Pension benefits accruing to Martin Griffiths under the Stagecoach Group defined benefit scheme are limited both by the notional pensionable earnings cap and by the 3.5% cap on pensionable salary growth as explained above. The Company makes cash contributions to Martin Griffiths for the part of his basic salary that exceeds the notional cap. Life assurance of four times basic annual salary is provided under the scheme. 10.12 Share options (audited) Executive Share Options The Executive Directors are generally not expected to receive further awards of executive share options following the approval of the EPP and LTIP by shareholders at the 2005 Annual General Meeting. TABLE 5 –– EPP AWARDS Grant Date Sir Brian Souter 26 June 2008 10 Dec 2009 28 June 2010 Martin Griffiths 26 June 2008 10 Dec 2009 28 June 2010 As at 1 May 2010 (deferred shares) Awards granted in year (deferred shares) Dividends in year (deferred shares) Vested in year (deferred shares) As at 30 April 2011 (deferred shares) Vesting Date Expected total value of award at time of grant Closing share price on date of grant 104,944 344,599 Nil 449,543 74,803 245,626 Nil 320,429 Nil Nil 49,552 49,552 Nil Nil 96,465 96,465 1,105 3,630 522 5,257 788 2,588 1,016 4,392 Nil Nil Nil Nil Nil Nil Nil Nil 106,049 348,229 50,074 504,352 75,591 248,214 97,481 421,286 26 June 2011 10 Dec 2012 28 June 2013 252,527 525,259 96,222 2.6825 1.6060 1.9020 26 June 2011 10 Dec 2012 28 June 2013 179,998 374,400 187,000 2.6825 1.6060 1.9020 Stagecoach Group plc | page 35 Stagecoach Group plc | page 35 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 36 Directors’ remuneration report SAYE Share Options In August 2008, all eligible UK employees were invited to participate in a new SAYE scheme with a three-year duration starting in September 2008. One director held options issued under this SAYE scheme. Further details on this are shown in Table 6 below 10.13 Satisfaction of share awards Under the rules of the Company’s share schemes, and consistent with guidance issued by the Association of British Insurers (‘‘ABI’’), there are limits on the number of share options and other awards that can be granted that may be satisfied by the issue of new shares. Following the consolidation of ordinary shares related to the returns of value in 2004 and 2007, which effectively halved the number of ordinary shares in issue, the number of executive share options that had been granted in the previous 10 years exceeded 5% of the issued number of ordinary shares. Also, the running total of share capital allocated to all share options including all-employee SAYE options in the previous 10 years was effectively doubled through the consolidation process to 10.2%, and so exceeded the 10% guideline for the issued ordinary shares. It was not possible, therefore, to satisfy any new grants of share options or EPP awards with newly issued shares since to do so would have exceeded both the 5% and 10% limits under the share schemes rules. Accordingly, the Board and the Remuneration Committee determined that all future grants of executive share options and EPP awards will be satisfied with existing shares until such time as there is sufficient headroom available under the original limits for the issue of new shares. However, and in order to support the issuance of shares for all-employee schemes, such as the SAYE, Shareholder approval to change the limit to 12.8% was obtained at the 2008 Annual General Meeting on 29 August 2008 so that 5% of the new 12.8% limit may be allocated for issuing new shares to satisfy all-employee share schemes, such as the SAYE. In the 10 years prior to 30 April 2011, the Company had granted share options (not lapsed) over executive and SAYE share schemes as follows: TABLE 7 Executive Options SAYE Options Total Share options to be satisfied from new issue shares Expressed as a percentage of the issued share capital as at 30 April 2011 49,248,108 22,583,542 71,831,650 6.9% 3.1% 10.0% The Group’s Employee Share Ownership Trusts are used to acquire and finance shares to meet contingent obligations under share based incentive schemes that are not expected to be satisfied through the issue of new shares. At 30 April 2011, these trusts held 2,187,585 (2010: 2,336,447) 56/57th ordinary shares in the Company, representing 0.3% (2010: 0.3%) of the total issued ordinary shares. The Company follows the ABI guideline that the shares held by Employee Share Ownership Trusts should not exceed 5% of the total shares in issue. The Employee Share Ownership Trusts have waived the right to receive dividends on the shares held by them. 10.14 Long Term Incentive Plan To be used for Executive Directors and a small number of senior executives, the 2005 Long Term Incentive Plan (‘‘LTIP’’) was approved at the 2005 Annual General Meeting. The LTIP introduces stringent performance criteria related to total shareholder return (‘‘TSR’’) over a three-year assessment period. TSR is calculated as the movement in share value after taking account of re-invested dividends. TSR is measured against a comparator group, which is the list of FTSE 250 companies. Details of LTIP awards made to the Directors are shown in Table 8 below. Under the LTIP, executives are awarded Incentive Units at the discretion of the Remuneration Committee with each Incentive Unit having a nominal value TABLE 6 – SAYE OPTIONS Martin Griffiths TABLE 8 LTIP Grant date Sir Brian Souter 30 June 2008 10 Dec 2009 28 June 2010 9 Dec 2010 Martin Griffiths 30 June 2008 10 Dec 2009 28 June 2010 9 Dec 2010 At 1 May 2009 No.of ordinary shares Options Granted over No. or ordinary shares At 1 May 2010 and 30 April 2011 No of ordinary shares Exercise price £ Date from which excercisable Expiry date 3,733 2.51775 1 Oct 2011 31 March 2012 As at 30 April 2010 (incentive units) 216,372 534,482 Nil Nil Awards granted in year (incentive units) Nil Nil 222,281 203,512 750,854 425,793 146,516 361,925 Nil Nil Nil Nil 150,552 137,840 508,441 288,392 Dividends in year (incentive units) As at 30 April 2011 (incentive units) Vesting Date* Expected total value of award at time of grant £ 2,227 5,502 2,288 2,095 12,112 1,508 3,725 1,549 1,419 8,201 30 June 2011 10 Dec 2012 28 June 2013 9 Dec 2013 213,856 238,382 115,275 121,863 30 June 2011 10 Dec 2012 28 June 2013 9 Dec 2013 144,812 161,421 78,076 82,539 218,599 539,984 224,569 205,607 1,188,759 148,024 365,650 152,101 139,259 805,034 Closing Share price on date of grant £ 2.8000 1.6060 1.9030 2.0785 2.8000 1.6060 1.9030 2.0785 The LTIP awards granted on 28 June 2007 would in the normal course of events have vested on 28 June 2010. As noted in the 2010 Remuneration Report, the Remuneration Committee considered it appropriate to bring forward the vesting date of the award to 31 March 2010. The awards were re-tested on the original due vesting date to consider whether vesting on 28 June 2010 would have delivered a lower or different amount and it was found that the earlier vesting had resulted in an understatement of the award level and unit price. Adjusting payments were made to reflect vesting of 100% of the available units at a unit price of £1.903 to reflect actual performance over the original performance period. page 36 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 37 equal to one of the Company’s ordinary shares. The maximum awards granted in relation to any financial year for an individual is limited to Incentive Units with an aggregate nominal value not exceeding 1.5 times the individual’s basic salary. The Company intends to settle all such awards in cash but would support the settlement in shares via an employee share ownership trust where executives wish to increase their holdings in the Company’s shares. The individual would also need to remain with the Company for three years from the date of an award in order to receive full entitlement to the LTIP units. For all LTIP awards granted up to 30 April 2009, vesting of the LTIP units is subject to two quantitative TSR-based performance criteria and also to a qualitative underpin. The qualitative underpin was that LTIP units will only vest if the Remuneration Committee is satisfied with the underlying financial performance of the Group. The two quantitative conditions for LTIP awards granted up to 30 April 2009 are: • Firstly, no awards vest unless the total shareholder return of the Group over the three-year testing period is positive. • Secondly, the element of the awards that vest is based on how the Group’s total shareholder return compares to a comparator group, being the list of FTSE 250 companies. For LTIP awards granted up to 30 April 2009, the number of LTIP units that would be released after the three years is calculated as follows: • If TSR is negative no LTIP units are released; • If TSR is positive but is less than the median TSR of the comparator group, no LTIP units are released; • If TSR exceeds the median of the comparator group, 33% of the LTIP units are released; • If TSR is in the top quartile of the comparator group, 100% of the LTIP units are released; • If TSR is higher than the median but less than the top quartile, the proportion of LTIP units to be released would be between 33% and 100% depending on the exact ranking against the comparator group. For LTIP awards granted from 1 May 2009 the performance conditions are set so as to provide a lower payout for median performance against the comparator group, and to increase the performance target from top quartile to top decile at which maximum payout levels may occur based on granting Incentive Units with an aggregate nominal value of 1.5 times basic salary. In addition the use of a positive TSR has been replaced with the requirement for the Committee to have the authority to reduce any awards if it is not satisfied that the TSR performance is consistent with the underlying financial performance of the Group. For LTIP awards granted from 1 May 2009 the number of LTIP units that would be released after the three years is calculated as follows: • If TSR exceeds the median of the comparator group, then only one-sixth (16.67%) of the LTIP units awarded will be released; • For 100% of the LTIP units awarded to be released then the TSR must be in the top decile of the comparator group; • If TSR is higher than the median but less than the top decile then the proportion of LTIP units to be released would be between 16.67% and 100% of the units awarded depending on the actual ranking against the comparator group. An independent third party will calculate the TSR measures for the purposes of determining the extent to which the performance condition is satisfied. Other than on retirement, if participants choose to leave the Group, the awards would lapse. 10.15 Review of share based incentive schemes The principal share based incentive schemes for the Executive Directors and other executives are the EPP and the LTIP, which are described earlier in this Directors’ remuneration report. The EPP and the LTIP schemes were adopted by shareholders at the Annual General Meeting of the Company held in August 2005 following a review by the Remuneration Committee of the Group’s share based payments and other incentive arrangements. The Remuneration Committee believes that the operation of the Group’s share based incentive schemes, the potential award levels under the schemes, the nature of the performance conditions and timing of vesting remain appropriate in light of the Group’s circumstances and future prospects. To support participation by its employees in the shares of the Company, shareholder approval shall be sought at the 2011 Annual General Meeting for two new employee share schemes as follows: • A new Share Incentive Plan ("SIP") intended to take advantage of the tax beneficial status of a share incentive plan approved by Her Majesty's Revenue & Customs. Participation to this approved plan will be open to all eligible UK employees; and • A new Unapproved Share Option Plan to replace the existing executive share option plan that expired on 25 June 2011. The new Unapproved Share Option Plan will be available for use with all employees other than directors of the Company who may not participate. The rules of each of the above new plans will contain provisions consistent with relevant ABI guidelines such that the use of new ordinary shares will be limited to ten per cent of the issued share capital of the Company from time to time, taking into account ordinary shares issued or to be issued over the previous ten year period under any other employees' share plans adopted by the Company. Furthermore, no employee may during a financial year receive in aggregate awards under the Unapproved Option Plan and awards under the Company’s 2005 Long Term Incentive Plan over shares worth more than one and a half times his or her total remuneration in that period. 10.16 Shareholding targets The Executive Directors and certain other senior executives are expected to accumulate significant shareholdings in the Company. In the case of Executive Directors, they are each expected to accumulate shares in the Company with a value of at least 100% of basic salary. These targets were first introduced in 2005 and Executive Directors were allowed five years to accumulate the appropriate level of shares. The Executive Directors have significant effective interests in the Company’s ordinary shares ensuring alignment of Executive Directors’ and Shareholders’ objectives. The effective interests of Executive Directors as at 30 April 2011 were: TABLE 9 Sir Brian Souter Martin Griffiths Ordinary shares Shares held under share options Deferred Shares under Executive Participation Plan 108,625,564 202,337 Nil 3,733 504,352 109,129,916 421,286 627,356 Stagecoach Group plc | page 37 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 38 Directors’ remuneration report 10.17 Directors’ service agreements The details of the Executive Directors’ service contracts are summarised in the table below: TABLE 10 – EXECUTIVE DIRECTORS’ SERVICE CONTRACTS Name of director Date of contract Sir Brian Souter Martin Griffiths 2 April 1993 (amended 26 January 1996) 8 August 2000 (amended 29 November 2001 and 10 April 2003) Notice period 12 months 12 months It is the Company’s policy that Executive Directors should have 12-month rolling service contracts providing for a maximum of one year’s notice. Due to the nature of the Group’s businesses, the service contracts contain restrictive covenants that will be rigorously applied. Non-executive directors are appointed by a letter, which makes no specific provision for notice periods. The letters of appointment do not contain any contractual entitlement to a termination payment and the directors can be removed in accordance with the Company’s Articles of Association. Non- executive directors are subject to election and re-election by shareholders as described on pages 24 and 25. 10.18 Early termination If the Company terminates an executive director’s contract, the costs for which the Company is liable will vary depending on length of service. The costs will include a termination payment of up to one times annual salary and the value of one year’s additional retirement benefits. There are no arrangements otherwise to enhance or accelerate pension benefits on termination or early retirement. 10.19 Change of control The following apply where there is a change in control of the Company: • Executive directors are entitled to normal termination benefits as outlined above, except where the director is offered and has refused employment on terms and conditions that were no less favourable to those in place prior to the change of control; • With respect to Executive Share Options, options can be exercised within six months of the change of control. For options currently outstanding, the extent to which the performance condition is applied shall be determined by the Remuneration Committee; • Under the EPP, shares deferred would automatically vest on a change of control; • Under the LTIP, Incentive Units would vest on a pro-rata basis taking account of the proportion of the vesting period that had expired and the TSR performance condition. 10.20 Outside appointments Executive directors are able to accept substantive external appointments, provided that approval is given by the Board. The fees from such appointments are retained by the director, recognising the level of personal commitment and expertise required for non-executive roles. Details of remuneration earned where an Executive Director serves as a non-executive director elsewhere are disclosed in note 34 to the consolidated financial statements. 10.21 Transactions in which Directors have had a material interest (audited) 10.21.1 Noble Grossart Limited Ewan Brown (Non-Executive Director) is a former executive director and current non-executive director of Noble Grossart Limited that has previously provided advisory services to the Group. Total fees payable to Noble Grossart Limited in respect of the year ended 30 April 2011 amounted to £Nil (2010: £13,333). At 30 April 2011, Noble Grossart Investments Limited, a subsidiary of Noble Grossart Limited, held 4,084,999 (2010: 4,084,999) ordinary shares in the Company, representing 0.6% (2010: 0.6%) of the Company’s issued ordinary share capital. 10.21.2 Alexander Dennis Limited Sir Brian Souter (Chief Executive) and Ann Gloag (Non-Executive Director) collectively hold 37.9% (30 April 2010: 37.9%) of the shares and voting rights in Alexander Dennis Limited. Noble Grossart Investments Limited (see 10.21.1 above) controls a further 28.4% (30 April 2010: 28.4%) of the shares and voting rights of Alexander Dennis Limited. None of Sir Brian Souter, Ann Gloag or Ewan Brown is a director of Alexander Dennis Limited nor do they have any involvement in the management of Alexander Dennis Limited. Furthermore, they do not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Alexander Dennis Limited. For the year ended 30 April 2011, the Group purchased £87.1m (2010: £48.9m) of vehicles from Alexander Dennis Limited and £5.7m (2010: £3.4m) of spare parts and other services. As at 30 April 2011, the Group had £1.3m (2010: £0.4m) payable to Alexander Dennis Ltd. 10.21.3 Argent Energy Group Limited Sir Brian Souter (Chief Executive) and Ann Gloag (Non-Executive Director) collectively hold 39.3% (30 April 2010: 39.3%) of the shares and voting rights in Argent Energy Group Limited. Neither Sir Brian Souter nor Ann Gloag is a director of Argent Energy Group Limited nor do they have any involvement in the management of Argent Energy Group Limited. Furthermore, they do not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Argent Energy Group Limited. For the year ended 30 April 2011, the Group purchased £2.0m (2010: £0.4m) of biofuel from Argent Energy Group. As at 30 April 2011, the Group had £0.2m (2010: £Nil) payable to Argent Energy Group. 10.22 Remuneration policy approval An ordinary resolution to receive and approve this Directors’ remuneration report will be proposed at the 2011 Annual General Meeting. On behalf of the Board Phil White Chairman of the Remuneration Committee 29 June 2011 page 38 | Stagecoach Group plc 78189_Front FINAL_78189_StCchV10_FRONT 05/07/2011 11:40 Page 39 11. Responsibility statement The Directors confirm that to the best of their knowledge: • The consolidated financial statements, prepared in accordance with the applicable United Kingdom law and in conformity with IFRS, as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the undertakings included in the consolidation taken as a whole; and • The Chairman’s statement, Chief Executive’s review and Directors’ report (incorporating the Operating and Financial Review) include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Signed on 29 June 2011 on behalf of the Board by: Sir Brian Souter Chief Executive Martin A Griffiths Finance Director Stagecoach Group plc | page 39 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 40 Independent auditors’ report to the members of Stagecoach Group plc (Company No. SC100764) We have audited the consolidated financial statements of Stagecoach Group plc for the year ended 30 April 2011 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated balance sheet, the Consolidated statement of changes in equity, the Consolidated statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ responsibilities in respect of the Annual Report, the Directors’ remuneration report and the financial statements set out on page 21, the Directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the consolidated financial statements: • give a true and fair view of the state of the Group’s affairs as at 30 April 2011 and of its profit and cash flows for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the information given in the Directors’ report for the financial year for which the consolidated financial statements are prepared is consistent with the consolidated financial statements; and • the information given in the Corporate governance report set out on pages 24 to 28 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or • a corporate governance statement has not been prepared by the parent company. Under the Listing Rules we are required to review: • the Directors’ statement, set out on page 23, in relation to going concern; • the part of the Corporate governance statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and • certain elements of the report to shareholders by the Board on Directors’ remuneration. Other matter We have reported separately on page 102 on the parent company financial statements of Stagecoach Group plc for the year ended 30 April 2011 and on the information in the Directors’ remuneration report that is described as having been audited. Michael Timar (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Glasgow 29 June 2011 page 40 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 41 Consolidated income statement For the year ended 30 April 2011 2011 2010 Performance pre intangibles and exceptional items £m Intangibles and exceptional items (note 4) £m Notes Performance pre intangibles and exceptional items £m Intangibles and exceptional items (note 4) £m Results for the year £m CONTINUING OPERATIONS Revenue Operating costs Other operating expense Operating profit of Group companies Share of profit of joint ventures after finance income and taxation Total operating profit: Group operating profit and share of joint ventures’ profit after taxation Non-operating exceptional items Profit before interest and taxation Finance costs Finance income Profit before taxation Taxation Profit for the year from continuing operations DISCONTINUED OPERATIONS Profit for the year from discontinued operations TOTAL OPERATIONS Profit after taxation for the year attributable to equity shareholders of the parent Earnings per share from continuing and discontinued operations – Adjusted basic/Basic – Adjusted diluted/Diluted Earnings per share from continuing operations – Adjusted basic/Basic – Adjusted diluted/Diluted Dividends per ordinary share – Interim paid – Final proposed 2 3 5 2 2 2 4 6 6 8 4 10 10 10 10 9 9 2,389.8 (2,066.7) (122.4) Nil (10.1) Nil 2,389.8 (2,076.8) (122.4) 2,164.4 (1,947.2) (53.2) 200.7 (10.1) 190.6 39.5 (5.1) 34.4 240.2 Nil 240.2 (39.9) 5.4 205.7 (35.1) (15.2) 0.7 (14.5) Nil Nil (14.5) 1.8 225.0 0.7 225.7 (39.9) 5.4 191.2 (33.3) 164.0 28.0 192.0 Nil 192.0 (41.5) 10.8 161.3 (27.2) Nil (7.8) Nil (7.8) (5.1) (12.9) (2.0) (14.9) (20.5) Nil (35.4) 9.1 Results for the year £m 2,164.4 (1,955.0) (53.2) 156.2 22.9 179.1 (2.0) 177.1 (62.0) 10.8 125.9 (18.1) 170.6 (12.7) 157.9 134.1 (26.3) 107.8 Nil 18.5 18.5 Nil 3.9 3.9 170.6 5.8 176.4 134.1 (22.4) 111.7 23.8p 23.5p 23.8p 23.5p 18.7p 18.5p 18.7p 18.5p 24.6p 24.3p 22.0p 21.7p 2.2p 4.9p 15.6p 15.4p 15.1p 14.9p 6.5p Nil The accompanying notes form an integral part of this consolidated income statement. Interim dividends of £15.8m were paid during the year ended 30 April 2011 (2010: £46.6m). A final dividend of 4.9 pence per share is proposed in respect of the year ended 30 April 2011 (2010: Nil). Stagecoach Group plc | page 41 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 42 Consolidated statement of comprehensive income For the year ended 30 April 2011 Profit for the year attributable to equity shareholders of the parent Other comprehensive income/(expense) Foreign exchange differences on translation of foreign operations (net of hedging) Actuarial gains/(losses) on Group defined benefit pension schemes Share of actuarial (losses)/gains on joint ventures’ defined benefit pension schemes Share of other comprehensive (expense)/income on joint ventures’ cash flow hedges Net fair value gains on cash flow hedges Net fair value losses on available for sale investments 2011 Notes £m 176.4 (5.4) 76.5 (0.7) (0.1) 52.6 Nil 122.9 26 27(j) 15 Transfers to the income statement Cash flow hedges reclassified and reported in profit for the year 27(j) (21.8) Tax on items taken directly to or transferred from equity Tax on foreign exchange differences on translation of foreign operations (net of hedging) Tax effect of actuarial (gains)/losses on Group defined benefit pension schemes Tax effect of share of actuarial losses/(gains) on joint ventures’ defined benefit pension schemes Tax effect of share of other comprehensive (expense)/income on joint ventures’ cash flow hedges Tax effect of share based payments Tax effect of cash flow hedges 27(j) Total comprehensive income for the year attributable to equity shareholders of the parent The accompanying notes form an integral part of the consolidated statement of comprehensive income. (0.4) (24.0) 0.2 Nil Nil (7.4) (31.6) 245.9 2010 £m 111.7 6.0 (138.7) 0.2 1.8 38.3 (0.2) (92.6) 61.8 Nil 38.8 (0.1) (0.5) 0.7 (28.0) 10.9 91.8 page 42 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 43 Consolidated balance sheet (statement of financial position) As at 30 April 2011 2011 Notes £m ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in joint ventures Available for sale and other investments Derivative instruments at fair value Retirement benefit asset Deferred tax asset Other receivables Current assets Inventories Trade and other receivables Derivative instruments at fair value Foreign tax recoverable Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Borrowings Derivative instruments at fair value Provisions Non-current liabilities Other payables Borrowings Derivative instruments at fair value Deferred tax liabilities Provisions Retirement benefit obligations Total liabilities Net assets EQUITY Ordinary share capital Share premium account Retained earnings Capital redemption reserve Own shares Translation reserve Cash flow hedging reserve Total equity 11 12 13 14 15 27(j) 26 24 20 19 20 27(j) 21 22 23 27(j) 25 22 23 27(j) 24 25 26 28 30 30 30 30 30 30 2010 £m 99.4 16.1 796.2 56.7 1.9 5.5 Nil 1.3 17.6 994.7 24.1 200.3 25.7 1.4 375.7 627.2 95.3 24.2 924.3 58.1 2.1 20.7 23.7 Nil 19.4 1,167.8 26.6 221.5 50.8 1.4 358.3 658.6 1,826.4 1,621.9 529.6 20.4 62.5 0.1 56.9 669.5 24.3 592.1 0.1 46.8 126.6 120.8 910.7 1,580.2 246.2 7.1 9.8 (217.4) 416.3 (14.6) 1.7 43.3 246.2 524.6 19.1 50.8 4.0 46.6 645.1 20.4 626.1 7.3 19.2 89.0 202.1 964.1 1,609.2 12.7 7.1 9.8 (433.5) 415.6 (13.3) 7.1 19.9 12.7 These financial statements have been approved for issue by the Board of Directors on 29 June 2011. The accompanying notes form an integral part of this consolidated balance sheet. Sir Brian Souter Chief Executive Martin A Griffiths Finance Director Stagecoach Group plc | page 43 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 44 ) 2 0 ( . – 8 0 . 3 0 . 3 6 . . ) 7 6 7 ( . 7 2 1 . 5 9 6 . 4 6 7 1 – – – – – – . 9 9 1 – . 4 3 2 ) 8 1 ( . – 5 0 . 7 4 . . ) 8 5 1 ( – – – – – . 9 5 4 2 . 4 3 2 . 2 6 4 2 . 3 3 4 – – – – – – – – – – – – – – – – l a t o T y t i u q e m £ m £ m £ ) 6 9 ( . . ) 2 2 5 ( 2 0 . . ) 9 9 1 ( . 7 1 1 1 – . 1 2 7 – ) 2 0 ( . . 8 1 9 . 1 2 7 . ) 2 0 ( . 0 6 m £ 1 1 . – 0 6 . – – – – – – – – – ) 2 0 ( . 8 0 . – – – – – – – – – – – – 1 2 . . ) 8 7 9 ( . 7 1 1 1 . 9 3 1 – – ) 1 2 ( . – 3 6 . . ) 7 6 7 ( – – – – – – – – 3 0 . – – – – – – – – – – ) 4 5 ( . . ) 4 5 ( – – – – – – – – ) 8 1 ( . 5 0 . – – – – – – – – – – 7 0 . . 5 1 5 . 4 6 7 1 . 9 7 2 2 – – ) 7 0 ( . 7 4 . . ) 8 5 1 ( – – – – – – – – – – – – – – – – 1 7 . . ) 3 3 1 ( . 6 5 1 4 . ) 5 3 3 4 ( 8 9 . 1 7 . 7 1 . . ) 6 4 1 ( . 3 6 1 4 . ) 4 7 1 2 ( 8 9 . 1 7 . 9 9 . y t i u q e n i s e g n a h c x a t f o t e n , ) e s n e p x e ( / e m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P ) e s n e p x e ( / e m o c n i e v i s n e h e r p m o c l a t o T d e s a h c r u p s e r a h s i y r a n d r o n w O d e m e e d e r s e r a h s e c n e r e f e r P l d o s s e r a h s i y r a n d r o n w O s e u s s i e r a h s i y r a n d r o w e n n o g n i s i r A s t n e m y a p d e s a b e r a h s d e l t t e s - y t i u q e o t n o i t a e r n l i t i d e r C x a t f o t e n , ) e s n e p x e ( / e m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P 0 1 0 2 y a M 1 d n a 0 1 0 2 l i r p A 0 3 t a e c n a l a B ) e s n e p x e ( / e m o c n i e v i s n e h e r p m o c l a t o T d e s a h c r u p s e r a h s i y r a n d r o n w O d e m e e d e r s e r a h s e c n e r e f e r P l d o s s e r a h s i y r a n d r o n w O s e r a h s i y r a n d r o n o d a p s d n e d i v i D i s t n e m y a p d e s a b e r a h s d e l t t e s - y t i u q e o t n o i t a e r n l i t i d e r C f o t n e m e t a t s d e t a d i l o s n o c s i h t f o t r a p l a r g e t n i s e r a h s i y r a n d r o n o d a p s d n e d i v i D i n a m r o f s e t o n g n i y n a p m o c c a e h T 1 1 0 2 l i r p A 0 3 t a e c n a l a B w o l f h s a C i g n g d e h e v r e s e r l e b a l i a v A r o f e v r e s e r e a s l n o i t a l s n a r T e v r e s e r s e r a h s n w O l a t i p a C n o i t p m e d e r e v r e s e r i d e n a t e R i s g n n r a e e r a h S i m u m e r p t n u o c c a e r a h s y r a n d r O i l a t i p a c y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o C page 44 | Stagecoach Group plc m £ m £ m £ m £ m £ s e t o N . ) 9 3 1 ( . 5 3 1 4 . ) 9 4 7 3 ( 5 9 . 1 7 . 9 0 0 2 y a M 1 d n a 9 0 0 2 l i r p A 0 3 t a e c n a l a B 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 45 Consolidated statement of cash flows For the year ended 30 April 2011 Cash flows from operating activities Cash generated by operations Interest paid Interest received Dividends received from joint ventures Net cash flows from operating activities before tax Tax paid Net cash from operating activities after tax Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Disposals and closures of subsidiaries and other businesses, net of cash disposed of Purchase of property, plant and equipment Disposal of property, plant and equipment Purchase of intangible assets Purchase of other investments Movement in loans to joint ventures Net cash outflow from investing activities Cash flows from financing activities Issue of ordinary shares for cash Redemption of ‘B’ shares Investment in own ordinary shares by employee share ownership trusts Sale of own ordinary shares by employee share ownership trusts Repayments of hire purchase and lease finance Proceeds of sale and leaseback transaction Movement in other borrowings Dividends paid on ordinary shares Sale of tokens Redemption of tokens Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of year Exchange rate effects 2011 Notes £m 31 16 17 31 9 253.5 (35.6) 5.5 28.8 252.2 (20.4) 231.8 (57.0) 1.2 (156.3) 14.7 (0.4) (0.4) Nil (198.2) Nil (0.7) (1.8) 0.5 (24.1) Nil (5.1) (15.8) 1.4 (4.1) (49.7) (16.1) 375.7 (1.3) Cash and cash equivalents at the end of year 21 358.3 2010 £m 234.5 (58.5) 5.4 35.7 217.1 (0.7) 216.4 (2.5) 1.6 (89.2) 53.0 (0.9) (0.6) 1.4 (37.2) 0.3 (2.1) (0.2) 0.8 (58.7) 3.6 53.3 (76.7) 3.2 (3.4) (79.9) 99.3 277.3 (0.9) 375.7 Cash and cash equivalents for the purposes of the consolidated cash flow statement comprise cash at bank and in hand, overdrafts and other short- term highly liquid investments with maturities at the balance sheet date of twelve months or less. The accompanying notes form an integral part of this consolidated statement of cash flows. Stagecoach Group plc | page 45 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 46 Notes to the consolidated financial statements Note 1 IFRS accounting policies These consolidated financial statements are presented in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the European Union. The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. • Basis of preparation The consolidated financial statements have been prepared in accordance with IFRS and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations as adopted by the European Union (and therefore comply with Article 4 of the EU IAS Regulation), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by financial assets and financial liabilities (including derivative instruments) at fair value. The consolidated financial statements are presented in pounds sterling, the presentational currency of the Group, and the functional currency of the Company and all values are rounded to the nearest one hundred thousand (£0.1m) except where otherwise indicated. • New accounting standards adopted during the year The following new standard has been applied by the Group for the first time for the financial year beginning 1 May 2010: • IFRS 3 (revised), ‘Business combinations’. The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with the previous version of IFRS 3. For example, all acquisition-related costs should be expensed. The standard was applied to the acquisition of the East London bus business on 14 October 2010. Acquisition-related costs of £0.6m have been recognised in the consolidated income statement, which previously would have been included in the consideration for the business combination. The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 May 2010, but do not have any significant effect on the consolidated financial statements of the Group: • Amendments resulting from April 2009 Annual Improvements to IFRSs • IFRS 1 (revised), ‘First time adoption of IFRSs – revised and restructured’ • IFRS 1 (amended), ‘First time adoption of IFRSs – amendments relating to oil and gas assets and determining whether an arrangement contains a lease’ • IFRS 2 (amended), ‘Share-based payment – amendments relating to group cash-settled share-based payment transactions’ • IAS 27 (amended), ‘Consolidated and separate financial statements – consequential amendments arising from amendments to IFRS 3’ • IAS 28 (amended), ‘Investments in associates – consequential amendments arising from amendments to IFRS 3’ • IAS 31 (amended), ‘Investments in joint ventures – consequential amendments arising from amendments to IFRS 3’ • IAS 32 (amended), ‘Financial instruments: presentation – amendments relating to classification of rights issues’ • IAS 39 (amended), ‘Financial instruments: recognition and measurement – amendments for eligible hedged items’ • IAS 39 (amended), ‘Financial instruments: recognition and measurement – amendments for embedded derivatives when reclassifying financial instruments’ • IFRIC 17, ‘Distributions of non-cash assets to owners’ • IFRIC 18, ‘Transfers of assets from customers’ • New standards and interpretations not applied The International Accounting Standards Board (“IASB”) and IFRIC have issued the following standards and interpretations with an effective date for financial years beginning on or after the dates disclosed below and therefore after the date of these financial statements. International Accounting Standards and Interpretations Amendments resulting from May 2010 Annual Improvements to IFRSs IFRS 1 IFRS 1 IFRS 1 IFRS 7 Effective date 1 January 2011 and later 1 July 2010 1 January 2011 1 July 2011 First-time adoption of International Financial Reporting Standards (revised January 2010) First-time adoption of International Financial Reporting Standards (revised May 2010) First-time adoption of International Financial Reporting Standards (revised December 2010) Financial Instruments: Disclosures – Amendments enhancing disclosures about transfers of financial assets. Financial Instruments – Classification and measurement (revised November 2009) Consolidated Financial Instruments Joint Arrangements Disclosures of interests in other entities Fair value measurement Presentation of Financial Statements (revised June 2011) Income Taxes – Limited scope amendment (recovery of underlying assets) Employee Benefits (revised June 2011) Related Party Disclosures (revised November 2009) Consolidated and separate financial statements (amended in 2011) Investments in Associates and joint ventures (amended in 2011) Financial Instruments: Presentation – Amendment re classification of rights issue. Amendment re Prepayments of a Minimum Funding Requirement Extinguishing Financial Liabilities with Equity Instruments IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 IAS 1 IAS 12 IAS 19 IAS 24 IAS 27 IAS 28 IAS 32 IFRIC14 IFRIC19 1 July 2011 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 July 2012 1 January 2012 1 January 2013 1 January 2011 1 January 2013 1 January 2013 1 February 2011 1 July 2010 1 July 2010 The Directors are currently reviewing the requirements of the above standards and interpretations to determine whether they will have a material impact on the Group’s financial statements in the period of initial application. • Comparatives Where appropriate, comparative figures for the previous year have been adjusted to conform to changes in presentation. These changes have no impact on the consolidated income statement or on consolidated net assets. page 46 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 47 Note 1 IFRS accounting policies (continued) • Basis of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiary undertakings and joint ventures made up to 30 April in each year. The consolidated income statement includes the results of businesses purchased from the effective date of acquisition and excludes the results of disposed operations and businesses sold from the effective date of disposal. • Subsidiaries and joint ventures (i) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits from their activities, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method (also known as the acquisition method) of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. The excess of the cost of acquisition over the fair value of acquiree’s identifiable assets, liabilities and contingent liabilities is recorded as goodwill. Costs attributable to the acquisition are expensed to the consolidated income statement. Intercompany transactions, balances, income and expenses are eliminated on consolidation. (ii) Associates and joint ventures Investments in joint ventures are accounted for using the equity method of accounting. Under the equity method of accounting, the Group’s consolidated income statement includes the Group’s share of profits less losses of joint ventures, while the share of net assets of joint ventures is included in the Group’s consolidated balance sheet. Where the Group’s share of losses in a joint venture exceeds its interest in that enterprise, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture. The Group’s reported interest in joint ventures includes goodwill on acquisition. The Group applies its own accounting policies and estimates when accounting for its share of joint ventures making appropriate adjustments where necessary, having due regard to all relevant factors. • Presentation of income statement and exceptional items Where applicable, income statement information has been presented in a columnar format, which separately highlights intangible asset expenses and exceptional items. This is intended to enable users of the financial statements to determine more readily the impact of intangible asset expenses and exceptional items on the results of the Group. Exceptional items are defined in note 36. • Use of estimates The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Although these estimates and assumptions are based on management’s best knowledge, actual results may ultimately differ from those estimates and assumptions used. The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are the measurement of tax assets and liabilities, the measurement of contract provisions, the measurement of retirement benefit obligations, the measurement and impairment of goodwill and other non-current assets, the measurement of insurance provisions and the measurement of receivables and payables in relation to rail contracts. The measurement of tax assets and liabilities requires an assessment to be made of the potential tax consequence of certain items that will only be resolved when agreed by the relevant tax authorities. The measurement of contract provisions requires estimates of future cash flows relating to the relevant contracts and the selection of a suitable discount rate. The measurement of retirement benefit obligations requires the estimation of life expectancies, future changes in salaries, inflation, the expected return on scheme assets and the selection of a suitable discount rate (see note 26). The Group determines whether goodwill arising on business combinations is impaired on an annual basis and this requires the estimation of value in use of the cash generating units to which the goodwill is allocated. This requires estimation of future cash flows and the selection of a suitable discount rate (see note 11). The estimation of the insurance provisions is based on an assessment of the expected settlement on known claims together with an estimate of settlements that will be made in respect of incidents occurring prior to the balance sheet date but for which claims have not been reported to the Group. The estimation of receivables and payables in relation to rail contracts requires an estimate of the likely outcomes based on interpreting the applicable contracts. Those accounting policies that the Directors believe require the greatest exercise of judgement are described on page 14. • Revenue Revenue represents gross revenue earned from public transport services and excludes payments received on account. Amounts receivable for tendered services and concessionary fare schemes are included as part of revenue. Where appropriate, amounts are shown net of rebates and VAT. Revenues incidental to the Group’s principal activity (including advertising income and maintenance income) are reported as miscellaneous revenue (see note 5). Rail revenue includes amounts attributable to the train operating companies, based principally on agreed models of route usage, by Railway Settlement Plan Limited (which administers the income allocation system within the UK rail industry) in respect of passenger receipts. Franchise agreement receipts or payments from or to the Department for Transport (“DfT”) are treated as other operating income (see note 5). Revenue is recognised by reference to the stage of completion of the customer’s travel or services provided under contractual arrangements as a proportion of total services to be provided. Cash received for the sale of season tickets and travelcards is deferred within liabilities and recognised in the income statement over the period covered by the relevant ticket. Stagecoach Group plc | page 47 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 48 Notes to the consolidated financial statements Note 1 IFRS accounting policies (continued) • Revenue (continued) Income from advertising and other activities is recognised as the income is earned. Finance income is recognised using the effective interest method as interest accrues. Under the contractual terms of its franchise agreements to operate rail services, the Group has revenue sharing arrangements with the DfT. As a result of these arrangements, the Group may be liable to make payments to the DfT or receive amounts from the DfT based on calculations that involve comparison of actual revenue with the target revenue specified in the relevant franchise agreement. The Group recognises revenue share amounts payable or receivable in the income statement in the same period in which it recognises the related revenue. Revenue share amounts payable (if any) are classified within other operating expense and revenue share amounts receivable (if any) are classified within other operating income. • Performance incentive payments Performance incentive payments made to Network Rail by the Group in respect of train service delivery are recognised in the same period that the performance relates to and are shown as other operating costs. • Government grants Grants from government are recognised where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are recorded as liabilities and are credited to the income statement on a straight-line basis over the expected lives of the related assets. Amounts are held as deferred grant income within trade and other payables. Revenue grants receivable in respect of the operation of rail franchises in the UK are credited to the income statement in the period in which the related expenditure is recognised in the income statement or where they do not relate to any specific expenditure, in the period in respect of which the grant is receivable. These rail franchise grants are classified within other operating income. • Share based payments The Group issues equity-settled and cash-settled share based payments to certain employees. Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period. In valuing equity-settled transactions, no account is taken of any non-market based vesting conditions and no expense is recognised for awards that do not ultimately vest as a result of a failure to satisfy a non-market based vesting condition. None of the Group’s equity-settled transactions have any market based performance conditions. Fair value for equity-settled share based payments is estimated by use of the Black-Scholes pricing model. At each balance sheet date, before vesting, the cumulative expense is calculated based on management’s best estimate of the number of equity instruments that will ultimately vest taking into consideration the likelihood of achieving non-market based vesting conditions. The movement in this cumulative expense is recognised in the income statement, with a corresponding entry in equity. Where an equity-settled award is cancelled by the Group or the holder, it is treated as if it had vested on the date of cancellation and any cost not yet recognised in the income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. Cash-settled transactions The cost of cash-settled transactions is measured at fair value. Fair value is estimated initially at the grant date and at each balance sheet date thereafter until the awards are settled. Market based performance conditions are taken into account when determining fair value. Fair value for cash-settled share based payments (being only those that relate to the Long Term Incentive Plan) is estimated by use of a simulation model. During the vesting period, a liability is recognised representing the estimated fair value of the award and the portion of the vesting period expired as at the balance sheet date. Changes in the carrying amount of the liability are recognised in the income statement for the period. Choice of settlement The Company can choose to settle awards under the Long Term Incentive Plan in either cash or equity, although it currently expects to settle all such awards in cash. Awards under the Long Term Incentive Plan are accounted for as cash-settled transactions (see above). • Operating profit Operating profit is stated after charging restructuring costs and after the share of after-tax results of joint ventures but before finance income, finance costs, non-operating exceptional items, taxation and profit from discontinued operations. • Taxation Tax, current and deferred, is calculated using tax rates and laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Corporation tax is provided on taxable profit at the current rate applicable. Tax charges and credits are accounted for through the same primary statement as the related pre-tax item. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is measured at tax rates that are expected to apply in periods in which the temporary differences reverse based on tax rates and law enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. page 48 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 49 Note 1 IFRS accounting policies (continued) • Taxation (continued) Deferred income tax is provided on temporary differences arising on investments in subsidiaries and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. • Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, who is responsible for allocating resources and assessing performance of operating segments, which for this purpose has been identified as the Board of Directors. • Foreign currency translation The financial statements of foreign operations are maintained in the functional currencies in which the entities transact business. The trading results of foreign operations are translated into sterling using average rates of exchange. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling using rates of exchange at the relevant balance sheet date. Exchange differences arising on the translation of the opening net assets and results of overseas operations, together with exchange differences arising on net foreign currency borrowings and foreign currency derivatives, to the extent they hedge the Group’s investment in overseas operations, are recognised as a separate component of equity being the translation reserve. Further information on the Group’s accounting policy on hedges of net investments in a foreign entity is provided on page 53. Foreign currency monetary assets and liabilities are translated into the respective functional currencies of the Group entities at the rates of exchange ruling at the balance sheet date. Foreign currency transactions arising during the year are translated into the respective functional currencies of Group entities at the rate of exchange ruling on the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. On disposal of a foreign subsidiary, the amount of any exchange differences relating to the subsidiary that has been deferred in the translation reserve is recognised in the income statement within the reported gain or loss on disposal. The principal rates of exchange applied to the consolidated financial statements were: US Dollar: Year end rate Average rate Canadian Dollar: Year end rate Average rate 2011 2010 1.6680 1.5646 1.5827 1.5823 1.5307 1.6020 1.5504 1.7189 • Business combinations and goodwill On the acquisition of a business, fair values are attributed to the identifiable assets, liabilities and contingent liabilities of the acquiree. Goodwill represents the excess of the fair value of the consideration given for a business over the fair value of such net assets. The fair value of intangible assets and acquired customer contract provisions on the acquisition of a business are amortised to the income statement in line with the projected cash flows. Goodwill arising on acquisitions is capitalised and is subject to impairment review, both annually and when there are indications that the carrying value may not be recoverable. Prior to 1 May 2004, goodwill was amortised over its estimated useful life; such amortisation ceased on 30 April 2004 but goodwill amortisation expensed prior to 1 May 2004 was not reversed. Goodwill that arose prior to 1 May 2004 is measured at the amount recognised under the Group’s previous accounting framework, UK GAAP. Goodwill arising on acquisitions in the year ended 30 April 1998 and earlier periods was written off directly to equity in accordance with the UK accounting standards then in force. Under IFRS 1 and IFRS 3, such goodwill remains eliminated against reserves. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, then the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the cash generating unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Any impairment of goodwill is recognised immediately in the income statement. Where goodwill (other than that already written off directly to equity) forms part of a cash generating unit and all or part of that unit is disposed of, the associated goodwill is included in the carrying amount of the disposed operation when determining the overall gain or loss on disposal. • Impairment of non-current assets Property, plant and equipment, intangible assets (excluding goodwill), financial assets and other non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Non-financial assets other than goodwill that have suffered an impairment are reviewed for possible reversal at each reporting date. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Any impairment loss is recognised immediately in the income statement. Marketing costs incurred during the start-up phase of a new activity are charged to the income statement as incurred. Stagecoach Group plc | page 49 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 50 Notes to the consolidated financial statements Note 1 IFRS accounting policies (continued) • Intangible assets Intangible assets acquired separately from a business combination are initially capitalised at cost and subsequently measured at cost less accumulated amortisation and accumulated impairment losses. The initial cost recognised is the aggregate amount paid plus the fair value of any other consideration given to acquire the asset. Intangible assets acquired as part of a business combination are capitalised, separately from goodwill, at fair value at the date of acquisition if the asset is separable or arises from contractual or legal rights and its fair value can be measured reliably and are subsequently measured at fair value less accumulated amortisation and accumulated impairment losses. Amortisation is calculated on the straight-line method to write-off the cost or fair value at acquisition (as the case may be) of each asset over their estimated useful lives shown below. Intangible assets relating to rail franchises of a finite duration are amortised over the life of the franchise. Customer contracts Right to operate rail franchises over the life of the contract (1 to 5 years for current contracts) over the life of the franchise (10 years from February 2007 to February 2017 for South Western Trains franchise and 7 years and 4 months from November 2007 to March 2015 for East Midlands Trains franchise) between 2 and 5 years for current contracts 2 to 7 years Non-compete contracts Software costs • Property, plant and equipment Property, plant and equipment acquired as part of a business combination is stated at fair value at the date of acquisition and is subsequently measured at fair value on acquisition less accumulated depreciation and any provision for impairment. All other property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is calculated on the straight-line method to write off the cost, fair value at acquisition or deemed cost of each asset to their residual values over their estimated useful lives as follows: Heritable and freehold buildings and long leasehold properties Short leasehold properties IT and other equipment, furniture and fittings Passenger Service Vehicles (“PSVs”) and transportation equipment Motor cars and other vehicles 50 years period of lease 3 to 10 years 7 to 16 years 3 to 5 years Freehold land is not depreciated. The useful lives and residual values of property, plant and equipment are reviewed at least annually and, where applicable, adjustments are made on a prospective basis. An item of property, plant or equipment is derecognised upon disposal. An item on which no future economic benefits are expected to arise from the continued use of the asset is impaired if it is continued to be used by the Group. Gains and losses on disposals are determined by comparing the proceeds received with the carrying amount of the asset and are included in the income statement. Any gain or loss on derecognition of the asset is included in the income statement in the period of derecognition. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. • Inventories Inventories are stated at the lower of cost and net realisable value after making due allowance for obsolete or slow moving items. Cost is determined using the first-in, first-out (“FIFO”) or average cost method. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. • Pre-contract costs The costs associated with securing new rail franchises are expensed as incurred, except when at the time the costs are incurred it is probable that a contract will be awarded, in which case they are recognised as an asset and are charged to the income statement over the life of the franchise. • Hire purchase and lease obligations Assets acquired under hire purchase and finance lease arrangements, where substantially all the risks and rewards of ownership of the asset have passed to the Group, are capitalised at the commencement of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Fixed lease payments are apportioned between the finance costs, and the reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are charged directly against income and are reported within finance costs in the consolidated income statement. Assets capitalised under finance leases and other similar contracts are depreciated over the shorter of the lease terms and their useful economic lives. Assets capitalised under hire purchase contracts are depreciated over their useful economic lives. Rentals under operating leases are charged on a straight-line basis over the lease term. The principal restriction on assets held under finance lease or hire purchase agreements is a restriction on the right to dispose of the assets during the period of the agreement. • Tokens Tokens issued by National Transport Tokens Limited, a subsidiary of the Group, to facilitate public passenger travel in the United Kingdom are credited to a token redemption provision to the extent they are expected to be redeemed by customers. Redemptions are offset against this provision and associated handling commission paid to third parties is included in operating costs. Funds from the sale of tokens required for token redemption are included as a financing activity in the consolidated statement of cash flows. page 50 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 51 Note 1 IFRS accounting policies (continued) • Tokens (continued) The estimate of the balance sheet provision for token redemptions is remeasured at each balance sheet date and is based on the value of tokens issued by the Group but not yet redeemed or cancelled at the balance sheet date. Allowance is made for the estimated proportion of tokens in issue that will never be redeemed. This allowance is estimated with reference to historic redemption rates. At 30 April 2011, it has been estimated that 97% (30 April 2010: 97%) of tokens in issue will be redeemed. • Restructuring provisions Provisions for restructuring are recognised when the Group has a present legal or constructive obligation as a result of past events and a reliable estimate of associated costs can be made. • Insurance The Group receives claims in respect of traffic incidents and employee claims. The Group protects against the cost of such claims through third party insurance policies. An element of the claims is not insured as a result of the “excess” or “deductible” on insurance policies. Provision is made on a discounted basis for the estimated cost to the Group to settle claims for incidents occurring prior to the balance sheet date. The estimate of the balance sheet insurance provisions is based on an assessment of the expected settlement of known claims together with an estimate of settlements that will be made in respect of incidents occurring prior to the balance sheet date but for which claims have not yet been reported to the Group. The provision is set after taking account of advice from third party actuaries. • Retirement benefit obligations The Group contributes to a number of pension schemes as described in note 26. In respect of defined benefit schemes, obligations are measured at discounted present value whilst scheme assets are recorded at market value. In relation to each scheme, the recognised net asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the scheme. An economic benefit is available to the Group if it is realisable during the life of the scheme or on settlement of the scheme liabilities. The operating and financing costs of defined benefit plans are included within operating profit and are disclosed separately in the notes to the financial statements; service costs are spread systematically over the working lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised immediately in the statement of comprehensive income. Mortality rates are considered when retirement benefit obligations are calculated. Past service costs and adjustments are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period (the vesting period), in which case the past service costs are amortised using a straight-line method over the vesting period. Curtailments arise where the Group makes a material reduction in the number of employees covered by a pension scheme or amends a defined benefit pension scheme’s terms such that a material element of future service by current employees will qualify for no or significantly reduced benefits. Settlements arise when the Group enters into a transaction that eliminates all or part of the Group’s obligations for benefits provided under a defined benefit pension scheme. The gain or loss arising on a settlement or curtailment comprises the resulting change in the net pension asset or liability, and such gain or loss is recognised in the income statement when the settlement or curtailment occurs. Where the gain or loss is related to a disposal of a business, it is included within the reported gain or loss on disposal within profit or loss from discontinued operations. A full actuarial valuation is undertaken triennially for each scheme and updated annually using independent actuaries following the projected unit credit method. The present value of the scheme obligations is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds which have terms to maturity equivalent to the terms of the related obligations. Experience adjustments and changes in assumptions which affect actuarial gains and losses are reflected in the actuarial gain or loss for the year. The liability or asset recognised for the relevant sections of the Railways Pension Scheme represents only that part of the net deficit (or surplus) of each section that the employer expects to fund (or recover) over the life of the franchise to which the section relates. For defined contribution schemes, the Group pays contributions to separately administered pension schemes. Once the contributions have been paid, the Group has no further payment obligations. The Group’s contributions to defined contribution schemes are charged to the income statement in the period to which the contributions relate. • Financial instruments The disclosure of the accounting policies that follow for financial instruments are those that apply under IFRS 7 ‘Financial Instruments: Disclosures’, IAS 32 ‘Financial Instruments: Presentation’ and IAS 39 ‘Financial Instruments: Recognition and measurement’. Financial assets Financial assets are classified, as appropriate, as financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments or as available for sale. They include cash and cash equivalents, trade receivables, other receivables, loans, other investments and derivative financial instruments. The Group determines the classification of its financial assets at initial recognition. When financial assets are recognised initially, they are measured at fair value, normally being the transaction price plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. The subsequent measurement of financial assets depends on their classification, as follows: Financial assets at fair value through profit or loss: Financial assets classified as held for trading and other assets designated as such on inception are classified as financial assets at fair value through profit or loss where the assets meet the criteria for such classification. Financial assets are classified as held for trading if they are acquired for sale in the short-term. Derivatives are also classified as held for trading unless they are designated as hedging instruments. Assets in this category are carried on the balance sheet at fair value with gains or losses recognised in the income statement. Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either at fair value through profit or loss or available for sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Where the time value of money is material, receivables are discounted to the present value at the point they are first recognised and are subsequently amortised to the invoice amount by the payment due Stagecoach Group plc | page 51 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 52 Notes to the consolidated financial statements Note 1 IFRS accounting policies (continued) • Financial instruments (continued) Financial assets (continued) date. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered in evaluating whether a trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within ‘Other external charges’. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss. Held-to-maturity investments: The Group has no financial assets classified as held-to-maturity investments. Available for sale financial assets: Available for sale financial assets are those non-derivative financial assets that are designated as such or are not classified in any of the above categories. These are included in non-current assets unless the Group intends to dispose of them within 12 months of the balance sheet date. After initial recognition, available for sale financial assets are measured at fair value, with gains or losses being recognised as a separate component of equity until the asset is derecognised or until the asset is determined to be impaired, at which time the cumulative gain or loss reported in equity is included in the income statement. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and is recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Financial liabilities When a financial liability is recognised initially, the Group measures it at its fair value plus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability. Financial liabilities include trade payables, other payables, borrowings and derivative financial instruments. Subsequent measurement depends on its classification as follows: Financial liabilities at fair value through profit or loss: Financial liabilities classified as held for trading and derivative liabilities that are not designated as effective hedging instruments are classified as financial liabilities at fair value through profit or loss. Such liabilities are carried on the balance sheet at fair value with gains or losses being recognised in the income statement. Other: All other financial liabilities not classified as fair value through profit or loss are measured at amortised cost using the effective interest method. Fair values The fair value of quoted investments is determined by reference to appropriate market prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include using pricing models and discounted cash flow analysis. Derivative financial instruments Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re- measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. For those derivatives designated as hedges and for which hedge accounting is desired, the hedging relationship is documented at its inception. This documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how effectiveness will be measured throughout its duration. Such hedges are expected at inception to be highly effective. For the purpose of hedge accounting, hedges are classified as: – – – Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability; Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, including intra-group transactions; or Hedges of net investment in a foreign entity. Net gains or losses arising from changes in the fair value of all other derivatives, which are classified as held for trading, are taken to the income statement. These may arise from derivatives for which hedge accounting is not applied because they are either not designated or not effective as hedging instruments from an accounting perspective. The treatment of gains and losses arising from revaluing derivatives designated as hedging instruments depends on the nature of the hedging relationship, as follows: Fair value hedges: For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged; the derivative is remeasured at fair value and gains and losses from both the derivative and the hedged item are taken to the income statement. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. For hedged items carried at amortised cost, the hedge adjustment is amortised through the income statement such that it is fully amortised by maturity. Cash flow hedges: For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised in the statement of comprehensive income, while the ineffective portion is recognised in the income statement. Amounts recorded in the statement of comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when a forecast sale or purchase occurs. For cash flow hedges of forecast fuel purchases, the transfer is to operating costs within the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recorded in the statement of recognised income remain in equity until the forecast transaction occurs and are then transferred to the income statement. If a forecast transaction is no longer expected to occur, amounts previously recognised in the statement of comprehensive income are transferred to the income statement immediately. page 52 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 53 Note 1 IFRS accounting policies (continued) • Financial instruments (continued) Hedges of net investment in a foreign entity: For hedges of the net investment in a foreign entity, the effective portion of the gain or loss on the hedging instrument is recorded in the statement of comprehensive income, while the ineffective portion is recognised in the income statement. Amounts recorded in the statement of comprehensive income are transferred to the income statement when the foreign entity is sold. Non-derivative financial liabilities can be designated as hedges of a net investment in a foreign entity and are subject to the same requirements as derivative hedges of a net investment in a foreign entity. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks and other short-term highly liquid investments. Interest bearing loans and borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method subject to any adjustments in respect of fair value hedges; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings. Interest on borrowings to purchase property, plant and equipment is expensed in the income statement. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer or rollover settlement for at least 12 months after the balance sheet date. Trade and other payables Trade and other payables are generally not interest bearing and are stated at amortised cost which approximates to nominal value due to creditors days being relatively low. Preferred shares Preferred shares, which are redeemable on a specific date or at the option of the shareholder, or which carry non-discretionary dividend obligations, are classified as liabilities. The dividend on these preferred shares is recognised in the income statement as an interest expense. Share capital and dividends Ordinary shares are classified as equity. Incremental external costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds. Where the Company, its subsidiaries or employee share ownership trusts sponsored by the Company purchase ordinary shares in the Company, the consideration paid, including any attributable incremental external costs net of income taxes, is deducted from equity. Where such shares are subsequently sold or reissued, any consideration received is included in equity. Dividends on ordinary shares are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders, or in the case of interim dividends, in the period in which they are paid. The accounting policy in relation to preferred shares and dividends payable on such shares is included in the accounting policy for financial instruments above. Note 2 Segmental information Management has determined the operating segments based on the reports reviewed by the Board of Directors that are used to make strategic decisions. The Group is managed, and reports internally, on a basis consistent with its four continuing operating segments, being UK Bus (regional operations), UK Bus (London), North America and UK Rail. The Group’s IFRS accounting policies are applied consistently, where appropriate, to each segment. The segmental information provided in this note is on the basis of four operating segments as follows: Segment name UK Bus (regional operations) UK Bus (London) North America UK Rail Service operated Coach and bus operations Bus operations Coach and bus operations Rail operations Country of operation United Kingdom United Kingdom USA and Canada United Kingdom The basis of segmentation is consistent with the Group’s last annual financial statements for the year ended 30 April 2010, except that the new UK Bus (London) operating segment consists of the East London Bus business acquired by the Group in October 2010. Management has determined that the East London Bus business should be treated as a separate operating segment as it is managed separately to our UK Bus regional operations and is reported separately to the Board of Directors, reflecting the different risk profile of the business. The Group has interests in three trading joint ventures: Virgin Rail Group that operates in UK Rail, Citylink that operates in UK Bus (regional operations) and Twin America LLC that operates in North America. The results of these joint ventures are shown separately in notes 2(c) and 2(g). The Group has an interest in a non-trading joint venture, New York Splash Tours LLC, which operated in North America until trading ceased in the year ended 30 April 2010. (a) Revenue Due to the nature of the Group’s business, the origin and destination of revenue is the same in all cases. As the Group sells bus and rail services to individuals, it has few customers that are individually “major”. Its major customers are typically public bodies that subsidise or procure transport services – such customers include local authorities, transport authorities and the UK Department for Transport. Stagecoach Group plc | page 53 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 54 Notes to the consolidated financial statements Note 2 Segmental information (continued) (a) Revenue (continued) Revenue split by segment was as follows: Continuing operations UK Bus (regional operations) UK Bus (London) North America Total bus continuing operations UK Rail Total Group revenue Intra-Group revenue – UK Bus (regional operations) Reported Group revenue (b) Operating profit Operating profit split by segment was as follows: Continuing operations UK Bus (regional operations) UK Bus (London) North America Total bus continuing operations UK Rail Total continuing operations Group overheads Intangible asset expenses Restructuring costs Total operating profit of continuing Group companies Share of joint ventures’ profit after finance income and taxation Total operating profit: Group operating profit and share of joint ventures’ profit after taxation 2011 £m 893.6 133.6 295.1 1,322.3 1,070.0 2,392.3 (2.5) 2,389.8 2010 £m 875.4 Nil 266.1 1,141.5 1,026.7 2,168.2 (3.8) 2,164.4 2011 2010 Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Results for the year £m Results for the year £m 153.1 (5.9) 19.3 166.5 48.4 214.9 (11.3) Nil (2.9) Nil Nil Nil Nil Nil Nil Nil (10.1) Nil 153.1 (5.9) 19.3 166.5 48.4 214.9 (11.3) (10.1) (2.9) 200.7 (10.1) 190.6 39.5 (5.1) 34.4 126.1 Nil 9.1 135.2 41.6 176.8 (11.6) Nil (1.2) 164.0 28.0 (2.6) Nil Nil (2.6) Nil (2.6) Nil (6.0) 0.8 (7.8) (5.1) 123.5 Nil 9.1 132.6 41.6 174.2 (11.6) (6.0) (0.4) 156.2 22.9 240.2 (15.2) 225.0 192.0 (12.9) 179.1 The reported operating loss for UK Bus (London) of £5.9m is after taking account of (i) a £3.2m release from the provision that was recorded as at acquisition in respect of acquired customer contracts and (ii) £9.9m of costs in relation to rebasing of staff terms and conditions. page 54 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 55 Note 2 Segmental information (continued) (c) Joint ventures The share of profit from joint ventures was further split as follows: Continuing Virgin Rail Group (UK Rail) Operating profit Finance income (net) Taxation Goodwill charged on investment in continuing joint ventures Citylink (UK Bus, regional operations) Operating profit Taxation New York Splash Tours LLC (North America) Operating loss Twin America LLC (North America) Operating profit Taxation Share of profit of joint ventures after finance income and taxation (d) Gross assets and liabilities Assets and liabilities split by segment were as follows: UK Bus (regional operations) UK Bus (London) North America UK Rail Central functions Joint ventures Borrowings and cash Taxation Total 2011 2010 Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Results for the year £m Results for the year £m 39.5 0.2 (11.3) 28.4 Nil 28.4 2.5 (0.7) 1.8 Nil Nil 9.7 (0.4) 9.3 Nil Nil Nil Nil (5.1) (5.1) Nil Nil Nil Nil Nil Nil Nil Nil 39.5 0.2 (11.3) 28.4 (5.1) 23.3 2.5 (0.7) 1.8 Nil Nil 9.7 (0.4) 9.3 25.5 0.2 (6.5) 19.2 Nil 19.2 1.7 (0.5) 1.2 (0.9) (0.9) 8.9 (0.4) 8.5 Nil Nil Nil Nil (5.1) (5.1) Nil Nil Nil Nil Nil Nil Nil Nil 25.5 0.2 (6.5) 19.2 (5.1) 14.1 1.7 (0.5) 1.2 (0.9) (0.9) 8.9 (0.4) 8.5 39.5 (5.1) 34.4 28.0 (5.1) 22.9 2011 Gross liabilities £m (240.0) (92.1) (76.3) (411.6) Gross assets £m 733.9 146.0 266.9 232.5 Net assets/ (liabilities) £m 493.9 53.9 190.6 (179.1) Gross assets £m 693.3 Nil 271.7 196.6 1,379.3 (820.0) 559.3 1,161.6 29.3 58.1 358.3 1.4 (38.4) Nil (654.6) (67.2) (9.1) 58.1 (296.3) (65.8) 25.2 56.7 375.7 2.7 2010 Gross liabilities £m (323.9) Nil (83.7) (416.6) (824.2) (69.8) Nil (676.9) (38.3) Net assets/ (liabilities) £m 369.4 Nil 188.0 (220.0) 337.4 (44.6) 56.7 (301.2) (35.6) 1,826.4 (1,580.2) 246.2 1,621.9 (1,609.2) 12.7 Central assets and liabilities include the token provision, interest payable and receivable and other net assets of the holding company and other head office companies. Segment assets and liabilities are determined by identifying the assets and liabilities that relate to the business of each segment but excluding intra- Group balances, cash, borrowings, taxation, interest payable, interest receivable and the token provision. Stagecoach Group plc | page 55 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 56 Notes to the consolidated financial statements Note 2 Segmental information (continued) (e) Capital expenditure on property, plant and equipment The capital expenditure on property, plant and equipment is shown below and is on an accruals basis, not on a cash basis, and includes expenditure on property, plant and equipment through business combinations. UK Bus (regional operations) UK Bus (London) North America UK Rail 2011 £m 85.1 99.3 31.4 34.2 250.0 2010 £m 98.2 Nil 14.5 45.1 157.8 Capital expenditure, excluding business combinations is analysed in section 3.8.10 of the Operating and Financial Review. (f) Capital expenditure on intangible assets The capital expenditure on intangible assets (including goodwill) is shown below and includes acquisitions through business combinations. UK Bus (regional operations) UK Bus (London) UK Rail (g) Earnings before interest, tax, depreciation and amortisation (“EBITDA”) The results of each segment are further analysed below: Year ended 30 April 2011 2011 £m 0.5 21.4 Nil 21.9 2010 £m 2.2 Nil 0.9 3.1 EBITDA pre-exceptional items £m Joint venture interest and tax £m UK Bus (regional operations) UK Bus (London) North America UK Rail – subsidiaries UK Rail – joint venture (Virgin Rail Group) UK Bus – joint venture (Citylink) North America – joint ventures (Splash Tours and Twin America) Group overheads Restructuring costs 213.9 (3.2) 40.4 54.0 39.5 2.5 9.7 (11.2) (2.9) Nil Nil Nil Nil (11.1) (0.7) (0.4) Nil Nil EBITDA including joint venture interest Depreciation and tax £m 213.9 (3.2) 40.4 54.0 28.4 1.8 9.3 (11.2) (2.9) expense £m (60.8) (2.7) (21.1) (5.6) Nil Nil Nil (0.1) Nil Operating profit pre intangibles and exceptional items £m Intangible asset expenses £m Exceptional items £m Allocation of restructuring costs £m 153.1 (5.9) 19.3 48.4 28.4 1.8 9.3 (11.3) (2.9) (1.2) (6.3) (0.1) (2.5) (5.1) Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil (0.3) (0.3) (0.7) (1.3) Nil Nil Nil (0.3) 2.9 Nil Operating profit £m 151.6 (12.5) 18.5 44.6 23.3 1.8 9.3 (11.6) Nil 225.0 342.7 (12.2) 330.5 (90.3) 240.2 (15.2) Year ended 30 April 2010 EBITDA pre-exceptional items £m Joint venture interest and tax £m EBITDA Depreciation including joint venture interest & impairment and tax £m expense £m Operating profit pre intangibles and exceptional items £m Intangible asset expenses £m Exceptional items £m Allocation of restructuring costs £m Operating profit £m UK Bus (regional operations) North America UK Rail – subsidiaries UK Rail – joint venture (Virgin Rail Group) UK Bus – joint venture (Citylink) North America – joint ventures (Splash Tours and Twin America) Group overheads Restructuring costs 180.9 29.2 58.3 25.5 1.7 8.0 (11.3) (1.2) 291.1 Nil Nil Nil (6.3) (0.5) (0.4) Nil Nil (7.2) 180.9 29.2 58.3 19.2 1.2 7.6 (11.3) (1.2) (54.8) (20.1) (16.7) Nil Nil Nil (0.3) Nil 126.1 9.1 41.6 19.2 1.2 7.6 (11.6) (1.2) (3.1) (0.4) (2.5) (5.1) Nil Nil Nil Nil (2.6) Nil Nil Nil Nil Nil Nil 0.8 283.9 (91.9) 192.0 (11.1) (1.8) (0.2) (0.3) 0.3 Nil Nil Nil (0.2) 0.4 Nil 120.2 8.4 39.4 14.1 1.2 7.6 (11.8) Nil 179.1 page 56 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 57 Note 3 Operating costs Operating costs were as follows: Materials and consumables Staff costs (note 7) Depreciation on property, plant and equipment – owned assets – assets held under hire purchase agreements and finance leases Loss on disposal of plant and equipment Impairment of plant and equipment Repairs and maintenance expenditure on property, plant and equipment Amortisation of intangible assets (note 12) Network Rail charges Operating lease rentals payable – plant and equipment – property Other external charges – exceptional – non-exceptional Restructuring costs – exceptional – non-exceptional 2011 £m 289.7 941.9 59.0 31.3 0.9 Nil 31.4 10.1 225.3 136.0 8.5 Nil 339.8 Nil 2.9 2010 £m 300.0 826.6 46.0 31.2 2.0 14.7 18.2 6.0 222.7 146.1 7.1 2.6 331.4 (0.8) 1.2 Total operating costs 2,076.8 1,955.0 Amounts payable to PricewaterhouseCoopers LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non- audit services are shown below: Fees payable to the Company’s auditors for the audit of the Company’s financial statements and consolidated financial statements Fees payable to the Company’s auditors for the audit of the Company’s subsidiaries pursuant to legislation Total audit fees Assurance services pursuant to legislation Other assurance services (see below) Tax advisory services Provision of training and related materials Non-audit fees Total fees payable by the Group to its auditors 2011 £000 25.0 794.9 819.9 NiNil 28.4 Nil 2.9 31.3 851.2 2010 £000 20.0 710.5 730.5 Nil 323.0 55.6 2.0 380.6 1,111.1 The fees payable to the auditors for other assurance services of £323,000 shown above for the year ended 30 April 2010 include £295,000 in relation to the issue of corporate bonds and the proposal to acquire certain businesses of, or merge with, National Express Group plc. This related to work that was best undertaken by the auditors in respect of a shareholder circular, a review of the adequacy of the Group’s working capital and advice on the accounting and legal structuring of the proposal. In addition to the fees detailed above, PricewaterhouseCoopers LLP received US$120,000 (2010: US$110,000) in relation to the audit of our joint venture, Twin America LLC. A description of the work of the Audit Committee is set out in the Audit Committee Report on page 29, and includes an explanation of how auditor independence is safeguarded when non-audit services are provided by the auditors. Stagecoach Group plc | page 57 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 58 Notes to the consolidated financial statements Note 4 Exceptional items and intangible asset expenses The Group highlights amounts before intangible asset expenses and exceptional items as well as clearly reporting the results in accordance with IFRS. Exceptional items are defined in note 36. Information on exceptional items is provided in section 3.8.2 of the Operating and Financial Review. The items shown in the column headed “Intangibles and exceptional items” on the face of the consolidated income statement for the year ended 30 April 2011 can be further analysed as follows: 2011 Exceptional items Intangible asset expenses Intangibles and exceptional items Operating costs Intangible asset expenses Share of profit of joint ventures Goodwill charged on investment in joint ventures Non-operating exceptional items – continuing operations Loss on sale of properties Revision to the estimated insurance provision relating to pre-acquisition liabilities Expenses incurred in relation to acquisition of East London bus business Loss on disposal of operations (note 17) Non-operating exceptional items – continuing operations Intangible asset expenses and exceptional items – continuing operations Tax effect of intangible asset expenses and exceptional items Intangible asset expenses and exceptional items after taxation – continuing operations Resolution of certain liabilities re disposals – discontinued operations £m Nil Nil (0.1) 4.6 (0.6) (3.2) 0.7 0.7 (1.3) (0.6) 18.5 £m £m (10.1) (10.1) (5.1) Nil Nil Nil Nil Nil (15.2) 3.1 (12.1) Nil (5.1) (0.1) 4.6 (0.6) (3.2) 0.7 (14.5) 1.8 (12.7) 18.5 The items shown in the column headed “Intangibles and exceptional items” on the face of the consolidated income statement for the prior year comparatives can be further analysed as follows: 2010 Exceptional items Intangible asset expenses Intangibles and exceptional items Operating costs Restructuring costs – release of unutilised provision Costs of participation in the Competition Commission study of the UK local bus market Intangible asset expenses Share of profit of joint ventures Goodwill charged on investment in joint ventures Non-operating exceptional items – continuing operations Gain on sale of properties Loss on disposal of operations (note 17) Loss on exit from certain operations Expenses incurred in relation to proposal to acquire certain businesses of, or merge with, National Express Group plc Non-operating exceptional items – continuing operations Exceptional finance costs Loss on ineffective interest rate swaps following issuance of sterling bond Intangible asset expenses and exceptional items – continuing operations Tax effect of intangible asset expenses and exceptional items Intangible asset expenses and exceptional items after taxation – continuing operations Resolution of certain liabilities re disposals – discontinued operations £m 0.8 (2.6) Nil (1.8) Nil 4.3 (3.2) (0.8) (2.3) (2.0) (20.5) (24.3) 7.4 (16.9) 3.9 £m Nil Nil (6.0) (6.0) (5.1) Nil Nil Nil Nil Nil Nil (11.1) 1.7 (9.4) Nil £m 0.8 (2.6) (6.0) (7.8) (5.1) 4.3 (3.2) (0.8) (2.3) (2.0) (20.5) (35.4) 9.1 (26.3) 3.9 page 58 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 59 Note 4 Exceptional items and intangible asset expenses (continued) The “goodwill charged on investment in joint ventures” is an annual charge for goodwill in relation to our investment in Virgin Rail Group. On adoption of IFRS, the Group took the exemption offered under IFRS 1 not to restate prior period business combinations. Accordingly, the goodwill arising under UK GAAP on the acquisition of the 49% stake in Virgin Rail Group was carried over to IFRS. However, Virgin Rail Group’s only significant business is the operation of the West Coast Trains rail franchise, which has a finite duration as the franchise ends on a particular date. We therefore have to reduce the goodwill in relation to Virgin Rail Group with an annual charge to reflect the fact that we should have no goodwill left at the end of the current West Coast Trains rail franchise. Whilst IFRS generally prohibits the amortisation of goodwill, the treatment adopted is a result of an anomaly on the first-time adoption of IFRS that would not arise if IFRS were applied to new acquisitions of businesses. Note 5 Other operating (expense)/income Other operating (expense)/income was as follows: Miscellaneous revenue Rail franchise premia Rail revenue support 2011 £m 94.3 (284.8) 68.1 (122.4) 2010 £m 87.7 (148.7) 7.8 (53.2) Miscellaneous revenue comprises revenue incidental to the Group’s principal activities. It includes commissions receivable, advertising income, maintenance income, railway station access income, railway depot access income, fuel sales and property income. Rail franchise premia is the amount of financial premia payable to the Department for Transport (“DfT”) in respect of the operation of UK passenger rail franchises. Rail revenue support is the amount of additional financial support receivable from the DfT in certain circumstances where a train operating company’s revenue is below target. Note 6 Finance costs and income Net finance costs included: Finance costs Interest payable and other facility costs on bank loans, loan notes and overdrafts Hire purchase and finance lease interest payable Interest payable and other finance costs on bonds Fair value losses on financial instruments not qualifying as hedges: Foreign exchange derivative contracts Unwinding of discount on provisions Interest payable on interest rate swaps qualifying as cashflow hedges Finance income Interest receivable Interest receivable on interest rate swaps qualifying as fair value hedges Exchange gains on retranslation of US$ bonds Net finance costs before exceptional items Exceptional item Ineffective interest rate swaps Net finance costs 2011 £m 5.7 6.8 23.5 Nil 3.9 Nil 39.9 (2.2) (3.2) Nil (5.4) 34.5 Nil 34.5 2010 £m 4.5 7.3 16.1 5.1 3.7 4.8 41.5 (4.0) (1.3) (5.5) (10.8) 30.7 20.5 51.2 No interest (2010: £Nil) was capitalised during the year. At 1 May 2009, the US$293.1m of US$ notes and a US$20.0m foreign currency derivative contract were designated as a hedge of overseas net investments. On 7 July 2009, this hedge relationship was de-designated. On the same day, the Group took out US$ derivative contracts, with notional amounts totalling US$342.0m to give certainty of the sterling value of the redemption payment that would be made by the Group when the US$ notes matured on 16 November 2009. Exchange gains on the US$ notes in the period from 7 July 2009 to 16 November 2009 of £5.5m are included within finance income above. The notional value of the derivative contracts exceeded the outstanding US$ notes in order to take account of the tax effect of the transactions. Stagecoach Group plc | page 59 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 60 Notes to the consolidated financial statements Note 7 Staff costs Total staff costs were as follows: Staff costs Wages and salaries Social security costs Pension costs (note 26) Share based payment costs (excluding social security costs) – Equity-settled – Cash-settled Summary of directors’ remuneration Aggregate emoluments (including bonuses awarded in deferred shares) Amount waived by a director Gains made by directors on exercise of share options Payments made in the year under the Long Term Incentive Plan 2011 £m 823.7 68.8 42.2 4.7 2.5 941.9 2011 £m 2.5 (0.3) 2.2 Nil 2.2 Nil 2.2 2010 £m 714.1 58.8 44.8 6.3 2.6 826.6 2010 £m 2.3 (0.3) 2.0 0.1 2.1 2.2 4.3 In the table above, awards made under the Executive Participation Plan are shown in the year in respect of which the award was made and the amount is included at its fair value on the grant date. Awards made under the Long Term Incentive Plan are shown in the year in which the payments are made and the amount is included at the gross amount payable. Key management personnel are considered to be the Directors and further information on their remuneration, share options, incentive schemes and pensions is contained within the Directors’ remuneration report on pages 32 to 38. The average monthly number of persons employed by the Group during the year (including executive directors) was as follows: UK operations UK administration and supervisory Overseas 2011 number 24,802 3,140 3,857 31,799 The average monthly number of persons employed by the Group during the year, split by segment, was as follows: 2011 number 18,294 2,429 3,857 7,090 129 31,799 UK Bus (regional operations) UK Bus (London) North America UK Rail Central page 60 | Stagecoach Group plc 2010 number 23,240 2,912 3,774 29,926 2010 number 18,842 Nil 3,774 7,177 133 29,926 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 61 Note 8 Taxation (a) Analysis of charge in the year Current tax: UK corporation tax at 27.8% (2010: 28%) Prior year over provision for corporation tax Foreign tax (current year) Foreign tax (adjustments in respect of prior years) Total current tax Deferred tax: Origination and reversal of temporary differences Adjustments in respect of prior years Total deferred tax Total tax on profit (b) Factors affecting tax charge for the year 2011 2010 Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Notes Performance pre intangibles and exceptional items £m Intangibles and exceptional items £m Results for the year £m Results for the year £m 26.3 (2.2) 0.4 (0.2) 24.3 7.4 3.4 10.8 35.1 (1.8) Nil Nil Nil (1.8) Nil Nil Nil (1.8) 24.5 (2.2) 0.4 (0.2) 22.5 7.4 3.4 10.8 33.3 12.7 (0.9) 0.4 1.0 13.2 14.9 (0.9) 14.0 27.2 (9.1) Nil Nil Nil (9.1) Nil Nil Nil (9.1) 3.6 (0.9) 0.4 1.0 4.1 14.9 (0.9) 14.0 18.1 Profit before taxation – continuing operations Profit multiplied by standard rate of corporation tax applying to the year in the UK of 27.8% (2010: 28%) Effects of: Intangible asset allowances/deductions Non-deductible expenditure/(non-taxable income) Utilisation of tax losses not previously recognised as deferred tax assets Foreign taxes differences Adjustments to tax charge in respect of prior years Tax effect of share of results of joint ventures Change in UK corporation rate to 26% from 1 April 2011 Total taxation (note 8a) 2011 £m 191.2 53.2 1.2 1.6 (11.6) 1.6 1.0 (8.4) (5.3) 33.3 2010 £m 125.9 35.3 1.4 (0.2) (13.5) 1.3 (0.8) (5.4) Nil 18.1 (c) Factors that may affect future tax charges There are no temporary differences associated with investments in overseas subsidiaries for which deferred tax liabilities have not been recognised. Gross deductible temporary differences of £72.8m (2010: £105.8m) have not been recognised due to restrictions in the availability of their use. Temporary differences in respect of the revaluation of land and buildings and in respect of rolled over capital gains are fully offset by temporary differences in respect of capital losses. In the 2010 budget on 22 June 2010, the UK Government announced its intention to reduce the UK corporate income tax rate from 28% to 24% by 1% per annum over a four-year period. Furthermore on 23 March 2011, the UK Government announced its intention to further reduce the rate with effect from 1 April 2011 by another 1% to 26% creating a 23% main rate by 2014. The deferred tax balances as at 30 April 2011 have been determined with reference to the enacted UK corporate income tax rate of 26%. The rate change reduction to 25% which is proposed to take effect from 1 April 2012 had not been substantively enacted at the balance sheet date. Had the reduction to 25% been substantively enacted the estimated impact of this reduction on the deferred tax liability would have been a reduction of £1.8m. (d) Tax on items taken directly or transferred from equity The components of tax on items taken directly to or transferred from equity are shown in the consolidated statement of comprehensive income on page 42. Stagecoach Group plc | page 61 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 62 Notes to the consolidated financial statements Note 9 Dividends Dividends payable in respect of ordinary shares are shown below. Dividends payable in respect of ‘B’ Shares are included as an expense in finance costs. Amounts recognised as distributions in the year Dividends on ordinary shares Final dividend in respect of the previous year Interim dividends in respect of the current year Amounts recognised as distributions to equity holders in the year Dividends proposed but neither paid nor included as liabilities in the financial statements Dividends on ordinary shares Final dividend in respect of the current year 2011 2010 2011 pence per share pence per share £m Nil 2.2 2.2 4.2 6.5 10.7 Nil 15.8 15.8 2010 £m 30.1 46.6 76.7 4.9 Nil 35.2 Nil The dividends proposed or declared and the actual dividends recognised as distributions can differ slightly due to the number of shares at the balance sheet date being different to the number outstanding at the record date. Note 10 Earnings per share Basic earnings per share (”EPS“) have been calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, excluding any ordinary shares held by employee share ownership trusts. The diluted earnings per share was calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares in relation to share options and long-term incentive plans. In respect of share options, a calculation was performed to determine the number of ordinary shares that could have been acquired at fair value (determined based on the average annual market share price of the Company’s ordinary shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of ordinary shares calculated as above was compared with the number of ordinary shares that would have been issued assuming the exercise of the share options. The difference was added to the denominator as an issue of ordinary shares for no consideration and no adjustment was made to earnings (numerator). Basic weighted average number of ordinary shares Dilutive ordinary shares – Executive Share Option Scheme – Long Term Incentive Plan – Executive Participation Plan 2011 no. of shares million 717.5 0.3 3.2 4.1 2010 no. of shares million 716.2 0.6 3.1 3.7 Diluted weighted average number of ordinary shares 725.1 723.6 Profit after taxation (for basic EPS calculation) Intangible asset expenses (see note 4) Exceptional items before tax (see note 4) Tax effect of intangible asset expenses and exceptional items (see note 4) Profit for the year from discontinued operations (see note 4) Profit for adjusted EPS calculation 2011 £m 176.4 15.2 (0.7) (1.8) (18.5) 170.6 2010 £m 111.7 11.1 24.3 (9.1) (3.9) 134.1 page 62 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 63 Note 10 Earnings per share (continued) Earnings per share before intangible asset expenses and exceptional items is calculated by adding back intangible asset expenses and exceptional items after taking account of taxation, as shown on the consolidated income statement on page 41. This has been presented to allow shareholders to gain a further understanding of the underlying performance. The basic and diluted earnings per share can be analysed as follows: Basic – Continuing operations – Discontinued operations Adjusted basic – Continuing operations – Discontinued operations Diluted – Continuing operations – Discontinued operations Adjusted diluted – Continuing operations – Discontinued operations 2011 2010 Weighted average number of shares Million Earnings per share Pence Weighted average number of shares Million Earnings per share Pence Earnings £m 717.5 717.5 717.5 717.5 717.5 717.5 725.1 725.1 725.1 725.1 725.1 725.1 22.0 2.6 24.6 23.8 Nil 23.8 21.7 2.6 24.3 23.5 Nil 23.5 107.8 3.9 111.7 134.1 Nil 134.1 107.8 3.9 111.7 134.1 Nil 134.1 716.2 716.2 716.2 716.2 716.2 716.2 723.6 723.6 723.6 723.6 723.6 723.6 15.1 0.5 15.6 18.7 Nil 18.7 14.9 0.5 15.4 18.5 Nil 18.5 Earnings £m 157.9 18.5 176.4 170.6 Nil 170.6 157.9 18.5 176.4 170.6 Nil 170.6 There have been no ordinary share transactions between the balance sheet date and the date of approval of this report that would have significantly changed the number of ordinary shares outstanding at 30 April 2011. Stagecoach Group plc | page 63 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 64 Notes to the consolidated financial statements Note 11 Goodwill The movements in goodwill were as follows: Cost and net book value At beginning of year Acquired through business combinations Disposals Foreign exchange movements At end of year 2011 £m 99.4 3.7 (2.5) (5.3) 95.3 2010 £m 99.9 1.7 Nil (2.2) 99.4 For the purpose of impairment testing, all goodwill that has been acquired in business combinations has been allocated to three individual cash generating units (”CGUs”) on the basis of the Group’s operations. Each cash generating unit is an operational division. The UK Bus (regional operations) and UK Bus (London) cash generating units operate coach and bus operations in the United Kingdom. The North America Bus cash generating unit operates coach and bus operations in the US and Canada. No goodwill has been allocated to the Group’s rail operations. The cash generating units are as follows: Carrying amount of goodwill Carrying value of intangible assets with indefinite useful lives UK Bus (regional operations) UK Bus (London) North America 2011 £m 32.4 Nil 2010 £m 34.8 Nil 2011 2011 £m 3.6 Nil £m 59.3 Nil 2010 £m 64.6 Nil Basis on which recoverable amount has been determined Value in use Value in use Value in use Value in use Value in use Period covered by approved management plans used in value in use calculation 5 years 5 years 5 years 5 years Pre-tax discount rate applied to cash flow projections 10.3% 11.8% 10.3% 13.3% 5 years 14.8% Growth rate used to extrapolate cash flows beyond period of management plan Difference between above growth rate and long-term average growth rate for market in which unit operates 2.0% 2.0% 2.0% 1.7% 2.0% Nil Nil Nil Nil Nil The calculation of value in use for each cash generating unit shown above is most sensitive to the assumptions on discount rates and growth rates and in the case of UK Bus (London), the number of new contracts won and the terms of such contracts.. The assumptions used are considered to be realistically achievable in light of economic and industry measures and forecasts. The principal risks and uncertainties are set out in section 3.10 of the Operating and Financial Review. The cost base of the UK Bus (regional operations) and North American Bus operations can be flexed in response to changes in revenue and there is scope to reduce capital expenditure in the medium-term if other cash flows deteriorate. Risks to the cash flow forecasts remain, however, and are described in section 3.10. The cost base of UK Bus (London) is less flexible because the business is contractually committed to operate the majority of its services. The discount rates have been determined with reference to the estimated post-tax Weighted Average Cost of Capital (“WACC”) of the Group. The WACC has been estimated as at 30 April 2011 at 7.6% based on: • The market capitalisation and net debt of the Group as at 30 April 2011 as an indication of the split between debt and equity; • A risk-free rate of 3.3%; • A levered beta for the Group of 1.0; • A marginal pre-tax cost of debt of 5.6%. The pre-tax discount rate for each CGU has been determined by adjusting the Group’s WACC for the risk profile and effects of tax on each of the relevant CGUs. The Directors believe that in the case of each of the cash generating units shown above, any reasonably possible change in the key assumptions on which the recoverable amount of the unit is based would not cause its carrying amount to exceed its recoverable amount. page 64 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 65 Note 12 Other intangible assets The movements in other intangible assets were as follows: Year ended 30 April 2011 Cost At beginning of year Additions Acquired through business combinations Disposals Foreign exchange movements At end of year Accumulated amortisation At beginning of year Amortisation charged to income statement Disposals Foreign exchange movements At end of year Net book value at beginning of year Net book value at end of year Customer contracts Non-compete contracts Rail franchises Software costs £m £m £m £m 18.6 Nil 17.8 (0.2) Nil 36.2 (17.1) (7.1) 0.2 Nil (24.0) 1.5 12.2 12.7 Nil Nil Nil (0.4) 12.3 (12.3) (0.3) Nil 0.4 (12.2) 0.4 0.1 19.7 Nil Nil Nil Nil 19.7 (6.6) (2.1) Nil Nil (8.7) 13.1 11.0 1.7 0.4 Nil (0.1) Nil 2.0 (0.6) (0.6) 0.1 Nil (1.1) 1.1 0.9 Total £m 52.7 0.4 17.8 (0.3) (0.4) 70.2 (36.6) (10.1) 0.3 0.4 (46.0) 16.1 24.2 Intangible assets include customer contracts purchased as part of the Group’s business combinations, non-compete contracts, the right to operate UK Rail franchises and software costs. The amortisation of each of the above intangible assets is included within the operating costs line of the income statement. Intangible assets arising during the year (including any acquired through business combinations) and the amortisation periods are as follows: Subsidiaries – UK Bus (regional operations) additions Subsidiaries – UK Bus (London) additions Year ended 30 April 2010 Cost At beginning of year Additions Acquired through business combinations Disposals Foreign exchange movements At end of year Accumulated amortisation At beginning of year Amortisation charged to income statement Disposals Foreign exchange movements At end of year Net book value at beginning of year Net book value at end of year Amortisation period years 1-3 1-5 Intangible additions £m 0.4 17.8 18.2 Customer contracts Non-compete contracts Rail franchises Software costs £m £m £m £m 18.1 Nil 0.5 Nil Nil 18.6 (15.6) (1.5) Nil Nil (17.1) 2.5 1.5 17.3 Nil Nil (4.1) (0.5) 12.7 (11.1) (2.0) 0.6 0.2 (12.3) 6.2 0.4 19.7 Nil Nil Nil Nil 19.7 (4.4) (2.2) Nil Nil (6.6) 15.3 13.1 0.8 0.9 Nil Nil Nil 1.7 (0.3) (0.3) Nil Nil (0.6) 0.5 1.1 Total £m 55.9 0.9 0.5 (4.1) (0.5) 52.7 (31.4) (6.0) 0.6 0.2 (36.6) 24.5 16.1 Stagecoach Group plc | page 65 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 66 Notes to the consolidated financial statements Note 13 Property, plant and equipment The movements in property, plant and equipment were as follows: Year ended 30 April 2011 Land and buildings £m Passenger service vehicles £m Other plant and equipment £m Cost At beginning of year Additions Acquired through business combinations Disposals of subsidiaries Disposals Foreign exchange movements Reclassifications At end of year Depreciation At beginning of year Depreciation charged to income statement Disposals of subsidiaries Disposals Foreign exchange movements Reclassifications At end of year Net book value at beginning of year Net book value at end of year Included in the above net book value at end of year are: Assets on hire purchase Leased passenger service vehicles Short leasehold land and buildings Long leasehold land and buildings Year ended 30 April 2010 Cost At beginning of year Additions Acquired through business combinations Disposals Foreign exchange movements Transferred from assets held for sale Reclassifications At end of year Depreciation At beginning of year Depreciation charged to income statement Impairment charged to income statement Disposals Foreign exchange movements Transferred from assets held for sale Reclassifications At end of year Net book value at beginning of year Net book value at end of year Included in the above net book value at end of year are: Assets on hire purchase Leased passenger service vehicles Short leasehold land and buildings Long leasehold land and buildings 237.2 10.7 39.7 (0.6) (0.6) (2.6) Nil 283.8 (29.1) (5.7) 0.2 0.2 1.0 Nil (33.4) 208.1 250.4 Nil Nil 29.8 57.5 1,001.7 117.4 41.0 (6.5) (70.2) (21.4) (3.0) 1,059.0 (453.6) (73.5) 3.5 62.7 11.6 3.0 (446.3) 548.1 612.7 224.1 64.2 Nil Nil 161.6 39.7 1.5 (0.6) (11.8) (0.1) 3.0 193.3 (121.6) (11.1) 0.5 3.2 (0.1) (3.0) (132.1) 40.0 61.2 Nil Nil Nil Nil Land and buildings £m Passenger service vehicles £m Other plant and equipment £m 226.5 11.2 0.4 (5.2) (0.5) 4.8 Nil 237.2 (21.3) (5.9) Nil 0.6 (0.1) (2.4) Nil (29.1) 205.2 208.1 Nil Nil 27.1 26.3 968.4 94.5 0.7 (53.9) 0.3 Nil (8.3) 1,001.7 (444.4) (64.4) Nil 47.5 1.2 Nil 6.5 (453.6) 524.0 548.1 238.5 78.5 Nil Nil 154.2 51.0 Nil (52.4) 0.5 Nil 8.3 161.6 (97.7) (6.9) (14.7) 4.7 (0.5) Nil (6.5) (121.6) 56.5 40.0 Nil Nil Nil Nil Total £m 1,400.5 167.8 82.2 (7.7) (82.6) (24.1) Nil 1,536.1 (604.3) (90.3) 4.2 66.1 12.5 Nil (611.8) 796.2 924.3 224.1 64.2 29.8 57.5 Total £m 1,349.1 156.7 1.1 (111.5) 0.3 4.8 Nil 1,400.5 (563.4) (77.2) (14.7) 52.8 0.6 (2.4) Nil (604.3) 785.7 796.2 238.5 78.5 27.1 26.3 During the year ended 30 April 2010, we reached agreement with the DfT on a commercial settlement in favour of South Western Trains in respect of certain elements of the smartcard project which had been subject to delay. In light of elements of the smartcard project not being delivered on time we reviewed the carrying value of plant and equipment held in relation to the smartcard project and recorded a £14.7m impairment charge. Heritable and freehold land amounting to £94.3m (2010: £91.4m) has not been depreciated. Depreciation of £31.3m (2010: £31.2m) has been charged in the year in respect of assets held under hire purchase or finance lease agreements. Included in the net book value of property, plant and equipment is £27.2m (2010: £10.2m) in respect of assets under construction that the Group expects to be sold to Network Rail following the completion of each asset’s construction. page 66 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 67 Note 14 Interests in joint ventures The principal joint ventures are: Virgin Rail Group Holdings Limited Scottish Citylink Coaches Limited New York Splash Tours LLC Twin America LLC Country of incorporation Number of shares in issue at 30 April 2011 Nominal value of share capital in issue at 30 April 2011 United Kingdom United Kingdom USA USA 34,780 1,643,312 n/a n/a £3,478 £1,643,312 n/a n/a % interest held 49% 35% 50% 60% The Group has four joint ventures: Virgin Rail Group Holdings Limited, Scottish Citylink Coaches Limited (“Citylink”), New York Splash Tours LLC and Twin America LLC. Virgin Rail Group Holdings Limited is the holding company of Virgin Rail Group Limited, which in turn is the holding company of West Coast Trains Limited. The Virgin Rail Group Holdings shareholders’ agreement provides for joint decision making on key matters and equal representation on the Board. As a consequence, the investment has been accounted for as a joint venture. The Citylink shareholder agreement provides for joint and unanimous decision making on all key matters and therefore the investment has been accounted for as a joint venture. In North America, Stagecoach has two joint ventures, New York Splash Tours LLC, with Port Imperial Duck Charters LLC and Twin America LLC, with CitySights NY. New York Splash Tours LLC currently has no share capital but is governed by a joint venture agreement. Stagecoach began operating Twin America LLC, a joint venture with CitySights NY, on 31 March 2009. In return for transferring certain assets to the joint venture, the Group holds 60% of the economic rights and 50% of the voting rights. Twin America LLC has no share capital and is governed by a joint venture agreement, which provdes for joint decision making on key matters. The Directors undertook an impairment review as at 30 April 2011 of the carrying value of the Group’s joint venture interests and concluded that there had been no impairment loss. The movements in the carrying values were as follows: Cost At beginning of year Share of recognised profit Share of actuarial (losses)/gains on defined benefit pension schemes, net of tax Share of net fair value (losses)/gains on cash flow hedges, net of tax Dividends received in cash Foreign exchange movements At end of year Amounts written off At beginning of year Goodwill charged to income statement At end of year Net book value at beginning of year Net book value at end of year Virgin Rail Group £m 55.8 28.4 (0.5) (0.1) (17.1) Nil 66.5 (48.2) (5.1) (53.3) 7.6 13.2 Citylink Twin America LLC £m 3.4 1.8 Nil Nil (1.3) Nil 3.9 Nil Nil Nil 3.4 3.9 £m 45.7 9.3 Nil Nil (10.4) (3.6) 41.0 Nil Nil Nil 45.7 41.0 Total 2011 £m 104.9 39.5 (0.5) (0.1) (28.8) (3.6) 111.4 (48.2) (5.1) (53.3) 56.7 58.1 Total 2010 £m 111.8 28.9 0.1 1.3 (35.7) (1.5) 104.9 (43.1) (5.1) (48.2) 68.7 56.7 In addition to the above interests in joint ventures, a loan receivable from New York Splash Tours LLC of £2.8m (2010: £3.1m) is reflected in note 20. New York Splash Tours LLC has net liabilities as at 30 April 2011 of £3.5m (2010: £3.8m). The Group has not recognised its share of the net liabilities but has assessed the loan receivable for impairment and a provision for impairment of £2.8m (2010: £3.1m) has been held against the receivable. A loan payable to Scottish Citylink Coaches Limited of £1.7m (2010: £1.7m) is reflected in note 22. Stagecoach Group plc | page 67 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 68 Notes to the consolidated financial statements Note 14 Interests in joint ventures (continued) The Group’s share of the net assets of its joint ventures is analysed below: Non-current assets Current assets Current liabilities Share of net assets Goodwill Virgin Rail Group £m 3.8 89.6 (84.4) 9.0 4.2 13.2 The Group’s share of post-tax results from joint ventures is analysed below: Citylink £m 0.1 3.3 (2.1) 1.3 2.6 3.9 Citylink £m 11.4 (8.9) 2.5 Nil (0.7) Twin America LLC £m 13.4 6.3 (5.8) 13.9 27.1 41.0 Twin America LLC £m 43.3 (33.6) 9.7 Nil (0.4) Total 2011 £m 17.3 99.2 (92.3) 24.2 33.9 58.1 Total 2011 £m 447.4 (395.7) 51.7 0.2 (12.4) Virgin Rail Group £m 392.7 (353.2) 39.5 0.2 (11.3) Total 2010 £m 18.5 95.8 (99.0) 15.3 41.4 56.7 Total 2010 £m 405.5 (370.3) 35.2 0.2 (7.4) 28.0 Revenue Expenses Operating profit Finance income (net) Taxation Share of joint ventures’ profit after taxation 28.4 1.8 9.3 39.5 A net actuarial loss after taxation of £0.5m (2010: gain of £0.1m) was recognised in addition to the above in relation to Virgin Rail Group’s defined benefit pension schemes. A net loss after taxation of £0.1m (2010: gain of £1.3m) was recognised in addition to the above in relation to fair value gains on fuel derivative contracts held by Virgin Rail Group. Note 15 Available for sale and other investments The movements in available for sale and other investments were as follows: Cost / valuation At beginning of year Additions Disposals Net fair value losses Foreign exchange movements At end of year Amounts written off At end of year Disposals At end of year Net book value at beginning of year Net book value at end of year 2011 £m 3.7 0.4 (1.8) Nil (0.2) 2.1 (1.8) 1.8 Nil 1.9 2.1 2010 £m 3.3 0.6 Nil (0.2) Nil 3.7 (1.8) Nil (1.8) 1.5 1.9 Note 16 Business combinations (i) East London Bus On 14 October 2010, Stagecoach Bus Holdings Limited ("SBHL"), a Group subsidiary, completed the acquisition of the bus business formerly owned by East London Bus Group Limited (in administration). SBHL acquired 100% of the voting equity interests in four companies that together operate the acquired business. The acquired business is the third largest bus operator in the London market, and has an estimated 15% share of that market. 99% of its revenue is from Transport for London. The business operates bus services under contract to Transport for London whereby it receives a fixed fee (subject to adjustment for certain inflation indices) for operating the services and takes the cost and capital risk. The cash paid in respect of the acquisition was £59.5m, comprising £5.4m for the entire share capital of the acquired companies and £54.1m to settle inter-company liabilities payable by the acquired companies to their former parent company. The consideration payable was calculated on the basis that the acquired business had aggregate cash balances of approximately £6.7m at close of business on the day prior to completion, giving a transaction enterprise value of £52.8m. The consideration was fully paid in cash and there is no contingent consideration. The aggregate cash balances at acquisition were £3.5m, with the movement of £3.2m reflecting net payments on the day of acquisition. These payments were in line with the Group’s expectations. page 68 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 69 Note 16 Business combinations (continued) (i) East London Bus (continued) Goodwill of £3.6m arose on the acquisition of the East London bus business and represents: the benefits that the Group expects to obtain from synergies with its other businesses; • the benefits that the Group expects to obtain from applying its own management expertise to improve the operational and financial performance • of the acquired business; the value of the assembled workforce of the East London bus business and; the value of the arrangements with Transport for London, over and above the existing contracts for particular bus services, but which cannot be reliably valued as a separate asset. • • None of the goodwill arising from the acquisition is deductible for tax purposes. The revenue and loss of the acquired business recognised in the consolidated income statement for the period from the acquisition date of 14 October 2010 to 30 April 2011 is shown in note 2. The consolidated revenue for the period of the Group for the year ended 30 April 2011 would have been £2,503.3m had the acquisition occurred on 1 May 2010. The equivalent consolidated profit for the period would not have been materially different from the actual reported profit. The assets and liabilities acquired were as follows: Intangible assets – Customer contracts Property, plant and equipments – Land and buildings – Passenger service vehicles – Other plant and equipment Retirement benefit asset Deferred tax (liability) / asset Inventory Cash Trade and other receivables Trade and other payables Intercompany payables Provisions – Insurance provisions – Environmental provisions – Acquired customer contracts Net assets / (liabilities) acquired, excluding goodwill Goodwill arising on acquisition Total consideration (settled in cash) Initial book value £m Nil 46.7 63.2 2.2 7.8 (0.8) 0.8 3.5 15.1 (27.7) (54.1) (14.5) (0.3) Nil 41.9 Nil 41.9 Restatement to fair value Fair value to the Group £m £m 17.8 (7.0) (22.2) (0.7) Nil 14.8 Nil Nil Nil (0.2) Nil (3.1) Nil (39.5) (40.1) 3.6 (36.5) 17.8 39.7 41.0 1.5 7.8 14.0 0.8 3.5 15.1 (27.9) (54.1) (17.6) (0.3) (39.5) 1.8 3.6 5.4 There are no material receivables that are considered to be uncollectable as at the date of acquisition. (ii) Other business combinations One business acquisition has been made by our UK Bus (regional operations) division during the year ended 30 April 2011. £0.1m was paid to acquire the assets and goodwill of a small bus business. (iii) Effect on consolidated net debt and goodwill The effect of the above acquisitions on consolidated net debt was: Fair value to Group Intangible fixed assets (excluding goodwill) Property, plant and equipment Other net liabilities Net assets/(liabilities) acquired, excluding goodwill Goodwill arising on acquisition Consideration Costs of acquisitions in year Add: deferred consideration paid in respect of businesses acquired in prior years Intercompany debt assumed and re-financed Net cash and cash equivalents acquired (including overdrafts) Net cash outflow 2011 £m 17.8 82.2 (98.2) 1.8 3.7 5.5 0.6 0.3 54.1 (3.5) 57.0 2010 £m 0.5 1.1 (1.8) (0.2) 1.7 1.5 0.1 0.6 Nil 0.3 2.5 Stagecoach Group plc | page 69 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 70 Notes to the consolidated financial statements Note 17 Disposals Exceptional gains of £18.5m (2010: £3.9m) for the year ended 30 April 2011 have been included in the consolidated income statement as the results of discontinued operations. These gains arose from the release of liabilities that were previously recorded for amounts potentially owing which are now no longer payable in respect of disposed businesses. In respect of the businesses disposed of, the consideration, net assets disposed and profit on disposal for the year ended 30 April 2011, were as follows: Net assets disposed Loss on disposal Net consideration receivable Deferred consideration in respect of businesses disposed of in current year Deferred consideration received in year in respect of businesses disposed of in prior years Net cash inflow Note 18 Principal subsidiaries 2009 2009 19.9 Nil 0.8 0.8 Nil 3.3 (1.7) 3.6 2011 £m 5.3 (3.2) 2.1 (0.9) Nil 1.2 2010 £m 3.5 il(3.2) 0.3 Nil 1.3 1.6 The principal subsidiary undertakings (ordinary shares 100% owned except where shown) as at 30 April 2011 were: Company Stagecoach Transport Holdings plc SCOTO Limited SCUSI Limited Stagecoach Bus Holdings Limited The Integrated Transport Company Limited Stagecoach (South) Limited Stagecoach (North West) Limited East Midland Motor Services Limited Stagecoach Scotland Limited East Kent Road Car Company Limited Stagecoach West Limited Busways Travel Services Limited Cleveland Transit Ltd Cambus Limited Greater Manchester Buses South Limited Highland Country Buses Limited Orkney Coaches Limited Eastbourne Buses Limited The Yorkshire Traction Group Limited East London Bus & Coach Company Limited South East London & Kent Bus Company Limited East London Bus Group Property Investments Limited Stagecoach Services Limited National Transport Tokens Limited (99.9%) PSV Claims Bureau Limited Stagecoach South Western Trains Limited East Midlands Trains Limited Trentway-Wager Inc Country of registration or incorporation Scotland England England Scotland Scotland England England England Scotland England England England England England England Scotland Scotland England England England England England England England England England England Canada Principal activity Holding company Holding company Holding company Holding company Holding company Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus and coach operator Bus operator Bus operator Property company Provision of accounting and payroll services Transport tokens Claims handling Train operating company Train operating company Bus and coach operator All companies operate in the countries shown above and, except for Stagecoach Transport Holdings plc, are indirectly held. The Group considers that principal subsidiaries includes any subsidiary that has revenue greater than £25.0m per annum, profit before interest and taxation greater than £2.5m per annum, gross assets greater than £25.0m or gross liabilities greater than £25.0m. These thresholds exclude any intercompany amounts and investments in subsidiaries. A complete list of subsidiary undertakings is available on request to the company and will be filed with the next Annual Return. page 70 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 71 Note 19 Inventories Inventories were as follows: Parts and consumables 2011 £m 26.6 2010 £m 24.1 All inventories are carried at cost less a provision to take account of slow moving and obsolete items. Changes in the provision for slow moving and obsolete inventories were as follows: At beginning of year Charged to income statement Amount released to income statement, not used Amount utilised At end of year 2011 £m 1.6 0.4 Nil (0.3) 1.7 2010 £m 1.8 0.2 (0.1) (0.3) 1.6 There was no material write down of inventories during the current or prior years. The Group is party to consignment stock arrangements and as at 30 April 2011, the Group physically held consignment stock of a value amounting to £0.7m (2010: £0.7m) in addition to the amounts disclosed above. Note 20 Trade and other receivables Trade and other receivables were as follows: Non-current: Loan to joint venture Less: provision for impairment Prepayments Other receivables Current: Trade receivables Less: provision for impairment Trade receivables – net Other receivables Prepayments Accrued income VAT and other government receivables 2011 £m 2.8 (2.8) Nil 19.2 0.2 19.4 115.0 (1.9) 113.1 23.6 29.3 31.1 24.4 221.5 2010 £m 3.1 (3.1) Nil 17.2 0.4 17.6 128.8 (4.5) 124.3 12.4 25.5 21.7 16.4 200.3 A loan of US$4.7m (2010: US$4.7m) to New York Splash Tours LLC is outstanding at 30 April 2011. The loan is interest bearing at 7% per annum and is repayable by instalments. The loan outstanding as at 30 April 2011, translated at year end rates was £2.8m (2010: £3.1m) and is included in non- current trade and other receivables. The movement in the provision for impairment of trade receivables was as follows: At beginning of year Impairment losses in year charged to income statement Reversal of impairment losses credited to income statement Amounts utilised Foreign exchange movements At end of year Further information on credit risk is provided in note 27. 2011 £m (4.5) (0.8) 0.3 3.1 Nil (1.9) 2010 £m (4.3) (1.8) 0.5 1.0 0.1 (4.5) Stagecoach Group plc | page 71 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 72 Notes to the consolidated financial statements Note 21 Cash and cash equivalents Cash at bank and in hand 2011 £m 358.3 2010 £m 375.7 The cash amounts shown above include £25.0m on 12 month deposit maturing by March 2012, £52.0m on 3 month deposit maturing by May 2011, £65.0m on 3 month deposit maturing by June 2011, and £35.0m deposited on 30 day notice accounts (2010: £169.0m on 3 month deposit maturing by June 2010, £32.0m deposited on 30 day notice accounts and £10.4m deposited in a 7 day notice account). The remaining amounts are accessible to the Group within one day (2010: one day). The Group has a bank offset arrangement whereby the Company and several of its subsidiaries each have bank accounts with the same bank, which are subject to rights of offset. The cash at bank and in hand of £358.3m (2010: £375.7m) above included the net balance on these offset accounts of £24.2m (2010: £13.7m), which comprised £844.5m (2010: £702.2m) of positive bank balances less £820.3m (2010: £688.5m) of bank overdrafts. Note 22 Trade and other payables Trade and other payables were as follows: Current Trade payables Accruals Deferred income Cash-settled share based payment liability Deferred grant income Loans from joint ventures PAYE and NIC payable VAT and other government payables Non-current Accruals Deferred grant income Cash-settled share based payment liability PAYE and NIC payable VAT and other government payables Other payables Note 23 Borrowings The carrying value of borrowings was as follows: Current Loan notes Hire purchase and lease obligations Redeemable ‘B‘ preference shares Non-current Sterling 5.75% Notes Hire purchase and lease obligations Total borrowings page 72 | Stagecoach Group plc 2011 £m 134.6 270.1 94.1 0.5 1.4 1.7 23.0 4.2 529.6 13.9 7.3 2.0 0.6 Nil 0.5 24.3 2011 £m 21.1 38.8 2.6 62.5 410.2 181.9 592.1 654.6 2010 £m 124.6 300.2 74.2 0.4 4.0 1.7 18.1 1.4 524.6 11.1 7.3 0.4 0.4 0.4 0.8 20.4 2010 £m 26.2 21.3 3.3 50.8 406.9 219.2 626.1 676.9 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 73 Note 23 Borrowings (continued) The minimum lease payments under hire purchase and lease obligations fall due as follows: Not later than one year Later than one year but not more than five years More than five years Future finance costs on hire purchase and finance leases Carrying value of hire purchase and finance lease liabilities 2011 £m 43.6 142.7 49.9 236.2 (15.5) 220.7 2010 £m 26.0 152.3 78.6 256.9 (16.4) 240.5 For variable-rate hire purchase arrangements, the future finance costs included in the above table are based on the interest rates applying at the balance sheet date. The Group in its ordinary course of business enters into hire purchase and finance lease agreements to fund or refinance the purchase of vehicles. All of the hire purchase and lease obligations shown above are in respect of vehicles. The lease agreements are typically for periods of 5 to 10 years and do not have contingent rent or escalation clauses. The agreements have industry standard terms and do not contain any restrictions on dividends, additional debt or further leasing. (a) Sterling 5.75% Notes On 16 December 2009, the Group issued £400m of 5.75% Notes due in 2016. Interest on the Notes is paid annually in arrears and all remaining Notes will be redeemed at their principal amount on 16 December 2016. The Notes were issued at 99.599% of their principal amount. The consolidated carrying value of the Notes at 30 April 2011 was £410.2m (2010: £406.9m) after taking account of the discount on issue, issue costs and the fair value of interest rate swaps used to manage the interest rate profile of the Notes. (b) Repayment profile Borrowings are repayable as follows: On demand or within 1 year Loan notes Hire purchase and lease obligations Redeemable ‘B’ preference shares Within 1-2 years Hire purchase and lease obligations Within 2-5 years Hire purchase and lease obligations Over 5 years Hire purchase and lease obligations Sterling 5.75% Notes Total borrowings Less current maturities Non-current portion of borrowings 2011 £m 21.1 38.8 2.6 62.5 33.7 98.8 49.4 410.2 459.6 654.6 (62.5) 592.1 2010 £m 26.2 21.3 3.3 50.8 38.4 102.8 78.0 406.9 484.9 676.9 (50.8) 626.1 Interest terms on UK hire purchase and lease obligations are at annual rates between 0.40% and 2.00% over bank base rate or equivalent LIBOR rates, subject to certain minimum rates. Interest terms on overseas lease obligations are at fixed rates, which at 30 April 2011 average 4.3% per annum. Interest on loan notes are at three months LIBOR. Loan notes amounting to £21.1m (2010: £26.2m) are backed by guarantees provided under Group banking facilities. The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemptions. UK bank loans and Sterling Notes are unsecured. Stagecoach Group plc | page 73 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 74 Notes to the consolidated financial statements Note 24 Deferred tax The Group movement in deferred tax during the year was as follows: Beginning of year Charged to income statement Acquired through business combinations Charged to equity Foreign exchange movements End of year Deferred tax liabilities Deferred tax asset £m (19.2) (9.5) 14.0 (32.6) 0.5 (46.8) £m 1.3 (1.3) Nil Nil Nil Nil Net £m (17.9) (10.8) 14.0 (32.6) 0.5 (46.8) The deferred tax liabilities after more than one year are £47.3m (2010: £19.2m). The deferred tax asset due after more than one year is £Nil (2010: £1.3m – which was recognised in respect of tax losses). Deferred taxation is calculated as follows: Accelerated capital allowances Pension temporary differences Short-term temporary differences The amount of deferred tax recognised in the income statement by type of temporary difference is as follows: 2011 £m (99.1) 25.2 27.1 (46.8) 2011 £m (4.9) (4.8) (1.1) (10.8) 2010 £m (100.9) 56.6 26.4 (17.9) 2010 £m 1.8 (5.1) (10.7) (14.0) Accelerated capital allowances Pension temporary differences Short-term temporary differences Note 25 Provisions The movements in provisions were as follows: Beginning of year Provided during year (after discounting) Unwinding of discount Utilised in the year Acquired through business combinations Arising on sale of tokens during year Redemption of tokens Foreign exchange movements End of year 30 April 2011: Current Non-current 30 April 2010: Current Non-current Token redemption provision Insurance provisions Environmental provisions Redundancy provision Acquired customer contracts £m 14.8 Nil Nil Nil Nil 1.4 (4.1) Nil 12.1 4.1 8.0 12.1 4.5 10.3 14.8 £m 115.2 54.8 3.8 (58.0) 17.6 Nil Nil (3.1) 130.3 41.9 88.4 130.3 39.0 76.2 115.2 £m 3.6 Nil Nil (0.7) 0.3 Nil Nil (0.2) 3.0 0.5 2.5 3.0 1.2 2.4 3.6 £m 1.8 1.2 Nil (1.3) Nil Nil Nil Nil 1.7 1.7 Nil 1.7 1.8 Nil 1.8 £m 0.2 Nil 0.1 (3.4) 39.5 Nil Nil Nil 36.4 8.7 27.7 36.4 0.1 0.1 0.2 Total £m 135.6 56.0 3.9 (63.4) 57.4 1.4 (4.1) (3.3) 183.5 56.9 126.6 183.5 46.6 89.0 135.6 The token redemption provision relates to tokens issued to third parties to be redeemed as payment for transportation services. Tokens are typically redeemed within three years of issue. The insurance provisions relate to insurance reserves on incurred accidents up to 30 April in each year where claims have not been settled. These are based on actuarial reviews and prior claims history. Claims are typically settled within five years of origination. The environmental provisions relate to legal or constructive obligations to undertake environmental work, such as an obligation to rectify land which has been contaminated by fuel or to eliminate the presence of asbestos. The provision is based on the estimated cost of undertaking the work required, and is expected to be fully utilised over the next three years. The redundancy provision relates to planned redundancies and is expected to be utilised within one year. Provisions for acquired customer contracts relate to contracts that have been acquired through business combinations that have been identified as being on unfavourable terms at the relevant requisition date and the provisions are expected to be fully utilised within five years. page 74 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 75 Note 26 Retirement benefits The Group contributes to a number of pension schemes. The principal defined benefit occupational schemes are as follows: Date as at which last scheme valuation was prepared • Stagecoach Pension Schemes (“SPS”) comprising the Stagecoach Group Pension Scheme and the East London Bus Group Pension Scheme; • The South West Trains section of the Railways Pension Scheme (“RPS”); • The Island Line section of the Railways Pension Scheme (“RPS”); • The East Midlands Trains section of the Railways Pension Scheme (“RPS”); and • A number of UK Local Government Pension Schemes (“LGPS”). 30 April 2008, 5 April 2010 30 December 2007 30 December 2007 30 December 2007 5 April 2010 The Directors believe that separate consideration should be given to RPS as the Group has no rights or obligations in respect of sections of the scheme following expiry of the related franchises. In addition, under the terms of RPS, any fund deficit or surplus is shared by the employer (60%) and the employees (40%) in accordance with the shared cost nature of RPS. The employees’ share of the deficit (or surplus) is reflected as an adjustment to the RPS liabilities (or assets). Therefore the liability (or asset) recognised for the relevant sections of RPS reflects that part of the net deficit (or surplus) of each section that the employer is obliged to fund (or expected to recover) over the life of the franchise to which the section relates. The “franchise adjustment” is the portion of the deficit (or surplus) that is expected to exist at the end of the franchise and for which the Group will not be obliged to fund (or entitled to recover). In addition, the Group contributes to a number of defined contribution (“DC”) schemes, covering UK and non-UK employees. The consolidated balance sheet shows retirement benefit assets of £23.7m (2010: £Nil) and retirement benefit obligations of £120.8m (2010: £202.1m). The net liability of £97.1m (2010: £202.1m) is analysed below. The amounts recognised in the balance sheet were as follows: Funded plans As at 30 April 2011 SPS RPS LGPS Other Equities Bonds Cash Property Fair value of plan assets Present value of obligations – gross liabilities – adjustment for members’ share of RPS deficit (40%) – franchise adjustment Present value of obligations Irrecoverable surplus Liabilities recognised in the balance sheet As at 30 April 2010 Equities Bonds Cash Property Fair value of plan assets Present value of obligations – gross liabilities – adjustment for members’ share of RPS deficit (40%) – franchise adjustment Liabilities recognised in the balance sheet The major categories of plan assets as a percentage of total plan assets are as follows: Equities Bonds Cash Property £m £m £m 653.6 235.8 71.4 66.9 474.4 99.3 3.1 94.1 179.7 39.3 35.4 15.9 1,027.7 670.9 270.3 (1,041.0) Nil Nil (913.6) 97.1 99.2 (282.9) Nil Nil (1,041.0) (717.3) (282.9) (8.2) Nil (9.2) (21.5) (46.4) (21.8) Funded plans £m 0.3 0.6 0.4 Nil 1.3 (4.5) Nil Nil (4.5) Nil (3.2) Unfunded plans Total £m £m Nil Nil Nil Nil Nil 1,308.0 375.0 110.3 176.9 1,970.2 (4.2) Nil Nil (2,246.2) 97.1 99.2 (4.2) (2,049.9) Nil (17.4) (4.2) (97.1) SPS RPS LGPS Other Unfunded plans Total £m £m £m £m £m £m 521.1 125.7 46.0 25.9 424.8 88.9 2.8 84.2 178.0 56.2 16.3 19.4 718.7 600.7 269.9 (814.8) Nil Nil (850.2) 99.8 110.8 (329.5) Nil Nil (814.8) (639.6) (329.5) (96.1) (38.9) (59.6) 0.2 0.6 0.4 Nil 1.2 (4.1) Nil Nil (4.1) (2.9) 2011 % 66.4 19.0 5.6 9.0 Nil Nil Nil Nil Nil 1,124.1 271.4 65.5 129.5 1,590.5 (4.6) Nil Nil (2,003.2) 99.8 110.8 (4.6) (1,792.6) (4.6) (202.1) 2010 % 70.7 17.1 4.1 8.1 100.0 100.0 Stagecoach Group plc | page 75 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 76 Notes to the consolidated financial statements Note 26 Retirement benefits (continued) The amounts recognised in the income statement were as follows: Year ended 30 April 2011 Funded plans Defined benefit schemes: Current service cost Interest cost Expected return on plan assets Unwinding of franchise adjustment Total defined benefit costs Defined contribution costs Total included in staff costs SPS RPS LGPS Other Unfunded and DC plans Total £m £m £m £m £m £m £m £m 24.9 51.3 (62.0) Nil 14.2 Nil 14.2 28.1 29.3 (28.2) (6.3) 22.9 Nil 1.9 16.5 (19.2) Nil (0.8) Nil 22.9 (0.8) 1.0 0.2 (0.1) Nil 1.1 Nil 1.1 Nil Nil Nil Nil Nil 4.8 4.8 55.9 97.3 (109.5) (6.3) 37.4 4.8 42.2 The actual return on plan assets for the year ended 30 April 2011 was £145.6m. Year ended 30 April 2010 Defined benefit schemes: Current service cost Curtailments Interest cost Expected return on plan assets Unwinding of franchise adjustment Total defined benefit costs Defined contribution costs Total included in staff costs Funded plans SPS RPS LGPS Other Unfunded and DC plans Total £m £m £m £m £m £m £m £m 19.3 Nil 40.3 (42.0) Nil 17.6 Nil 17.6 20.6 (0.7) 23.5 (21.9) (2.7) 18.8 Nil 18.8 1.7 Nil 16.8 (16.0) Nil 2.5 Nil 2.5 0.6 Nil 0.2 (0.1) Nil 0.7 Nil 0.7 Nil Nil Nil Nil Nil Nil 5.2 5.2 42.2 (0.7) 80.8 (80.0) (2.7) 39.6 5.2 44.8 The actual return on plan assets for the year ended 30 April 2010 was £326.9m. page 76 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:46 Page 77 Note 26 Retirement benefits (continued) The movements in the net liability recognised in the balance sheet in respect of defined benefit plans for the year ended 30 April 2011 were as follows: Year ended 30 April 2011 At beginning of year – liability Total expense Actuarial (gains)/losses Employers’ contributions and settlements Acquisitions Disposals Foreign exchange movements At end of year – liability SPS £m 96.1 14.2 (53.8) (27.2) (7.8) Nil Nil Funded plans RPS LGPS £m 38.9 22.9 10.7 (26.1) Nil Nil Nil £m 59.6 (0.8) (32.7) (4.2) Nil (0.1) Nil 9.8 (7.5) (3.3) (3.3) (3.3) (17.9) (19.5) 21.5 46.4 21.8 Other Unfunded plans Total £m 2.9 1.1 (0.6) Nil Nil Nil (0.2) 3.2 £m 4.6 Nil (0.1) (0.3) Nil Nil Nil 4.2 £m 202.1 37.4 (76.5) (57.8) (7.8) (0.1) (0.2) 97.1 (4.8) (13.0) (30.0) (30.0) (30.0) (18.3) (27.3) The movements in the net liability recognised in the balance sheet in respect of defined benefit plans for the year ended 30 April 2010 were as follows: Year ended 30 April 2010 At beginning of year – liability Total expense Actuarial losses/(gains) Employers’ contributions and settlements At end of year – liability (4.8) (13.0) (18.3) (27.3) SPS £m 11.6 17.6 94.5 (27.6) 9.8 (7.5) (17.9) (19.5) 96.1 38.9 Funded plans RPS LGPS Other Unfunded plans Total £m 28.2 18.8 16.7 (24.8) £m 33.9 2.5 27.3 (4.1) 59.6 £m 2.5 0.7 (0.3) Nil 2.9 £m 4.4 Nil 0.5 (0.3) 4.6 £m 80.6 39.6 138.7 (56.8) 202.1 The movements in the present value of obligations recognised in the balance sheet in respect of defined benefit plans for the year ended 30 April 2011 were as follows: At beginning of year Current service cost Interest cost Unwinding of franchise adjustment Members’ contributions paid Actuarial (gains)/losses Benefits paid Curtailments Acquisitions Disposals Foreign exchange movements At end of year Movements in the total fair value of plan assets were as follows: At beginning of year Expected return on scheme assets Actuarial gains Other employers’ contributions and settlements Members’ contributions paid Benefits paid Acquisitions Disposals Foreign exchange movements At end of year 2011 £m 1,792.6 55.9 97.3 (6.3) 10.9 (57.8) (65.5) Nil 236.2 (13.3) (0.1) 2,049.9 2011 £m 1,590.5 109.5 36.1 57.8 10.9 (65.5) 244.0 (13.2) 0.1 1,970.2 2010 £m 1,339.0 42.2 80.8 (2.7) 8.7 385.6 (60.0) (0.7) Nil Nil (0.3) 1,792.6 2010 £m 1,258.4 80.0 246.9 56.8 8.7 (60.0) Nil Nil (0.3) 1,590.5 Stagecoach Group plc | page 77 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 78 Notes to the consolidated financial statements Note 26 Retirement benefits (continued) The amounts recognised in the statement of comprehensive income were as follows: Actual return less expected return on plan assets Experience adjustment, arising on scheme liabilities Adjustment for unrecognised surplus Changes in assumptions underlying the present value of the liabilities Franchise adjustment Total actuarial gain/(loss) recognised The history of experience adjustments is as follows: 2011 £m 36.1 (23.1) (17.4) 98.8 (17.9) 76.5 2010 £m 246.9 42.3 Nil (497.3) 69.4 (138.7) 2011 2010 2009 2008 2007 Experience adjustments on scheme liabilities: Experience adjustments on scheme liabilities: Experience adjustments (£m) Scheme liabilities (£m) Percentage of scheme liabilities (%) Experience adjustments on plan assets: Experience adjustments (£m) Plan assets (£m) Percentage of scheme assets (%) (23.1) (2,049.9) 1.1% 36.1 1,970.2 1.8% 42.3 (1,792.6) (2.4)% 246.9 1,590.5 15.5% 59.7 (1,339.0) (4.5)% (334.2) 1,258.4 (26.6)% (28.6) (1,432.1) 2.0% (141.7) 1,474.6 (9.6)% (18.1) (1,325.0) 1.4% 55.2 1,290.2 4.3% The cumulative amount of actuarial gains and losses on Group defined benefit schemes recognised in the statement of comprehensive income since 1 May 2004 is a £159.7m loss (2010: £236.2m loss). The estimated amounts of contributions expected to be paid by the Group to the schemes during the financial year ending 30 April 2012 is £68.1m (estimated at 30 April 2010 for year ended 30 April 2011: £62.1m). The principal actuarial assumptions used were as follows: Rate of increase in pensionable salaries – SPS Rate of increase in pensionable salaries – other defined benefit schemes Rate of increase of pensions in payment – SPS – other defined benefit schemes Discount rate RPI Inflation CPI Inflation Expected long-term rates of return as at 30 April were: Equities* Bonds Cash Property 2011 3.4% 4.3% 3.3% 2.5% 5.6% 3.3% 2.3% 8.3% 5.0% 4.4% 7.5% 2010 3.4% 4.4% 3.4% 2.4%-3.3% 5.7% 3.4% n/a 8.3% 5.0% 4.7% 7.5% * includes private equity The expected return on plan assets is based on expectations at the beginning of the period for returns over the entire life of the benefit obligation. The expected returns are set in conjunction with external advisors and take account of market factors, fund managers’ views and targets for future returns and where appropriate, historical returns. The life expectancy assumptions used for each scheme are periodically reviewed. The weighted average life expectancies assumed as at 30 April 2011 were: Current pensioners aged 65 – male Current pensioners aged 65 – female Future pensioners at age 65 (aged 45 now) – male Future pensioners at age 65 (aged 45 now) – female 2011 years 19.6 23.9 21.9 26.0 2010 years 19.5 23.8 21.8 25.9 Note 27 Financial instruments (a) Overview This note provides details of the Group’s financial instruments. Except where otherwise stated, the disclosures provided in this note exclude: – Interests in subsidiaries and joint ventures accounted for in accordance with International Accounting Standard 27 (“IAS 27”), Consolidated and Separate Financial Statements and International Accounting Standard 31 (“IAS 31”), Interests in Joint Ventures. Financial instruments, contracts and obligations under share based payment transactions. – Retirement benefit assets and obligations. – Liabilities or assets that are not contractual (such as income taxes that are created as a result of statutory requirements imposed by governments, prepayments, provisions and deferred income) are not financial liabilities or financial assets. Accordingly, prepayments, provisions, deferred income and amounts payable or receivable in respect of corporation tax, sales tax (including UK Value Added Tax), payroll tax and other taxes are excluded from the disclosures provided in this note. page 78 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 79 Note 27 Financial instruments (continued) (b) Carrying values of financial assets and financial liabilities The carrying amounts of financial assets and financial liabilities on the consolidated balance sheet and their respective fair values were: Other balance sheet notes 20 20 20 20 21 15 22 22 23 22 22 22 23 Financial assets Financial assets at fair value through profit or loss Held-to-maturity investments Loans and receivables – Non-current assets – Other receivables – Current assets – Accrued income – Trade receivables, net of impairment – Other receivables – Cash and cash equivalents Available for sale financial assets – Non-current assets – Available for sale and other investments Total financial assets Financial liabilities Financial liabilities at fair value through profit or loss Financial liabilities measured at amortised cost – Non-current liabilities – Accruals – Other payables – Borrowings – Current liabilities – Trade payables – Accruals – Loans from joint ventures – Borrowings Total financial liabilities Net financial liabilities 2011 2010 Carrying value Carrying value 2011 Fair value £m Nil Nil 0.2 31.1 113.1 23.6 358.3 2.1 528.4 Nil (13.9) (0.5) (592.1) (134.6) (270.1) (1.7) (62.5) (1,075.4) (547.0) £m Nil Nil 0.4 21.7 124.3 12.4 375.7 1.9 536.4 Nil (11.1) (0.8) (626.1) (124.6) (300.2) (1.7) (50.8) (1,115.3) (578.9) £m Nil Nil 0.2 31.1 113.1 23.6 358.3 2.1 528.4 Nil (13.9) (0.5) (605.1) (134.6) (270.1) (1.7) (62.5) (1,088.4) (560.0) 2010 Fair value £m Nil Nil 0.4 21.7 124.3 12.4 375.7 1.9 536.4 Nil (11.1) (0.8) (640.7) (124.6) (300.2) (1.7) (50.8) (1,129.9) (593.5) Derivatives that are designated as effective hedging instruments are not shown in the above table. Information on the carrying value of such derivatives is provided in note 27(j). The fair values of financial assets and financial liabilities shown above are determined as follows: • The carrying value of loans to joint ventures, accrued income, trade receivables and other receivables is considered to be a reasonable approximation of fair value. Given the short average time to maturity, no specific assumptions on discount rates have been made. The effect of credit losses not already reflected in the carrying value as impairment losses is assumed to be immaterial. • £2.1m (2010: £1.9m) of available for sale financial assets for which market prices are not available are measured at cost because their fair value cannot be measured reliably – the fair value of these assets is shown in the above table as being equal to their carrying value. • The carrying value of trade payables, other payables, accruals and loans from joint ventures is considered to be a reasonable approximation of fair value. Given the relatively short average time to maturity, no specific assumptions on discount rates have been made. • The fair value of fixed-rate notes (included in borrowings) that are quoted on a recognised stock exchange is determined with reference to the “bid” price as at the balance sheet date. • The carrying value of fixed rate hire purchase and finance lease liabilities (included in borrowings) is considered to be a reasonable approximation of fair value taking account of the amounts involved in the context of total financial liabilities and the fixed interest rates relative to market interest rates at the balance sheet date. • The fair value of other borrowings on which interest is payable at floating rates is not considered to be materially different from the carrying value. We do not consider that the fair value of financial instruments would change materially from that shown above as a result of any reasonable change to the assumptions made in determining the fair values shown above. The fair value of financial instruments, and in particular the fixed rate notes, would be affected by changes in market interest rates. We estimate that a 100 basis points reduction in market interest rates would increase the fair value of the fixed-rate notes liability by around £20.1m (2010: £23.3m). At 30 April 2011, this increase would be partly offset by a movement of £5.0m (2010: £8.5m in the fair value of the Group’s interest rate derivatives (see note 27(j)), which are fair value hedges of a portion of the fixed-rate notes. Stagecoach Group plc | page 79 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 80 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (b) Carrying values of financial assets and financial liabilities (continued) Fair value estimation Financial instruments that are measured in the balance sheet at fair value are disclosed by level of the following fair value measurement hierarchy: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3 – Inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs). The following table presents the Group’s financial assets and liabilities that are measured at fair value within the hierarchy at 30 April 2011. Assets Derivatives used for hedging Available for sale financial assets – Equity securities Total assets Liabilities Derivatives used for hedging Total liabilities Note 27(j) 27(j) Level 1 £m Level 2 £m Level 3 £m Nil Nil Nil Nil Nil 71.5 Nil 71.5 (0.2) (0.2) Nil 2.1 2.1 Nil Nil The following table presents the Group’s financial assets and liabilities that are measured at fair value within the hierarchy at 30 April 2010. Assets Derivatives used for hedging Available for sale financial assets – Equity securities Total assets Liabilities Derivatives used for hedging Total liabilities The following table presents the changes in Level 3 financial assets for the year: At beginning of year Foreign exchange movements Purchases At end of year Note 27(j) 27(j) Level 1 £m Level 2 £m Level 3 £m Nil Nil Nil Nil Nil 31.2 Nil 31.2 (11.3) (11.3) 2011 £m 1.9 (0.2) 0.4 2.1 Nil 1.9 1.9 Nil Nil 2010 £m 1.3 Nil 0.6 1.9 Total £m 71.5 2.1 73.6 (0.2) (0.2) Total £m 31.2 1.9 33.1 (11.3) (11.3) The “Level 3” financial assets of £2.1m (2010: £1.9m) shown above represent investments in securities that do not trade on a recognised market, such as investments in unlisted companies. These assets have been valued by management taking account of the cost of the assets and the valuation of similar assets. The value of the assets is not material to the Group and therefore changes in unobservable inputs to the valuations would not have a material effect on the financial statements. (c) Nature and extent of risks arising from financial instruments The Group’s use of financial instruments exposes it to a variety of financial risks, principally: • Market risk – including currency risk, interest rate risk and price risk; • Credit risk; and • Liquidity risk. This note (c) presents qualitative information about the Group’s exposure to each of the above risks, including the Group’s objectives, policies and processes for measuring and managing risk: there have been no significant changes to these matters during the year ended 30 April 2011. This note (c) also provides summary quantitative data about the Group’s exposure to each risk. In addition, information on the Group’s management of capital is provided in section 3.8.15 of the Operating and Financial Review. The Group’s overall financial risk management programme focuses on the unpredictability of financial markets and seeks to reduce the likelihood and/or magnitude of adverse effects on the financial performance and financial position of the Group. The Group uses derivative financial instruments to reduce exposure to foreign exchange risk, commodity price risk and interest rate movements. The Group does not generally hold or issue derivative financial instruments for speculative purposes. A Group Treasury Committee and central treasury department (“Group Treasury”) oversee financial risk management in the context of policies approved by the Board. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. Group Treasury is responsible for the execution of derivative financial instruments to manage financial risks. Certain financial risk management activities (for example, the management of credit risk arising from trade and other receivables) are devolved to the management of individual business units. The Board provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investing excess liquidity. page 80 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 81 Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, equity prices and commodity prices will affect the Group’s financial performance and/or financial position. The objective of the Group’s management of market risk is to manage and control market risk exposures within acceptable parameters. The Group enters into derivative financial instruments in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Board. Generally the Group seeks to apply hedge accounting in order to reduce volatility in the consolidated income statement. Foreign currency translation risk Foreign currency translation risk is the risk that the fair value or future cash flows of a financial instrument (including overseas net investments) will fluctuate because of changes in foreign exchange rates. The Group is exposed to foreign currency translation risk principally as a result of net investments in foreign operations and borrowings denominated in foreign currencies. The Group has overseas investments in Canada and the USA. To reduce balance sheet translation exposure, the Group partially hedges the sterling carrying value of overseas operations through borrowings denominated in their functional currency or, where appropriate, through the use of derivative financial instruments. Gains and losses arising from hedging instruments that provide a hedge against foreign net investments are recognised in the statement of comprehensive income. On 18 December 2009, the Group entered into foreign currency derivative contracts with a notional value of US$160.0m, which were accounted for as a hedge of the Group’s overseas net investments and this hedging relationship remains in place. The table below includes the sterling notional value (calculated using the year-end exchange rate) of the foreign currency derivatives outstanding at the balance sheet date. The Group’s objective in managing and measuring foreign currency translation risk associated with net investments in foreign operations and borrowings denominated in foreign currencies is to maintain an appropriate cost of borrowing and retain some potential for benefiting from currency movements whilst partially hedging against adverse currency movements. It is the Group’s policy to examine each overseas investment individually and to adopt a strategy based on current and forecast political and economic climates. The Group measures foreign currency translation risk by identifying the carrying value of assets and liabilities denominated in the relevant foreign currency and quantifying the impact on equity of changes in the relevant foreign currency rate. The Group’s consolidated income statement is exposed to movements in foreign exchange rates in the following ways: • The translation of the revenues and costs of the Group’s North American operations; and • The translation of interest payable on US dollar and Canadian dollar denominated debt. The Group’s consolidated balance sheet exposures to foreign currency translation risk were as follows: 2011 2010 US dollars – Net investments in foreign operations (excluding intra-group balances, cash and borrowings) – Cash – Borrowings – Notional value of foreign currency derivatives Canadian dollars – Net investments in foreign operations (excluding intra-group balances, cash and borrowings) – Cash – Borrowings Net exposure £m £m 165.4 11.0 (40.4) 95.9 47.5 0.8 (3.4) 276.8 179.7 21.6 (51.2) 104.5 49.7 1.6 (3.9) 302.0 The amounts shown above are the notional values of all foreign currency derivatives that are net investment hedges and the carrying values of all items in the consolidated balance sheet that would have differed at the balance sheet date had a different foreign currency exchange rate been applied, except that commodity derivatives that are cash flow hedges are excluded. The sensitivity of the Group’s consolidated balance sheet to translation exposures is illustrated below: 2011 2010 US dollar US dollar balance sheet foreign exchange rate Impact of 10% depreciation of UK sterling against US dollar – US dollar foreign exchange rate – Increase in consolidated equity (£m) Impact of 10% appreciation of UK sterling against US dollar – US dollar foreign exchange rate – Decrease in consolidated equity (£m) Canadian dollar Canadian dollar balance sheet foreign exchange rate Impact of 10% depreciation of UK sterling against Canadian dollar – Canadian dollar foreign exchange rate – Increase in consolidated equity (£m) Impact of 10% appreciation of UK sterling against Canadian dollar – Canadian dollar foreign exchange rate – Decrease in consolidated equity (£m) 1.6680 1.5012 25.8 1.8348 (21.1) 1.5827 1.4244 5.0 1.7410 (4.1) 1.5307 1.3776 28.3 1.6838 (23.1) 1.5504 1.3954 5.3 1.7054 (4.3) The above sensitivity analysis is based on the following assumptions: – Only those foreign currency assets and liabilities that are directly affected by changes in foreign exchange rates are included in the calculation. – The above calculations assume that the exchange rates between any pair of currencies other than the pair stated do not change as a result of the change in the exchange rate between the pair stated. Stagecoach Group plc | page 81 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 82 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk (continued) The Group’s consolidated income statement exposures to foreign currency translation risk were as follows: US dollars – US$ element of North American operating profit – Intangible asset expenses – Redundancy / restructuring costs – Share of profit of joint ventures – Exceptional items – Net finance costs – Net tax charge Canadian dollars – C$ element of North American operating profit – Net finance costs – Net tax (charge)/credit Net exposure 2011 £m 17.8 (0.1) (0.7) 9.3 Nil (0.4) (10.0) 2.2 Nil (0.8) 17.3 2010 £m 9.7 (0.3) (0.3) 8.0 (4.1) (5.2) (2.8) Nil (0.3) 0.1 4.8 The operating profit figures shown in the above table reconcile to the operating profit for North America shown in the segmental information in note 2(b) as follows: US$ element of North American operating profit shown above C$ element of North American operating profit shown above Share based payment charges denominated in sterling Operating profit shown in segmental information The sensitivity of the Group’s consolidated income statement to translational exposures is illustrated below: US dollar US dollar average foreign exchange rate Impact of 10% depreciation of UK sterling against US dollar – US dollar foreign exchange rate – Increase in consolidated profit after taxation (£m) Impact of 10% appreciation of UK sterling against US dollar – US dollar foreign exchange rate – Decrease in consolidated profit after taxation (£m) Canadian dollar Canadian dollar average foreign exchange rate Impact of 10% depreciation of UK sterling against Canadian dollar – Canadian dollar foreign exchange rate – Increase in consolidated profit after taxation (£m) Impact of 10% appreciation of UK sterling against Canadian dollar – Canadian dollar foreign exchange rate – Decrease in consolidated profit after taxation (£m) The above sensitivity analysis is based on the following assumptions: 2011 £m 17.8 2.2 (0.7) 19.3 2010 £m 9.7 Nil (0.6) 9.1 2011 2010 1.5646 1.4081 1.8 1.7211 (1.4) 1.5823 1.4241 0.2 1.7405 (0.1) 1.6020 1.4418 0.5 1.7622 (0.5) 1.7189 1.5470 Nil 1.8908 Nil – Only those income statement items directly affected by changes in foreign exchange rates are included in the calculation. For example, changes in commodity prices that indirectly occur due to changes in foreign exchange rates are not included in the sensitivity calculation. – The above calculations assume that the exchange rates between any pair of currencies other than the pair stated do not change as a result of the change in the exchange rate between the pair stated. page 82 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 83 Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk (continued) Foreign currency transactional risk Foreign currency transactional risk is the risk that future cash flows (such as from sales and purchases of goods and services) will fluctuate because of changes in foreign exchange rates. The Group is exposed to limited foreign currency transactional risk due to the low value of transactions entered into by subsidiaries in currencies other than their functional currency. Group Treasury carries out forward buying of currencies where appropriate. The Group reviews and considers hedging of actual and forecast foreign exchange transactional exposures up to one year forward. At 30 April 2011 there were no material net transactional foreign currency exposures (2010: £Nil). The Group’s exposure to commodity price risk includes a foreign currency element due to the impact of foreign exchange rate movements on the sterling cost of fuel for the Group’s UK operations. The effect of foreign exchange rate movements on sterling-denominated fuel prices is managed through the use of fuel derivative financial instruments denominated in the functional currency in which the fuel is purchased. Further information on fuel hedging is given under the heading “Price risk” on pages 84 to 86. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk principally through its borrowings and interest rate derivatives. It has a mixture of fixed-rate borrowings (where the fair value is exposed to changes in market interest rates), cash and floating-rate borrowings (where the future cash flows are exposed to changes in market interest rates). The Group’s objective with regards to interest rate risk is to reduce the risk of changes in interest rates significantly affecting future cash flows and/or profit. To provide some certainty as to the level of interest cost, it is the Group’s policy to manage interest rate exposure through the use of fixed and floating rate debt. Derivative financial instruments are also used where appropriate to generate the desired interest rate profile. The Group measures interest rate risk by quantifying the relative proportions of each of gross debt and net debt that are effectively subject to fixed interest rates and considers the duration for which the relevant interest rates are fixed. Following the issue of the Group’s £400m 5.75% bonds in December 2009, the Group adjusted its interest rate management arrangements to ensure an appropriate interest rate profile going forward. Certain of the Group’s interest rate cash flow hedges became ineffective and were cancelled. As a result, the Group entered into interest rate fair value hedges with a notional value of £150m which synthetically convert a proportion of the fixed rate debt to floating rate debt. At 30 April 2011, the interest rate profile of the Group’s interest bearing financial liabilities was as follows: Currency Floating rate Fixed rate Total Weighted average fixed interest rate Weighted average period for which rate is fixed Sterling US Dollar Canadian Dollar Gross borrowings £m 342.2 Nil Nil 342.2 £m 268.6 40.4 3.4 312.4 £m 610.8 40.4 3.4 654.6 % 5.8% 4.2% 5.1% 5.5% Years 5.7 3.7 0.9 5.4 At 30 April 2010, the interest rate profile of the Group’s interest bearing financial liabilities was as follows: Currency Floating rate Fixed rate Total Weighted average fixed interest rate Weighted average period for which rate is fixed Sterling US Dollar Canadian Dollar Gross borrowings £m 355.5 Nil Nil 355.5 £m 266.3 51.2 3.9 321.4 £m 621.8 51.2 3.9 676.9 % 5.8% 4.2% 5.1% 5.5% Years 6.7 4.7 1.9 6.3 All of the above figures take into account the effect of interest rate derivatives. The floating rate financial liabilities bear interest at rates fixed in advance for periods ranging from one to six months based on market rates. The maturity profile of the Group’s borrowings is shown in note 23(b). The Group’s financial assets on which floating interest is receivable comprise cash deposits and cash in hand of £358.3m (2010: £375.7m). Financial assets on which fixed interest is receivable total £2.8m (2010: £3.1m) before impairment and comprise a loan to a joint venture in 2011 and 2010. The net financial assets on which fixed interest is receivable have a weighted average interest rate of 7.0% (2010: 7.0%) and have no fixed repayment date. The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. The interest rate derivatives outstanding at 30 April 2011 are designated by the Group as hedging instruments under a fair value accounting model. No other hedging instruments are accounted for by the Group under a fair value accounting model. Stagecoach Group plc | page 83 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 84 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk (continued) The impact of a change of 100 basis points on all relevant floating interest rates on annualised interest payable on cash and borrowings balances outstanding at the balance sheet date was: Interest rates 100 basis points higher - Decrease in net finance costs - Increase in net tax charge - Increase in profit after taxation Interest rates 100 basis points lower - Increase in net finance costs - Decrease in net tax charge - Decrease in profit after taxation 2011 £m 0.2 (0.1) 0.1 (0.2) 0.1 (0.1) 2010 £m 0.2 (0.1) 0.1 (0.2) 0.1 (0.1) The above sensitivity analysis is based on the following methods and assumptions: - All relevant floating interest rates (including Bank of England base rate and LIBOR) change by 100 basis points. - The change is calculated by working out an annualised interest charge on the amounts outstanding at the balance sheet date and comparing this to the same charge re-calculated for a change of 100 basis points in the interest rate. While this provides some indication of the impact on future profit and cash flows from changes in interest rates, it does not necessarily indicate the extent to which the profit for the years ended 30 April 2011 and 30 April 2010 would have differed had the interest rates applying during those years been different. - The impact of changes in interest rates on items that are not financial instruments (for example, provisions and pension assets/obligations) is excluded. Price risk The Group is exposed to commodity price risk. The Group’s operations as at 30 April 2011 consume approximately 370m litres of diesel fuel per annum. As a result, the Group’s profit is exposed to movements in the underlying price of fuel. The Group’s objective in managing commodity price risk is to reduce the risk that movements in fuel prices result in adverse movements in its profit and cash flow. The Group has a policy of managing the volatility in its fuel costs by maintaining an ongoing fuel-hedging programme whereby derivatives are used to fix or cap the variable unit cost of a percentage of anticipated fuel consumption. The Group’s exposure to commodity price risk is measured by quantifying the element of projected future fuel costs, after taking account of derivatives in place, which varies due to movements in fuel prices. Group Treasury is responsible for the processes for measuring and managing commodity price risk. The Group’s overall fuel costs include the impact of delivery margins, fuel taxes and fuel tax rebates. These elements of fuel costs are not managed as part of Group Treasury’s commodity price risk management and are managed directly by business unit management. The Group uses a number of fuel derivatives to hedge against movements in the price of the different types of fuel used in each of its divisions. The fuel derivatives hedge the underlying commodity price risk (denominated in US$) and in the case of the UK Bus (regional operations) division, the UK Bus (London) and the UK Rail division, they also hedge the currency risk due to the commodity being priced in US$ and the functional currency of the two divisions being pounds sterling. page 84 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 85 Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk (continued) At 30 April 2011 and 30 April 2010, the projected fuel costs (excluding premia payable on fuel derivatives, delivery margins, fuel taxes and fuel tax rebates) for the next twelve months were: Costs subject to fuel swaps: – UK Bus (regional operations) – UK Bus (London) – UK Rail – North America Costs not subject to fuel swaps: – UK Bus (regional operations) – UK Bus (London) – UK Rail – North America Total 2011 £m (76.3) (9.4) (19.0) (21.0) (125.7) (4.1) (11.4) (8.4) (9.0) (32.9) (158.6) 2010 £m (68.0) Nil (14.9) (18.9) (101.8) (1.8) Nil (5.8) (4.6) (12.2) (114.0) The figures in the above table are after taking account of derivatives and applying the fuel prices and foreign exchange rates as at the balance sheet date. If all of the relevant fuel prices were 10% higher at the balance sheet date, the amounts in the above table would change by the following: Costs not subject to fuel swaps: – UK Bus (regional operations) – UK Bus (London) – UK Rail – North America Decrease in projected profit before taxation 2011 £m (0.4) (1.1) (0.8) (0.9) (3.2) 2010 £m (0.2) Nil (0.6) (0.5) (1.3) Stagecoach Group plc | page 85 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 86 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (i) Market risk (continued) If all of the relevant fuel prices were 10% lower at the balance sheet date, the amounts would change by the following: Costs not subject to fuel swaps: – UK Bus (regional operations) – UK Bus (London) – UK Rail – North America Increase in projected profit before taxation 2011 £m 0.4 1.1 0.8 0.9 3.2 2010 £m 0.2 Nil 0.6 0.5 1.3 (ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk is managed by a combination of Group Treasury and business unit management, and arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to amounts due from outstanding receivables and committed transactions. The Group’s objective is to minimise credit risk to an acceptable level whilst not overly restricting the Group’s ability to generate revenue and profit. It is the Group’s policy to invest cash assets safely and profitably. To control credit risk, counterparty credit limits are set by reference to published credit ratings and the counterparty’s geographical location. The Group considers the risk of material loss in the event of non-performance by a financial counterparty to be low. In determining whether a financial asset is impaired, the Group takes account of: • The fair value of the asset at the balance sheet date and where applicable, the historic fair value of the asset; • In the case of receivables, the counterparty’s typical payment patterns; • In the case of receivables, the latest available information on the counterparty’s creditworthiness such as available financial statements, credit ratings etc. In the case of equity investments classified as available for sale assets, a significant or prolonged reduction in the fair value of the assets is considered as an indicator that the securities might be impaired. The movement in the provision for impairment of trade and other receivables is shown in note 20. The table below shows the maximum exposure to credit risk for the Group at the balance sheet date: Financial assets at fair value through profit or loss Trade receivables Loans and other receivables Cash and cash equivalents – pledged as collateral Cash and cash equivalents - other Excluding derivative financial instruments Derivatives used for hedging Total exposure to credit risk Gross Impairment Net exposure 2011 £m Nil 115.0 57.7 20.3 338.0 531.0 71.5 602.5 2011 £m Nil (1.9) (2.8) Nil Nil (4.7) Nil (4.7) 2011 £m Nil 113.1 54.9 20.3 338.0 526.3 71.5 597.8 Gross 2010 £m Nil 128.8 37.6 65.8 309.9 542.1 31.2 573.3 Impairment Net exposure 2010 £m Nil (4.5) (3.1) Nil Nil (7.6) Nil (7.6) 2010 £m Nil 124.3 34.5 65.8 309.9 534.5 31.2 565.7 The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer or counterparty. The Group’s largest credit exposures are to the UK Department for Transport, Transport for London, and other government bodies and financial institutions with short-term credit ratings of A1 (or equivalent) or better, all of which the Group considers unlikely to default on their respective liabilities to the Group. page 86 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 87 Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (ii) Credit risk (continued) The Group’s total net exposure to credit risk by geographic region is analysed below: United Kingdom North America The Group’s financial assets by currency are analysed below: Sterling US dollars Canadian dollars All of the above financial assets’ carrying amounts are representative of their maximum credit exposure. The following financial assets were past due, but not impaired at the balance sheet date: Amounts 1 to 90 days overdue Amounts 91 to 180 days overdue Amounts 181 to 365 days overdue Amounts more than 365 days overdue 2011 £m 552.0 45.8 597.8 2011 £m 552.0 41.0 4.8 597.8 2011 £m 13.7 1.3 0.5 Nil 15.5 2010 £m 515.6 50.1 565.7 2010 £m 515.4 44.7 5.6 565.7 2010 £m 12.5 2.3 0.1 0.1 15.0 The Group does not hold any collateral in respect of its credit risk exposures set out above (2010: £Nil) and has not taken possession of any collateral it holds or called for other credit enhancements during the year ended 30 April 2011 (2010: £Nil). (iii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s objective in managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The funding policy is to finance the Group through a mixture of bank, lease and hire purchase debt, capital markets issues and cash generated by the business. As at 30 April 2011, the Group’s credit facilities were £1,112.1m (2010: £959.2m), £447.2m (2010: £466.0m) of which were utilised, including utilisation for the issuance of bank guarantees, bonds and letters of credit. The Group had the following undrawn committed banking and uncommitted asset finance facilities: 2011 2010 Expiring within one year Expiring in more than one year but not more than two years Expiring beyond two years £m 204.7 6.6 453.6 664.9 £m 170.5 322.7 Nil 493.2 Although there is an element of seasonality in the Group’s bus and rail operations, the overall impact of seasonality on working capital and liquidity is not considered significant. The Board expects the Group to be able to meet current and future funding requirements through free cash flow and available committed facilities. In addition, the Group has an investment grade rating which should allow it access at short notice to additional bank and capital markets debt funding. The Group’s principal lines of credit have been arranged on a bi-lateral basis with a group of relationship banks which provide bank facilities for general corporate purposes. These arranged lines of credit allow cash drawdowns to finance the Group and also include facilities which are dedicated to issuing performance/season ticket bonds, guarantees and letters of credit. The Group’s committed bank facilities as at 30 April 2011 are analysed below: Expiring in MAIN GROUP FACILITIES – 2016 – 2014 – 2013 – 2012 LOCAL & SHORT-TERM FACILITIES – Various Performance bonds, guarantees etc drawn £m Available for non-cash utilisation only £m Available for cash drawings £m (66.9) (34.8) (70.8) (51.8) (224.3) (2.2) (226.5) (33.0) (7.2) (9.9) (17.8) (67.9) Nil (67.9) 410.1 Nil Nil Nil 410.1 13.5 423.6 Facility £m 510.0 42.0 80.7 69.6 702.3 15.7 718.0 Stagecoach Group plc | page 87 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 88 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (c) Nature and extent of risks arising from financial instruments (continued) (iii) Liquidity risk (continued) The Group manages its liquidity risk based on contracted cash flows. The following are the contractual maturities of financial liabilities, including interest payments. The amounts disclosed in the table are the contractual undiscounted cash flows. As at 30 April 2011 Non derivative financial liabilities: Unsecured bond issues Redeemable preference shares Finance lease liabilities Hire purchase liabilities Loan notes payable Trade and other payables Derivative financial liabilities: Derivatives used for hedging As at 30 April 2010 Non derivative financial liabilities: Unsecured bond issues Redeemable preference shares Finance lease liabilities Hire purchase liabilities Loan notes payable Trade and other payables Derivative financial liabilities: Derivatives used for hedging Carrying amount £m Contractual cash flows £m Less than 1 year £m 1-2 years £m 2-5 years £m More than 5 years £m (410.2) (2.6) (43.8) (176.9) (21.1) (420.8) (538.0) (2.6) (48.2) (188.0) (21.1) (420.8) (23.0) (2.6) (11.7) (31.9) (21.1) (406.4) (23.0) Nil (8.4) (29.2) Nil (14.4) (69.0) Nil (26.9) (78.2) Nil Nil (423.0) Nil (1.2) (48.7) Nil Nil (1,075.4) (1,218.7) (496.7) (75.0) (174.1) (472.9) (0.2) (0.2) (0.1) (0.1) Nil Nil (1,075.6) (1,218.9) (496.8) (75.1) (174.1) (472.9) Carrying amount £m Contractual cash flows £m Less than 1 year £m 1-2 years £m 2-5 years £m More than 5 years £m (406.9) (3.3) (55.1) (185.4) (26.2) (438.4) (561.0) (3.3) (62.2) (194.7) (26.2) (438.4) (23.0) (3.3) (9.9) (16.1) (26.2) (426.5) (23.0) Nil (12.5) (29.8) Nil (11.9) (69.0) Nil (33.0) (77.0) Nil Nil (446.0) Nil (6.8) (71.8) Nil Nil (1,115.3) (1,285.8) (505.0) (77.2) (179.0) (524.6) (11.3) (11.8) (4.4) (5.4) (2.0) Nil (1,126.6) (1,297.6) (509.4) (82.6) (181.0) (524.6) The “contractual cash flows” shown in the above tables are the contractual undiscounted cash flows under the relevant financial instruments. Where the contractual cash flows are variable based on a price, foreign exchange rate, interest rate or index in the future, the contractual cash flows in the above table have been determined with reference to the relevant price, foreign exchange rate, interest rate or index as at the balance sheet date. In determining the interest element of contractual cash flows in cases where the Group has a choice as to the length of interest calculation periods and the interest rate that applies varies with the period selected, the contractual cash flows have been calculated assuming the Group selects the shortest available interest calculation periods. Where the holder of an instrument has a choice of when to redeem, the amounts in the above tables are on the assumption the holder redeems at the earliest opportunity. In the case of bank loans, which are drawn under revolving facilities, the contracted cash flows in respect of interest up to and including the next rollover date are shown. page 88 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 89 Note 27 Financial instruments (continued) (d) Accounting policies The Group’s significant accounting policies and measurement bases in respect of financial instruments are disclosed in note 1. (e) Reclassification of financial assets There have been no reclassifications of financial assets between (1) those measured at cost or amortised cost and (2) those measured at fair value during the year ended 30 April 2011 (2010: None). (f) Collateral Included within the cash and cash equivalents balance of £358.3m as at 30 April 2011 (2010: £375.7m) are £20.3m (2010: £65.8m) of cash balances that have been pledged as collateral for liabilities as follows: – £Nil (2010: 40.2m) has been pledged by the Group as collateral for letters of credit issued by the Bank of Scotland as collateral for the Group’s North American insurance provisions. – £18.9m (2010: £23.8m) has been pledged by the Group as collateral for £18.9m (2010: £23.8m) of loan notes that are classified within current liabilities: borrowings. The cash is held on deposit at Bank of Scotland. Bank of Scotland has guaranteed the Group’s obligations to the holders of the loan notes and to the extent that the Group fails to satisfy its obligations under the loan notes, Bank of Scotland shall use the cash collateral to satisfy such obligations. – £1.0m (2010: £1.4m) has been pledged by the Group as collateral for liabilities to the vendors of certain businesses that the Group acquired in North America. – £0.4m (2010: £0.4m) is held in an escrow account in North America in relation to insurance claims. The fair value of the financial assets pledged as collateral is the same as their carrying value as at 30 April 2011 and 30 April 2010. (g) Compound financial instruments The Group did not hold any compound financial instruments as at 30 April 2011 (2010: £Nil). (h)Defaults and breaches The Group has not defaulted on any loans payable during the years ended 30 April 2011 and 30 April 2010 and no loans payable are in default as at 30 April 2011 and 30 April 2010. The Group was in compliance with all bank loan covenants as at 30 April 2011 and as at 30 April 2010. (i) Income, expense, gains and losses The following items of income, expense, gains and losses in respect of financial instruments (excluding commodity hedges, trade and other payables and trade and other receivables) have been recognised in the financial statements. Financial assets at fair value through profit or loss Interest income and expense Interest income for financial assets and financial liabilities that are not at fair value through profit or loss Interest expense for financial assets and financial liabilities that are not at fair value through profit or loss Available for sale financial assets Losses recognised directly in equity 2011 £m Nil 5.4 (36.0) Nil (30.6) 2010 £m Nil 10.8 (58.3) (0.2) (47.7) The net finance costs reported in the consolidated income statement includes amounts that arise on non-financial liabilities and excludes amounts recognised directly in equity and impairment losses on investments. The net loss presented above can be reconciled to the net finance costs reported in the consolidated income statement as follows: Reconciliation to net finance costs: Net loss presented above Unwinding of discount on provisions Exclude losses recognised directly in equity Net finance costs reported in consolidated income statement 2011 £m (30.6) (3.9) Nil (34.5) Note 6 2010 £m (47.7) (3.7) 0.2 (51.2) Stagecoach Group plc | page 89 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 90 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (j) Hedge accounting A summary of the Group’s hedging arrangements is provided in the table below. Type of hedge Fair value hedges Cash flow hedges Hedges of net investment in foreign operations Risks hedged by Group – Interest rate risks – Commodity price risk – Interest rate risks – Foreign investment risk Carrying value and fair value of derivative financial instruments Derivative financial instruments are classified on the balance sheet as follows: Non-current assets Interest rate derivatives Fuel derivative Current assets Interest rate derivatives Fuel derivatives Foreign currency derivatives Current liabilities Fuel derivatives Non-current liabilities Interest rate derivatives Fuel derivatives Foreign currency derivatives Total net carrying value Interest rate derivatives Fuel derivatives Foreign currency derivatives Hedging instruments used – Derivatives (interest rate swaps) – Derivatives (commodity swaps) – Derivatives (interest rate swaps) – Foreign currency borrowings – Derivatives (foreign currency forward contracts) 2011 £m 2.9 17.8 20.7 2.7 45.2 2.9 50.8 (0.1) (0.1) Nil (0.1) Nil (0.1) 5.6 62.8 2.9 71.3 2010 £m 1.9 3.6 5.5 2.8 22.9 Nil 25.7 (4.0) (4.0) (1.9) Nil (5.4) (7.3) 2.8 22.5 (5.4) 19.9 The fair value of derivative financial instruments is equal to their carrying value, as shown in the above table. Embedded derivatives In accordance with IAS 39, Financial Instruments: Recognition and measurement, all significant contracts to which the Group is a party have been reviewed for embedded derivatives. There were no embedded derivatives as at 30 April 2011 (2010: None) which were separately accounted for. page 90 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 91 Note 27 Financial instruments (continued) (j) Hedge accounting (continued) Cash flow hedges - fuel As noted previously, the Group uses a number of fuel derivatives to hedge the different types of fuel used in each of its divisions. The movements in the fair value of fuel derivatives in the year were as follows: 2011 Fuel derivatives Fair value at start of year Changes in fair value during year taken to cash flow hedging reserve Cash (received)/paid during the year Fair value at end of year The fair value of the fuel derivatives split by maturity was as follows: As at 30 April 2011 Within one year 1 to 2 years 2 to 3 years As at 30 April 2010 Within one year 1 to 2 years The fair value of fuel derivatives is further analysed by currency and segment as follows: As at 30 April 2011 Sterling denominated – UK Bus (regional operations) Sterling denominated – UK Bus (London) Sterling denominated – UK Rail US dollar denominated – North America As at 30 April 2010 Sterling denominated – UK Bus (regional operations) Sterling denominated – UK Rail US dollar denominated – North America £m 22.5 52.6 (12.3) 62.8 Assets £m 45.2 17.0 0.8 63.0 22.9 3.6 26.5 Fair value £m 37.0 4.4 9.6 11.8 62.8 16.0 1.1 5.4 22.5 2010 £m (61.1) 42.6 41.0 22.5 Liabilities £m (0.1) (0.1) Nil (0.2) (4.0) Nil (4.0) Notional quantity of fuel covered by derivatives Millions of litres 277.8 7.8 88.1 79.1 452.8 240.0 47.5 79.0 366.5 Fair value and cash flow hedges - interest As noted previously, the Group uses a number of interest rate derivatives to hedge its exposure to floating interest rates. In connection with the issue of the Group’s £400m 5.75% Bonds in December 2009, the Group adjusted its interest rate management arrangements. The Group’s cash flow interest rate hedges became ineffective and were cancelled, resulting in a one-off exceptional expense and cash outflow of £20.5m during the year ended 30 April 2010. The Group subsequently entered into a number of interest rate fair value hedges which cover periods up to 16 December 2014. The movements in the fair value of interest rate derivatives used as hedging instruments in the year were as follows: Interest rate derivatives Fair value at start of year Changes in fair value during year taken to cash flow hedging reserve Changes in fair value reflected in carrying value of hedged item Cash paid/(received) during the year Fair value at end of year Cash flow hedges Fair value hedges 2011 £m Nil Nil Nil Nil Nil 2010 £m (21.0) (4.3) Nil 25.3 Nil 2011 £m 2.8 Nil 6.1 (3.3) 5.6 2010 £m Nil Nil 2.6 0.2 2.8 Stagecoach Group plc | page 91 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 92 Notes to the consolidated financial statements Note 27 Financial instruments (continued) (j) Hedge accounting (continued) Fair value and cash flow hedges - interest (continued) The fair value of the interest rate derivatives split by maturity was as follows: Cash flow hedges Fair value hedges As at 30 April 2011 Within one year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years As at 30 April 2010 Within one year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Assets £m Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Liabilities £m Nil Nil Nil Nil Ni Nil Nil Nil Nil Nil Nil Nil Assets £m 2.7 1.5 0.3 1.1 Nil 5.6 2.8 1.3 Nil Nil 0.6 4.7 All of the interest rate derivatives are sterling denominated and are managed and held centrally. Cash flow hedging reserve The movements in the cash flow hedging reserve were as follows: Interest rate derivatives Fuel derivatives Cash flow hedging reserve at 1 May 2009 Changes in fair value during the year taken to cash flow hedging reserve Cash flow hedges reclassified and reported in profit for year Tax effect of cash flow hedges Cash flow hedging reserve at 30 April 2010 Changes in fair value during the year taken to cash flow hedging reserve Cash flow hedges reclassified and reported in profit for year Tax effect of cash flow hedges Cash flow hedging reserve at 30 April 2011 Cash flow hedging reserve before tax Tax to be charged to income statement in future periods Cash flow hedging reserve after tax £m (14.8) (4.3) 24.8 (5.7) Nil Nil Nil Nil Nil Nil Nil Nil £m (37.4) 42.6 37.0 (22.3) 19.9 52.6 (21.8) (7.4) 43.3 58.4 (15.1) 43.3 Liabilities £m Nil Nil Nil Nil Nil Nil Nil Nil (0.4) (1.5) Nil (1.9) Total £m (52.2) 38.3 61.8 (28.0) 19.9 52.6 (21.8) (7.4) 43.3 58.4 (15.1) 43.3 During the year ended 30 April 2010, forecast interest payments for which hedge accounting had previously been applied were no longer expected to occur because floating-rate bank loans were repaid following the issue of a fixed-rate corporate bond. As a result, certain interest rate derivatives ceased to be effective hedging instruments and £20.5m of pre-tax losses previously deferred in the cash flow hedging reserve were immediately reclassified and reported in profit as an exceptional item (see note 4). There have been no other instances during the year ending 30 April 2011 (2010: None) from a Group perspective where a forecast transaction for which hedge accounting had previously been used was no longer expected to occur. Hedge of overseas net investments Changes in the Group’s hedging of overseas net investments during the year ended 30 April 2011 are explained on page 81. The movements in the fair value of the foreign currency derivative contracts used as a hedging instrument in the year were as follows: Foreign currency derivatives Fair value at start of year Changes in fair value during the year Cash received during the year Fair value at end of year page 92 | Stagecoach Group plc 2011 £m (5.4) 8.3 Nil 2.9 2010 £m 3.1 (5.4) (3.1) (5.4) 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 93 Note 27 Financial instruments (continued) (j) Hedge accounting (continued) Hedge of overseas net investments (continued) The fair value of the foreign currency derivatives split by maturity was as follows: Assets Liabilities As at 30 April 2011 Within one year As at 30 April 2010 1 to 2 years £m 2.9 Nil £m Nil (5.4) Note 28 Share capital Under the Companies Act 2006, companies are no longer required to have an authorised share capital and a resolution was passed at the 2010 Annual General Meeting to take advantage of this deregulating measure. Therefore, the Company no longer has an authorised share capital. The allotted, called-up and fully paid ordinary share capital was: Allotted, called-up and fully-paid ordinary shares of 56/57 pence each At beginning of year Allotted to employees and former employees under share option schemes At end of year 2011 2010 No. of shares £m No. of shares £m 720,066,186 58,764 720,124,950 7.1 – 7.1 719,478,434 587,752 720,066,186 7.1 – 7.1 The balance on the share capital account shown above represents the aggregate nominal value of all ordinary shares in issue. The Group operates two Employee Share Ownership Trusts: the Stagecoach Group Qualifying Employee Share Ownership Trust (“QUEST”) and the Stagecoach Group Employee Benefit Trust (“EBT”). Shares held by these trusts are treated as a deduction from equity in the Group’s financial statements. Other assets and liabilities of the trusts are consolidated in the Group’s financial statements as if they were assets and liabilities of the Group. As at 30 April 2011, the QUEST held 333,372 (2010: 333,372) ordinary shares in the Company and the EBT held 1,854,213 (2010: 2,003,075) ordinary shares in the Company. The trusts have waived dividends on the shares they hold. The Group had 4,087,302 (2010: 5,187,055) redeemable ‘B’ shares of 63 pence each at 30 April 2011. The Group had the right to redeem all of the remaining ‘B’ shares at any time and redeemed the remaining shares on 31 May 2011. The ‘B’ shares that remained in issue are classified as liabilities and the dividends payable on such shares are classified in the consolidated income statement within finance costs. Stagecoach Group plc | page 93 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 94 Notes to the consolidated financial statements Note 29 Share based payments The Group operates an Executive Share Option Scheme, a Save as You Earn Scheme (“SAYE”), a Long Term Incentive Plan (“LTIP”) and an Executive Participation Plan (“EPP”). The Directors’ remuneration report on pages 32 to 38 gives further details of each of these arrangements. As disclosed in note 7, share based payment charges of £7.2m (2010: £8.9m) have been recognised in the income statement during the year in relation to the above schemes. Grant date Share price at grant/award date (£) Exercise price (£) Number of employees holding options/units at 30 April 2011 Shares under option/ notional units at 30 April 2011 Vesting period (years) Expected volatility Option/award life (years) Expected life (years) Risk free rate Expected dividends expressed as an average annual dividend yield Expectations of meeting performance criteria Fair value per option/ notional unit at grant date (£) Executive Share Option Scheme SAYE LTIP* LTIP* LTIP* LTIP* LTIP* December 2004 ø June 2004 ø December 2003† October 2008 June 2007 June 2008 December 2009 June 2010 December 2010 1.1150 1.1150 0.8575 0.8575 0.8075 0.8075 2.5178 3.2750 1.8075 2.8000 1.6070 2.1160 2.0785 Nil 4,237 n/a Nil n/a 13 n/a 14 n/a 14 n/a 14 7 72,824 3 30% 7 4.4 Nil Nil 3 30% 7 4.4 Nil 6,042,752 Nil 1,030,295 2,779,259 1,185,910 1,085,777 3 30% 7 4.4 3 3 3 3 30% 30% 30% 30% 3.5 3 3 3 n/a 3 3 n/a 3 3 n/a 3 30% 3 3 n/a 3 30% 3 3 n/a 4.75% 4.64% 4.64% 4.43% 3.14% 3.38% 3.34% 1.37% 3.15% 2.12% 4.04% 3.89% 3.37% 100% 100% 100% 100% ** ** ** ** ** 0.26 0.20 0.19 1.14 0.70 1.08 0.46 0.52 0.60 Option pricing model Black-Scholes Black-Scholes Black-Scholes Black-Scholes Bespoke simulation Bespoke simulation Bespoke simulation Bespoke simulation Bespoke simulation † These options became fully vested during the year to 30 April 2007. ø These options became fully vested during the year to 30 April 2008. *LTIP awards are based on notional units. One notional unit has a value equal to one of the Company’s ordinary shares but subject to performance conditions. LTIP awards are not share options and are valued using a separate simulation model therefore some of the above disclosures are not applicable. **Reflected in fair value. Expected volatility was determined at the date of grant from historic volatility, adjusted for events that were not considered to be reflective of the volatility of the share price going forward. Executive Share Option Scheme The movements in executive share options during the year were as follows: Award date 12 December 2003 25 June 2004 10 December 2004 At 1 May 2010 58,764 501,415 178,377 Exercised (58,764) (501,415) (105,553) 738,556 (665,732) At 30 April 2011 Nil Nil 72,824 72,824 Exercise price £ 0.8075 0.8575 1.1150 Date from which exercisable Expiry date 12 December 2006 25 June 2007 10 December 2007 12 December 2010 25 June 2011 10 December 2011 All options were granted for nil consideration. The mid-market price for the ordinary shares at 30 April 2011 was £2.47 (2010: £1.97). The Company’s ordinary shares traded in the range of £1.60 to £2.47 (2010: £1.16 to £1.99) during the year to that date. As share options are exercised continuously throughout the year, the average share price during the year of £1.97 (2010: £1.57) is considered representative of the weighted average share price at the date of exercise. page 94 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 95 Note 29 Share based payments (continued) Save as You Earn Scheme One issue from the SAYE scheme was in operation during the year as follows: Issue E Option grant date Savings contract start date Exercise price Date from which exercisable Expiry date 1 September 2008 1 October 2008 10251.775p 1 October 2011 31 March 2012 The changes in the number of participating employees and options over ordinary shares were as follows: Issue D Issue E Beginning of year Expired Cancelled Forfeited End of year 349 (53) (53) (53) Nil Number of employees Ordinary shares under option 909,097 (92,619) (92,619) (92,619) Number of employees 4,841 (35) (495) (74) Ordinary shares under option 6,828,996 (61,960) (626,799) (97,485) Nil 4,237 6,042,752 Long Term Incentive Plan Under the LTIP, executives are awarded notional units with a value equal to one of the Company’s ordinary shares but subject to the same performance conditions disclosed in the Directors’ remuneration report on pages 36 and 37. The movements in the LTIP during the year to 30 April 2011 were as follows: Award date 28 June 2007 30 June 2008 10 Dec 2009 28 June 2010 9 Dec 2010 Outstanding at start of year (notional units) Awards granted in year Dividends in year (notional units) (notional units) Vested in year (notional units) Outstanding at end of year (notional units) Fair value per LTIP unit at grant date £ Fair value per LTIP unit at 30 April 2011 £ TSR ranking at 30 April 2011† Vesting date 105,424 Nil Nil (105,424) Nil 1,019,802 2,750,946 Nil Nil Nil Nil 1,173,833 1,074,718 10,493 28,313 12,077 11,059 Nil Nil Nil Nil 1,030,295 2,779,259 1,185,910 1,085,777 3,876,172 2,248,551 61,942 (105,424) 6,081,241 0.6991 1.0830 0.4619 0.5186 0.5988 Nil 1.2345 1.2689 0.7097 0.9412 Nil 158 63 133 99 31 Mar 2010 & 28 June 2010* 30 June 2011 10 Dec 2012 28 Jun 2013 9 Dec 2013 * The LTIP awards granted on 28 June 2007 would in the normal course of events have vested on 28 June 2010. As noted in the Directors’ remuneration report included in the 2010 Annual Report, the Remuneration Committee considered it appropriate to bring forward the vesting date of the award to 31 March 2010 for Executive directors and certain others so as to permit vesting within the 2009/10 tax year. The awards were re-tested on the original due vesting date to consider whether vesting on 28 June 2010 would have delivered a lower or different amount and it was found that the earlier vesting had resulted in an understatement of the award level and unit price. Adjusting payments were made to reflect vesting of 100% of the available units at a unit price of £1.903 to reflect actual performance over the original performance period. † TSR ranking is based on the Group’s TSR ranking in the FTSE 250 whereby 1 is top and 250 is bottom of the comparator group. The TSR ranking is calculated by independent advisors. Executive Participation Plan Under the EPP, executives and senior managers sacrifice part of their actual annual cash bonus and are awarded deferred shares with an initial market value approximately equal to the amount of bonus foregone. The movements in EPP notional units during the year were as follows: Outstanding at start of year (notional units) Awards granted in year (notional units) Exercised in year (notional units) Lapsed in year (notional units) Dividends in year (notional units) Outstanding at end of year (notional units) Award date 28 June 2007 476,110 Nil (476,110) Nil Nil Nil 26 June 2008 29 June 2009 10 Dec 2009 28 June 2010 909,278 1,524,721 1,009,627 Nil 3,919,736 Nil Nil Nil 917,657 917,657 (16,343) Nil Nil (8,310) (14,997) (83,330) Nil (13,199) (500,763) (111,526) 9,218 15,059 10,633 9,408 44,318 887,156 1,456,450 1,020,260 905,556 4,269,422 Vesting date 8 Mar 2010 & 28 June 2010* 26 June 2011 29 June 2012 10 Dec 2012 28 June 2013 Expected total value of award at time of grant £ Closing share price on date of grant £ 1,775,639 1.8075 2,411,107 1,819,440 1,538,943 1,780,805 2.6825 1.2700 1.6060 1.9020 * The awards granted on 28 June 2007 would in the normal course of events have vested on 28 June 2010. In light of the approach adopted for the 2008/09 bonus award to Executive Directors and senior managers, which was awarded wholly in deferred shares under the EPP, the Remuneration Committee considered it appropriate to bring forward the vesting date of the 2007 EPP Award to permit vesting within the 2009/10 tax year for those affected individuals, subject to the requirement to retain a number of released EPP shares to the original due vesting date (28 June 2010). The closing share price on the vesting date of 8 March 2010 was £1.7820. Stagecoach Group plc | page 95 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 96 Notes to the consolidated financial statements Note 30 Reserves A reconciliation of the movements in each reserve is shown in the Consolidated statement of changes in equity on page 44. The balance of the share premium account represents the amounts received in excess of the nominal value of the ordinary shares offset by issue costs, bonus issues of shares and any transfer between reserves. The balance held in the retained earnings reserve is the accumulated retained profits of the Group. Cumulative goodwill of £113.8m (2010: £113.8m) has been written off against reserves in periods prior to 1 May 1998 in accordance with the UK accounting standards then in force and such goodwill will remain eliminated against reserves. The capital redemption reserve represents the cumulative par value of all shares bought back and cancelled. Details of own shares held are given in note 28. The own shares reserve represents the cumulative cost of shares in Stagecoach Group plc purchased in the market and held by the Group’s two Employee Share Ownership Trusts offset by cumulative sales proceeds. The translation reserve is used to record exchange differences arising from the translations of the financial statements of foreign operations. It is also used to record the effect of hedging net investments in foreign operations. The cash flow hedging reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. The cumulative gain or loss is recycled to the income statement to match the recognition of the hedged item through the income statement. Note 31 Consolidated cash flows (a) Reconciliation of operating profit to cash generated by operations The operating profit of Group companies reconciles to cash generated by operations as follows: Operating profit of Group companies Depreciation Loss on disposal of plant and equipment Intangible asset expenses Impairment of plant and equipment Equity-settled share based payment expense Operating cashflows before working capital movements Increase in inventories (Increase)/decrease in receivables Decrease in payables Decrease in provisions Differences between employer pension contributions and amounts recognised in the income statement Cash generated by operations (b) Proceeds from sale of property, plant and equipment In the cash flow statement, proceeds from sale of property, plant and equipment comprise: Net book values Loss on disposal of plant and equipment (Loss)/gain on disposal of properties Value of property, plant and equipment traded in Movement in receivables and deposits for proceeds from sale of property, plant and equipment Proceeds from sale of property, plant and equipment 2011 £m 190.6 90.3 0.9 10.1 Nil 4.7 296.6 (2.1) (13.4) (4.4) (2.8) (20.4) 253.5 2011 £m 16.5 (0.9) (0.1) (0.8) Nil 14.7 2010 £m 156.2 77.2 2.0 6.0 14.7 6.3 262.4 (1.9) 0.5 (7.4) (1.9) (17.2) 234.5 2010 £m 58.7 (2.0) 4.3 (3.0) (5.0) 53.0 page 96 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 97 Note 31 Consolidated cash flows (continued) (c) Reconciliation of net cash flow to movement in net debt The (decrease)/increase in cash reconciles to the movement in net debt as follows: (Decrease)/increase in cash Cash inflow from movement in borrowings New hire purchase and finance leases Debt of acquired subsidiaries Foreign exchange movements Other movements Decrease in net debt Opening net debt (as defined in note 36) Closing net debt (as defined in note 36) 2011 £m (16.1) 29.9 13.8 (8.1) Nil 10.8 (0.7) 15.8 (296.7) (280.9) 2010 £m 99.3 3.9 103.2 (65.7) (0.4) 7.1 (0.8) 43.4 (340.1) (296.7) (d) Analysis of net debt For the purpose of this note, net debt is as defined in note 36. The analysis below further shows the other items classified as net borrowings in the consolidated balance sheet. Cash Cash collateral Hire purchase and finance lease obligations Bank loans and loan stock Bonds Preference shares Net debt Accrued interest on bonds and preference shares Effect of fair value hedges on carrying value of borrowings Foreign exchange derivatives not included in borrowings in balance sheet Opening Cashflows £m 309.9 65.8 £m 29.4 (45.5) (240.5) (26.2) (402.4) (3.3) (296.7) (8.6) (1.3) 5.4 24.1 5.1 Nil 0.7 13.8 23.0 Nil Nil New hire purchase/ Foreign exchange finance leases movements movements Other £m Nil Nil (8.1) Nil Nil Nil (8.1) Nil Nil £m (1.3) Nil 3.8 Nil 8.3 Nil 10.8 Nil Nil £m Nil Nil Nil Nil (0.7) Nil (0.7) (23.0) (2.6) Closing £m 338.0 20.3 (220.7) (21.1) (394.8) (2.6) (280.9) (8.6) (3.9) Nil (8.3) Nil (2.9) Net borrowings (IFRS) (301.2) 36.8 (8.1) 2.5 (26.3) (296.3) The cash amounts shown above include term deposits as explained in note 21. (e) Restricted cash The cash collateral balance as at 30 April 2011 of £20.3m (2010: £65.8m) comprises balances held in respect of insurance letters of credit of £Nil (2010: £40.2m), balances held in trust in respect of loan notes of £18.9m (2010: £23.8m) and North America restricted cash balances of £1.4m (2010: £1.8m). In addition, cash includes train operating company cash of £163.1m (2010: £182.8m). Under the terms of the franchise agreements, train operating companies can only lend or distribute cash out of retained earnings, and only to the extent they do not breach franchise liquidity ratios. (f) Non cash transactions The principal non cash transactions were the acquisition of property, plant and equipment using new hire purchase and finance leases. During the year, the Group entered into hire purchase and finance lease arrangements in respect of new assets with a total capital value at inception of the contracts of £8.9m (2010: £72.4m). After taking account of deposits paid up front and other financing transactions of £Nil (2010: £3.6m) new hire purchase and finance lease liabilities of £8.1m (2010: £69.3m) were recognised. Stagecoach Group plc | page 97 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 98 Notes to the consolidated financial statements Note 32 Contingencies Contingent liabilities (i) At 30 April 2011, the following bonds and guarantees were in place relating to the Group’s rail operations: Performance bonds backed by bank facilities – Stagecoach South Western Trains – East Midlands Trains Season ticket bonds backed by bank facilities and/or insurance arrangements – Stagecoach South Western Trains – East Midlands Trains Intercompany loan facilities and guarantees – Stagecoach South Western Trains – East Midlands Trains 2011 £m 53.3 17.5 46.8 5.0 25.0 55.0 2010 £m 59.9 20.8 45.2 5.0 25.0 35.0 These contingent liabilities are not expected to crystallise, except that the intercompany loan facilities will be used from time to time but eliminate on consolidation. (ii) The Group and its joint venture, Virgin Rail Group Holdings Limited, have, in the normal course of business, entered into a number of long-term supply contracts. The most significant of these relate to track, station and depot access facilities, together with new train lease and maintenance arrangements. (iii) Under UK Rail franchise agreements, the Group and its joint venture, Virgin Rail Group Holdings Limited, have agreed with the DfT annual amounts receivable or payable in respect of the operation of rail franchises for future periods. Under these agreements, there is a requirement to comply with a number of obligations. Failure to comply with these obligations would be a breach of the relevant franchise. The Group assessed whether a provision for onerous contracts is required in respect of its rail franchises. The Group has discounted the expected future cash flows related to its rail franchises to determine whether it is probable that the benefits to be derived by the Group from the franchises will be lower than the unavoidable costs of meeting its obligations under the franchises. Estimates of cash flows are consistent with management’s plans and forecasts. The Group has determined that no provision is necessary. The estimation of future cash flows and the discount rate involves a significant degree of judgment. Actual results can differ from those assumed and there can be no absolute assurance that the assumptions used will hold true. Under certain circumstances following a breach by the Group of one or more of its rail franchise agreements, the DfT has the right to terminate all of the franchises operated by the Group. Where the Group has defaulted on one franchise, the DfT has cross-default rights that might enable it (but not require it) to terminate all of the franchises. The financial effect on the Group of a termination of one or more franchises would depend on which, if any, of the Group’s contingent liabilities that the DfT sought to call. As at 30 April 2011, the capital at risk of the Group in this respect was: Actual liabilities Net intra-group amounts payable to train operators Contingent liabilities Season ticket bonds Performance bonds Parent company guarantees to suppliers Undrawn committed loan facilities Capital at risk as at 30 April 2011 Cash Cash in train operating companies Pro forma impact on net debt South Western Trains East Midlands Trains £m 49.3 46.8 53.3 Nil 25.0 174.4 116.9 291.3 £m Nil 5.0 17.5 9.5 20.0 52.0 46.2 98.2 Total £m 49.3 51.8 70.8 9.5 45.0 226.4 163.1 389.5 We consider the likelihood of the contingent liabilities crystallising as being low. However, if all of the contingent liabilities had crystallised at 30 April 2011, the Group would have needed to have financed £226.4m (2010: £247.2m) and its gross debt would have increased by this amount. In addition, the cash in the train operating companies would be transferred with the franchises and therefore the net debt of the Group would have increased by £389.5m (2010: £430.0m). There is no recourse to the Group in respect of any liabilities or contingent liabilities of Virgin Rail Group. (iv) The Group and the Company are from time to time party to legal actions arising in the ordinary course of business. Liabilities have been recognised in the financial statements for the best estimate of the expenditure required to settle obligations arising under such legal actions. As at 30 April 2011, the accruals in the consolidated financial statements for such claims total £2.0m (2010: £5.4m). In addition, certain of the claims intended to be covered by the insurance provisions (see note 25) are subject to or might become subject to litigation against the Group and/or the Company. page 98 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 99 Note 33 Guarantees and other financial commitments (a) Capital commitments Capital commitments were as follows: Contracted for but not provided For delivery in one year 2011 £m 119.8 (b) Operating lease commitments The following were the future minimum contractual lease payments due under unexpired operating leases as at 30 April 2011: As at 30 April 2011 Land & buildings Buses & other road transportation equipment Trains & rolling stock Plant & machinery Lease payments due in respect of: Year ending 30 April 2012 Year ending 30 April 2013 Year ending 30 April 2014 Year ending 30 April 2015 Year ending 30 April 2016 1 May 2016 and thereafter £m 11.6 10.3 8.3 4.3 3.8 27.2 65.5 £m 7.8 7.4 6.2 1.9 0.2 Nil 23.5 £m 134.0 124.6 85.2 Nil Nil Nil 343.8 £m 3.5 2.0 0.3 0.1 Nil 0.6 6.5 2010 £m 11.1 Total £m 156.9 144.3 100.0 6.3 4.0 27.8 439.3 All operating lease commitments associated with UK Rail franchises are assumed to terminate in line with the expected franchise end. The franchise- end for the purpose of determining the commitments is the earlier date of which each franchise could end if the Group failed to meet specified performance targets. The amounts shown above do not include Network Rail charges, which are shown separately in note 33(c). The following were the future minimum contractual lease payments due under unexpired operating leases as at 30 April 2010: As at 30 April 2010 Land & buildings Buses & other road transportation equipment Trains & rolling stock Plant & machinery Lease payments due in respect of: Year ending 30 April 2011 Year ending 30 April 2012 Year ending 30 April 2013 Year ending 30 April 2014 Year ending 30 April 2015 1 May 2015 and thereafter £m 9.5 8.1 7.4 5.7 2.7 20.1 53.5 £m 6.2 5.5 3.9 3.7 3.0 0.8 23.1 £m 128.5 131.1 133.6 96.8 Nil Nil 490.0 £m 5.1 4.1 2.4 0.2 Nil Nil 11.8 Total £m 149.3 148.8 147.3 106.4 5.7 20.9 578.4 (c) Network Rail charges The Group’s UK Rail franchises have contracts with Network Rail for access to the railway infrastructure (track, stations and depots) until the expected end of the franchises. Commitments for payments under these contracts as at 30 April 2011 are as shown below. Lease payments due in respect of: Year ending 30 April 2012 Year ending 30 April 2013 Year ending 30 April 2014 2011 £m 140.7 125.2 100.9 366.8 Stagecoach Group plc | page 99 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 100 Notes to the consolidated financial statements Note 33 Guarantees and other financial commitments (continued) (c) Network Rail charges (continued) Commitments for payments under these contracts as at 30 April 2010 were as follows: Lease payments due in respect of: Year ending 30 April 2011 Year ending 30 April 2012 Year ending 30 April 2013 Year ending 30 April 2014 2010 £m 149.1 144.2 148.7 136.7 578.7 (d) Joint ventures Our share of commitments and contingent liabilities in joint ventures shown below are based on the latest statutory financial statements of the relevant companies: Annual commitments under non-cancellable operating leases Franchise performance bonds Season ticket bonds 2011 £m 48.1 10.3 2.1 2010 £m 47.6 10.3 1.9 The arrangements pursuant to which a performance bond is issued in respect of Virgin Rail Group Holdings Limited, a joint venture, requires that the consolidated net assets (under UK GAAP and applying its own accounting policies) of Virgin Rail Group Holdings Limited are no less than £22.5m (2010: £22.5m). This could restrict Virgin Rail Group Holding‘s ability to make distributions to the Group. Note 34 Related party transactions Details of major related party transactions during the year ended 30 April 2011 are provided below, except for those relating to the remuneration of the Directors and management. (i) Virgin Rail Group Holdings Limited - Non-Executive Directors Two of the Group’s managers are non-executive directors of Virgin Rail Group Holdings Limited. During the year ended 30 April 2011, the Group earned fees of £60,000 (2010: £60,000) from Virgin Rail Group Holdings Limited in this regard. (ii) West Coast Trains Limited West Coast Trains Limited is a subsidiary of Virgin Rail Group. For the year ended 30 April 2011, East Midlands Trains had purchases totalling £0.3m (2010: £0.8m) and sales totalling £Nil (2010: £0.5m) from/to West Coast Trains Limited. East Midlands Trains has a payable of £Nil (2010: £27,000) owed to West Coast Trains Limited as at 30 April 2011. (iii) Noble Grossart Limited Ewan Brown (Non-Executive Director) is a former executive director and current non-executive director of Noble Grossart Limited that provided advisory services to the Group. Total fees payable to Noble Grossart Limited in respect of the year ended 30 April 2011 amounted to £Nil (2010: £13,333). At 30 April 2011, Noble Grossart Investments Limited, a subsidiary of Noble Grossart Limited, held 4,084,999 (2010: 4,084,999) ordinary shares in the Company, representing 0.6% (2010: 0.6%) of the Company’s issued ordinary share capital. (iv) Alexander Dennis Limited Sir Brian Souter (Chief Executive) and Ann Gloag (Non-Executive Director) collectively hold 37.9% (2010: 37.9%) of the shares and voting rights in Alexander Dennis Limited. Noble Grossart Investments Limited (see (iii) above) controls a further 28.4% (2010: 28.4%) of the shares and voting rights of Alexander Dennis Limited. None of Sir Brian Souter, Ann Gloag or Ewan Brown is a director of Alexander Dennis Limited nor do they have any involvement in the management of Alexander Dennis Limited. Furthermore, they do not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Alexander Dennis Limited. For the year ended 30 April 2011, the Group purchased £87.1m (2010: £48.9m) of vehicles from Alexander Dennis Limited and £5.7m (2010: £3.4m) of spare parts and other services. As at 30 April 2011, the Group had £1.3m (2010: £0.4m) payable to Alexander Dennis Limited. (v) Pension Schemes Details of contributions made to pension schemes are contained in note 26 to the consolidated financial statements. page 100 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 101 Note 34 Related party transactions (continued) (vi) Robert Walters plc Martin Griffiths (Finance Director) is a non-executive director and Senior Independent Director of Robert Walters plc and received remuneration of £58,927 (2010: £56,120) in respect of his services for the year ended 30 April 2011. Martin Griffiths holds 20,000 (2010: 20,000) shares in Robert Walters plc which represents 0.03% (2010: 0.03%) of the issued share capital. During the year ended 30 April 2011, the Group paid Robert Walters plc £5,286 (2010: £Nil) for recruitment services. (vii) Troy Income & Growth Trust plc Martin Griffiths (Finance Director) became a non-executive director of Troy Income & Growth Trust plc (formerly Glasgow Income Trust plc) on 8 November 2007 and resigned from the role on 31 August 2010. He received £5,833 (2010: £14,000) in respect of his services for the year ended 30 April 2011. (viii) AG Barr plc Martin Griffiths became a non-executive director of AG Barr plc on 1 September 2010 and received remuneration of £25,125 (2010: £Nil) in respect of his services for the period ended 30 April 2011. Martin Griffiths holds 1,800 shares in AG Barr plc which represents less than 0.1% of the issued share capital. (ix) Loan to New York Splash Tours LLC A net interest bearing long-term loan of £2.8m (2010: £3.1m) was outstanding from a joint venture, New York Splash Tours LLC, as at 30 April 2011. (x) Scottish Citylink Coaches Limited A non interest bearing loan of £1.7m (2010: £1.7m) was due to Scottish Citylink Coaches Limited as at 30 April 2011. The Group received £16.0m (2010: £14.9m) in the year ended 30 April 2011 in respect of the operation of services subcontracted by Scottish Citylink Coaches Limited. As at 30 April 2011, the Group had a net £1.6m (2010: £3.6m) receivable from Scottish Citylink Coaches Limited, excluding the loan referred to above. (xi) Argent Energy Group Limited Sir Brian Souter (Chief Executive) and Ann Gloag (Non-Executive Director) collectively hold 39.3% (2010: 39.3%) of the shares and voting rights in Argent Energy Group Limited. Neither Sir Brian Souter nor Ann Gloag is a director of Argent Energy Group Limited nor do they have any involvement in the management of Argent Energy Group. Furthermore, they do not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Argent Energy Group. For the year ended 30 April 2011, the Group purchased £2.0m (2010: £0.4m) of biofuel from Argent Energy Group. As at 30 April 2011, the Group had £0.2m (2010: £Nil) payable to Argent Energy Group. Note 35 Post balance sheet events All of the remaining 4,087,302 redeemable ‘B’ preference shares were redeemed on 31 May 2011. Note 36 Definitions • Adjusted earnings per share is calculated by dividing profit after taxation excluding intangible asset expenses and exceptional items by the basic weighted average number of shares in issue in the period. • Like-for-like amounts are derived, on a constant currency basis, by comparing the relevant year-to-date amount with the equivalent prior year period for those businesses and individual operating units that have been part of the Group throughout both periods. • Operating profit or loss for a particular business unit or division within the Group refers to profit or loss before net finance income/charges, taxation, intangible asset expenses, exceptional items and restructuring costs. • Operating margin for a particular business unit or division within the Group means operating profit or loss as a percentage of revenue. • Exceptional items means items which individually or, if of a similar type, in aggregate need to be disclosed by virtue of their nature, size or incidence in order to allow a proper understanding of the underlying financial performance of the Group. • Gross debt is borrowings as reported on the consolidated balance sheet, adjusted to exclude accrued interest and the effect of fair value hedges on the carrying value of borrowings, and to include the effect of foreign exchange derivatives that synthetically convert an element of borrowings from one currency to another. • Net debt (or net funds) is the net of cash and gross debt. Stagecoach Group plc | page 101 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 102 Independent auditors’ report to the members of Stagecoach Group plc (Company No. SC100764) Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ report for the financial year for which the parent company financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on page 40 on the consolidated financial statements of Stagecoach Group plc for the year ended 30 April 2011. Michael Timar (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Glasgow 29 June 2011 We have audited the parent company financial statements of Stagecoach Group plc for the year ended 30 April 2011 which comprise the Company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ responsibilities in respect of the Annual Report, the Directors’ remuneration report and the financial statements set out on page 21, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the parent company financial statements: • give a true and fair view of the state of the Company’s affairs as at 30 April 2011; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. page 102 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 103 Company balance sheet As at 30 April 2011 Prepared using UK Generally Accepted Accounting Practice (UK GAAP) Fixed assets Tangible assets Derivative financial instruments at fair value – due after more than one year Investments Current assets Debtors – due within one year Deferred tax asset Derivative financial instruments at fair value – due within one year Cash Creditors: Amounts falling due within one year Trade and other creditors Redeemable ‘B’ preference shares Net current assets Total assets less current liabilities Creditors: Amounts falling due after more than one year Other creditors Derivative financial instruments at fair value Net assets excluding pension liability Pension liability, net of deferred tax Net assets including pension liability Capital and reserves Called-up share capital Share premium account Profit and loss account Capital redemption reserve Own shares Shareholders’ funds 2010 £m 0.1 1.9 978.5 980.5 699.9 0.4 2.8 101.8 804.9 (562.5) (3.3) (565.8) 239.1 2011 Notes £m 0.1 2.9 1,022.8 1,025.8 662.8 0.2 2.7 181.9 847.6 (572.8) (2.6) (575.4) 272.2 2 7 3 4 5 7 6 6 7 8 9 10 10 10 10 1,298.0 1,219.6 (409.4) Nil 888.6 (2.0) 886.6 7.1 9.8 468.0 416.3 (14.6) 886.6 (406.1) (1.9) 811.6 (2.3) 809.3 7.1 9.8 390.1 415.6 (13.3) 809.3 These financial statements were approved for issue by the Board of Directors on 29 June 2011. The accompanying notes form an integral part of this balance sheet. Sir Brian Souter Chief Executive Martin A Griffiths Finance Director Stagecoach Group plc | page 103 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 104 Notes to the Company financial statements Note 1 UK GAAP accounting policies The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with UK GAAP. Basis of accounting • The financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial instruments, and in accordance with applicable accounting standards in the United Kingdom. No profit and loss account is presented by the Company as permitted by Section 408 of the Companies Act 2006. The Company is not required to prepare a cash flow statement under Financial Reporting Standard 1 (“FRS 1”) (revised). Tangible fixed assets • Tangible fixed assets are shown at their original historic cost net of depreciation and any provision for impairment as set out in note 2. Cost includes the original purchase price of the assets and costs attributable to bringing the asset to its working condition for its intended use. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset on a straight-line basis over their estimated useful lives, as follows: IT and other equipment, furniture and fittings Motor cars and other vehicles 3 to 10 years 3 to 5 years The need for any fixed asset impairment write-down is assessed by comparing the carrying value of the asset against the higher of net realisable value and value in use. Investments • Investments in subsidiary undertakings are stated at cost, less provision for impairment. Taxation • Corporation tax is provided on taxable profit at the current rate applicable. Tax charges and credits are accounted for through the same primary statement (either the profit and loss account or the statement of total recognised gains and losses) as the related pre-tax item. In accordance with FRS 19, “Deferred Taxation”, full provision is made for deferred tax on a non-discounted basis in respect of all timing differences except those arising from the revaluation of fixed assets where there is no binding sale agreement and undistributed profits of overseas subsidiaries. Deferred tax is calculated at rates at which it is estimated the tax will arise. Deferred tax assets are recognised to the extent they are more likely than not to be recovered. Tax, current and deferred, is calculated using tax rates and laws enacted or substantively enacted at the balance sheet date. Foreign currencies • Foreign currency transactions arising during the year are translated into sterling at the rate of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are retranslated into sterling at the rates of exchange ruling at the year end. Any exchange differences so arising are dealt with through the profit and loss account. For the principal rates of exchange used see the Group IFRS accounting policies on page 49. Share based payment • The Company issues equity-settled and cash-settled share based payments to certain employees. Share based payment awards made by the Company to employees of its subsidiary companies are recognised in the Company’s financial statements as an increase in its investments in subsidiary undertakings rather than as an expense in the profit and loss account to the extent that the amount of the expense recorded by each subsidiary company is less than the amount recharged to it by the Company. Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense (or as an increase in investments in subsidiary undertakings) over the vesting period. In valuing equity-settled transactions, no account is taken of any non-market based vesting conditions and no expense or investment is recognised for awards that do not ultimately vest as a result of a failure to satisfy a non-market based vesting condition. None of the Group’s equity-settled transactions have any market based performance conditions. Fair value for equity-settled share based payments is estimated by use of the Black-Scholes pricing model. At each balance sheet date, before vesting, the cumulative expense or investment is calculated based on management’s best estimate of the number of equity instruments that will ultimately vest taking into consideration the likelihood of achieving non-market based vesting conditions. Cash-settled transactions The cost of cash-settled transactions is measured at fair value. Fair value is estimated initially at the grant date and at each balance sheet date thereafter until the awards are settled. Market based performance conditions are taken into account when determining fair value. Fair value for cash-settled share based payments (being only those that relate to the Long Term Incentive Plan) is estimated by use of a simulation model. During the vesting period, a liability is recognised representing the estimated fair value of the award and the portion of the vesting period expired as at the balance sheet date. Choice of settlement The Company can choose to settle awards under the Long Term Incentive Plan in either cash or equity, although it currently expects to settle all such awards in cash. Awards under the Long Term Incentive Plan are accounted for as cash–settled transactions (see above). page 104 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 105 Note 1 UK GAAP accounting policies (continued) Dividends • Dividends on ordinary shares are recorded in the financial statements in the period in which they are approved by the Company’s shareholders, or in the case of interim dividends, in the period in which they are paid. Financial instruments • The accounting policy of the Company under FRS 25 “Financial instruments: Presentation” and FRS 26 “Financial instruments: Recognition and measurement” for financial instruments is the same as the accounting policy for the Group under IAS 32 “Financial Instruments: Presentation” and IAS 39 “Financial instruments: Recognition and measurement”. Therefore for details of the Company’s accounting policy for financial instruments refer to pages 51 to 53. Investment in own shares • In accordance with UITF Abstract 38, “Accounting for ESOP Trusts”, own shares held by the Group’s Employee Benefit Trust and Qualifying Employee Share Ownership Trust have been classified as deductions from shareholders’ funds. Interest bearing loans and borrowings • Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest rate method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss account over the period of the borrowings. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement for at least 12 months after the balance sheet date. Pensions • The Company accounts for pensions and similar benefits under FRS 17 “Retirement Benefits” and measures its obligations due at discounted present value. Tangible fixed assets Note 2 The movements in tangible fixed assets were as follows: Cost At beginning and end of year Depreciation At beginning and end of year Net book value at beginning and end of year Investments Note 3 The movements in investments were as follows: Cost At beginning of year Additions At end of year Amounts written off At beginning and end of year Net book value at beginning of year Net book value at end of year £m 0.7 (0.6) 0.1 Subsidiary undertakings £m 978.5 44.3 1,022.8 Nil 978.5 1,022.8 Stagecoach Group plc | page 105 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 106 Notes to the Company financial statements Note 4 Debtors Amounts falling due within one year were: Amounts owed by Group undertakings Prepayments and accrued income Other debtors Note 5 Deferred tax asset The movement in the deferred tax asset during the year was as follows: At beginning of year (Charge)/credit to profit and loss account At end of year The deferred tax asset recognised can be analysed as follows: Short-term timing differences Note 6 Creditors (a) Creditors: Amounts falling due within one year Bank overdrafts Bank loans and loan notes Amounts due to Group undertakings Accruals and deferred income Trade creditors are non-interest bearing and are normally settled on 30 to 45 day terms. (b) Creditors: Amounts falling due after more than one year Accruals and deferred income Sterling 5.75% Notes (c) Borrowings were repayable as follows: On demand or within 1 year Bank overdraft Bank loans and loan notes Repayable after 5 years Sterling 5.75% Notes Total borrowings page 106 | Stagecoach Group plc 2011 £m 644.3 2.6 15.9 662.8 2011 £m 0.4 (0.2) 0.2 2011 £m 0.2 2011 £m 375.7 21.1 172.5 3.5 572.8 2011 £m 0.5 408.9 409.4 2011 £m 375.7 21.1 408.9 805.7 2010 £m 687.1 0.6 12.2 699.9 2010 £m 0.3 0.1 0.4 2010 £m 0.4 2010 £m 360.9 26.2 171.8 3.6 562.5 2010 £m 0.5 405.6 406.1 2010 £m 360.9 26.2 405.6 792.7 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 107 Financial instruments Note 7 The fair values of derivative financial instruments, all of which are with counterparties that are subsidiaries of the Company, are set out below: 2011 2010 Fair value assets £m Fair value liabilities £m Fair value assets £m Fair value liabilities £m Current assets Interest rate swaps – due within one year Interest rate swaps – due after more than one year Creditors: amounts falling due after more than one year Interest rate swaps 2.7 2.9 Nil Nil Nil Nil 2.8 1.9 Nil Nil Nil (1.9) In accordance with FRS 26, “Financial Instruments: Recognition and measurement” the Company has reviewed all significant contracts for embedded derivatives that are required to be separately accounted for. None were identified. The Stagecoach Group plc consolidated financial statements for the year ended 30 April 2011 contain financial instrument disclosures which comply with FRS 25, “Financial Instruments: Disclosure and Presentation”. Consequently, the Company has taken advantage of the exemption in FRS 25 not to present separate financial instrument disclosures for the Company. There were no derivatives outstanding at the balance sheet date designated as hedges. Note 8 Pension liability, net of deferred tax Unfunded pension liability Deferred tax asset 2011 £m 2.7 (0.7) 2.0 2010 £m 3.0 (0.7) 2.3 The Company no longer has any employees but has unfunded liabilities in respect of former employees which are shown above. See note 26 to the consolidated financial statements for more details on retirement benefits. Note 9 Called up share capital Information on share capital is provided in note 28 to the consolidated financial statements. Stagecoach Group plc | page 107 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 108 Notes to the Company financial statements Note 10 Share capital and reserves At 1 May 2010 Profit for the year Credit in relation to share based payment Dividends Own shares sold Own shares purchased Preference shares redeemed At 30 April 2011 Equity share capital £m 7.1 Nil Nil Nil Nil Nil Nil 7.1 Share premium account Profit and loss account Capital redemption reserve £m 9.8 Nil Nil Nil Nil Nil Nil 9.8 £m £m 390.1 90.0 4.4 (15.8) Nil Nil (0.7) 468.0 415.6 Nil Nil Nil Nil Nil 0.7 416.3 Own shares £m (13.3) Nil Nil Nil 0.5 (1.8) Nil (14.6) Total £m 809.3 90.0 4.4 (15.8) 0.5 (1.8) Nil 886.6 As permitted by section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. The profit as disclosed above of £90.0m (2010: profit of £126.0m) is consolidated in the results of the Group. The profit and loss account reserve is distributable but the other components of shareholders’ funds shown above are not distributable. The remuneration of the Directors is borne by other Group companies and is equal to the amounts shown in note 7 to the consolidated financial statements. Note 11 Share based payments For details of share based payment awards and fair values see note 29 to the consolidated financial statements. The Company accounts for the equity- settled share based payment charge for the year of £4.4m (2010: £6.3m) by recording an increase to its investment in subsidiaries for this amount and recording a corresponding entry to the profit and loss account reserve to reflect the fact that the Company has no employees (2010: Nil) and all share based payment awards are to employees of subsidiary companies. The remuneration of the Directors is borne by other Group companies. The Company accounts for the cash-settled share based payment charge for the year of £2.5m (2010: £2.6m) by recording a liability for this amount and recording a corresponding entry as a charge through the profit and loss account. The cash-settled share based payment charge is recharged in full to subsidiary companies and the recharge income and related expense are both included in the profit and loss account. Note 12 Guarantees, other financial commitments and contingent liabilities (a) The Company has provided guarantees to third parties of £85.7m (2010: £98.6m) in respect of subsidiary companies’ liabilities. The liabilities that are guaranteed are included in the consolidated balance sheet but are not included in the Company balance sheet. In addition, the Company has provided guarantees to third parties of £91.7m (2010: £71.8m) in respect of contingent liabilities that are neither included in the consolidated balance sheet nor the Company balance sheet. The Company is also party to cross-guarantees whereby the bank overdrafts, bank loans and Value Added Tax liabilities of it and certain of its subsidiaries are cross-guaranteed by it and all of the relevant subsidiaries. None of the above contingent liabilities of the Company are expected to crystallise. The Company may be found to be liable for some of the legal liabilities referred to in note 32 (iv) to the consolidated financial statements. (b) Capital commitments Capital commitments (where the Company has contracted to acquire assets on behalf of its subsidiaries) are as follows: Contracted for but not provided: For delivery in one year (c) Operating lease commitments Annual charges for operating leases are made with expiry dates as follows: 2011 £m 72.4 Within one year Between one year and five years Five years and over Note 13 Related party transactions 2011 2010 Land and buildings £m Nil Nil 0.3 Other £m 0.1 0.6 Nil Land and buildings £m Nil Nil 0.3 2010 £m Nil Other £m 0.1 0.6 Nil The Company has taken advantage of the exemption under FRS 8, “Related party disclosures” from having to provide related party disclosures in its own financial statements when those statements are presented with consolidated financial statements of its group. Related party disclosures provided by the Group can be found in note 34 to the consolidated financial statements. page 108 | Stagecoach Group plc 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 109 Shareholder information Analysis of shareholders as at 30 April 2011 Range of holdings 1 – 25,000 25,001 – 250,000 250,001 – 500,000 500,001 – 3,750,000 Over 3,750,000 Classification of shareholders Individuals Other corporate bodies Banks and Nominees Limited companies Investment trusts Pension funds Number of holders 40,249 325 56 117 38 % 98.7 0.8 0.1 0.3 0.1 Ordinary shares held 42,861,872 27,459,025 20,366,374 158,623,083 470,814,596 % 6.0 3.8 2.8 22.0 65.4 40,785 100.00 720,124,950 100.0 Number of holders 39,239 74 1,356 103 11 2 40,785 % 96.2 0.2 3.3 0.3 0.0 0.0 Ordinary shares held 159,875,685 22,085,965 512,064,798 21,984,239 4,110,309 3,954 % 22.2 3.1 71.1 3.0 0.6 0.0 100.0 720,124,950 100.0 Registrars All administrative enquiries relating to shareholdings should, in the first instance, be directed to the Company’s registrars and clearly state the shareholder’s name and address. Please write to: Capita Registrars, Northern House, Woodsome Park, Fenay Bridge, Huddersfield HD8 0GA. Telephone 0871 664 0443 (calls cost 10p per minute plus network extras) if calling from the UK or 0844 842 9587 if calling from outside the UK. Registrar forms can be obtained on-line at http://www.stagecoachgroup.com/scg/ir/shareholder/registrar/ Stagecoach individual savings accounts The Company has appointed Halifax Share Dealing Limited as an ISA provider and shareholders who would like further information should contact their help desk on 08457 22 55 25. The Company has also made arrangements with Stocktrade for ISAs. Full details and an application form are available from Stocktrade (a division of Brewin Dolphin), 81 George Street, Edinburgh EH2 3ES. Telephone 0131 240 0448. Share dealing facilities The Company has set up a range of execution only share dealing services to enable Stagecoach shareholders to buy and sell shares by phone, online or by post. The phone and online dealing services are provided by Capita Share Dealing Services and offer a quick and easy way to buy and sell shares at latest market prices. To use these services go to www.capitadeal.com or call 0871 664 0384 (calls cost 10p a minute plus network extras, lines are open 8.30am-5.30pm Mon-Fri). Please have your share certificate to hand when you log-in or call. Charges start from £20 online and £25 by phone. A postal dealing service is available from Stocktrade, a division of Brewin Dolphin. Charges start from £15. Shareholders who would like further information should write to Stocktrade, 81 George Street, Edinburgh EH2 3ES. Telephone 0845 601 0995, quoting dealing reference Low Co020. Postal dealing packs are available on request. Payment of dividends by BACS Many shareholders have already arranged for dividends to be paid by mandate directly to their bank or building society account. The mandates enable the Company to pay dividends through the BACS (Bankers’ Automated Clearing Services) system. The benefit to shareholders of the BACS system is that the registrar posts the tax vouchers directly to them, whilst the dividend is credited on the payment date to the shareholder bank or building society account. Shareholders who wish to benefit from this service should request the Company’s registrars (address above) to send them a dividend/interest mandate form or alternatively complete the mandate form attached to the next dividend tax voucher they receive. Dividend Re-Investment Plan The Company operates a Dividend Re-Investment Plan which allows a shareholder’s cash dividend to be used to buy Stagecoach shares at favourable commission rates. Shareholders who would like further information should telephone the Company’s registrars, Capita Registrars, on 0871 664 0443 (calls cost 10p per minute plus network extras) if calling from the UK or 0844 842 9587 if calling from outside the UK. Stagecoach Group plc | page 109 78189_STC_Back FINAL_78189_StCchV13_BACK 05/07/2011 11:47 Page 110 Five year financial summary – consolidated Results Revenue Operating profit Net finance (costs)/income Profit before taxation Tax (charge)/credit Profit attributable to equity shareholders of the parent Net assets/(liabilities) Non-current assets Current assets Current liabilities (excluding provisions) Non-current liabilities (excluding provisions) Provisions Total equity Cash and debt Cash at bank and in hand Gross debt*** Net (debt)/funds*** Cash flow Net cash flow from operating activities after tax Ratios Adjusted earnings per ordinary share* Dividends per ordinary share Net cash from operating activities after tax per ordinary share 2011 2010 2009 2008 2007** £m £m £m £m £m 2,389.8 225.0 (34.5) 191.2 (33.3) 176.4 1,167.8 658.6 (612.6) (784.1) (183.5) 246.2 2,164.4 179.1 (51.2) 125.9 (18.1) 111.7 994.7 627.2 (598.5) (875.1) (135.6) 12.7 2,103.3 202.4 (31.4) 170.8 (37.3) 133.5 992.9 517.2 (893.7) (486.1) (139.9) 1,763.6 192.3 (23.6) 167.3 61.9 249.1 880.7 502.0 (558.1) (625.0) (119.2) 1,504.6 180.9 0.7 184.1 (43.6) 277.3 779.4 669.1 (445.1) (382.7) (108.4) (9.6) 80.4 512.3 358.3 (639.2) (280.9) 375.7 (672.4) 277.3 (617.4) (296.7) (340.1) 262.2 (581.9) (319.7) 513.3 (326.9) 186.4 231.8 216.4 277.8 325.0 162.3 23.8p 7.1p 32.3p 18.7p 6.5p 22.9p 6.0p 20.3p 5.4p 11.7p 4.1p 30.2p 38.9p 45.1p 14.9p Ordinary shares in issue at year end 720.1m 720.1m 719.5m 718.1m 1,101.0m *before intangible asset expenses and exceptional items **discontinued operations as defined under IFRS accounting are excluded from operating profit for 2007. *** as defined in note 36 to the consolidated financial statements. page 110 | Stagecoach Group plc (cid:32) (cid:32) (cid:32)(cid:32) (cid:32)(cid:32) (cid:32)(cid:32) (cid:32) Registered office, advisers and financial calendar Company Secretary Ross Paterson Registered Office 10 Dunkeld Road Perth PH1 5TW Telephone +44 (0) 1738 442 111 Facsimile +44 (0) 1738 643 648 Email info@stagecoachgroup.com Company Number SC 100764 Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0GA Telephone +44 (0) 871 664 0443* Merchant Bankers Noble Grossart Limited 48 Queen Street Edinburgh EH2 3NR Independent Auditors PricewaterhouseCoopers LLP 141 Bothwell Street Glasgow G2 7EQ Stockbrokers Nomura International plc 1 Angel Lane London EC4R 3AB Principal Bankers Lloyds Bank Corporate Markets 25 Gresham Street London EC2V 7HN Solicitors Shepherd & Wedderburn LLP 1 Exchange Crescent Conference Square Edinburgh EH3 8UL Herbert Smith LLP Exchange House Primrose Street London EC2A 2HS Financial Calendar Annual General Meeting 26 August 2011 Interim Results December 2011 Final Dividend 5 October 2011 Interim Dividend March 2012 2 *calls cost 10 pence per minute plus network extras. b t N a Registered Office: 10 Dunkeld Road Perth PH1 5TW Scotland Tel: 01738 442111 Fax: 01738 643648 Email: info@stagecoachgroup.com Registered in Scotland Number: 100764 www.stagecoachgroup.com

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