Arriva plc 2006 Annual Report

Moving you across Europe Arriva plc Annual Report & Accounts 2006 20 1 4 6A 21 22 24 26 60 61 64 Moving you across Europe 02 06 08 Who we are and what we do 42 46 47 Corporate governance 24 hours in the life of Arriva Statement of directors’ responsibilities Independent auditors’ report on the group financial statements Financial statements Our growth story 10 12 14 Our markets 48 Chairman’s statement Chief executive’s review 22 26 32 Financial review 52 Accounting policies 56 Notes to the accounts 82 Five-year financial summary 83 90 91 92 Parent company financial statements Statement of directors’ responsibilities on the parent company financial statements Independent auditors’ report on the parent company financial statements Financial calendar, registered office and advisors Corporate responsibility Board of directors 34 37 Directors’ report Directors’ remuneration report Arriva plc Annual Report & Accounts 2006 1 Who we are and what we do Arriva is a leading operator of passenger transport in Europe, carrying people on buses, trains, commuter coaches and water buses. Nine countries, more than a billion passenger journeys a year • 20,000 employees • 6,620 buses • 116 trains • 2,300 employees • 1,250 buses • 51 trains • 3,700 employees • 1,390 buses • 47 trains • 1,000 employees • 340 buses • 1,300 employees • 360 buses • 111 trains • 260 employees • 170 buses • 1,700 employees • 860 buses • 320 employees • 240 buses • 2,200 employees • 1,700 buses We operate an extensive range of services in nine countries: the UK, Italy, Germany, the Netherlands, Denmark, Sweden, Portugal, Spain and the Czech Republic. In the UK Arriva is also engaged in bus and coach distribution. Over the last decade the group has transformed itself from a UK-based motor retailer and bus operator into one of the largest Europe-wide passenger transport operators. Arriva’s operations include a mixture of cash-generative businesses in mature markets, and profitable growth businesses in markets which are opening up to competition. In some countries we are amongst the market leaders, in others we are growing from a small base. But we never enter a national market without a firm belief that we can become one of the most successful operators in that country, and move a step closer to our vision: to be recognised as the leading transport services organisation in Europe. 2 Moving you across Europe Arriva is: • One of the UK’s largest regional bus operators, serving customers in the North East, North West and South East of England, Yorkshire, the Midlands, Scotland and Wales • The largest operator in London, where it runs more than 1,500 buses under contract to Transport for London. Arriva also operates The Original Tour sightseeing buses • The operator of the Arriva Trains Wales/Trenau Arriva Cymru passenger rail franchise providing inter-urban, rural and commuter passenger rail services throughout Wales and the English border counties • A bus and coach distributor marketing a range of bus and coach chassis and bodywork solutions, together with flexible finance options. The company has the exclusive rights to import VDL bus and coach chassis and products • The largest provider of services in the Danish bus market and the first private company to operate rail passenger franchises in Denmark • A bus operator across southern Sweden. Arriva has also now entered the Swedish rail market with a nine-year contract to operate the Pågatåg regional train service in the Skåne region, beginning in the summer of 2007 • A rapidly growing contender in both bus and rail in the German public transport market - the largest in Europe • The largest wholly private sector bus operator in Italy, providing urban, inter-urban and airport services in the regions of Lombardy, Friuli-Venezia Giulia and Piemonte in the north of the country • A major bus operator in the Netherlands with around 20 per cent of the regional market. Arriva is already the largest private rail operator and its presence continues to grow • One of Portugal’s leading bus companies, with operations in the north west of the country and around Lisbon, and a 21.5 per cent holding in Portugal’s largest passenger transport operator, Barraqueiro • A growing entrant in the Spanish bus market, in Galicia, Madrid and Mallorca • A recent entrant into the Czech Republic with operations around Prague Arriva plc Annual Report & Accounts 2006 3 Who we are and what we do The services we provide (continued) The main variations include: Gross cost contracts In a gross cost contract the tendering authority agrees to pay an operator a specified sum to provide the specified service for a specified period. Revenue from fares is passed to the tendering authority, which bears the ‘revenue risk’. The service provider generally carries the ‘cost risk’, though there may be provisions for certain cost increases to be passed through, such as elements of wage or fuel costs. Generally the tendering authority will take responsibility for working out routes, and may also specify the vehicles used. Because the operator has no direct commercial relationship with passengers it is common for the tendering authority to provide a system of bonuses and penalties to give operators a financial incentive to provide the desired quality of service. Examples of Arriva’s gross cost contracts include: • The UK London bus business • Oberhausen rail in Germany • Arriva Denmark, HUR Copenhagen bus contracts Net cost contracts In a net cost contract the operator takes on both the revenue risk and the cost risk. It keeps the revenues from fares. The tendering authority provides an additional contribution in the form of a subsidy to offset obligations that it may have to ensure the provision of a public transport service, or to meet social objectives where the cost of providing such a service would not be commercially viable if it depended solely on the fare income that it could achieve. On particularly popular and important routes it may be possible for the tendering authority to reap a premium payment from the operator rather than providing a subsidy. Examples of Arriva’s net cost contracts include: • Arriva Netherlands rail contracts • Arriva Italy bus contracts • Arriva Trains Wales To the travelling public Arriva’s core business may appear straightforward and easy to understand. But we operate according to several different business models which vary by country, by region, and by the mode of transport. Deregulated services In a ‘deregulated’ bus market, the key commercial relationship is directly between Arriva and our passengers - they are our customers, and their fare payments are the dominant source of income for the business. Our services have to be profitable in order to be sustainable, to generate the profits which underpin investments in replacement vehicles, in our depot facilities, and in expansion and development of services. In a deregulated market we compete against other forms of transport, and against other operators of similar transport, in just the same way as a high street retailer competes for the spending power of the public. We bear the ‘revenue risk’, which is to say that if the travelling public decides to switch to another form of transport, the lost revenue directly affects our finances. Even deregulated services are subject to significant scrutiny and regulation in various ways, including the full law of the land and the same regulation as any other business on subjects like consumer protection, environmental protection, safety and many other aspects of our operations. There is usually a layer of sector-specific regulation too. In our UK Bus operations, for example, the quality of operation and fitness for service of our vehicles and drivers is regulated by Traffic Commissioners. Outside London, most of the bus operations in the UK are currently deregulated and operate on a purely commercial basis. Some partially deregulated bus markets exist in other European countries too, although contracted services are more common. Contracted services In most of our mainland European bus and rail markets, UK rail and the London bus market, our primary customer is some form of public sector body. A regional government or transport authority may offer various forms of contract which give an operator the right to operate services, usually exclusively, on a particular route or in a specific area. Increasingly, as European transport markets become more liberalised, these contracts are awarded on the basis of competitive tendering. During a transition period, however, contracts may be awarded directly following negotiation with an incumbent operator. 4 Moving you across Europe Arriva plc Annual Report & Accounts 2006 5 24 hours in the life of Arriva An early morning start in Jönköping, passing Lake Vättern, Sweden’s second largest lake 05:I0 David, team leader from Arriva Trains Wales, helps keep services running on time during the morning rush hour at Cardiff Central 06:50 Ivan travelling to work from La Coruna to Ferrol in Spain 08:I5 Phillip, a Prignitzer Eisenbahn Gmbh mechanic, begins work at our Meyenburg workshop in Germany 07:30 Václav transporting Skoda employees to work in Mlada Boleslav in the Czech Republic 09:00 Amendeep and friends travel to lectures at De Montfort University in Leicester I0:30 Jimmy transporting passengers on service 23 to Glasgow I2:00 Anna takes tourists around the famous sights of London on the Original Sightseeing Tour I3:30 300 6 6A 36 38 39 3 17 23 23A 23C 24 25 X 21 By day and night, from winter to summer, for work, for family, for shopping and for fun, our customers depend on our 6 18 101 33,000 people to make their journeys work. 21 In turn, each of our drivers and every Arriva bus or train depends 60 on a team working in support to keep the service rolling. 20 Here, we present snapshots from 24 hours in the lives of the people around Europe who trust their travel to Arriva, and just a few of the dedicated employees who make it possible. 1 4 6A 21 22 24 26 60 61 64 68 101 300 6 Moving you across Europe Helan and Morgan make the journey home by train after a day out in Cardiff I4:30 Glen clocks in to start his shift at the Arriva North East Darlington depot I5:50 Manuel takes the bus to visit his grandchildren in Selvino in northern Italy I6:00 Anna and Jose travelling to the University of Groningen to work on their graduation project, in the Netherlands I7:00 Maintenance chief Mariano and mechanic Joao servicing vehicles at Laranjeiro maintenance plant at TST in Portugal I9:30 Anni and Gunnar use the waterbus to travel to the opera in Copenhagen 20:00 Arriva London N38 service carrying people throughout the night between Walthamstow Central and Victoria 0I:I5 06.50 - David’s story David, a team leader at our Arriva Trains Wales operation, is giving the Camarthen to Manchester Piccadilly train the goahead to depart from Cardiff Central, taking commuters to the north west of England via Crewe. He and his team manage the despatch of our services, ensuring that passengers are safely aboard and trains depart promptly. 09.00 - Václav’s story Václav is a bus and coach driver at our Transcentrum Bus business, to the north east of Prague in the Czech Republic. Here he is transporting the morning shift Skoda Auto employees to their factory in the north of the Mlada Boleslav region. 16.00 - Manuel’s story Manuel is beginning his regular journey from his home in Bergamo, northern Italy on a local SAB bus service. He is travelling the 11 kilometres to nearby Selvino to visit his grandchildren. 20.00 - Anni and Gunnar’s story Anni and Gunnar are travelling to the opera on Arriva’s waterbus service in Copenhagen, Denmark. They use this service regularly as they enjoy the relaxing journey and it is the most scenic way to get to the opera in the centre of the city. Arriva plc Annual Report & Accounts 2006 7 Our growth story International expansion Founded as a family motorcycle business in 1938, T Cowie Limited was floated in 1965. The acquisition of its first UK bus business in 1980 was the foundation of a passenger transport business alongside extensive motor trade interests. After acquiring a number of UK bus businesses during the 1990s the company was renamed as Arriva plc in 1997, the same year it entered mainland Europe where it now operates in eight countries. Following the disposal of the contract hire business in 1999, and the motor retailing activities in 2003, Arriva completed its repositioning as a passenger transport group in 2006, with the sale of its vehicle rental division. Passenger services revenue* *Including associates £439m £486m £651m £1,020m £1,230m 1997 1998 1999 2000 2001 Entered mainland Europe with the acquisition of a Danish bus business Began operating bus services in the Netherlands with the acquisition of two bus companies Entered the Spanish and Swedish bus markets. Expanded bus operations in Denmark. Entered the Dutch rail market Entered the Portuguese bus market. Started UK rail operations Acquired a third Danish bus business Mainland Europe Moving you across Europe Total 8 A repositioned business £m Mainland Europe 41.9 Other 29.2 Vehicle Rental 58.9 UK Trains 253.9 UK Bus 444.2 Motor Retailing 686.4 Mainland Europe 752.3* Contract Hire 295.7 UK Bus 762.8 1998 2006 £1,318m £1,497m £1,712m £1,584m £1,769m 2002 2003 2004 2005 2006 Entered the Italian bus market. Expanded bus operations in Spain with the acquisition of two operators in Mallorca. Acquired a stake in a Portuguese bus company First private company to operate passenger rail services in Denmark. Won 15-year rail franchise in Wales. Purchased the remaining stake in the Portuguese bus company Entered the German rail market with two acquisitions. Expanded operations in Denmark with the acquisition of another bus company. Acquired a stake in a further Italian bus company Entered the German bus market. Acquired a stake in a further Italian bus operation Entered the Swedish rail market. Expanded in the German bus market with two acquisitions. Extended presence in Portugal with the acquisition of a stake in a bus and rail operator. Entered the Czech Republic with the acquisition of a bus company Arriva plc Annual Report & Accounts 2006 9 Our markets Transport market characteristics UNITED KINGDOM In the UK, the bus market in London is tendered out by the authority Transport for London. Buses in the rest of England, Scotland and Wales operate in a deregulated market, with private, and some municipal, operators running the majority of services, and local authorities tendering additional services. The UK government awards franchises for train services for set timescales to private operators through a bidding process. Network Rail, a private company limited by guarantee and Population: 60 million operating as a commercial business, owns and operates the UK’s rail infrastructure. Arriva’s presence: Arriva is one of the top three bus operators in the UK, and is London’s largest bus operator. We operate virtually all trains in Wales and are bidding to secure more rail franchises. DENMARK The Danish bus market is regulated and largely operated by private companies. Funding comes from local authorities, which award service contracts through competitive tendering. The rail sector is currently dominated by DSB, the Danish State Railway, but is becoming increasingly open for tender opportunities. Population: 5.4 million Arriva’s presence: In 2003 Arriva won contracts to run 15 per cent of the Danish rail network. Arriva has a market share of 40 per cent of bus services in Copenhagen and 30 per cent of regional services outside the capital. SWEDEN The Swedish bus market is regulated and about 95 per cent of routes are tendered. Responsibility for the procurement and funding of bus transport rests with local authorities. The government owned operator SJ dominates the rail market, but the devolution of responsibility for the procurement and provision of services to regional authorities has stimulated competitive tendering. Population: 9.1 million Arriva’s presence: Our Swedish buses operate predominantly around Helsingborg and Malmo. Arriva has also won entry into the Swedish rail market, with a nine-year contract to operate the Pågatåg regional train service in the Skåne region of southern Sweden from the summer of 2007. THE NETHERLANDS The Dutch bus market is regulated, with local authorities awarding contracts of up to six years in length. The Dutch Transport Act of 2001 stipulates that all bus transport must be awarded to contractors through a competitive tendering process by 2009. This programme represents a good opportunity for Arriva Netherlands to grow its business. The privatisation of state-owned Connexxion is expected in 2007. The responsibility for regional rail is being transferred from the national government to the regional authorities. This is already the case in the regions of Groningen, Friesland and Gelderland. Population: 16.4 million Arriva’s presence: Arriva Netherlands operates rail services in the north of the country and won the contract to operate rail services for 15 years in the provinces of Friesland and Groningen. We have a 12-year bus and rail contract in the south of the country operating between Dordrecht and Geldermalsen. Arriva is one of the two biggest private bus operators in the Netherlands. It operates 20 per cent of the regional bus services in the country, in the city and province of Groningen, the province of Drenthe, in Waterland and in the centre of the country near Rotterdam. CZECH REPUBLIC Procurement of public transport is devolved to regional authorities, with funding centrally controlled. The former state-owned regional bus companies have all been privatised for some years, and negotiated contracts are in place. Population: 10.2 million Arriva’s presence: Arriva entered the Czech Republic bus and coach market in 2006, acquiring bus operator Transcentrum Bus s.r.o, followed by Bosak Bus s.r.o, in 2007, operating to the north and south of Prague. 10 Moving you across Europe GERMANY Although the German bus sector is dominated by publicly owned companies, some regional authorities have announced programmes for competitive tendering. Competitive tendering has been a feature of rail services for a number of years. However less than 20 per cent of the services have been tendered to date and only a proportion of those have moved into the private sector. The state-owned Deutsche Bahn still dominates. Arriva’s presence: Arriva entered the German rail market in April 2004 and the bus market in February 2005. The group operates Sippel, which provides bus services in the Rhine-Main area, Verkehrsbetriebe Bils KG which operates in the Münsterland region and Neißeverkehr in north east Germany near the Polish border. Population: 82.7 million We have secured several rail contracts via our Prignitzer Eisenbahn Gruppe (PEG) and Regentalbahn operations. PEG provides rail services in the federal states of North Rhine-Westphalia, Berlin, Brandenburg and MecklenbergWestern Pomerania, and Regentalbahn provides rail passenger and freight services in Bavaria, Thuringia, Saxony and cross-border services into the Czech Republic and Switzerland. In 2007 we have contracted to acquire over 85 per cent of bus and rail company Osthannoversche Eisenbahnen AG, based in Celle near Hannover in the north of Lower Saxony. ITALY The Italian market is regulated, with the bus and rail sectors moving towards competitive tendering. A state law reintroducing the obligation for market testing through competitive tendering is expected to be in force during 2007. Only a small number of regions have awarded bus services by tender so far. The General Transport Plan in July 2000 laid down the guidelines for the restructuring of the national rail system, emphasising the need to separate rail infrastructure management from transport operations. Population: 58.1 million Operator certification remains a function of the Ministry of Infrastructure and Transport. Arriva’s presence: Arriva entered the Italian market in July 2002, acquiring SAB Autoservizi SrI, a bus operator in the Lombardy, Liguria and Friuli-Venezia Giulia regions of northern Italy. Arriva later acquired 60 per cent of Società Autoservizi FVG S.p.A. (SAF) in the Udine area of the FriuliVenezia Giulia region, and in October 2005, acquired 80 per cent of the Sadem S.p.A. operations near Turin. Arriva is the largest wholly private sector bus operator in Italy. PORTUGAL The bus market is fragmented outside the main cities with long, rolling licences typically of ten years. There is little competitive tendering and maximum fare levels are controlled by the national government. There are proposals to create new metropolitan authorities, which may lead to the introduction of competitive tendering for bus and rail services in the cities of Lisbon and Oporto. The state rail system is yet to be privatised but the infrastructure has been separated from the regional operators. There is speculation regarding plans to tender some key lines which will provide future opportunities for private operators. Population: 10.5 million Arriva’s presence: Arriva entered the market in 2000. We operate Transportes Sul do Tejo (TST), which provides bus and coach services in the commuter region south of Lisbon, and Arriva Portugal - Transportes LDA which provides bus services in north west Portugal. In 2006 we purchased 21.5 per cent of the Barraqueiro Group, Portugal’s leading transport operator, which has bus, tram and the country’s only private rail operations and covers the area from Lisbon to the south of the country. SPAIN The bus market is fragmented outside the main cities with long, fixed concessions. The rail market is yet to open up to tendering. Historically the market has developed on a regional basis. Population: 43.4 million Arriva’s presence: Arriva entered the market in 1999. Our Arriva Noroeste business operates bus services in Galicia in north west Spain. We also operate bus services in the north and west of Mallorca. In December we purchased Esfera which provides school contract and private hire bus services in Madrid. Arriva plc Annual Report & Accounts 2006 11 Continuity in a developing business environment Chairman’s statement 2006 and the early part of 2007 have brought increased public and political focus on the transport industry. Concerns about the sustainability of carbon-based transport, fluctuating oil prices, increasing congestion on many routes, and a growing environmental debate have pushed transport up the agenda. Across Europe, populations are increasing, stimulating more demand for safe, effective and sustainable means of affordable public transport. Passenger transport markets continue to open to competition, and the role of a skilled, strong, private sector is now firmly established. This is the environment in which Arriva’s business strategy is rooted. The execution of that strategy has continued this year under David Martin’s leadership. Taking over as chief executive at our annual general meeting in April 2006, he has provided continuity and expertise in maximising our existing opportunities as well as seeking out new ones. The progress of change varies across countries, and even across the individual city-scale markets that are a feature of urban transport. But whilst the timing and nature of opportunities can never be fully predictable, we are confident that in Europe as a whole our strategy is based on a strong, historic trend across the continent. Almost a decade of building Arriva’s presence, which now extends to towns and cities in nine European countries, has established a valuable network of contacts and relationships, an increasingly balanced portfolio of businesses, and a depth of market understanding and knowledge that cannot easily be replicated. The value of having developed our businesses in this way goes further than the profitable growth that Arriva is generating in mainland Europe. Our spread of operations maximises our opportunities in a business environment which is continuously developing, but not necessarily in predictable fashion in any one jurisdiction. Risks are diversified across countries, and we gain opportunities for economies of scale, transfer of best practice and innovation across our operations. The results can be seen in our record. Over the three-year period from 1 January 2004, Arriva’s annualised total shareholder return has been a healthy 29 per cent. For 2006 I am pleased to report that revenue was up 10 per cent to £1,729.0 million (2005: £1,571.2 million) and group operating profit before goodwill impairment and intangible asset amortisation was up eight per cent at £126.7 million (2005: £117.8 million). 12 Moving you across Europe The growth of our mainland European business, including the contribution from associates, has been particularly strong. Contract wins, acquisitions and investments in 2006 and early 2007 have strengthened our positions in Germany, Portugal, the UK, Sweden and Spain as well as bringing us into the Czech Republic for the first time. Our estimated mainland European order book has risen by 13 per cent year on year, and we are active in many tender processes which we hope will bear fruit in the year ahead. Basic earnings per share rose substantially to 51.8 pence (2005: 43.7 pence), largely reflecting the gain on disposal of the vehicle rental business in February 2006. Basic earnings per share from continuing operations, excluding goodwill impairment, intangible asset amortisation and exceptional items, increased to 44.4 pence (2005: 43.6 pence). Earnings before interest, tax, depreciation, goodwill impairment and intangible asset amortisation (EBITDA) from continuing businesses is up 10 per cent at £232.9 million. The Board is recommending a final dividend of 15.51 pence per share. Together with the interim dividend of 5.32 pence per share paid in October 2006, this makes a total dividend of 20.83 pence per share, five per cent higher than last year, in line with our policy of stable dividend growth. The final dividend will be paid on 1 May 2007 to all shareholders on the register at the close of business on 30 March 2007. Strategically and financially, Arriva is in excellent shape to make further progress throughout 2007 by continuing to make the most of the many opportunities for profitable growth in our chosen markets. Sir Richard Broadbent Chairman Arriva plc Annual Report & Accounts 2006 13 Sound performance in changing times Chief executive’s review The last year has been one of solid progress for Arriva against a backdrop of dramatically increased attention for the passenger transport sector across Europe, and the broader issues surrounding all means of both public and private transport. Several events have combined to push the subject to the fore. Divisional results Considerable public policy benefits are expected from the delivery of public services that voters depend on at lower cost to the taxpayer, and from the disciplines of market mechanisms making transport providers more accountable to their communities. Meanwhile the EU continues to highlight the environmental benefits of people switching journeys away from the car in favour of other modes, including public transport. The public debate has begun in earnest about Revenue £m 2006 2005 Operating profit 2006 2005 UK Bus Mainland Europe* UK Trains Central 762.8 752.3 253.9 1,769.0 710.6 634.0 239.4 1,584.0 (12.8) 76.0 56.1 12.3 (13.6) 130.8 (4.1) 71.7 48.7 14.9 (15.8) 119.5 (1.7) Associated companies - mainland Europe (40.0) possible future developments in road pricing and Continuing operations 1,729.0 1,571.2 126.7 117.8 congestion charging in the UK, potentially Goodwill impairment and providing a great deal more flexibility than the intangible asset amortisation (7.2) (6.6) conventional road tolls and permit zones already Group revenue and operated in many other European countries. operating profit 1,729.0 1,571.2 119.5 111.2 We look forward to working in partnership with * Including share of associated companies’ revenue and operating profit UK government, alongside other operators, on proposals to strengthen the relationships Double-digit revenue growth from our mainland Europe between bus operators and local authorities with the aim of division continued for the sixth successive year, taking it to attracting more passengers and limiting the environmental 43 per cent of group operating revenue, including our share impact of travel. of associated companies. As we broaden and deepen our footprint across Europe our web of relationships and expertise grows with it, ensuring that we can introduce efficiency savings and best practice to our new acquisitions, transfer innovative ideas across the group, and identify opportunities to grow our business by providing transport services that meet the long-term needs of our passengers and their communities. In these times Arriva, with its wealth of knowledge and experience gained from operating bus and rail services in many different countries, is well qualified and highly motivated to rise to the challenge of a changing world. The group has delivered a solid performance in 2006 with the disposal of our vehicle rental division in February 2006 completing the strategic refocusing of the group on its core passenger transport activities. The results reflect the continued growth in mainland Europe, (including the full year impact of our German and Italian acquisitions in 2005), as well as the underlying strength of our UK businesses at a time when the transport industry is facing pressure on margins, predominantly due to the rise in fuel prices. Throughout 2006 and the early part of 2007, fuel prices were volatile. The short-term effect on Arriva in 2006 was a like-for-like increase in our costs of some £20 million in comparison to 2005. Our market positions in mainland Europe have been strengthened and expanded, with growth created through tender wins, acquisitions and investments. We are achieving revenue growth in all areas of the group, and the profile of revenue generation continues its shift towards mainland Europe, reflecting the opportunities available. At the same time we continue the focus on increasing patronage and growth opportunities in our UK bus and rail businesses whilst driving through efficiencies and improvements in operating performance. 14 Moving you across Europe Highlights Solid financial performance • Revenue up 10 per cent to £1,729.0 million • Operating profit* up 8 per cent at £126.7 million • EBITDA from continuing operations up 10 per cent at £232.9 million • Basic EPS increased 19 per cent to 51.8 pence • Adjusted EPS* from continuing operations up 2 per cent to 44.4 pence • Dividend per share up 5 per cent to 20.83 pence Strong mainland European growth driven by tender wins, acquisitions and investments • 19 per cent revenue** growth, and 15 per cent operating profit** growth • £3.4 billion pound order book in mainland Europe • Entry into the Czech Republic brings the number of country operations to nine UK Bus performed strongly both in London and the regions Excellent improvement in operational performance at Arriva Trains Wales * Before goodwill impairment, intangible asset amortisation and exceptional items ** Before goodwill impairment and intangible asset amortisation, including share of revenue and operating profit from associates Divisional revenue growth 2002 to 2006 2000 1500 £m 1000 500 0 2002 Mainland Europe* 2003 UK Bus 2004 UK Trains 2005 2006 *Including share of associated companies’ revenue Arriva plc Annual Report & Accounts 2006 15 Sound performance in changing times Chief executive’s review (continued) Mainland Europe Arriva’s mainland European operations again showed significant growth in both revenue and profit. Operating profit* rose 15 per cent to £56.1 million (2005: £48.7 million) on revenue* of £752.3 million (2005: £634.0 million). The growth in the year is due to contract wins in existing operations, the full year impact of our 2005 acquisitions in Germany and Italy, as well as the contribution from acquisitions and investments in 2006. Fuel price increases in mainland Europe in 2006 had an impact of some £5 million on operating profit. Arriva’s vision is to become Europe’s leading passenger transport group, and we continue to pursue opportunities for growth by tender gains and by acquisition when it makes financial sense. We have reinforced our position and will continue to build on the strong portfolio we now possess. *Including share of revenue and operating profit from associates. A series of strategic acquisitions has further underpinned our strongly performing operations. In January 2007 we agreed to buy 85 per cent of Osthannoversche Eisenbahnen AG (OHE). OHE operates more than 400 buses in Lower Saxony, rail infrastructure, road freight and port storage and freight and a share of two rail franchises. In 2005 the business broke even on revenue of €130 million (£89 million). We have also been successful with smaller acquisitions in the German bus sector, acquiring Verkehrsbetriebe Bils KG (Bils) in May. Bils is an operator in the Münsterland region with full year 2005 revenue of €10.4 million (£7.4 million). In December we agreed to acquire 80 per cent of bus firm Neißeverkehr, which operates near the Polish border. Neißeverkehr’s 2005 revenues were €7.5 million (£5.2 million). In the same month we also acquired BB Reisen and BB Touristik. The business operates urban bus services in the city of Neustrelitz in Mecklenburg Vorpommern. Despite this run of bus acquisitions and rail tender wins there is significant opportunity for Arriva in the German market, the largest in Europe, which remains relatively undeveloped with great potential. Italy Our Italian operations showed an increase in profits on the previous year, due to consolidation of additional profit from Società Autoservizi FVG S.p.A., which operates in the Udine area of the Friuli-Venezia Giulia region, following an increase in our share-holding to 60 per cent, and the first full year of our ownership of the Sadem S.p.A. (SADEM) bus businesses, acquired in October 2005, which operate in the Piemonte and Valle d'Aosta regions of northern Italy to the west of our other operations. SADEM co-managed, with GTT of Turin, all transport for the 2006 Winter Olympics. This involved procurement and planning of an operation which ran up to 1,000 coaches and buses a day for competitors and spectators. After increasing our stake in the northern Italy Trieste city bus network, Trieste Trasporti (TT), to approximately 35 per cent in 2005, we invested in a further five per cent shareholding in September 2006. Scandinavia Operating profit increased over 2006 as margins improved. In Sweden, we gained entry into the rail market with a nine-year contract to operate regional train services in the south of the country, starting in June 2007. We continue to bid for tenders, including those for the Oresund link between Sweden and Denmark, and see Sweden as a market with good potential for growth. In Denmark, labour and recruitment costs were higher than expected, due to full employment locally. Arriva is working closely with the trades unions to ease the Mainland Europe year to 31 December 2006 £m 800 700 600 500 400 300 30 50 Revenue £m 60 Operating profit 634.0 19% 752.3 48.7 15% 56.1 40 2005 2006 2005 2006 Germany Our German operations have performed very well, increasing operating profit. Our rail operations, Prignitzer Eisenbahn Gmbh and Regentalbahn AG, performed ahead of our financial expectations at the time we acquired them. They have also continued to deliver excellent operational performance in 2006. An encouraging series of tender successes in 2006 include a 12-year contract to operate rail services in Bavaria, southern Germany, from December 2009, as a 50:50 joint venture with Salzburg AG. It is expected to generate revenue of more than €55 million (£38 million), of which Arriva will see 50 per cent. This complements a 10-year contract win to operate Munich - Oberstdorf - Lindau rail services with lifetime revenue of €150 million (£100 million). We currently operate the services as a joint venture but will be sole operator from December 2007. The contract will integrate with our 2005 contract win to operate Munich - Hof Furth im Wald services, which also starts in December 2007. 16 Moving you across Europe recruitment challenge at depot level, as well as taking active steps such as introducing incentive schemes for employees who recruit new colleagues. There was a net loss of work from 2006 tenders, which will have some impact going forward, but the prospective withdrawal of the second largest player in the Danish bus market may create additional opportunities for Arriva in due course. Netherlands Operating profit fell as the contract mix changed, with a number of old contracts lost in 2005 proving more profitable than newer ones. Our bus operations turned in a weaker financial performance than in the prior year, but our rail operations were stronger. 2006 was the first full year of our 15-year contract to operate rail services in the provinces of Groningen and Friesland. In November we launched the first of 43 new trains to operate in the two provinces and across to Leer in Germany. Our services continue to experience significant increases in passenger numbers and we are working with the Provincial Executive to satisfy growing demand. In December we also started operating a new rail and bus contract in the Dordrecht region worth €500 million (£335 million) in revenue and signed a contract worth €30 million (£20 million) with Stadler to replace railway rolling stock. The first of the seven new electric trains will enter service on the Merwede - Linge line in late 2008. The bus contract included a new timetable, which has led to some congestion on several routes. We are working to overcome these challenges as they arise. In January 2007 we began operating an eight-year €150 million (£100 million) contract to provide buses in the Den Bosch region in southern Holland. We are working to deliver timetable improvements and have committed to a vehicle replacement plan by the end of 2007. Contract wins only partly offset the loss of a substantial contract in Friesland, leading to some restructuring of our operations in the north of the country. In future there will be continued tendering activity in the Netherlands. We are well placed to benefit from the continuing evolution of this important market, which will benefit from the privatisation of the greater part of stateowned operator Connexxion in 2007. Iberia Our Iberian operations recorded a small increase in operating profit. In May 2006 we purchased 21.5 per cent of Barraqueiro SGPS SA (Barraqueiro), the leading Portuguese passenger transport group. Barraqueiro has 4,800 employees, 2,000 buses, 18 trains, and will have tram operations starting in 2007. It operates in the south of Portugal, and in and around Lisbon. Arriva’s share of post tax profit in the period following acquisition was £0.9 million. This investment will help to consolidate our position in Portugal and will open up opportunities as the public transport market gradually moves towards a more devolved approach in key cities such as Oporto and Lisbon. In December 2006 we strengthened our position in Spain with the purchase of Madrid-based bus operator Esfera, a privately-held company with 2006 revenue of some €2.5 million (£1.7 million). Czech Republic In December 2006 we entered the Czech Republic market with the acquisition of Transcentrum Bus s.r.o, and, in January 2007, Bosak Bus s.r.o. The two operations provide an established platform for Arriva, with 170 buses around Prague, employing 260 people. Combined 2006 revenue was approximately £7.5 million and we will work with the management to develop the businesses. Including assumption of debt, the two acquisitions absorbed £6.8 million. Central Central costs in the mainland European division increased as expansion of the business continues, and included bid costs for the Oresund rail contracts bridging Sweden and Denmark. Mainland Europe revenue growth £35m £26m £24m £21m £12m Netherlands £634m* Scandinavia 2005 * Including share of associated companies Germany Iberia Italy 2006 £752m* Arriva plc Annual Report & Accounts 2006 17 Sound performance in changing times Chief executive’s review (continued) UK Bus Our bus business continued to perform strongly, both in London and the regions, with an operating profit of £76.0 million (2005: £71.7 million), an increase of six per cent, on revenue of £762.8 million (2005: £710.6 million). Margins were maintained at 10 per cent despite the underlying cost pressures, notably that of fuel, facing the business. The impact of increased fuel prices on the division was some £14 million in 2006. The divisional results include those of our bus and coach distribution operation, previously disclosed as a separate segment. The division benefited from a strong management focus on revenue growth and cost control. Revenue improvements flowed from proactive marketing initiatives to achieve patronage growth in the UK regions, and we also brought in some necessary price increases to help offset long-term cost pressures from rising fuel costs. These measures, alongside increased service provision to Transport for London (TfL), grew revenue for the division by seven per cent. We welcomed the UK government’s introduction in April 2006 of an enhanced concessionary fares scheme for England, which has created a positive environment for bus travel. UK Regions The ‘Arrivalution’ management programme, designed to revitalise routes across some of our major service areas outside London, increased passenger levels in a number of locations. During 2006 the programme helped us to sharpen our networks and to use our resources as effectively as possible. During 2007 and 2008 the final third of our networks will have been redeveloped and we are encouraged by the improved returns from those already completed. Innovative marketing initiatives have backed this up, such as our successful targeting of the large student market. We have also seen our millionth customer journey in partnership with PayPoint, which allows weekly or monthly tickets to be purchased at over 15,000 local shops. We remain committed to entering positive partnerships with stakeholders to ensure major benefits for customers, and back the call from Douglas Alexander, Secretary of State for Transport, for operators and local authorities to work more proactively in partnership. The Kent Fastrack scheme operated by Arriva is just one example of a successful close relationship with a local authority, Kent County Council. Fastrack has attracted one million passengers in its first six months, some 50 per cent ahead of expectations. In February 2006 Arriva acquired Premier Buses Limited in Milton Keynes, and took over further bus operations in Bishop Auckland. In February 2007 we acquired Chase Coaches Limited, based in Staffordshire. UK Bus to 31 December 2006 £m 800 750 700 650 600 550 500 Revenue £m 80 75 70 65 60 55 50 45 40 Operating profit 710.6 7% 762.8 71.7 6% 76.0 2005 2006 2005 2006 18 Moving you across Europe Our commitment to investment has seen CCTV fitted on all new buses, with 40 per cent of the fleet now covered and plans for a further £3.5 million investment in 2007. This reassures and protects our passengers and employees, and has played a significant role in reducing insurance costs and fraud throughout the year. London Arriva continues to be the largest bus operator in the capital, where TfL has forecast a 40 per cent expansion of the bus network by 2025. A number of contracts with TfL have been extended for two years and we have increased the number of buses we run on behalf of TfL. Our relationship with TfL continues to be positive. We are currently engaged in trials with TfL of the world’s first hybrid double-decker, which promises to bring significant environmental benefits if successful. Our London sightseeing operation The Original Tour has performed well during 2006 with record autumn figures, from both domestic and overseas visitors. Arriva is investing £1.6 million in its fleet in 2007 to improve wheelchair accessibility, enhance the experience of our customers and increase our peak summer capacity. UK Bus & Coach distribution Our bus and coach distribution business has performed well in a competitive sector, with very little requirement for increased investment. Previously disclosed as a separate segment, the business maintained its operating profit at £3.0 million (2005: £3.0 million) on reduced revenue of £12.3 million (2005: £13.1 million). Arriva plc Annual Report & Accounts 2006 19 Sound performance in changing times Chief executive’s review (continued) UK Trains Our UK Trains division experienced a reduction in operating profit to £12.3 million (2005: £14.9 million) on revenue of £253.9 million (2005: £239.4 million). The fall in operating profit was mainly due to additional bid costs and reduced residual income from the wind-up of our expired Arriva Trains Northern franchise. Arriva Trains Wales (ATW) has worked hard to achieve very positive progress in operational performance over the past 12 months. At December 2006 the year to date Public Performance Measure (PPM), based on the percentage of franchised passenger trains arriving at their destination within five minutes of schedule, increased to 87.1 per cent, up from 80.1 per cent in the prior year. Strong leadership and teamwork from our employees have contributed to the success. Our revised timetable, introduced in December 2005, which provided an additional 950 services on the network, has proved very successful, with passenger growth of eight per cent overall. Our programme to install onboard CCTV on the majority of our trains is nearing completion, providing improved safety and security for our passengers and employees. In the autumn of 2005 we were advised that a significant external contract with our Canton train maintenance depot in Cardiff would end on 10 December. This represented around 45 per cent of activity at Canton. Working in co-operation with the trades unions, we took the opportunity to implement a new structure which ensures the depot can provide an even better service for ATW’s own operations. The costs of this restructuring are reflected in the results. We are pleased to be short-listed as bidders for three UK rail franchises, East Midlands, Cross Country and InterCity East Coast. Bids for the first two have recently been submitted and announcements are expected in the summer of 2007. People Our business relies on the hard work and dedication of our employees to be successful. Our strong management team has ensured the company remains committed to get the best from employees at all levels. As our passenger transport business grows, we continue to invest in management development and succession planning. Our employees continually adapt to the use of changing technology within their jobs, as our vehicles and systems become ever more sophisticated in pursuit of cleaner, more efficient operations. Together, they help to make Arriva the modern, efficient and forward-looking company it is today. Outlook Arriva will continue to work closely with partners at all levels to deliver the best value for money for our customers and stakeholders. UK Trains to 31 December 2006 Revenue Operating profit £m 250 200 150 100 239.4 6% 253.9 £m 15 10 5 0 14.9 12.3 17% 2005 2006 2005 2006 Having established a strong position across Europe, we will see further opening up of transport markets, providing Arriva with further new opportunities, and the development of our existing established operations. The success of our European growth strategy has been rewarding, but there is more that we can and will achieve as markets continue to develop. We retain a close working relationship with the Welsh Assembly Government, and have worked with other stakeholders to build on the service we offer passengers as part of this franchise, which runs until 2018. ATW has introduced 11 upgraded trains to improve long distance services, between Cardiff and Holyhead, and west Wales and Manchester. The new trains have increased seating capacity by 10 per cent on those routes. The company has invested in new ticketing machines at 13 stations and ticket gates at 11 stations. The new facilities provide more opportunities for our customers to buy tickets and have almost halved ticketless travel within ATW. 20 Moving you across Europe We look forward to further developments in the UK bus market, where growth in London is set to continue, and where the government is intent on increasing the use of public transport in the regions. In UK rail, we look forward to the outcome of our two recently submitted bids and the forthcoming InterCity East Coast bid, success in any of which will transform our position in the market. We have strong cash flow and a strong balance sheet. Acquisitions, investment and returns to shareholders all have a call on our available financial resources. We shall continue to strive for the right balance, whilst being mindful of the flexibility needed to take advantage of the many opportunities for further development. David Martin Chief Executive Arriva plc Annual Report & Accounts 2006 21 Financial review The group has made further encouraging progress as it builds, continually, on its position in the developing public transport markets of Europe. Strong operational performance and investment in acquisitions, contract wins and existing businesses have, against the headwind of increased fuel costs, delivered, from continuing operations, a 10 per cent increase in EBITDA, a seven per cent increase in operating profit and the order book shows a 13 per cent increase in the group’s future anticipated revenue from contracts in mainland Europe. The transformation to a focused public transport group was completed with the disposal of the vehicle rental division in February 2006, realising £130 million for future investment, whilst the innovative refinancing of our £94 million train fleet in the Netherlands deepened our expertise in rolling stock financing and expanded our options in financing future growth. Results Group operating profit from continuing operations grew from £111.2 million to £119.5 million. Operating profit from continuing operations, before goodwill impairment and intangible asset amortisation, our preferred internal measure, was up eight per cent to £126.7 million (2005: £117.8 million). As reported in the Chief Executive’s review, the operating results reflect continued growth in mainland Europe, including the full year impact of the German and Italian acquisitions in 2005, as well as the underlying strength of our UK businesses at a time when the transport industry is facing cost pressure, predominantly due to the rise in fuel prices. The share of post tax profits from associates was £1.9 million (2005: £1.4 million) including a first time contribution of £0.9 million from the 21.5 per cent interest in Barraqueiro, acquired in May. The net finance cost for the year was higher at £11.6 million (2005: £9.5 million) despite a lower average level of net debt and reflects the increase in sterling and euro borrowing rates during 2006. Profit before taxation from continuing operations thereby increased to £109.8 million (2005: £103.1 million). The taxation charge was £25.2 million (2005: £19.8 million), reflecting an increase in the effective rate from 19.2 per cent to 23.0 per cent. The effective rate of tax remains lower than the standard rate primarily due to the release of provisions for taxation, in respect of prior years, no longer required. The effective rate is higher than the previous year mainly due to a reduction in prior year provision releases, changes in the Italian tax regime and a reduction in the level of non-taxable income. Profit for the year from continuing operations increased to £84.6 million (2005: £83.3 million). The gain on disposal of the vehicle rental division of £20.0 million, together with after tax profits from the one month of business of £0.1 million (2005 full year contribution: £3.0 million), comprises the profits from discontinued operations for the year. After taking account of minority interests, principally in our Italian subsidiaries, basic earnings per share was 51.8 pence (2005: 43.7 pence), the increase substantially reflecting the gain on disposal of the vehicle rental division. Our preferred internal measure, earnings per share, excluding goodwill impairment, intangible asset amortisation and exceptional items, from continuing operations, increased to 44.4 pence (2005: 43.6 pence). Cash flow EBITDA from continuing operations increased by 10 per cent to £232.9 million (2005: £211.3 million) contributing to net cash inflow from continuing operating activities for the year of £159.7 million (2005: £180.3 million). Cash contributions to the Arriva Passenger Services Pension Plan, payments for capital expenditure incurred in 2005 and expenditure on commencement of rail contracts were the significant elements of a working capital outflow in the year, as well as other timing differences around the year end. Continuing EBITDA £m 240 220 200 180 160 140 120 100 211.3 10% 232.9 2005 2006 22 Moving you across Europe In July, the group entered into a €138 million (£94 million) refinancing deal to provide 43 new trains for our Netherlands business. The transaction refinanced €69 million (£47 million) of advance payments for the trains held on the balance sheet at 30 June 2006 (£23.6 million at 31 December 2005), and provides ongoing refinancing during the delivery period of the trains up to the end of October 2007, followed by lease rentals up to the expiry of the franchise in January 2021. It also provides Arriva with fixed terms to acquire the trains at the end of the lease if the group wishes. This was an important transaction for the group. Provision of rolling stock financing in the UK is largely in the hands of three major providers, the unique historical result of rail privatisation in the UK, whilst the market for rolling stock finance to private operators in mainland Europe is largely undeveloped. Net capital expenditure was £92.5 million compared with £195.9 million in the previous year. Adjusted for the impact of the trains refinancing, and excluding the vehicle rental division, net capital expenditure was £118.2 million compared with £148.7 million, a decline of £30.5 million. Net expenditure in the UK was £52.7 million (2005: £80.4 million) with reduced expenditure in London due to the extension of contracts and consequent retention of the existing bus fleet. Net capital expenditure in mainland Europe, excluding the new trains in the Netherlands, was similar to the previous year at £65.5 million (2005: £68.3 million). Expenditure on acquisitions, including the absorption of net debt, in 2006 was £66.8 million (2005: £51.8 million). In May, Arriva purchased 21.5 per cent of Barraqueiro for €60 million (£41.0 million). Goodwill on the acquisition was €64.2 million (£43.7 million) in addition to an intangible asset of €10.7 million (£7.3 million). Expenditure, including absorption of net debt, on other smaller acquisitions in Germany, Czech Republic, Italy and Spain was £19.9 million with goodwill of £16.8 million. In the UK, we acquired Premier Buses Limited in February and further bus operations, primarily in Bishop Auckland, for £5.9 million, including cash assumed. Subsequent to the year end, the group contracted to acquire 85.12 per cent, subject to competition and pension authority clearance, of OHE in Germany for €30 million (£20.5 million) plus €30 million of debt (£20.5 million), and all the shares of Bosak Bus s.r.o in the Czech Republic for £1.1 million plus £0.7 million of debt. In addition, the acquisition of Chase Coaches Limited in February has absorbed £0.9 million. Servicing the debt and equity through interest and dividend payments absorbed £52.6 million (2005: £52.9 million), whilst there were corporation tax payments during the year of £24.9 million (2005: £25.8 million). New shares issued on exercise of share options generated £1.2 million (2005: £3.8 million). There was a reduction in net debt to £378.4 million (2005: £435.9 million), mainly reflecting the impact of the disposal of the vehicle rental division, partially offset by the acquisition and investment activity noted above. The ratio of net debt to EBITDA at the end of the year was 1.6 times (2005: 1.8 times). Arriva plc Annual Report & Accounts 2006 23 Financial review (continued) Contract order book A key measure of the underlying strength and stability of the business is demonstrated by the value of its order book, the expected future revenue from public transport contracts won by the group. The principal areas of the group where contractual arrangements prevail are the bus operations in London, Italy, Netherlands and Scandinavia, and the rail operations in the UK, Germany, Scandinavia and Netherlands. The other parts of the group, principally UK Regions and Iberia, operate under either concessions or commercial arrangements and are not included in the order book. Anticipated contractual revenue is substantial and is analysed as follows: Treasury The group’s financial risks are managed by the group treasury function in accordance with a formal Board approved treasury policy. The policy sets a range of formal targets for managing the group’s exposure to interest rate changes, currency movements, and fuel prices. These targets are achieved through the use of interest rate and exchange rate swaps, forward fuel price fixes and fixed rate finance. In addition, foreign acquisitions and operations are funded in local currency where possible. The result of this policy has been to reduce to insignificant levels the foreign exchange risk when translating overseas assets and liabilities into sterling and to increase euro borrowings as the group expands in mainland Europe. The group’s policy is to maintain fuel price fixes at least 12 to 15 months ahead on a rolling basis. The requirement to fix fuel is determined after taking into account the extent to which businesses are protected from fuel price volatility through contract price indexation. Based on 2006 levels of consumption, excluding associate companies, the group’s forward purchasing of fuel at 28 February 2007 compared with 2006 is summarised as follows: 2006 % Protected by indexation arrangements 10.7 83.6 5.7 100.0 Average price per litre (pence)* 24.9 2007 % 9.7 82.8 7.5 100.0 28.2 2008 % 10.1 51.0 38.9 100.0 25.7 Total contract order book 6,531 £m 723 6,745 727 2,761 2,582 3,047 3,436 Forward purchased* Subject to spot or future forward purchase 2005 ■ London ■ UK Trains ■ Mainland Europe 2006 *Average price per litre of forward purchased fuel, excluding fuel taxation and delivery Fuel costs will therefore increase further in 2007, with the prospect of reductions in 2008 if current prices are maintained. The total fuel consumption in 2006 was approximately 350 million litres. Capital structure Total shareholders’ equity was £542.5 million (2005: £487.4 million) at the end of the year. Retained profits contributed £62.7 million to distributable reserves, representing the bulk of the movement. Gearing at 31 December 2006 was 68 per cent (2005: 87 per cent). The 2006 interest cover (the ratio of EBITDA to net finance costs), from continuing operations excluding goodwill impairment and intangible asset amortisation, was 20 times (2005: 22 times). At the year end, the ratio of net debt to EBITDA was 1.6 times (2005: 1.8 times). Acquisitions made, and contracted to be made, subsequent to the year end increase the ratio of net debt to EBITDA, on a proforma basis, to 1.7 times. Arriva remains comfortably within the principal financial covenants set by its lenders, the principal covenants being that the ratio of EBITDA to net finance costs is not less than 3:1 and the ratio of net debt to EBITDA is not more than 3.5:1. These figures are estimates of future revenue from contracted business, over a year in duration, rolled forward to reflect contract variations and updated to current prices at each year end. Other changes, year on year, principally represent future revenue from contract wins or acquired businesses in the year less the revenue included in the year’s results from the contract base. Growth in mainland Europe is particularly encouraging with contract wins and extensions in the year substantially more than offsetting the erosion, by the effluxion of time, of the contracted revenue from contracts in operation. The year on year fall in future UK Trains revenue is the result of one year less to run on the Arriva Trains Wales franchise. Twoyear extensions to the normal five-year contracts have dampened growth in contracted revenue in London, despite an increase in tendered services. The group anticipates growth in the order book matching growth in the market when the usual, five-year London replacement cycle returns. 24 Moving you across Europe Borrowing facilities A large proportion of available finance for the group is provided by a £310 million five-year syndicated loan facility while much of the group's bus fleet is financed on medium-term hire purchase or finance lease arrangements. The typical duration of these arrangements is three to five years. As part of the UK rail franchising arrangements, the group has provided guarantees of £13 million. The rolling stock of the UK, Netherlands, Danish and German rail businesses that is provided through operating leases has annual commitments of approximately £48 million. All material commitments will cease on expiry of the franchises. Bonds amounting to £20 million have been provided in respect of the Netherlands, Danish and German rail businesses. Letters of credit amounting to £30 million are provided as part of the group’s UK insurance arrangements. There is a net cash position in sterling and a borrowing position in euros as a result of the group’s policy of reducing exposure to foreign exchange currency fluctuations to insignificant levels, as described above. The group's working capital and ancillary requirements are mainly provided by our principal bankers and reviewed annually. Retirement benefit obligations In order to protect the pension benefits of members, important changes were made during the year to the Arriva sponsored pension scheme with the largest active membership. Following consultation with the trustees, trade union representatives and employees, special contributions of £17 million were made to the Arriva Passenger Services Pension Plan during the year both to improve its financial position (£11 million) and also to facilitate the merger of the scheme with the Arriva Scotland West scheme (£6 million). At the same time contributions to the scheme from employers and employees were increased. Partly as a result of the foregoing changes, total liabilities in respect of retirement benefit obligations fell to £173.8 million (2005: £207.4 million). The retirement benefit obligation in respect of the Arriva Trains Wales section of the Railways pension scheme is £9.5 million (2005: £13.2 million). The reduction was due to investment returns being higher than expected as well as the one-off contributions of £17 million. The related deferred tax asset recognised in the balance sheet was £49.3 million (2005: £58.6 million). Financial summary The year saw some significant changes in the financing of the group. The proceeds from the disposal of the vehicle rental division in February provided a significant cash injection of funds for investment in acquisitions and growth in mainland Europe. The refinancing of the Dutch trains, with a new flexible lease product which better meets our commercial needs, marks the introduction of fresh competition and new options in the European rolling stock market. The underlying cash generation in the group continues to grow, supported by increases in contracted future revenue. Combined with the strength of the group balance sheet, this provides a solid base both for investment in further growth through tender wins and acquisitions, and improved shareholder returns. Steve Lonsdale Group Managing Director - Finance 300 22 6 6A 23C 22 23 23 6 1 10 18 6 60 17 20 36 64 20 1 4 6A 21 22 24 26 60 61 64 68 101 300 30 Arriva plc Annual Report & Accounts 2006 30 38 39 25 Our impact on society Corporate responsibility As a provider of passenger transport we play a vital economic and social role in the lives of the millions of people across nine countries whose communities we serve. With this role comes a responsibility for our impact on society that we take very seriously. Safety In managing our social impact we focus on four themes, from the boardroom to our depots: • Safety - operating our services in a way that minimises the risk to our passengers, bystanders and employees; • Employees - helping our people to make the most of their potential, and being a good employer; • Community - making a positive impact and building on the value we provide with our transport services; • Environment - finding the right balance between enabling people to make the journeys that enrich their lives, and helping to minimise the environmental impact of those journeys. Formal policies set out certain aspects of our approach to the wider community. Our set of Corporate Responsibility policies can be viewed on our website at www.arriva.co.uk. The safety of our customers and employees is our number one concern. Safety practices are reviewed regularly by the Board Safety Committee, which is responsible for reviewing and reporting to the Board on the group’s internal safety management system, overseeing the group safety policy and the arrangements for its implementation. As our group grows we aim to achieve the highest standards by passing on best practice to new businesses that we acquire. We continue to develop and deliver a range of businessfocused safety training programmes that meet strict quality criteria, many of which are externally accredited. Our investment in new technology has also played a major role in ensuring the bus remains one of the safest ways to travel on land. We are on track to have installed closedcircuit television (CCTV) systems on nearly 75 per cent of our UK buses by the end of 2007. CCTV has also been rolled out in many of our European operations. These systems have been well received by the travelling public and by our employees, who recognise the protection that they offer. As well as helping passengers and drivers to feel safer the cameras also have an important role to play in the investigation of accidents. By enabling a better understanding of the underlying causes of many accidents, the CCTV systems, in some cases complemented by aviation-style ‘black box’ recorders, help to feed back into training, and result in improved driving standards. 26 Moving you across Europe 23C 22 23 23 6 18 101 18 6 60 17 20 36 64 20 1 4 6A 21 22 24 26 60 61 64 68 101 300 30 17 20 30 38 39 66 Employees We invest in our people and encourage them to reach their full potential, because it is their contribution and effort that helps the group achieve its vision. We have undertaken the major task of surveying our entire workforce, in a bid to understand what more we can do to help them perform better. The results highlighted some important learning points which we have absorbed into management thinking. Our employees told us that there was great scope for improvement in internal communication and ensuring that people at all levels of the business have the opportunity to raise ideas and concerns based on their practical experience. During 2006 we built these factors into a training and development programme across our businesses aimed at giving our front-line supervisors and managers improved skills in communicating effectively with their teams. Feedback from the pilot programme has been highly encouraging, and we are making the training programme available more widely. We will repeat our survey in 2007 and will continue to use employee feedback as a valuable source of guidance. In the UK Arriva has 24 learning centres operated in partnership with the Transport and General Workers’ Union. Each centre has between four and eight computers, and access to ‘Learn Direct’ courses as well as our own online resource, the Arriva Learning and Development Gateway. X 21 24 25 2 Across our operations, our vocational training programmes6 continue to deliver great results, in60 fields as varied as 4 dealing with conflict, improving service and quality, computer skills, and advanced driving techniques to improve road safety, passenger comfort and fuel consumption. 1 3 The Arriva Graduate Development Programme is in place across Europe, designed to create the next generation of business leaders for the group. So far we have recruited in Denmark, Germany, the Netherlands, Sweden and the UK. Participants receive a thorough grounding in the transport industry and gain a full understanding of what makes Arriva successful. At Arriva our aim is to create an environment where everyone feels welcomed and valued. Arriva has been named as one of Business in the Community's (BiTC's) top ten overall performers in the Race for Opportunity (RfO) awards. RfO recognises the efforts organisations make to ensure their workforce is diverse and differences are valued and understood. Our diversity training in the UK has also won a major CBI award, while in Denmark we have introduced a scheme to encourage women from ethnic minorities to become bus drivers. Arriva also sponsors a Danish diversity awareness campaign, ‘Give the Red Card to Racism’, in cooperation with the Danish professional footballers’ union. Arriva plc Annual Report & Accounts 2006 27 Our impact on society Corporate responsibility (continued) Community Our primary benefit to the communities we serve comes directly from the transport services we provide. But we have more to offer, and our work with charities, youth groups, sports teams and the arts reflects our public vision: “As a people business, we value, encourage and celebrate the contribution our employees and others make to the communities we serve.” In the UK our businesses undertake many locally-based activities including: • free transport for community groups; • support for local organisations and charities with free advertising on buses; • educational visits to spread safety messages to youngsters; and • donations to support fundraising efforts by local charities and employees. Arriva realises that sport can help to educate and bring together people. One example is in Liverpool, where we have joined forces with Everton Football Club to raise awareness among school children of the benefits of healthy eating and an active lifestyle. A special bus will visit more than 8,000 school children under 11 in the first year. A similar initiative has taken place in Yorkshire with Castleford Tigers Rugby League team touring schools with an Arriva bus to promote road safety, highlighting the damaging effects of vandalism and encouraging youngsters to take up sport. We take our role in promoting community safety very seriously, especially in the area of transport. Arriva Trains Wales has sponsored performances of a new production by the Welsh National Opera, ‘Sweetness and Badness’ aimed at youngsters to highlight the dangers of railway trespass. In Denmark Arriva gives practical and financial support to ‘The Night Ravens’, a respected multi-ethnic community support network of almost 7,000 volunteers who monitor the streets and public transport systems of Copenhagen and other cities in the evening and at night, in support of safety and dialogue with young people. In Spain and Portugal, Arriva operates a ‘Child Safe’ campaign for families who are on holiday. Parents travelling on our buses receive a brightly coloured wristband for their child on which they can write their contact details. The bands carry a special logo and if a child gets lost they can go into shops which have the same logo in the window or approach police or lifeguards. The campaign was launched in both countries in partnership with local authorities during the summer of 2006. 28 Moving you across Europe Arriva plc Annual Report & Accounts 2006 29 Our impact on society Corporate responsibility (continued) Environment Access to transport and freedom of movement are at the heart of progress in economic and social well-being. However, transport also makes significant contributions to greenhouse gas emissions. One of the challenges faced by modern society is therefore how to maintain the necessary benefits of travel while keeping environmental impacts down. Public transport has a great deal to offer as part of the answer to maintaining vital mobility, underpinning freedom of movement and economic prosperity while keeping a brake on unnecessary emissions. We are in the process of carrying out an emissions assessment using business data that is robust and verifiable, that will show where our biggest sources of greenhouse gas emissions are generated. This will enable us to develop effective plans to manage our emissions in the future, with the long term aim of reducing significantly the CO2 impact of a given passenger journey. The assessment is the first step in the carbon management process and is the basis of further initiatives such as public reporting, target setting and the implementation of effective mitigation and reduction schemes. We are being assisted in this ‘carbon footprinting’ process by the Edinburgh Centre for Carbon Management, a leader in the field. We will be using the data to identify areas for improvement and increased management focus. In doing so we will not limit our activities to operational imperatives based on carrying passengers, but will also aim to improve the carbon-efficiency of our ancillary functions such as the travel that our own employees carry out in the course of business, and the way we manage our depots and other facilities. The aim of the research is to gain hands on experience and a working knowledge of new and novel technology so that we can make effective investment decisions that result in an environmentally sympathetic transport infrastructure for the future. Arriva is actively seeking to identify and implement viable low emission and renewable fuels. Our desire to minimise our impact on the environment keeps us at the forefront of developments. The diversity of our fleet and operating markets allows us to evaluate quickly the possible benefits of innovations, and to implement solutions rapidly. In our London business, with Transport for London, we are conducting trials of the world’s first hybrid double-decker bus. The bus uses electric motors in tandem with diesel engines to reduce emissions by a potential 40 per cent. 30 Moving you across Europe In Germany we use environmentally friendly biodiesel, derived from locally grown rape seed oil, for our train operations and our Bils bus business. The use of biodiesel reduces net CO2 emissions by up to 90 per cent for the operation of these vehicles. Although the contribution of vehicles to greenhouse gases is the environmental effect that most people think of when considering a business like Arriva, there are other ways in which we can limit our carbon footprint, and other matters such as air quality and use of water also still remain important. Since 2001 Arriva has invested over £480 million in modern buses and trains that are in line with, and sometimes exceed, the latest EU environmental standards. All new buses now meet the strict Euro 4 benchmark, whilst new trains meet the Euro Stage 3A standard. As part of our drive to improve group emissions we are now bringing our Portuguese bus fleet in line with the rest of our European operations and general policy of standardising vehicles on Ultra Low Sulphur Diesel (ULSD). Arriva Trains Wales is one of four UK train operating companies to be conducting trials of ULSD. We are looking at several of our facilities closely with a view to installing novel technology that will optimise the use of gas, electricity, fuel, oil, and water. Many of our bus washes already recycle up to 95 per cent of the water that washes each bus, and include systems to prevent the discharge of harmful chemicals. The priorities and solutions for managing our environmental impact in one location are often not the same as in another location. There is greater scope for use of solar power in southern Portugal than in Scotland, and a greater need to save water resources in Spain than in the Netherlands. Nevertheless, where we find good practice and innovation delivering benefits, we always look for ways in which other parts of Arriva can benefit. Arriva plc Annual Report & Accounts 2006 31 Board of directors 1 2 3 4 1. Sir Richard Broadbent KCB Chairman Aged 53. Sir Richard was appointed to the Board in July 2004 and was appointed Chairman in November 2004. Sir Richard is the Senior Independent Director of Barclays plc and was Executive Chairman, HM Customs and Excise, from 2000 to 2003. He was formerly a member of the Group Executive Committee of Schroders plc and Non-Executive Director of the Securities Institute. As Chairman, Sir Richard chairs the Nomination Committee of the Board and is also a member of the Safety Committee. 2. David Martin BA, FCMA, MiMgt Chief Executive Aged 55. David qualified as an accountant in 1977 after graduating in Business Studies. He held a variety of general management positions before joining the bus industry in 1986. After leading a management buy-out of an East Midlands based bus company, he was involved in the acquisition of National Express and subsequent management buy-outs leading to the creation of British Bus Group Limited. David joined Arriva in 1996 on the acquisition of British Bus, becoming a member of the Board in February 1998 with specific responsibility for the group’s international operations and development. In March 2005 he was appointed Group Managing Director - Operations and Deputy Chief Executive. On 19 April 2006 David succeeded Bob Davies as Chief Executive. 3. Steve Lonsdale BA, FCA Group Managing Director - Finance Aged 49. Steve graduated from the University of Newcastle upon Tyne with a degree in Economics and Accounting before joining Coopers & Lybrand in 1978. He qualified as a Chartered Accountant in 1981 and spent eight years working in the profession in the UK and overseas. Steve joined the group in 1987 where he worked as Group Accountant until 1991 when he was appointed to the Board as Group Finance Director. In March 2005 he was appointed Group Managing Director - Finance with responsibility for all finance, legal and company secretarial matters. 4. Steve Clayton BA, FCIT, MiMgt Group Managing Director - Corporate Affairs Aged 53. After graduating from London University in 1975, Steve held various management positions with London Transport. He was Managing Director of Leaside Bus Company Limited from 1988, which was acquired by the group in 1994. Steve was appointed to the Board in February 1998 with responsibility for the group’s UK Bus operations. In March 2005 he was appointed Group Managing Director Corporate Affairs, with responsibility for Human Resources, Health, Safety and the Environment, Corporate Communications and all Government Relations activities across the group. He sits as a member of the Safety Committee and is Chairman of the Community Relations Committee. 32 Moving you across Europe 5 6 7 8 5. Simon Batey MA, FCA Non-Executive Director Aged 53. Simon joined the Board as a Non-Executive Director on 1 October 2003 and since 1 January 2004 he has been Chairman of the Audit Committee; he also sits on the Remuneration and Nomination Committees. Simon is Chief Financial Officer of Thames Water Utilities Limited. After he graduated from Oxford, Simon worked for Armitage and Norton (now part of KPMG) where he trained and qualified as a Chartered Accountant and worked in a number of management posts. He was Group Finance Director of United Utilities plc from 2000 to 2006. Before this appointment he was Group Finance Director of AMEC plc from 1992 and prior to that was Deputy Finance Director. 6. Steve Williams LLB Non-Executive Director Aged 59. Steve was appointed to the Board as a NonExecutive Director on 1 September 2005 and on 18 October 2005 was appointed Senior Independent Director; Steve sits on the Nomination, Audit and Safety Committees. Steve is General Counsel and joint Company Secretary of Unilever plc and Unilever NV. Prior to joining Unilever, Steve spent 11 years at Imperial Chemical Industries plc in the legal and company secretarial departments and served for nine years as a Non-Executive Director of Bunzl plc, relinquishing that post in 2004. 7. Nick Buckles Non-Executive Director Aged 46. Nick was appointed to the Board as a NonExecutive Director on 19 July 2005 and on 18 October 2005 was appointed as Chairman of the Safety Committee; Nick also sits on the Nomination and Remuneration Committees. He was appointed to the Board of Securicor plc in 2000, having joined the group in 1985, and became its Chief Executive in January 2002. Following the merger between Securicor plc and the security businesses of Group 4 Falck in July 2004, he was appointed Deputy Chief Executive and Chief Operating Officer of the merged company, Group 4 Securicor. He was appointed Chief Executive of Group 4 Securicor in July 2005. 8. Veronica Palmer OBE Non-Executive Director Aged 66. Veronica was appointed to the Board as a NonExecutive Director in September 2001 and since June 2005 has chaired the Remuneration Committee of the Board; she also sits on the Audit and Nomination Committees of the Board. Prior to this she had held the position of Director General of the Confederation of Passenger Transport UK from 1989 until June 2001. Earlier she worked in the brewing industry’s trade association as Parliamentary Secretary following a successful career in the Royal Air Force and work as an employment consultant in Europe. Veronica has an MBE for military services and an OBE for services to the transport industry. She is Chairman of the Northern Ireland Transport Holding Company Board. Arriva plc Annual Report & Accounts 2006 33 D I R E C T O R S ’ R E P O RT The directors submit their report and the audited accounts of Arriva plc for the year ended 31 December 2006. A review of the group’s principal activities and performance for the year is contained in the Chairman’s Statement, the Chief Executive’s Review and the Financial Review which collectively comprise the Business Review and these are included in this report by reference. A review of the principal risks facing the company is contained in the Corporate Governance Review on pages 42 to 46 and is also included in this report by reference. Principal activities of the group The principal activities of the group at 31 December 2006 comprised the operation of bus and train services in the UK and eight countries in mainland Europe. Review of operations A review of operations, together with an indication of future prospects, is given in the Business Review on pages 12 to 25. Results and dividends The profit for the year amounted to £104.7 million (2005: £86.3 million). The directors recommend the payment of a final dividend on the ordinary shares of the company of 15.51 pence per share (2005: 14.77 pence) which together with the interim dividend of 5.32 pence (2005: 5.07 pence) represents a total of 20.83 pence per ordinary share (2005: 19.84 pence). The proposed final dividend, if approved, will be payable on 1 May 2007 to shareholders on the Register of Members at the close of business on 30 March 2007. The total amount paid and proposed to be paid is £41.1 million in respect of 2006 (2005: £39.1 million). Share capital The share capital of the company is made up of 290,000,000 ordinary shares of 5 pence each. As set out in the total voting rights notification issued on 1 March 2007, there were 198,103,442 shares in issue. The movement in the share capital during the year is detailed in Note 23 to the Accounts. Directors The names and biographies of the present directors appear on pages 32 and 33. Sir Richard Broadbent, Mr D R Martin and Mr S P Lonsdale retire by rotation, and, being eligible, offer themselves for re-election at the Annual General Meeting on 18 April 2007. Mr R J Davies retired from the Board on 19 April 2006. Mr D R Martin succeeded Mr Davies as Chief Executive on the same date. No director was interested in any contract or arrangement which was significant in relation to the group’s business. Indemnification of directors In accordance with its Articles of Association and as approved by shareholders at the 2006 Annual General Meeting, the company has the power (at its discretion) to grant an indemnity to the directors in respect of liabilities incurred as a result of their office. Deeds of Indemnity were issued to all directors in May 2006. The company has maintained a directors’ and officers’ liability insurance policy throughout the period. Neither the company’s indemnity nor insurance provides cover in the event that a director is proved to have acted fraudulently or dishonestly. No claims have been made either under the indemnity or the insurance policy. 34 Moving you across Europe Disclosure to auditors The directors confirm that, as at the date this report was approved, so far as each director is aware, there is no relevant audit information of which the auditors are unaware and they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the group’s auditors are aware of that information. Directors’ interests The interests of the directors (including their family interests) at the end of the year, including details of directors’ interests under the Long Term Incentive Plan, appear in the Directors’ Remuneration Report on pages 37 to 41. Purchase of own shares No shares were purchased pursuant to the authority granted to the directors at the Annual General Meeting held on 19 April 2006. Renewal of this authority will be sought at the Annual General Meeting to be held on 18 April 2007. Acquisitions and disposals The company announced in January 2006 the disposal of its vehicle rental division to Northgate plc for a total consideration of £130.2 million, representing a £20.0 million gain on the disposal. The transaction was completed on 3 February 2006. On 13 February 2006 it was announced that Premier Buses Limited, the holding company of MK Metro Limited of Milton Keynes had been acquired for a net cash consideration of £5.6 million. In May 2006, the group acquired 21.5 per cent of the issued share capital of Barraqueiro SGPS SA, the largest passenger transport operator in Portugal, with 4,800 employees, 2,000 buses and 18 trains. In the year ended 31 December 2005, Barraqueiro had consolidated revenue of £183.6 million. It has key operating territories in the south of the country and in and around Lisbon. On 11 December 2006 the acquisition of Czech Republic bus operator Transcentrum Bus s.r.o. was announced for approximately £5 million enterprise value. In January 2007 the acquisition of Czech Republic bus operator Bosak Bus s.r.o. was announced for a cash payment of £1.1 million and the assumption of £0.7 million debt. In January 2007, the acquisition was announced of Spanish bus operator Esfera for an initial payment of €3.7 million (£2.6 million); subject to the business achieving specific key growth targets, a further payment of up to €1 million (£0.7 million) will be made. Also in January 2007, the company announced that it had contracted to acquire 85.12 per cent of German bus and rail company Osthannoversche Eisenbahnen AG (OHE) for €30 million (£20.5 million). Arriva-Bachstein GmbH, a consortium between Arriva and regional transport operator Verkehrsbetriebe Bachstein GmbH, submitted the bid for the shares held by the German federal government, Niedersachsen and Deutsche Bahn. OHE is an established transport provider based in Celle near Hannover in the north of Lower Saxony. It has over 400 vehicles providing bus services in and around Hannover, Braunschweig, Bremen and Hamburg totalling more than 30 million kilometres per annum. OHE’s total combined revenue for 2005 was €130 million (£89 million). The acquisition is subject to approval from the German competition authority and the satisfactory outcome of negotiations with VBL, the German pension authority. Charitable and political donations During the year the group made charitable donations, for a variety of charitable purposes, amounting to £148,677 (2005: £201,426). There were no political donations (2005: nil). The Companies Act 1985 (‘the Act’) requires companies to obtain shareholder approval before incurring European Union (‘EU’) political expenditure. The group may need, as part of its business, to contact politicians and political parties within the EU on a non-partisan basis in order to make them aware of industry views. As the legalisation defines EU political donations, expenditure and organisations widely, the directors are proposing, as a precautionary measure only, to seek shareholder authority to incur any such expenditure at the forthcoming Annual General Meeting, but have no intention of making donations to any political party. Arriva plc Annual Report & Accounts 2006 35 D I R E C T O R S ’ R E P O RT c o n t i n u e d Annual General Meeting The Annual General Meeting will be held on 18 April 2007. Details of business to be considered at the Meeting can be found in the Notice of Annual General Meeting which has been sent to all shareholders with the Annual Report & Accounts. Employees The Board of Arriva plc recognises that its employees are key to its success and is committed to creating a working environment where everyone has the opportunity to learn, develop and contribute to the success of the group, working within a common set of values. The group intends to be an employer of choice and to employ a diverse workforce with the skills, abilities and attitudes to meet business objectives and needs. The group’s aim is to provide appropriate remuneration and benefits and conditions of employment which will serve to attract, retain, motivate and reward such employees. The group continues to give full and fair consideration to applications for employment by disabled persons, having regard to their respective aptitudes and abilities and its policy includes, where applicable, the continued employment of those who may become disabled during their employment. The group has, subject to the restraints of commercial confidentiality, continued its policy of employee involvement, by making information available to employees on a regular basis regarding recent and probable future developments and business activities. Policy regarding payment of suppliers The group’s policy regarding the payment of suppliers is either to agree terms of payment at the start of business with each supplier or to ensure that the supplier is made aware of the payment terms, and in either case to pay in accordance with its contractual or other legal obligations. At 31 December 2006 the company’s trade creditors outstanding represented approximately 49 days’ purchases (2005: 30 days). Substantial shareholdings As far as the directors are aware, the only notifiable holdings equal to or in excess of three per cent of the issued ordinary capital as at 19 February 2007 are: Per cent Marathon Asset Management LLP BT Pension Scheme Trustees Ltd Blackrock Inc. Legal & General 6.04 5.23 5.20 3.44 Corporate governance A review of the company’s application of the principles and provisions of The Combined Code appears on pages 42 to 46. Health, safety and environment Details of the company’s approach to health, safety and environmental issues appears within the Corporate Responsibility review on pages 26 to 31. Auditors A resolution to re-appoint PricewaterhouseCoopers LLP as auditor to the company and to authorise the directors to fix their remuneration will be proposed at the Annual General Meeting. By order of the Board D P TURNER Secretary 7 March 2007 36 Moving you across Europe D I R E C T O R S ’ R E M U N E R AT I O N R E P O RT 1. Introduction The Remuneration Committee is responsible for reviewing and making recommendations to the Board on all matters relating to the remuneration arrangements applying to the executive directors, the management population occupying roles immediately below those of the Board and to any other employee within the group whose remuneration package, including pensions and bonus exceeds £200,000 per annum. During the year under review the Committee met on five occasions; details of attendance at the meetings of the Committee are provided in the Corporate Governance Review on page 44. Membership of the Remuneration Committee is limited to the independent non-executive directors and is chaired by Mrs A V M Palmer. The other members of the Committee are Mr S G Batey and Mr N P Buckles. In his capacity as Senior Independent Director Mr S G Williams is entitled to attend any meeting of the Committee. During the year under review Sir Richard Broadbent, Mr R J Davies (until his retirement on 19 April 2006) and Mr D R Martin have attended meetings of the Committee as invitees. The Committee’s terms of reference are available on the company’s website www.arriva.co.uk. 2. Remuneration policy The objective of the Board’s remuneration policy is to ensure that senior management of the appropriate calibre and experience are attracted, motivated and retained to offer the best possible opportunity for the company to deliver sustained shareholder value. A comprehensive remuneration review conducted in 2005 with advice from KPMG confirmed the company’s policy of paying base salary at the median of the peer comparator group and to reward outstanding performance with upper quartile total remuneration. A peer comparator group was established for this purpose comprising a representative sample of FTSE 250 companies of a similar size and complexity to that of the company from the transport and other sectors. The committee aims to match the remuneration opportunity of the directors with that of the peer comparator group and to ensure that reward is a direct result of achieving stretching performance targets in line with the group’s strategic goals. 3. Remuneration structure 3.1 Base salary The base salaries of the executive directors are reviewed each year effective from 1 January and are as follows: Salary 1 January 2007 £’000 p.a. D R Martin S P Lonsdale S J Clayton R J Davies (retired 19 April 2006) 465 302 271 n/a Salary 1 January 2006 £’000 p.a. 312 290 260 447 Mr D R Martin’s salary was increased to £447,000 p.a. on 19 April 2006 on his assumption of the role of Chief Executive following the retirement of Mr R J Davies. 3.2 Performance related bonus The annual bonus opportunity is 100 per cent of base salary with 70 per cent being determined by group financial performance and the balance reflecting performance against personal objectives agreed with each director at the beginning of the year; the financial performance will be the group’s earnings per share before goodwill impairment and intangible asset amortisation calculated under International Financial Reporting Standards adjusted for exceptional items (“EPS”). The Remuneration Committee will review the measure each year to ensure that it remains appropriate. The financial element of the bonus scheme in 2006 was structured as follows: EPS Target 2006 (p) 42.4 44.6 49.1 Bonus as per cent of Base Salary 0 30 70 Arriva plc Annual Report & Accounts 2006 37 D I R E C T O R S ’ R E M U N E R AT I O N R E P O RT c o n t i n u e d 3.3 Long Term Incentive Plan (‘LTIP’) (a) Awards made up to and including 2005 The LTIP was initially introduced in 2000 and provides for the conditional award of shares at the discretion of the Board as advised by the Remuneration Committee. The market value of any conditional award is limited to 100 per cent of the director’s base annual salary at the date of the award. The vesting of the conditional share awards will depend upon EPS performance when compared with the growth in the Retail Price Index and also of the Total Shareholder Return (‘TSR’) of the group when compared with the TSR of the peer comparator group comprising the constituent companies of the FTSE 250 (excluding the company and investment companies), over a period of three years. The degree of vesting is on a sliding scale of 25 per cent - 100 per cent, with no share vesting unless the TSR of the group is at least equal to the median TSR of the peer comparator group. However, irrespective of TSR performance, no share shall vest in any event unless the growth in the group’s EPS over the three year measurement period exceeds the growth of the Retail Price Index in the same period by at least six per cent. With regard to the conditional share award made on 8 March 2004 the performance measurement period was the three years ended 31 December 2006; in that period the growth in the group’s EPS was 26.5 per cent compared with the growth in the Retail Price Index of 10.5 per cent. The company’s TSR for the same period fell between the TSR of the 66th and 67th ranked companies, delivering a conditional award vesting level of 58.16 per cent. (b) Awards made in 2006 At the Annual General Meeting held on 19 April 2006 shareholders approved a revision to the LTIP arrangement following the review of executive remuneration and the LTIP now comprises a blend of two elements providing (i) a reward equivalent to a maximum of 100 per cent of base salary at upper quartile TSR performance and (ii) a further reward equivalent to up to 100 per cent of base salary on superior EPS performance. Vesting for this second element is on a linear scale with 10 per cent vesting if EPS increases by RPI + four per cent annually over the three-year measurement period, rising to a maximum award of 100 per cent if the EPS increases by RPI + 13 per cent annually over the measurement period. In measuring TSR, the group’s performance will be ranked with that of a peer comparator group consisting of companies (excluding the company and investment companies) whose shares comprise the FTSE 250 at the beginning of the three-year measurement period. These revised arrangements apply to the conditional awards made in May 2006. Share retention guidelines have been introduced requiring retention of 50 per cent of any share award by executive directors until a holding equivalent in value to annual base salary has been achieved. As at 31 December 2006 the interests of the directors in conditional share awards made under the LTIP were as follows: Movement in Conditionally Awarded Shares Not Vested in Year Balance at 31 Dec 2006 Awards Subsisting at 1 January 2006 Share Price at Date of No. of Date Calculation shares Awarded of Award (p) D R Martin 65,636 61,682 54,744 182,062 65,636 61,682 45,620 172,938 63,781 60,280 45,620 169,681 6/3/03 8/3/04 14/3/05 283.0 374.5 548.0 6/3/03 8/3/04 14/3/05 283.0 374.5 548.0 6/3/03 8/3/04 14/3/05 283.0 374.5 548.0 Awarded During Year Share Price at Date of Calculation Date of Award (p) Vested During Year Value of Shares at Date of Date of Vesting Vesting (£) 1/3/06 398,070 No. of shares No. of shares 65,472 164 159,785 17/5/06 Total S J Clayton 544.0 61,682 54,744 159,785 276,211 65,472 1/3/06 398,070 164 92,940 17/5/06 Total S P Lonsdale 544.0 61,682 45,620 92,940 200,242 63,622 1/3/06 386,822 159 103,663 17/5/06 Total Note: (i) (ii) 544.0 60,280 45,620 103,663 209,563 The award made on 8 March 2004 for the performance measurement period ended 31 December 2006 vested in March 2007 at 58.16 per cent of the shares conditionally awarded. Following his retirement on 19 April 2006 the Remuneration Committee resolved that Mr R J Davies retain his entitlement to exercise, pro rata, in accordance with the length of the performance period for which he was employed any outstanding conditional shares awarded under the LTIP in 2004 and 2005 in accordance with the normal timetable and performance conditions of the rules of the LTIP. Mr Davies’ conditional share awards under the LTIP in 2004 and 2005 were 105,140 ordinary shares and 78,467 ordinary shares respectively. On 24 November 2006 Mr Davies exercised his option over the 114,995 ordinary shares that had vested in March 2006 under the terms of the LTIP. 38 Moving you across Europe 3.4 Share options Since the introduction of the LTIP in 2000 the executive directors have not participated in any of the company’s share option schemes and it is not envisaged that there will be any change to this policy in the future. The non-executive directors do not participate in either the LTIP or the share option schemes. 3.5 Remuneration details for the year ended 31 December 2006 (audited information) Payment in lieu of Company Contribution to FURBS £ 42,342 42,342 Fees £ Sir Richard Broadbent D R Martin S J Clayton S P Lonsdale A M Saxton (retired March 2005) M J Allen (retired June 2005) S G Batey N P Buckles A V M Palmer S G Williams* R J Davies (retired April 2006) Total 120,000 N/A 40,000 35,500 35,500 35,500 266,500 Salary £ 406,500 260,000 290,000 N/A 149,000 1,105,500 Performance Related Bonus £ 246,800 136,500 160,950 N/A 74,500 618,750 Benefits in Kind/ Allowance† £ 25,813 25,366 20,590 N/A 9,256 81,025 Total £ 120,000 679,113 421,866 471,540 N/A N/A 40,000 35,500 35,500 35,500 275,098 2,114,117 Prior Year £ 120,000 472,898 399,802 397,044 39,669 12,016 38,083 15,167 34,333 11,333 714,793 2,255,138 † Benefits in kind comprise a company car or car allowance, fuel/fuel allowance, medical insurance and telephone costs. * Fees paid to Unilever plc. A pension of £5,000 (2005: £5,000) was paid to a former director. 3.6 Non-executive directors’ fees With effect from 1 March 2005, the fee payable to each of the non-executive directors has been £32,500 per annum. Responsibility for chairing a Board Committee or occupying the role of Senior Independent Director will attract a further annual fee of £3,000 except for the Audit Committee Chairmanship where the additional annual fee is £7,500. The fees payable to the non-executive directors have remained unaltered since March 2005. The non-executive directors’ fees are currently limited by the Articles of Association to £400,000 per annum in the aggregate and the Articles permit the directors to increase this cap annually in line with the index of wage inflation. Within the aggregate cap the annual fee for each non-executive director is determined by the Board, the non-executive directors taking no part in the deliberations. Each of the non-executive directors is appointed for a fixed term not exceeding three years. The appointments are renewable with the agreement of both parties again for terms not exceeding three years. Arriva plc Annual Report & Accounts 2006 39 D I R E C T O R S ’ R E M U N E R AT I O N R E P O RT c o n t i n u e d 4. Directors’ share interests The interests of the directors (including their family interests) in the share capital of the company at the beginning and at the end of the year are shown below: 1 January 2006 Sir Richard Broadbent S J Clayton S P Lonsdale D R Martin S G Batey N P Buckles A V M Palmer S G Williams 5. Pensions (audited information) D R Martin Scheme* Normal retirement age Director’s contribution Increase in accrued pension during the year (allowing for indexation) (£ pa) Gross increase in accrued pension (£ pa) Accrued pension at 31/12/2006 (£ pa) Accrued pension at 31/12/2005 (£ pa) Value of net increase in accrual over period (£) Transfer value of accrued pension at 31/12/2005 (£) Transfer value of accrued pension at 31/12/2006 (£) Total change in value during period (£) Company contribution to FURBS and/or personal pension during the year (£) Premium for additional life cover (£) *1 2 3 4 2 65 Nil 28,472 34,520 190,643 156,123 373,653 1,690,955 2,572,530 881,575 4 65 Nil n/a n/a n/a n/a n/a n/a n/a n/a 3,600 S J Clayton 3 65 Nil 14,430 16,365 88,081 71,716 138,848 692,279 847,755 155,476 S P Lonsdale 1 65 Nil 58,234 61,779 193,083 131,304 480,187 1,104,476 1,608,394 503,918 R J Davies 4 65 Nil 14,770 2,829 27,246 70,000 289,831 420,238 3,818 Nil Nil Nil 31 December 2006 27,246 80,000 314,831 452,974 7,268 5,000 Nil 1,060 19 February 2007 27,246 80,000 314,831 452,974 7,268 5,000 Nil 1,060 Arriva Pension Scheme. Arriva Passenger Services Pension Plan. Arriva London North & Arriva London South Pension Scheme. FURBS and/or Personal Pension Plan. Since 1 January 2000 Messrs Clayton, Lonsdale and Martin have been accruing benefits in their respective schemes at 1/30th of basic annual salary; for service after 31 December 1999 bonus ceased to be taken into account when computing pension benefits. No director elected to cease membership of his respective pension scheme in the light of the changes to the pension taxation regime which took effect on 6 April 2006. No future executive director external appointees to the Board will be eligible for a final salary based pension arrangement, but instead will receive a cash contribution equal to 25 per cent of base salary. Any active executive director internal appointees will be permitted to retain their existing pension arrangements. 40 Moving you across Europe 6. Service contracts Each of the three executive directors has a service contract dated 19 April 2006; the contracts are subject to twelve months’ notice from the company and six months’ notice from the director. Each contract contains covenants restricting the ability of the director, within a period of six months from termination, from competing with the company. The contracts make specific provision with regard to termination payments which are quantified as the sum of: (i) the director’s base pay at the date of termination; (ii) the amount of bonus estimated to be payable in respect of the year in which notice is served, but in any event capped at maximum of 40 per cent of base pay; and (iii) the value of the benefits in kind. Additionally in the case of termination by the company, the company will seek to procure that the director is credited with an additional twelve months’ service in his respective pension scheme. Should the director terminate the contract within six months of a change of control of the company he will receive a termination payment equal to 50 per cent of the termination payment described above. 7. External Board appointments The Board will permit executive directors to accept one appointment outside the company. Before accepting such appointments the director(s) involved must receive the prior approval of the Board. In considering such cases the Board will always satisfy itself, as far as is possible, that such appointments will not detract from the executive directors’ expected contribution to the company, nor that such appointment will create any conflict of interest; any fees earned by an executive director in such a capacity will be assigned to the company. 8. TSR graph In accordance with the provisions of Schedule 7A to the Companies Act 1985, detailed below is a graph charting the performance of the company’s Total Shareholder Return (share value growth plus re-invested dividend(s) over the past five years) compared with that of: (a) The FTSE 250 and (b) The FTSE 350 Travel and Leisure Index Total return indices - Arriva, FTSE 250 and FTSE 350 Travel and Leisure Index 300 250 200 150 100 50 31/12/2001 31/12/2002 Arriva return index 31/12/2003 31/12/2004 31/12/2005 31/12/2006 FTSE 250 return index FTSE 350 Travel & Leisure return index 9. Remuneration report approval An Ordinary Resolution to consider and if thought fit approve this Remuneration Report, will be proposed at the Annual General Meeting to be held on 18 April 2007. For and on behalf of the Board A V M Palmer Chairman, Remuneration Committee Arriva plc Annual Report & Accounts 2006 41 C O R P O R AT E G O V E R N A N C E Compliance statement The company has throughout the year under report complied in all material respects with the provisions of Section 1 of the Combined Code on Corporate Governance adopted by the Financial Reporting Council in July 2003 (‘the Code’). The principles of the Code have been applied as set out below. The Board and its structure The Board is responsible for the strategic direction of the company, and comprises the non-executive Chairman, four independent non-executive directors and three executive directors. Further details of the directors, including their biographies and committee memberships, is given on pages 32 to 33. The Board has a specific schedule of matters reserved for its decision including the approval of financial statements, long-term objectives and commercial strategy, treasury policy, health and safety policy, major capital investment and all matters concerning the maintenance and development of good corporate governance practice. The composition of the Board comprises a majority of independent non-executive directors. Steve Williams is the Senior Independent Director and his responsibilities include providing an additional channel of communication for shareholders should they feel it necessary to express any concerns outside the normal methods of communication with the company. The Board met ten times during 2006, including a two-day session devoted to strategy. In addition to business matters requiring its attention, the Board at each meeting receives an operational and progress report from the Chief Executive, financial reports from the Group Managing Director - Finance, and a report from the Group Managing Director - Corporate Affairs, which includes matters relevant to the development of the transport industry in the UK and mainland Europe. The Board also receives reports from Board Committee Chairmen and updates on corporate governance, regulatory and other compliance matters. The roles of both Chairman and Chief Executive are clearly divided and set out in writing. The Chairman is responsible for ensuring the smooth and effective operation of the Board and its Committees, including the flow of information to the Board, for Board membership and succession and for facilitating relationships between the company and investors. The Chief Executive is responsible for running the business and implementing the decisions of the Board. In particular the Chief Executive formulates and keeps under review proposals for the strategic direction of the business, ensures that appropriate operational resources are available, promotes the company to the investing community and potential investors, and accounts to the Board for the financial performance of the company. One third of the directors are required to submit themselves for re-election each year and all directors will have submitted themselves for re-election every three years. Newly appointed directors will be subject to election by the shareholders at the first opportunity after their appointment. All directors have access to the advice and services of the Company Secretary who administers the Board and Board Committee meetings, regularly updates the Board on matters of corporate governance and ensures that relevant procedures and regulations are adhered to. There is an established procedure for any of the directors (both executive and non-executive) to obtain independent professional advice at the company’s expense. An induction programme applies for all new appointees to the Board, which incorporates full briefing on the Arriva approach to corporate governance and a review of the business and Board and corporate issues. The induction programme also includes site visits in the UK and mainland Europe and one-to-one meetings with key senior managers. Existing directors also receive regular business updates and make site visits as appropriate. Opportunities to further develop Board skills and knowledge are also considered as part of the Board evaluation process. Board evaluation The Board undertakes an annual evaluation of its own performance. The 2006 evaluation was an internal process based on confidential questionnaires completed by each director and reviewed by the Chairman. The evaluation, which was discussed by the Board, focused principally on the Board’s performance following the change of Chief Executive in early 2006. As part of the 2006 evaluation process Steve Williams, Senior Independent Director, held confidential discussions with other directors of the Board as part of an evaluation of the performance of Sir Richard Broadbent in his role as Chairman. Training requirements for directors are determined as a result of the evaluation process. Board committees The Board has four Committees - Audit, Remuneration, Nomination and Safety. The Audit Committee met four times during the year, the Remuneration Committee five times, the Nomination Committee met once and the Safety Committee met four times. A table showing attendance at Board meetings and Board committee meetings is given on page 44. A copy of the terms of reference of the Board Committees can be accessed by visiting the company’s website www.arriva.co.uk. Audit Committee The Audit Committee comprises independent non-executive directors and is chaired by Simon Batey, a Chartered Accountant and Chief Financial Officer of Thames Water Utilities Limited. In addition to Mr Batey, the members of the Committee are Veronica Palmer and Steve Williams. It is the responsibility of the Committee to review and report to the Board on the company’s internal controls and risk management systems, including risk transfer and risk retention. The Committee reviews reports by Group Internal Audit and reports to the Board on action being taken to address issues arising from the reports. It also monitors the effectiveness of both the internal and external audit functions and is required to satisfy itself as to the continuing independence and objectivity of the external auditors. 42 Moving you across Europe The Committee’s terms of reference require it to monitor the integrity of all the company’s financial statements and any other statements which may be issued relating to the company’s financial performance or financial standing; this review will include an assessment of financial reporting judgments applied. To assist it in performing its duties the Committee may invite other members of the Board, the Head of Internal Audit, any member of the company’s senior management team and any representative of the company’s external auditors to attend its meetings; however no invitee has any right of attendance. It is the responsibility of the Committee members to ensure that they are regularly briefed and receive training on matters concerning financial reporting developments and associated skills. During 2006 the Committee undertook a review of the objectivity, resources and independence of the auditors PricewaterhouseCoopers LLP (‘PwC’) and has considered the appointment of the auditors for 2007. Following this review the Committee believes that PwC continues to deliver a satisfactory service and has recommended to the Board that PwC’s re-appointment as auditors be proposed at the Annual General Meeting. The Board has endorsed that recommendation. As part of its process for ensuring continued audit independence, the Audit Committee reviews and approves the level and nature of non-audit work performed by the auditors. For the year under review the value of non-audit work was £0.3 million and the fee for audit work was £0.7 million. A breakdown of the elements of the fee comprising non-audit work is provided in note 3(b) to the accounts on page 60. The Committee has established policies relating to non-audit work performed by the auditors and to the employment by the group of ex-employees of the external auditors. Also during 2006 the Committee conducted an appraisal of the role of Group Internal Audit and how effectively that role is discharged. The Committee concluded that the Group Internal Audit function was performing well and represents a significant and effective unit in both the monitoring of the group’s internal controls and the quality, reliability and integrity of the group’s accounting records. Remuneration Committee The Remuneration Committee comprises only independent non-executive directors of the company and is chaired by Mrs A V M Palmer, the other members being Mr S G Batey and Mr N P Buckles. Full details of the work and membership of the Committee appear in the Directors’ Remuneration Report on pages 37 to 41. Nomination Committee The Nomination Committee comprises the non-executive directors and is chaired by Sir Richard Broadbent. It is responsible for keeping under review the structure, size and operation of the Board and its Committees and for forming an assessment and making appropriate recommendations regarding the resourcing of the Board. In relation to new appointments the Committee, in consultation with the Chief Executive and relevant external advisors, will identify the particular skill set, personal attributes and characteristics that are perceived as necessary to fulfill the role and will produce an appropriate job description and be directly involved in the recruitment process. It is also the responsibility of the Committee, together with the Chairman of the Board, to ensure the effective application of the Board evaluation procedure. The Committee also monitors and reviews senior management succession planning and during the year a comprehensive succession exercise covering senior management immediately below Board level, which commenced in 2005, was completed. Safety Committee The Safety Committee comprises Nick Buckles, Chairman of the Committee, Sir Richard Broadbent, Steve Williams (all non-executive directors) and Steve Clayton who as Group Managing Director - Corporate Affairs is responsible for health and safety. The Group Safety and Environment Manager supports the Committee in its work. The Committee met four times during the year. The Board recognises the fundamental importance of safety within the business and the Safety Committee exists to ensure that the appropriate Board level attention and overview is devoted to this subject. The Committee is required to identify and address key issues that may impact on the company, to review the key safety performance indicators, to advise the Board of Directors on the adequacy and effectiveness of the overall safety policy of the group and review and report on the company’s internal safety management system. In June 2006 the Board approved a revised Safety Policy statement, as developed by the Safety Committee, which reflects the arrangements in place for successful safety management across all Arriva businesses. The Safety Policy statement forms part of the Group Policy Manual and can be found on the Arriva website www.arriva.co.uk. Arriva plc Annual Report & Accounts 2006 43 C O R P O R AT E G O V E R N A N C E c o n t i n u e d Board and board committee attendance information BOARD (10 Meetings) Sir Richard Broadbent D R Martin S P Lonsdale S J Clayton A V M Palmer S G Batey N P Buckles S G Williams R J Davies* *Retired 19 April 2006. Relations with shareholders The company has an established programme of communication with shareholders and the Corporate Communications department organises presentations for analysts and investors. It is the Board’s intention that these arrangements should continue and are designed to facilitate a helpful and constructive dialogue between the company and major investors, while meeting statutory and regulatory requirements. A procedure has been established for the non-executive directors to receive direct feedback from the company’s stockbrokers of the investing community’s perception of the Board’s performance and strategy. Annual General Meeting The Annual General Meeting is an important opportunity for the Board to communicate with shareholders, particularly private shareholders. A presentation on the progress and performance of the business is made by the Chief Executive following the formal business of the meeting, and the Chairmen of the Audit, Remuneration, Nomination and Safety Committees are available to answer questions. Following each resolution, the meeting is informed of the number of proxy votes submitted in respect of each resolution; this information is also published on the company’s website following the meeting. Group policies In June 2006 the Board approved a Group Policy Manual, which is designed to strengthen the group’s corporate governance and internal control. The group policies, which relate to all major business processes and risks, have been circulated throughout the group and all businesses are required to certify their continued compliance with these policies as part of the internal control processes of the group. The policies are subject to periodic review and updating to take account of changes in regulation, legislation and best practice and the results from the ongoing risk assessment process as described below. All subsidiaries are required to follow group policies, although it is recognised that newly acquired businesses may require a period of time before being able to fully implement all of the policies. Subsidiary companies are required to report to the Chief Executive, on an annual basis, any departures or non-compliance with group policies. Whistleblowing The group operates a ‘Whistleblowing’ policy and procedure whereby employees can, in confidence, report on matters where they feel a malpractice is taking place, or if health and safety standards are being compromised. Areas that are addressed by this procedure cover financial malpractice, criminal activities, dangers to health and safety, improper or unethical behaviour and risks to the environment. The procedures allow for employees to raise their concerns with line management or, if this is inappropriate, to raise them on a confidential basis. A confidential telephone mailbox and confidential e-mail facility are provided to protect the identity of employees in these circumstances. The complaint will be investigated in a confidential manner and, after a decision is made as to what further steps should be taken, feedback is given to the person making the complaint. An official written record is kept of each stage of the procedure, and a report of the outcomes of all investigations is made to the Board. The ‘Whistleblowing’ policy and its operation is subject to periodic review by the Audit Committee; the last review was in February 2007. 10 10 10 10 10 10 10 8 3 AUDIT (4 Meetings) 4 4 4 NOMINATION (1 Meeting) 1 1 1 1 1 SAFETY (4 Meetings) 4 4 4 3 REMUNERATION (5 Meetings) 5 4 5 4 - 44 Moving you across Europe Internal control Companies are required to report to shareholders that they have conducted an annual review of the effectiveness of the system of internal control. The review required extends beyond financial controls to encompass operational and compliance control and risk management. The directors are responsible for the group’s system of internal control. Whilst no system can provide absolute guarantees and protection against material loss, the systems are designed to give the directors reasonable assurance that problems can be identified promptly and remedial action taken as appropriate. An ongoing process for identifying, evaluating and managing the significant risks facing the group has been in place throughout the year under review and continues to remain in place. The Board has reviewed the effectiveness on an ongoing basis of the system of internal control for the accounting period under review. The key features of the internal control system are: (a) Organisation structure The structure of the organisation is so designed to minimise, as far as possible, the complexity of the reporting arrangements commensurate with the commercial demands made on the group. The structure focuses on the core businesses of the group and stringent reporting procedures are applied to ensure that performance is closely monitored so that effective and prompt action can be taken if the need arises. Certain of the group’s key functions including company secretarial, legal, taxation, internal audit, treasury, insurance and health and safety policy are undertaken centrally. (b) Financial reporting The group operates a comprehensive financial control system with each operating division’s performance being closely monitored against budget, forecast and prior year performance. Monthly management accounts are prepared for consideration by the Board as a whole, and are issued in a timely manner to ensure proper consideration can be given to the information. (c) Group Internal Audit The internal control systems are comprehensively supported by the Group Internal Audit department. Group Internal Audit is responsible for advising all levels of management, and the Board of directors through the Audit Committee, on the quality of the operational systems of control for all parts of the group. This review and appraisal function does not relieve line management of its responsibility for effective control. Group Internal Audit functions by conducting independent appraisals in a professional manner leading to reports detailing findings and agreed actions. Group Internal Audit undertakes annual financial reviews of the balance sheets of all of the group’s material trading subsidiaries and engages in a cycle of operational and risk reviews both on scheduled and random bases; the Head of Group Internal Audit reports directly to the Audit Committee. Group Internal Audit is staffed by appropriately qualified and experienced auditors. (d) Risk assessment and risk control An essential element of good internal control is the continual process of risk assessment and the implementation of appropriate controls designed to eliminate or mitigate the effects of the crystallisation of identified major risks. The approach adopted by the Board involves a process which is designed to encourage divisional operational staff to critically examine their responsibilities and identify those risks which are of such a nature that their crystallisation would have a material impact on their business. In order for this process to succeed it is essential that ‘ownership’ of risk awareness, risk identification and risk control is fully embraced by line management as an essential ingredient of its normal responsibilities. In implementing its risk assessment programme the Board has devolved to the Audit Committee the task of implementing and maintaining an appropriate risk assessment and control programme and it works closely with the Head of Group Internal Audit in engaging in a formal review of the key business risks to the group. In the development of this programme there are a number of fundamental issues that the Board has identified as being absolutely critical to the success and effectiveness of the risk management and control programme, and in formulating its approach has structured the programme around the key areas of: • Clear leadership from the Board • The need for risk management to be seen as part of everyday activity and to be embedded in line management culture • Clear communication of the principles involved • Active support and involvement of the Group Internal Audit function • Regular review of the process and continual assessment of the changing nature of the risks presenting themselves to the business • Updating of the Group Policy Manual following the identification of new significant risks. Arriva plc Annual Report & Accounts 2006 45 C O R P O R AT E G O V E R N A N C E c o n t i n u e d The Board recognises that, as in any business, Arriva must manage a range of risks in the course of its activities, and that failure adequately to manage these risks could adversely impact the business. As part of the ongoing risk assessment and management programme three principal risks facing the business have been identified as: (i) Failure to meet health, safety and environmental standards The Board has made health and safety the key brand value of the group and clearly recognises the importance to the business, as a public transport operator, of maintaining high standards and the consequences of failing to do so. A Safety Committee of the Board has been established for a number of years with the prime objective to oversee the company’s safety policy and the arrangements for its implementation and reporting. Health and safety issues are discussed regularly on a structured basis at both the Safety and the Executive Committees. A process of self-certification (supported by appropriate responsibilities and accountabilities) has been fully implemented in the UK for some time and has recently been introduced into our mainland Europe operations. (ii) Proposed changes in transport legislation and/or regulations This is a risk that faces the group in all of the countries in which it operates. In the UK, the Goverment is currently planning changes to UK transport legislation that it is expected to outline in a draft bill in Spring 2007. This has the potential for a significant impact on the UK transport industry of which Arriva is a part. Arriva, alongside other UK transport operators, is monitoring developments in this area. In addition Arriva pays very close attention to legislative developments in the EU that may impact on the business. (iii) Changes in public transport budgets A substantial proportion of the group’s business is contracted with national or local government or their agencies. Whilst, in the shortterm, the group has significant protection from its contracts, the medium to long-term outlook may be impacted positively or negatively by changes in the allocation of funds to public transport. The group continues to ensure that it is strategically aware in all of the markets in which it operates of possible changes in order to understand and react to them in a timely fashion. Going concern The directors confirm that, after having made appropriate enquiries, they have a reasonable expectation that the group and the company have adequate resources to continue in operational existence for the foreseeable future. Accordingly the directors continue to adopt the going concern basis in the preparation of the Accounts. This approach was endorsed by the Audit Committee at its meeting held on 28 February 2007. S TAT E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of 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 judgments and estimates that are reasonable and prudent State that the financial statements comply with International Financial Reporting Standards (IFRS) Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the group will continue in business. The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of 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 the group’s website. Financial information published on the website is based on legislation in the United Kingdom governing the preparation and dissemination of financial statements and may differ from legislation in other jurisdictions. 46 Moving you across Europe I N D E P E N D E N T A U D I T O R S ’ R E P O RT T O T H E M E M B E R S O F A R R I VA P L C We have audited the group financial statements of Arriva plc for the year ended 31 December 2006 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Arriva plc for the year ended 31 December 2006 and on the information in the Directors’ Remuneration Report that is described as having been audited. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. The directors are also responsible for the preparation of the Annual Report. Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, 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. We report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors' Report is consistent with the group financial statements. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited group financial statements. The other information comprises only the Chairman’s Statement, the Chief Executive’s Review, the Financial Review, the Corporate Responsibility Review, the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, the Corporate Governance Statement, the Five-Year Financial Summary and the other reports on pages 2 to 11. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements. Opinion In our opinion: • • • the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended; the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and the information given in the Directors' Report is consistent with the group financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 12 March 2007 Arriva plc Annual Report & Accounts 2006 47 F I N A N C I A L S TAT E M E N T S Group income statement for the year ended 31 December 2006 notes Continuing operations Revenue Net operating expenses Group operating profit Share of post tax profits from associates Net finance costs Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the year from continuing operations Discontinued operations Profit for the year from discontinued operations Profit for the year Attributable to: Equity holders of the parent Minority interests 6 2 3 5 1 3(a) 1,729.0 (1,609.5) 119.5 1.9 (11.6) 109.8 (25.2) 84.6 20.1 104.7 1,571.2 (1,460.0) 111.2 1.4 (9.5) 103.1 (19.8) 83.3 3.0 86.3 2006 £m 2005 £m 102.3 2.4 104.7 85.9 0.4 86.3 19.84p Dividends per ordinary share Earnings per share Basic earnings per share Diluted earnings per share Earnings per share from continuing operations Basic earnings per share Diluted earnings per share Basic earnings per share before goodwill impairment, intangible asset amortisation and exceptional items from continuing operations 7 8(a) 20.83p 51.8p 51.4p 8(a) 41.6p 41.3p 43.7p 43.3p 42.2p 41.8p 8(b) 44.4p 43.6p 48 Moving you across Europe Group balance sheet at 31 December 2006 notes Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments Derivative financial instruments 9 10 11 12 20 2006 £m 286.4 34.9 982.5 51.4 3.9 1,359.1 Current assets Inventories Trade and other receivables Cash and cash equivalents Derivative financial instruments 13 14 15 20 34.9 221.1 87.6 9.4 353.0 Total assets Current liabilities Trade and other payables Tax liabilities Obligations under finance leases Bank overdrafts and loans Derivative financial instruments 1,712.1 2005 £m 277.5 40.8 1,092.8 7.9 15.0 1,434.0 27.8 209.4 94.1 7.5 338.8 1,772.8 16 17 18 18 20 369.6 16.5 24.8 131.5 13.6 556.0 388.6 29.8 18.2 145.4 582.0 203.8 93.3 207.4 44.3 69.3 69.0 687.1 1,269.1 503.7 Non-current liabilities Bank loans Other loans Retirement benefit obligations Deferred tax liabilities Obligations under finance leases Other non-current liabilities Derivative financial instruments 18 18 21 22 18 19 20 108.7 147.4 173.8 45.3 53.6 67.3 1.2 597.3 Total liabilities Net assets Equity Share capital Share premium account Other reserves Retained earnings Total shareholders’ equity Minority interest in equity Total equity 1,153.3 558.8 23 26 25 26 26 26 9.9 22.4 58.0 452.2 542.5 16.3 558.8 9.8 19.1 75.0 383.5 487.4 16.3 503.7 D R Martin S P Lonsdale | Directors Approved by the Board on 7 March 2007 Arriva plc Annual Report & Accounts 2006 49 F I N A N C I A L S TAT E M E N T S c o n t i n u e d Group cash flow statement for the year ended 31 December 2006 notes Cash flows from operating activities Cash generated from operations Interest and finance charges paid Tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisitions of businesses Net cash assumed on acquisitions Investment in associates Disposal of businesses Purchase of property, plant and equipment Disposal of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issuing ordinary share capital Decrease in loans due within one year (Decrease)/increase in loans due after one year (Decrease)/increase in finance lease obligations Dividends paid to the company’s shareholders Dividends paid to minority interests Net cash (used)/generated in financing activities Net increase/(decrease) in cash, cash equivalents and overdrafts Cash, cash equivalents and overdrafts at the beginning of the year Exchange losses on cash, cash equivalents and overdrafts Cash, cash equivalents and overdrafts at the end of the year 27(c) 27(c) 27(c) 27(c) 27(b) 2006 £m 160.0 (12.1) (24.9) 123.0 (20.9) 1.9 (41.8) 130.2 (171.2) 78.7 (23.1) 1.2 (6.6) (45.9) (7.9) (39.6) (0.9) (99.7) 0.2 71.6 (0.7) 71.1 2005 £m 207.9 (15.2) (25.8) 166.9 (45.5) 7.3 (0.8) 12.0 (252.5) 56.6 (222.9) 3.8 (1.8) 61.4 26.3 (37.7) 52.0 (4.0) 76.6 (1.0) 71.6 50 Moving you across Europe Group statement of recognised income and expense for the year ended 31 December 2006 2006 £m Net foreign exchange adjustments offset in reserves, net of tax Cash flow hedges, net of tax Actuarial gains/(losses) on defined benefit schemes, net of tax Net (expense)/income recognised directly in equity Profit for the year Total recognised income and expense for the year Adoption of IAS39, net of tax Total recognised income and expense Attributable to: Equity holders of the parent Minority interests (3.4) (17.0) 9.9 (10.5) 104.7 94.2 94.2 2005 £m (1.9) 9.2 (4.5) 2.8 86.3 89.1 3.7 92.8 92.3 1.9 94.2 92.3 0.5 92.8 Arriva plc Annual Report & Accounts 2006 51 ACCOUNTING POLICIES Basis of preparation As an EU listed company, Arriva plc is required to prepare its group accounts in accordance with EU endorsed International Financial Reporting Standards (IFRS), International Financial Reporting Interpretations Committee (IFRIC) interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. These financial statements have been prepared in accordance with EU endorsed IFRS, IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS for periods ending 31 December 2006. The financial statements are prepared on the historical cost basis of accounting, other than for certain items of property, plant and equipment that have been stated at deemed cost under the transitional rules of IFRS, share-based payment charges and derivative financial instruments which are measured at fair value. The principal accounting policies of the group are set out below: Basis of consolidation The consolidated financial statements incorporate the financial statements of Arriva plc and its subsidiaries made up to 31 December each year. Subsidiaries are entities over which the group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the group and de-consolidated from the date control ceases. The group’s interests in jointly controlled entities are accounted for by proportional consolidation, combining its share of the joint ventures’ profits, assets, liabilities and cash flows on a line-by-line basis with those of the group. Associates are those entities over which the group can exercise significant influence, but not control or joint control. Associates are accounted for using the equity method. All business combinations are accounted for by applying the purchase method. On acquisition, the assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. The excess of the cost of acquisition over the fair value of the group’s share of net assets acquired is recorded as an intangible asset or goodwill. If the cost of acquisition is less than the fair value of the group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Intercompany transactions, balances, income and expenses are eliminated on consolidation. Revenue recognition Revenue represents the fair value of consideration received or receivable in respect of the provision of public transport services and related activities in the UK and mainland Europe. Generally, revenue is recognised by reference to the stage of completion method, principally with respect to the percentage of services rendered to fare-paying customers, or the percentage of services provided under contractual arrangements. For contractual arrangements where significant timing differences may arise between the timing of cash revenues and cash costs, revenue is recognised with respect to the proportion of the total costs incurred to date. Proceeds from the disposal of non-current assets are excluded from revenue. Use of estimates and accounting assumptions The preparation of financial statements requires management to make estimates and assumptions that affect the group’s reported results. Although these estimates are based on management’s best knowledge at the time, actual results could differ from those estimates. The key areas of judgment or estimation which could impact the results in the next financial year were they to change include the economic useful lives of property, plant and equipment (disclosed below), the use of actuarial assumptions for measurement of retirement benefit obligations (see note 21), and the use of forecasts in respect of the annual testing for impairment of goodwill. Exceptional items Exceptional items are those items which, because of their nature and materiality, merit separate presentation to allow a better understanding of the group’s financial performance. Segment reporting The group’s primary risks and rates of return are determined by both the business and geographical areas in which it operates. Disclosure of results by business segment is used as the basis for primary segment disclosures, in line with the group’s internal management reporting structure. Government grants Government grants relating to capital expenditure are included as deferred income and are credited to the income statement over the expected useful economic life of the assets concerned. Revenue related grants are credited to the income statement when the related expenditure is expensed. Foreign currency translation The trading results of overseas subsidiary undertakings are translated into sterling using average rates of exchange. Foreign currency assets and liabilities are translated into sterling at the rates of exchange ruling at the balance sheet date. Differences on exchange arising from the retranslation of the opening investment in subsidiary undertakings and the associated borrowings or hedging instruments, where hedge accounting is permitted, are taken to the Statement of Recognised Income and Expense. Cumulative currency gains and losses in reserves are recycled to the income statement on disposal of operations. Property, plant and equipment Land and buildings held for use in the delivery of passenger transport services and for administration purposes are stated in the balance sheet at cost or deemed cost. 52 Moving you across Europe Depreciation is calculated using the straight-line method to allocate the cost of each asset less its residual value over its estimated useful life as follows: Buildings Fixtures, fittings, plant and machinery Motor vehicles - short-term rental vehicles Motor vehicles - buses and coaches Rail rolling stock 50 years 3 - 10 years up to 7 years up to 15 years up to 35 years Major refurbishment work on rail rolling stock is capitalised and depreciated over the interval to the subsequent related major refurbishment. Interest costs incurred in financing the construction of certain assets are capitalised where they are considered significant in relation to the asset being constructed and the asset necessarily takes a substantial period of time to be prepared for its intended use. Rail rolling stock undergoing post construction acceptance testing is not depreciated until the commencement of full operational service. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets, liabilities and contingent liabilities at the date of acquisition. Goodwill on acquisition of subsidiaries and joint ventures is disclosed separately in non-current assets. Goodwill on acquisition of associates is included in investments. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill previously eliminated against reserves has not been reinstated. Intangible assets Intangible assets are recognised when acquired as part of business combinations where customer related contractual cash flows exist, and their fair value can therefore be measured reliably. Intangible assets purchased separately are measured at cost. Intangible assets that have a finite life are amortised annually over their expected useful lives. Impairment At each balance sheet date the group reviews the carrying amount of its tangible and intangible assets to determine whether there are any indicators of impairment. If indicators of impairment exist then the recoverable amount of an asset or cash generating unit is estimated based on pre-tax discounted future cash flows. Where individual assets do not generate cash flows independent from other assets, the group reviews the carrying value and recoverable amount of a cash generating unit. This is the smallest group of assets where independent cash flows are produced. If the recoverable amount of an asset or cash generating unit is less than its carrying amount, the difference is recognised in the income statement as an impairment loss. Inventories Inventories are stated at the lower of cost and net realisable value after making allowances for slow moving or obsolete items. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the initial carrying value and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. Taxation Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities using the tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date. Deferred 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 consolidated financial statements. However, deferred tax is not recognised if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using the tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax liabilities are recognised on taxable temporary differences associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Arriva plc Annual Report & Accounts 2006 53 ACCOUNTING POLICIES continued Pensions The group operates both defined benefit and defined contribution retirement benefit schemes. The group also participates in a number of multi-employer retirement benefit schemes and a number of state-managed retirement benefit schemes. The liability recognised in the balance sheet in respect of the group’s defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised past service costs. The defined benefit obligation is calculated using the projected unit credit method. Formal actuarial valuations are carried out on a triennial basis, with updated calculations being prepared at each balance sheet date. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The cost of providing future benefits (service cost) is charged to the income statement in net operating expenses. The return on scheme assets and interest obligation on scheme liabilities comprise a pension finance adjustment which is included in net operating expenses. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity and shown in the Statement of Recognised Income and Expense in the period in which they arise. Certain overseas defined benefit schemes, where the employer’s underlying assets and liabilities are not separately identifiable within the scheme, are accounted for as defined contribution schemes under IAS19. Contributions to these schemes, and the group’s defined contribution schemes, are charged to the income statement as they arise. Share-based payments The group issues equity settled share-based payments to certain employees, which are measured at fair value at the date of grant. The fair value is expensed on a straight-line basis over the vesting period, based on the group’s estimate of shares that will eventually vest. The impact of revising original estimates, if any, is included in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Leases Leases of property, plant and equipment where the group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other payables. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest costs charged to the income statement on the outstanding balance. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Cash and cash equivalents Cash comprises cash in hand and demand deposits. Cash equivalents are short-term highly liquid investments with a maturity of less than 90 days that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Derivative financial instruments The group uses derivative financial instruments to reduce exposures to foreign currency exchange risk, interest rate risk and changes in fuel prices to acceptable levels. All derivatives are initially recognised at fair value, and are subsequently remeasured to fair value at each reporting date. Derivatives designated as hedging instruments are accounted for in line with the nature of the hedging arrangement. Derivatives are intended to be highly effective in mitigating the above risks, and hedge accounting is adopted where the required hedge documentation is in place and the relevant test criteria are met. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. Foreign currency exchange risk Derivatives are entered into in order to hedge exposure to foreign currency exchange risk. The group also uses foreign currency debt to hedge foreign currency exposures. Both the derivatives and debt are designated as hedges of net investments in overseas subsidiaries. 54 Moving you across Europe Interest rate and fuel price risk Derivative instruments are used to manage the group’s exposure to changes in cash flows arising from movements in interest rates and fuel prices. The derivatives are designated as cash flow hedges, and hedge accounting is used where it has been shown that the hedge relationship is highly effective. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Dividend distribution Dividend distributions to the company’s shareholders are recognised in the group’s financial statements in the period in which the dividends are paid. New standards and interpretations not applied The following standards and interpretations have been issued by the International Accounting Standards Board (IASB) and IFRIC with an effective date that does not impact on these financial statements. International Accounting Standards and Interpretations IFRS7 IFRS8 IAS1 IFRIC7 IFRIC8 IFRIC9 IFRIC10 IFRIC11 IFRIC12 Financial Instruments: Disclosures Operating Segments Amendment – Presentation of financial statements Applying the restatement approach under IAS29 Financial Reporting in Hyperinflationary Economies Scope of IFRS2 Reassessment of embedded derivatives Interim financial reporting and impairment IFRS2: Group and Treasury Share Transactions Service Concession Arrangements Effective date 1 January 2007 1 January 2009 1 January 2007 1 March 2006 1 May 2006 1 June 2006 1 November 2006 1 March 2007 1 January 2008 Upon adoption of IFRS7, the group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail although there will be no effect on the reported income or net assets. The directors do not anticipate that the adoption of any of the other above standards will have a material impact on the group’s financial statements in the period of initial application. Arriva plc Annual Report & Accounts 2006 55 NOTES TO THE ACCOUNTS 1. Segmental reporting Primary reporting format - business segments year ended 31 December 2006 UK Bus £m Revenue EBITDA Depreciation Operating profit* Goodwill impairment and intangible asset amortisation Group operating profit Share of post tax profits from associates Net finance costs Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year Profit attributable to minority interests Net profit attributable to equity shareholders * Before goodwill impairment and intangible asset amortisation. (a) Included above is £12.2 million of revenue and £0.8 million of operating profit, before goodwill impairment and intangible asset amortisation, relating to the acquisitions made by the mainland Europe division during the year. There is £11.1 million of revenue and £1.1 million of operating profit relating to acquisitions made by the UK Bus division. (b) Operating profit stated above includes £0.5 million of property profits. (c) The share of post tax profit from associates of £1.9 million above includes £0.9 million from the investment in Barraqueiro SGPS SA made in May 2006. (d) The profit for the year from discontinued operations relates to Arriva Vehicle Rental, and is analysed in note 6. (e) The UK Bus business segment now includes Bus & Coach, which was previously disclosed as a separate business segment. (f) Revenue for UK Trains includes franchise agreement receipts amounting to £142.0 million. 762.8 130.4 (54.4) 76.0 76.0 Mainland Europe £m 712.3 100.9 (48.9) 52.0 (6.4) 45.6 1.9 UK Trains £m 253.9 14.5 (2.2) 12.3 (0.8) 11.5 Central £m (12.9) (0.7) (13.6) (13.6) Total operations £m 1,729.0 232.9 (106.2) 126.7 (7.2) 119.5 1.9 (11.6) 109.8 (25.2) 84.6 20.1 104.7 (2.4) 102.3 56 Moving you across Europe Primary reporting format - business segments year ended 31 December 2005 UK Bus £m Revenue EBITDA Depreciation Operating profit* Goodwill impairment and intangible asset amortisation Group operating profit Share of post tax profits from associates Net finance costs Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year Profit attributable to minority interests Net profit attributable to equity shareholders * Before goodwill impairment and intangible asset amortisation. (a) Included above is £19.0 million of revenue and £2.0 million of operating profit, before goodwill impairment and intangible asset amortisation, relating to the acquisitions made by the mainland Europe division during the year. There is £7.2 million of revenue and £0.4 million of operating profit relating to acquisitions made by the UK Bus division. (b) Operating profit stated above includes £2.2 million of property profits. (c) The profit for the year from discontinued operations relates to Arriva Vehicle Rental, and is analysed in note 6. (d) The UK Bus business segment now includes Bus & Coach, which was previously disclosed as a separate business segment. (e) Revenue for UK Trains includes franchise agreement receipts amounting to £136.3 million. 710.6 122.0 (50.3) 71.7 71.7 Mainland Europe £m 621.2 88.4 (41.4) 47.0 (5.8) 41.2 1.4 UK Trains £m 239.4 16.3 (1.4) 14.9 (0.8) 14.1 Central £m (15.4) (0.4) (15.8) (15.8) Total operations £m 1,571.2 211.3 (93.5) 117.8 (6.6) 111.2 1.4 (9.5) 103.1 (19.8) 83.3 3.0 86.3 (0.4) 85.9 Arriva plc Annual Report & Accounts 2006 57 NOTES TO THE ACCOUNTS continued 1. Segmental reporting (continued) Primary reporting format - business segments year ended 31 December 2006 Mainland Europe £m 819.0 51.4 Discontinued operations £m - UK Bus £m Segment assets Investment in equity accounted associates Unallocated assets: - Cash and cash equivalents - Derivative financial instruments Total assets 658.0 - UK Trains £m 66.4 - Central £m 16.4 - Group £m 1,559.8 51.4 87.6 13.3 658.0 870.4 (270.0) 66.4 (86.5) 16.4 (33.1) - 1,712.1 (673.4) (466.0) (14.8) 0.9 Segment liabilities (283.8) Unallocated liabilities: - Corporate borrowings - Derivative financial instruments - Deferred tax on derivative financial instruments Total liabilities Net assets Other segment items Capital expenditure: - Property, plant and equipment existing businesses - Property, plant and equipment acquisitions (283.8) (270.0) (86.5) (33.1) - (1,153.3) 558.8 51.3 4.8 101.5 11.9 8.8 - 5.4 - 4.2 - 171.2 16.7 year ended 31 December 2005 UK Bus £m Segment assets Investment in equity accounted associates Unallocated assets: - Cash and cash equivalents - Derivative financial instruments Total assets 677.2 Mainland Europe £m 794.9 7.9 UK Trains £m 54.8 Central £m (8.4) Discontinued operations £m 129.8 Group £m 1,648.3 7.9 94.1 22.5 677.2 802.8 (279.3) 54.8 (99.7) (8.4) (8.6) 129.8 (19.8) 1,772.8 (732.7) (530.0) (6.4) (279.3) (99.7) (8.6) (19.8) (1,269.1) 503.7 Segment liabilities (325.3) Unallocated liabilities: - Corporate borrowings - Deferred tax on derivative financial instruments Total liabilities Net assets Other segment items Capital expenditure: - Property, plant and equipment existing businesses - Property, plant and equipment acquisitions - Intangible assets (325.3) 82.1 5.7 - 104.7 53.2 1.4 4.0 - 0.1 - 61.6 - 252.5 58.9 1.4 58 Moving you across Europe Secondary reporting format - geographical segments The group’s operations are located in the UK and mainland Europe. The UK is the home country of the parent. Revenue 2006 £m Continuing operations UK Mainland Europe 1,016.7 712.3 1,729.0 Discontinued operations in the UK Investments in equity accounted associates Unallocated assets: - Cash and cash equivalents - Derivative financial instruments 2005 £m 950.0 621.2 1,571.2 Segment assets 2006 £m 740.8 819.0 1,559.8 51.4 87.6 13.3 1,712.1 2005 £m 723.6 794.9 1,518.5 129.8 7.9 94.1 22.5 1,772.8 Capital expenditure 2006 £m 65.5 101.5 167.0 4.2 171.2 2005 £m 86.2 104.7 190.9 61.6 252.5 2. Net finance costs 2006 £m Interest expense: - Interest payable on bank and other borrowings repayable within five years - Interest payable on bank and other borrowings repayable after five years Finance lease charges Hire purchase charges Interest payable and similar charges Interest income: - Interest receivable on other financing items Net finance costs 10.2 0.2 4.1 2.6 17.1 (5.5) 11.6 2005 £m 4.7 0.6 3.2 4.4 12.9 (3.4) 9.5 3. Profit on ordinary activities before taxation (a) Net operating expenses: Operating costs Administrative expenses 2006 £m 1,375.2 234.3 1,609.5 2005 £m 1,261.4 198.6 1,460.0 Arriva plc Annual Report & Accounts 2006 59 NOTES TO THE ACCOUNTS continued 3. Profit on ordinary activities before taxation (continued) (b) The following items have been included in arriving at operating profit from continuing operations: Staff costs Depreciation of property, plant and equipment Amortisation of intangible assets Impairment of goodwill Profit on disposal of properties Operating lease rentals payable: - Plant and machinery - Property During the year the group (including its overseas subsidiaries) obtained the following services from the group’s auditors and network firms as detailed below: Remuneration payable to the company’s auditors for the auditing of the annual accounts The auditing of accounts of associates of the company pursuant to legislation (including that of countries and territories outside Great Britain) Services relating to taxation All other services 2006 £m 869.0 106.2 5.4 1.8 (0.5) 128.6 15.6 2006 £m 0.4 0.3 0.2 0.1 1.0 2005 £m 813.2 93.5 5.1 1.5 (2.2) 125.3 15.1 2005 £m 0.4 0.3 0.3 0.6 1.6 Included in the group’s audit fees and expenses paid to the auditors is £0.1 million (2005: £0.1 million) in respect of the parent company. 4. Employee information (a) Average number of employees by business: UK Bus UK Trains Mainland Europe 2006 Number 17,773 2,157 12,374 32,304 Central Continuing operations 131 32,435 2006 £m 746.6 82.7 39.7 869.0 2005 Number 17,750 1,930 11,987 31,667 115 31,782 2005 £m 695.8 77.9 39.5 813.2 (b) Staff costs from continuing operations: Wages and salaries Social security costs Pension costs Key management personnel are considered to be the directors and their remuneration is disclosed within the Directors’ Remuneration Report. 60 Moving you across Europe 5. Taxation Analysis of charge in the year for continuing operations Current tax Deferred tax Taxation 2006 £m 9.3 15.9 25.2 2006 £m 2.4 (7.3) 3.2 (1.7) 2005 £m 21.0 (1.2) 19.8 2005 £m 1.6 2.7 0.8 4.0 (1.3) 7.8 Tax on items (credited)/charged directly to equity Adoption of IAS39 Current tax charge on exchange movements offset in reserves Deferred tax charge on cross currency swaps Deferred tax (credit)/charge on cash flow hedges Deferred tax charge/(credit) on actuarial gains/(losses) on defined benefit schemes Total tax on items (credited)/charged directly to equity The tax for the year is lower (2005: lower) than the standard rate of corporation tax in the UK of 30 per cent (2005: 30 per cent). The differences are explained below: 2006 2005 £m £m Profit on ordinary activities before taxation Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30 per cent (2005: 30 per cent) Effects of: - Adjustments to tax in respect of prior years - Income not subject to tax - Expenses not deductible for tax purposes - Utilisation of previously unrecognised tax losses - Tax losses arising where no deferred tax asset has been recognised - Different tax rates of subsidiaries operating in other jurisdictions - Other Total taxation 109.8 32.9 (8.7) (0.3) 2.0 (4.2) 0.5 3.6 (0.6) 25.2 103.1 30.9 (10.3) (1.9) 2.1 (4.0) 1.4 3.1 (1.5) 19.8 6. Discontinued operations 2006 £m Post tax results from discontinued operations Gain on disposal of subsidiary Profit for the year from discontinued operations 0.1 20.0 20.1 2005 £m 3.0 3.0 On 3 February 2006, the group completed the disposal of the vehicle rental business for a total consideration of £130.2 million, comprising £54.9 million for the equity in the business and for certain other assets held by other companies within the Arriva group, and £75.3 million in reduced debt. There is no taxation arising on the gain on disposal. Arriva plc Annual Report & Accounts 2006 61 NOTES TO THE ACCOUNTS continued 6. Discontinued operations (continued) Cash flows from discontinued operations Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities 2006 £m (0.2) 132.3 132.1 2005 £m 21.6 (23.6) (0.3) (2.3) Net cash flows from operating activities represents £0.3 million (2005: £27.6 million) cash generated from discontinued operations, see note 27(b), less interest paid of £0.5 million (2005: £5.8 million) and tax paid of nil (2005: £0.2 million). These cash flows are included in the group cash flow statement. 2006 £m 5.0 (4.4) 0.6 (0.5) 0.1 20.0 20.1 2005 £m 55.6 (45.4) 10.2 (5.9) (1.3) 3.0 3.0 The post tax results of the discontinued operations comprise: Revenue Net operating expenses Operating profit Finance costs Taxation Post tax results from discontinued operations Gain on disposal of subsidiary Profit for the year from discontinued operations 7. Dividends 2006 £m Final dividend paid for the year ended 31 December 2005 of 14.77 pence (2005: final dividend paid for the year ended 31 December 2004 of 14.07 pence) per share Interim dividend paid for the year ended 31 December 2006 of 5.32 pence (2005: interim dividend paid for the year ended 31 December 2005 of 5.07 pence) per share Amounts recognised as distributions to equity holders in the year 29.2 10.4 39.6 2005 £m 27.7 10.0 37.7 The directors are proposing a final dividend in respect of the financial year ending 31 December 2006 of 15.51 pence per share which will absorb an estimated £30.7 million of shareholders’ funds. It will be paid on 1 May 2007 to shareholders who are on the Register of Members on 30 March 2007. 62 Moving you across Europe 8. Earnings per share 2006 (a) Basic and diluted earnings per share Profit attributable to ordinary shareholders Weighted average number of shares Basic earnings per share Performance-based share option schemes: Additional shares for earnings contingency Number of shares that would have been issued at fair value Diluted earnings per share Earnings per share from continuing operations Basic earnings per share Gain on disposal of subsidiary Post tax results from discontinued operations Basic earnings per share from continuing operations Diluted earnings per share Gain on disposal of subsidiary Post tax results from discontinued operations Diluted earnings per share from continuing operations Earnings per share from discontinued operations Gain on disposal of subsidiary Post tax results from discontinued operations Basic earnings per share from discontinued operations Gain on disposal of subsidiary Post tax results from discontinued operations Diluted earnings per share from discontinued operations 51.4 102.3 51.8 Per share p Earnings £m 102.3 197.7 102.3 197.7 43.7 85.9 Shares m Per share p 2005 Earnings £m 85.9 196.5 196.5 Shares m 1.5 (0.4) 198.8 43.3 85.9 2.6 (0.8) 198.3 51.8 (10.2) 41.6 51.4 (10.1) 41.3 102.3 (20.0) (0.1) 82.2 102.3 (20.0) (0.1) 82.2 197.7 43.7 (1.5) 42.2 43.3 (1.5) 41.8 85.9 (3.0) 82.9 85.9 (3.0) 82.9 196.5 197.7 198.8 196.5 198.3 198.8 198.3 10.2 10.2 10.1 10.1 20.0 0.1 20.1 20.0 0.1 20.1 198.8 197.7 1.5 1.5 1.5 1.5 3.0 3.0 3.0 3.0 2006 p 51.8 2.8 (10.2) 44.4 198.3 2005 p 43.7 2.5 (1.1) (1.5) 43.6 196.5 (b) Basic earnings per share from continuing operations before goodwill impairment, intangible asset amortisation and exceptional items Basic earnings per share Earnings per share relating to: - Goodwill impairment and intangible asset amortisation - Exceptional items* - Gain on disposal of subsidiary - Post tax results from discontinued operations Basic earnings per share before goodwill impairment, intangible asset amortisation and exceptional items from continuing operations *Exceptional items in 2005 include property profits of £2.2 million. Arriva plc Annual Report & Accounts 2006 63 NOTES TO THE ACCOUNTS continued 9. Goodwill 2006 £m Cost At 1 January Additions Hindsight adjustment Disposals Currency translation adjustments At 31 December Impairment At 1 January Impairment in the year Disposals Currency translation adjustments At 31 December Net book amount at 31 December 327.3 12.6 6.5 (6.7) (3.7) 336.0 2005 £m 316.9 20.9 1.6 (6.8) (5.3) 327.3 49.8 1.8 (1.6) (0.4) 49.6 286.4 50.2 1.5 (1.4) (0.5) 49.8 277.5 Details of acquisitions and disposals in the year are shown in note 28. During the year, goodwill was reviewed for impairment in accordance with IAS36. For the purposes of this impairment review goodwill has been tested on the basis of discounted future cash flows arising in each relevant cash generating unit. Goodwill is allocated across multiple cash generating units and the amount allocated to each unit is not significant in comparison with the total carrying amount of goodwill. 10. Other intangible assets 2006 £m Cost At 1 January Additions Hindsight adjustments Currency translation adjustments At 31 December Amortisation At 1 January Amortisation for the year Currency translation adjustments At 31 December Net book amount at 31 December 48.5 (0.7) 47.8 2005 £m 48.2 1.9 (0.5) (1.1) 48.5 7.7 5.4 (0.2) 12.9 34.9 2.6 5.1 7.7 40.8 All amortisation charges in the year have been charged through net operating expenses. Intangible assets relate to identifiable assets purchased as part of the group's business combinations, and the right to operate the Arriva Trains Wales franchise. Intangible assets are amortised on a straight-line basis over their expected useful economic lives. 64 Moving you across Europe 11. Property, plant and equipment Plant, company vehicles, fixtures & fittings £m 120.4 1.2 30.4 (17.1) (0.2) 134.7 Railway rolling stock £m 124.5 33.8 (48.2) (2.0) 108.1 Short-term rental vehicles £m 150.4 7.0 (141.6) 15.8 As at 31 December 2006 Cost At 1 January 2006 Acquisitions Additions Disposals Currency translation adjustments At 31 December 2006 Accumulated depreciation At 1 January 2006 Acquisitions Charge for the year Disposals Currency translation adjustments At 31 December 2006 Net book amounts At 31 December 2006 Land & buildings £m 265.4 3.9 11.2 (10.0) (3.1) 267.4 Buses & coaches £m 1,048.5 17.3 88.8 (63.8) (7.0) 1,083.8 Total £m 1,709.2 22.4 171.2 (280.7) (12.3) 1,609.8 36.0 0.3 4.7 (0.1) (1.1) 39.8 71.7 0.7 14.5 (10.1) (0.2) 76.6 448.4 4.7 80.2 (51.0) (3.0) 479.3 18.3 5.2 (0.4) (0.4) 22.7 42.0 3.7 (36.8) 8.9 616.4 5.7 108.3 (98.4) (4.7) 627.3 227.6 58.1 604.5 85.4 6.9 982.5 The net book amount of assets held under hire purchase and finance lease contracts included in plant, company vehicles, buses and coaches is £280.7 million (2005: £295.8 million). The depreciation provided in the year in respect of these assets was £33.5 million (2005: £34.4 million). The gross cost of assets held for the purpose of letting under operating leases amounts to £15.8 million (2005: £150.4 million). The accumulated depreciation on these assets was £8.9 million (2005: £42.0 million). Plant, company vehicles, fixtures & fittings £m 102.1 6.7 18.6 (8.8) 1.8 120.4 As at 31 December 2005 Cost At 1 January 2005 Acquisitions Additions Disposals Currency translation adjustments At 31 December 2005 Accumulated depreciation At 1 January 2005 Acquisitions Charge for the year Disposals Currency translation adjustments At 31 December 2005 Net book amounts At 31 December 2005 Land & buildings £m 243.1 22.7 8.1 (10.2) 1.7 265.4 Buses & coaches £m 940.6 58.9 132.4 (72.3) (11.1) 1,048.5 Railway rolling stock £m 98.8 28.3 (2.6) 124.5 Short-term rental vehicles £m 152.9 65.1 (67.6) 150.4 Total £m 1,537.5 88.3 252.5 (158.9) (10.2) 1,709.2 31.6 2.6 4.2 (2.3) (0.1) 36.0 61.8 4.3 11.1 (6.2) 0.7 71.7 423.0 22.5 71.8 (64.5) (4.4) 448.4 14.0 4.7 (0.4) 18.3 44.5 25.3 (27.8) 42.0 574.9 29.4 117.1 (100.8) (4.2) 616.4 229.4 48.7 600.1 106.2 108.4 1,092.8 Arriva plc Annual Report & Accounts 2006 65 NOTES TO THE ACCOUNTS continued 11. Property, plant and equipment (continued) 2006 £m Net book amount of land and buildings comprises: - Freehold - Long-leasehold - Short-leasehold 225.7 0.5 1.4 227.6 2005 £m 226.4 1.2 1.8 229.4 12. Investments accounted for using the equity method Investments (all unquoted) Cost At 1 January Additions Disposals Share of recognised profit for the year* Currency translation adjustments At 31 December * Share of recognised profit for the year is stated after tax. In May 2006 the group acquired a 21.5 per cent interest in Barraqueiro SGPS SA for consideration of £41.0 million. The group’s share of the net assets of its associates is analysed below: Non-current assets Current assets Non-current liabilities Current liabilities Share of net assets 2006 £m 93.3 27.5 (27.8) (42.8) 50.2 2006 £m 40.0 1.9 2005 £m 9.1 8.9 (5.1) (6.2) 6.7 2005 £m 12.8 1.4 2006 £m 7.9 41.7 1.9 (0.1) 51.4 2005 £m 6.2 4.4 (4.3) 1.4 0.2 7.9 The group’s share of its associates revenue and profit is analysed below: Revenue Profit 13. Inventories 2006 £m Raw materials, consumables and work in progress Finished goods and goods for resale 23.6 11.3 34.9 The group consumed £222.1 million (2005: £164.9 million) of inventories during the year. There was no material write down of inventories during the current or prior year. 2005 £m 20.9 6.9 27.8 14. Trade and other receivables 2006 £m Current assets: Trade receivables Less: Provision for impairment of receivables Trade receivables – net Prepayments and accrued income Other receivables 90.3 (3.6) 86.7 50.9 83.5 221.1 2005 £m 83.5 (3.3) 80.2 47.4 81.8 209.4 66 Moving you across Europe 15. Cash, cash equivalents and overdrafts Cash, cash equivalents and overdrafts in the cash flow statement comprise: Cash and cash equivalents Bank overdrafts (note 18) 2006 £m 87.6 (16.5) 71.1 2005 £m 94.1 (22.5) 71.6 16. Trade and other payables 2006 £m Current liabilities: Trade payables Payments received on account Other taxation and social security payable Other creditors Accruals and deferred income 74.5 0.9 29.2 111.5 153.5 369.6 2005 £m 102.1 1.6 29.9 102.4 152.6 388.6 17. Tax liabilities 2006 £m Current tax liabilities 16.5 2005 £m 29.8 18. Financial liabilities - borrowings 2006 £m Current liabilities: - Short-term loans - Bank overdrafts - Finance leases 115.0 16.5 131.5 24.8 156.3 Non-current liabilities: - Syndicated loans - Other loans - Finance leases 108.7 147.4 53.6 309.7 2005 £m 122.9 22.5 145.4 18.2 163.6 203.8 93.3 69.3 366.4 2006 £m Loan capital and other borrowings repayment statement: - Within one year or on demand - Between one and two years - Between two and five years - Over five years 156.3 72.2 208.9 28.6 466.0 2005 £m 163.6 81.7 252.6 32.1 530.0 The total of the loans, any part of which fall due for repayment after 5 years, is £92.9 million (2005: £91.7 million). £44.9 million (2005: £42.3 million) represents bank loans in the mainland Europe division, with varying repayment dates and interest rates. £48.0 million (2005: £49.4 million) represents fixed interest finance lease funding of the mainland Europe bus fleet, with varying repayment dates and interest rates ranging between 4.1 per cent and 7.5 per cent. Arriva plc Annual Report & Accounts 2006 67 NOTES TO THE ACCOUNTS continued 18. Financial liabilities - borrowings (continued) Security and guarantees Borrowings amounting to £140.3 million (2005: £151.5 million), principally relating to the bus fleet, are secured by charges over the related assets. As part of the UK rail franchising arrangements the group has provided guarantees of £13 million (2005: £13 million). The group has provided £20 million (2005: £13 million) of bonds in respect of its rail operations in Denmark, the Netherlands and Germany. At 31 December 2006, letters of credit amounting to the value of £30 million (2005: £29 million) are provided by the group’s bankers, guaranteed by Arriva plc, in favour of the group’s insurers. Syndicated loans are secured by guarantees given by Arriva plc and certain UK subsidiaries. The effective interest rates at the balance sheet date were as follows: Cash and cash equivalents Bank overdraft Bank borrowings Finance lease Other financial liabilities 2006 % 3.4 5.0 4.4 4.6 5.6 2006 £m 123.7 209.8 98.0 34.5 466.0 2005 % 2.8 5.5 3.3 4.0 5.6 2005 £m 182.8 219.0 97.4 30.8 530.0 The carrying amount of the group's borrowings are denominated in the following currencies: Sterling Euro Danish Krone Swedish Krone Fair value of financial assets and financial liabilities Due to the short-term nature of financial assets and financial liabilities, or the floating rate nature of non-current financial liabilities, the group considers there to be no material difference between the fair value of financial assets and financial liabilities and their carrying amount in the balance sheet. Maturity of financial liabilities The maturity profile of the carrying amount of the group’s non-current liabilities at 31 December was as follows: Finance leases £m 19.9 11.4 22.3 53.6 Other financial liabilities £m 15.9 0.7 16.6 2006 Total £m 72.3 209.0 28.4 309.7 Finance leases £m 34.0 15.2 20.1 69.3 Other financial liabilities £m 16.3 16.9 33.2 2005 Total £m 81.7 252.6 32.1 366.4 Debt £m In more than one year but not more than two years In more than two years but not more than five years In more than five years 36.5 196.9 6.1 239.5 Debt £m 31.4 220.5 12.0 263.9 68 Moving you across Europe Borrowing facilities The group has the following undrawn committed floating rate borrowing facilities available at 31 December in respect of which all conditions precedent had been met at that date: 2006 £m Expiring within one year Expiring in more than two years 36.2 201.6 237.8 2005 £m 19.9 107.1 127.0 Finance leases The group typically enters into finance leases of no more than five years' duration on an amortising basis. Given the short-term nature of this funding, the group considers there to be no material difference between the fair value of finance leases and their carrying amount in the balance sheet. Finance lease obligations included in current liabilities amount to £24.8 million (2005: £18.2 million) and in non-current liabilities amount to £53.6 million (2005: £69.3 million). 19. Other non-current liabilities 2006 £m Accruals and deferred income Payments received on account 67.3 67.3 2005 £m 68.2 0.8 69.0 20. Derivative financial instruments Financial instrument disclosures are set out below. Additional disclosures are set out in the accounting policies. 2006 £m Non-current assets: Interest rate swaps - cash flow hedge Fuel derivatives - cash flow hedge Cross currency swaps - net investment hedge 1.7 2.2 3.9 2006 £m Current assets: Interest rate swaps - cash flow hedge Forward foreign currency contracts - cash flow hedge Fuel derivatives - cash flow hedge Cross currency swaps - net investment hedge 0.6 8.4 0.4 9.4 2006 £m Current liabilities: Fuel derivatives - cash flow hedge 13.6 2005 £m 0.7 14.2 0.1 15.0 2005 £m 0.1 0.1 5.0 2.3 7.5 2005 £m - Arriva plc Annual Report & Accounts 2006 69 NOTES TO THE ACCOUNTS continued 20. Derivative financial instruments (continued) 2006 £m Non-current liabilities: Fuel derivatives - cash flow hedge Cross currency swaps - net investment hedge 1.0 0.2 1.2 2005 £m - In accordance with IAS39 'Financial instruments: Recognition and Measurement', Arriva plc has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the Standard. All embedded derivatives were found to be closely related to their host contracts, and therefore no fair value exercise was required to be undertaken. Net fair values of derivative financial instruments The fair values of derivative financial instruments designated as cash flow hedges were: 2006 £m Contracts with positive fair values: - Interest rate swaps - Forward foreign currency contracts - Fuel derivatives Contracts with negative fair values: - Fuel derivatives 1.7 0.6 8.4 (14.6) 2005 £m 0.8 0.1 19.2 - The fair values of derivatives have been supplied externally by the respective counterparties to the derivative and by banks using market rates prevailing at the balance sheet date. 21. Retirement benefit obligations At 31 December 2006 the group operated a number of retirement benefit schemes, both defined benefit and defined contribution, which are financed through separate Trustee administered funds managed by independent professional fund managers on behalf of the Trustees. Contributions to the defined benefit funds are based upon actuarial advice following the most recent of a regular series of valuations of the funds by their representative independent actuaries. Certain employees of Arriva Merseyside Limited participate in the Local Government Pension Scheme. This is a defined benefit scheme funded by payments to the Merseyside Pension Fund. The latest formal actuarial valuation of the Merseyside Pension Fund was carried out as at 31 March 2004. Certain employees of Arriva Trains Wales Limited participate in funded defined benefit sections which form part of the overall Railways Pension Scheme (‘RPS’). Total pension cost The total pension cost for the group was £39.7 million (2005: £39.7 million). The pension costs in respect of the group's defined contribution schemes were £19.5 million (2005: £17.1 million). Defined benefit plans The directors believe that separate consideration should be given to the RPS under IAS19 as the group has no rights or obligations in respect of sections of this scheme following the expiry of the franchises. The amounts relating to the rail schemes are therefore shown separately and relate to sections in respect of Arriva Trains Wales Limited only. The calculations used to assess the IAS19 liabilities of the retirement benefit schemes are based on the most recent actuarial valuations, updated to 31 December 2006 by qualified independent actuaries. The schemes' assets are stated at their market value at 31 December 2006. The principal actuarial assumptions at the balance sheet date are: 2006 % Discount rate Inflation rate Increases to deferred benefits during deferment Increases to pensions in payment Increases to salaries Weighted average expected long-term rate of return of the scheme assets at 31 December, after deduction for scheme expenses 5.2 2.9 2.9 2.9 4.1 7.5 2005 % 4.9 2.6 2.6 2.6 3.8 7.0 70 Moving you across Europe Weighted average life expectancy for mortality tables to determine benefit obligations: Member age 65 (current life expectancy) Member age 45 (life expectancy at age 65) Male Female Male Female 2006 years 19 22 20 22 2005 years 18 21 19 22 The major categories of plan assets and the expected rate of return at the balance sheet date for each category, is as follows: 2006 % Category of assets at the year end Equities Bonds Other Weighted average expected long-term rate of return at 31 December, after deduction for scheme expenses 8.25 4.8 6.5 7.5 7.8 4.6 4.1 7.0 2005 % The overall expected rate of return is a weighted average of the expected returns of the various categories of plan assets held. The directors’ assessment of the expected returns is based on historical return trends, the forward looking views of financial markets (suggested by the yields available) and the views of investment organisations. The actual return on plan assets was £80.3 million (2005: £103.2 million). Group Schemes 2006 £m (781.2) 616.9 (164.3) (164.3) (164.3) RPS 2006 £m (146.7) 130.8 (15.9) 6.4 (9.5) (9.5) Total 2006 £m (927.9) 747.7 (180.2) 6.4 (173.8) (173.8) Total 2005 £m (856.3) 640.2 (216.1) 8.7 (207.4) (207.4) 2006 £m 25.1 39.2 (40.1) (1.6) (2.4) 20.2 Actuarial gains and losses have been reported in the statement of recognised income and expense. Total 2004 £m (729.8) 525.3 (204.5) 8.8 (195.7) 2.3 (193.4) 2005 £m 20.3 37.2 (34.9) 22.6 The amounts recognised in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Deficit Deficit relating to scheme members Rail franchise adjustment Net deficit recognised in the balance sheet The amounts recognised in the income statement are as follows: Current service costs Interest cost Expected return on assets Settlements Past service adjustment Arriva plc Annual Report & Accounts 2006 71 NOTES TO THE ACCOUNTS continued 21. Retirement benefit obligations (continued) 2006 £m 856.3 13.6 25.1 (2.7) 40.4 (23.3) 22.6 (4.1) 927.9 2006 £m 640.2 41.7 53.6 (23.3) 38.0 (2.5) 747.7 2005 £m 729.8 11.6 20.3 39.5 (19.8) 74.9 856.3 2005 £m 525.3 37.3 31.9 (19.8) 65.5 640.2 Movements in the present value of defined benefit obligations were as follows: At 1 January Member contributions paid Current service cost Past service adjustment* Interest cost* Benefits paid Actuarial losses* Settlements At 31 December Movements in the fair value of plan assets were as follows: At 1 January Expected return on plan assets* Total contributions Benefits paid Actuarial gains* Settlements At 31 December *Before RPS shared cost adjustment The movements in the present value of defined benefit obligations and in the fair value of the plan assets do not take into account the shared cost nature of the RPS. The income statement and the statement of recognised income and expenses include 60 per cent of the relevant RPS amounts. Plan assets The weighted average asset allocations at the year end were as follows: Equities Bonds Other 2006 % 74 20 6 2006 £m 11.0 13.1 24.1 2006 £m (22.6) 2.4% 38.0 5.1% 2005 £m (74.9) 8.7% 65.5 10.2% 2005 % 77 21 2 2005 £m 16.8 (5.8) 11.0 2004 £m (4.3) 0.6% 19.5 3.7% Cumulative actuarial gains and losses recognised in equity At 1 January Actuarial gains/(losses) recognised in year At 31 December History of experience gains and losses Experience adjustments on scheme liabilities: - Amounts (£m) - Percentage of scheme liabilities Experience adjustments on scheme assets: - Amounts (£m) - Percentage of scheme assets The group expects to make contributions of approximately £24 million to the defined benefit plans during the next financial year. 72 Moving you across Europe 22. Deferred tax The movement in deferred tax is shown below: At 1 January Exchange differences Acquisition of subsidiaries Disposal of subsidiary Income statement charge/(credit) for continuing operations Income statement charge for discontinued operations Tax (credited)/charged directly to equity Adoption of IAS39 At 31 December 2006 £m 44.3 (0.4) 0.7 (11.1) 15.9 (4.1) 45.3 2005 £m 37.9 (0.5) 1.8 (1.2) 1.2 3.5 1.6 44.3 Deferred tax assets have not been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because of the uncertainty regarding the recoverability of the resulting deferred tax assets. Deferred tax is not provided on the unremitted earnings of overseas subsidiaries where the group has control over the timing of remittance and it is probable that remittance will not take place in the foreseeable future. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. The movements in deferred tax assets and liabilities during the period are shown below: Accelerated tax depreciation £m 69.3 (0.1) 2.6 1.1 72.9 (0.2) 0.8 (10.9) 12.5 75.1 Revaluation £m 17.4 (0.4) 17.0 (0.7) (0.1) 16.2 Intangibles £m 12.6 (0.4) 0.5 (1.6) 11.1 (0.2) (1.7) 9.2 Derivatives £m 1.6 4.8 6.4 (7.3) 0.9 Other £m 0.7 1.3 0.5 2.5 (0.1) 2.4 Total £m 100.0 1.6 (0.5) 1.8 1.1 1.1 4.8 109.9 (0.4) 0.8 (11.6) 10.6 (7.3) 0.9 102.9 Deferred tax liabilities At 1 January 2005 Adoption of IAS39 Exchange differences Acquisition of subsidiaries Income statement charge/(credit) for continuing operations Income statement charge for discontinued operations Tax charged directly to equity At 31 December 2005 Exchange differences Acquisition of subsidiaries Disposal of subsidiary Income statement charge/(credit) for continuing operations Tax credited directly to equity Transferred to deferred tax assets At 31 December 2006 The deferred tax liability due after more than one year is £101.3 million (2005: £106.1 million). Arriva plc Annual Report & Accounts 2006 73 NOTES TO THE ACCOUNTS continued 22. Deferred tax (continued) Retirement benefit obligations £m (56.6) (0.8) 0.1 (1.3) (58.6) 0.5 5.6 3.2 (49.3) Provisions £m (4.7) (1.5) (6.2) 1.8 (4.4) Derivatives £m (0.9) (0.9) Other £m (0.8) (0.8) (0.1) (2.1) (3.0) Total £m (62.1) (2.3) 0.1 (1.3) (65.6) (0.1) 0.5 5.3 3.2 (0.9) (57.6) Deferred tax assets At 1 January 2005 Income statement credit for continuing operations Income statement charge for discontinued operations Tax credited directly to equity At 31 December 2005 Acquisition of subsidiaries Disposal of subsidiaries Income statement charge/(credit) for continuing operations Tax charged directly to equity Transferred from deferred tax liabilities At 31 December 2006 The deferred tax asset due after more than one year is £47.3 million (2005: £57.6 million). 23. Called up equity share capital Authorised 2006 Ordinary shares of 5 pence each Number of shares Reconciliation of movement in issued share capital: Shares in issue 1 January Share allotments on exercise of options Shares in issue 31 December £14,500,000 290,000,000 2005 £14,500,000 290,000,000 Allotted - fully paid 2006 £9,904,472 198,089,442 2005 £9,846,118 196,922,357 196,922,357 1,167,085 198,089,442 195,749,903 1,172,454 196,922,357 Consideration of £1.2 million was received in respect of the share allotments in the year ended 31 December 2006. At 31 December 2006 there were outstanding options to receive allotments of 2,774,684 ordinary shares under the Executive Share Option Scheme, the Share Incentive Scheme and the Long Term Incentive Plan. The price for the vested share for the Long Term Incentive Plan is nil. The option exercise prices for the other schemes range from 175.0 pence to 613.4 pence. The options are exercisable up to March 2015. At 29 December 2006 the middle market quotation of the ordinary share, as derived from the Stock Exchange Official List, was 764.0 pence. The highest price attained by the ordinary share in 2006 was 764.0 pence and the lowest level during 2006 was 503.0 pence. 74 Moving you across Europe 24. Share-based payments The group operates an Executive Share Option Scheme (ESOS), Share Incentive Scheme (SIS) and Long Term Incentive Plan (LTIP). The ESOS is an Inland Revenue approved discretionary employee share option scheme, with options granted to certain senior employees (excluding directors) and exercisable between three and ten years from date of grant, subject to performance criteria having been satisfied. The SIS is an unapproved discretionary employee share option scheme, with options granted to certain senior employees (excluding directors) and exercisable between three and seven years from date of grant, subject to performance criteria having been satisfied. The LTIP is a discretionary share scheme providing incentives in the form of conditional awards of shares to selected senior employees, including executive directors. There is a performance period of not less than three years before any of the shares may vest, with vesting of any of the shares subject to performance criteria having been satisfied. Further details of the LTIP and performance criteria are given in the Directors' Remuneration Report. In accordance with the transitional provisions of IFRS, the following disclosures relate only to awards made after 7 November 2002 that had not vested before 1 January 2005. The fair value per option granted and the assumptions used in the calculation of fair value are as follows: Executive Share Option Scheme March 2003 Share price at grant date Exercise price Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Expectations of meeting performance criteria Fair value per option £2.83 £2.83 12 73,000 3 32% 10 3 4% 5.8% 100% £0.470 March 2004 £3.73 £3.73 46 206,162 3 24% 10 3 4.5% 5.1% 100% £0.504 March 2003 £2.83 £2.83 44 254,500 3 32% 7 3 4% 5.8% 100% £0.470 Share Incentive Scheme March 2004 £3.73 £3.73 54 197,338 3 24% 7 3 4.5% 5.1% 100% £0.504 March 2005 £5.48 £5.48 95 442,500 3 24% 7 3 4% 3.6% 100% £0.835 March 2006 £6.13 £6.13 78 336,000 3 24% 7 3 4.6% 3.7% 100% £0.959 Long Term Incentive Plan March 2003 Share price at grant date Exercise price Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Expectations of meeting performance criteria Fair value per option £2.83 £0.00 34 1,042,308 3 32% 3 3 4% 5.8% 100% £2.537 March 2004 £3.75 £0.00 4 346,261 3 24% 3 3 4.5% 5.1% 58% £3.215 March 2005 £5.48 £0.00 4 224,451 3 24% 3 3 4% 3.6% 0% £4.919 May 20061 £5.44 £0.00 3 178,194 3 25% 3 3 4.8% 3.3% 10% £4.980 May 20062 £5.44 £0.00 3 178,194 3 25% 3 3 4.8% 3.3% 100% £2.140 Sept 20061 £6.79 £0.00 14 267,228 3 20% 3 3 4.8% 3.3% 10% £6.290 Sept 20062 £6.79 £0.00 14 109,150 3 20% 3 3 4.8% 3.3% 100% £4.330 The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the assumed option life. 1 2 Relates to the EPS element of the award. Relates to the TSR element of the award. Arriva plc Annual Report & Accounts 2006 75 NOTES TO THE ACCOUNTS continued 24. Share-based payments (continued) A reconciliation of option movements for each of the above schemes over the year to 31 December is shown below: (a) Executive Share Option Scheme 2006 Weighted average exercise price (£) 3.54 3.10 3.69 2.83 2005 Weighted average exercise price (£) 3.49 3.28 3.24 3.54 - Number (‘000) Outstanding at 1 January Forfeited Exercised Outstanding at 31 December Exercisable at 31 December 232 (59) 173 7 Number (‘000) 279 (38) (9) 232 - 2006 Range of exercise prices (£) 2.83 - 3.73 Weighted average exercise Number of price shares (£) (‘000) 3.69 173 Weighted average remaining life Expected Contractual (years) (years) 7.0 Weighted average exercise price (£) 3.54 2005 Weighted average remaining life Expected (years) 1.0 Contractual (years) 8.0 Number of shares (‘000) 232 The weighted average share price during the period for options in the ESOS exercised over the year was 630.6 pence (2005: 573.4 pence). The total charge for the year relating to the scheme was £nil (2005: £nil). (b) Share Incentive Scheme 2006 Weighted average exercise price (£) 4.42 6.13 4.68 3.22 5.24 2.83 2005 Weighted average exercise price (£) 3.22 5.48 3.20 5.25 4.42 - Number (‘000) Outstanding at 1 January Granted Forfeited Exercised Outstanding at 31 December Exercisable at 31 December 827 336 (36) (177) 950 52 Number (‘000) 442 442 (51) (6) 827 - 2006 Range of exercise prices (£) 2.83 - 6.13 Weighted average exercise Number of price shares (£) (‘000) 5.24 950 Weighted average remaining life Expected Contractual (years) (years) 1.2 5.1 Weighted average exercise price (£) 4.42 2005 Weighted average remaining life Expected (years) 1.5 Contractual (years) 5.5 Number of shares (‘000) 827 The weighted average share price during the year for options exercised in the Share Incentive Scheme over the year was 642.3 pence (2005: 573.4 pence). The total charge for the year relating to the scheme was £0.3 million (2005: £0.2 million), all of which related to equity-settled share-based payment transactions. After deferred tax, the total charge was £0.2 million (2005: £0.1 million). 76 Moving you across Europe (c) Long Term Incentive Plan 2006 Weighted average exercise price (£) 2005 Weighted average exercise price (£) - Number (‘000) Outstanding at 1 January Granted Forfeited Exercised Outstanding at 31 December Exercisable at 31 December 1,338 733 (786) 1,285 39 Number (‘000) 1,204 224 (90) 1,338 - 2006 Range of exercise prices (£) 0.00 Weighted average exercise Number of price shares (£) (‘000) 0.00 1,285 Weighted average remaining life Expected Contractual (years) (years) 1.3 1.3 Weighted average exercise price (£) 0.00 2005 Weighted average remaining life Expected (years) 0.8 Contractual (years) 0.8 Number of shares (‘000) 1,338 The weighted average share price for the LTIP awards exercised in the year was 639.6 pence (2005: 452.7 pence). The total charge for the year relating to the scheme was £0.9 million (2005: £1.2 million), all of which related to equity-settled share-based payment transactions. After deferred tax, the total charge was £0.6 million (2005: £0.8 million). 25. Other reserves Capital redemption reserve £m At 1 January 2005 Cash flow hedges (net of tax): - Fair value gains in period - Transfers to net profit At 31 December 2005 Cash flow hedges (net of tax): - Fair value losses in period - Transfers to net profit At 31 December 2006 1.8 1.8 1.8 Special reserve £m 59.1 59.1 59.1 Hedge reserve £m 4.9 26.2 (17.0) 14.1 (10.8) (6.2) (2.9) Other reserves £m 65.8 26.2 (17.0) 75.0 (10.8) (6.2) 58.0 The capital redemption reserve represents the cumulative par value of all shares bought back and cancelled by the group and is not distributable. The special reserve was created in 1997 when an application to transfer the share premium account into a special reserve was granted by the High Court and is not distributable. The hedge reserve records movements on derivative financial instruments designated as cash flow hedges. Arriva plc Annual Report & Accounts 2006 77 NOTES TO THE ACCOUNTS continued 26. Statement of changes in shareholders’ equity Share capital £m At 1 January 2005 Arising on issue of shares Share-based payments Total recognised income and expense for the year Dividends Minority share of acquisition At 31 December 2005 Arising on issue of shares Share-based payments Total recognised income and expense for the year Dividends Minority share of acquisition At 31 December 2006 9.8 9.8 0.1 9.9 Share premium £m 15.3 3.8 19.1 3.3 22.4 Other reserves £m 65.8 9.2 75.0 (17.0) 58.0 Retained earnings £m 340.4 1.4 79.4 (37.7) 383.5 (2.2) 1.2 109.3 (39.6) 452.2 Total shareholders' equity £m 431.3 3.8 1.4 88.6 (37.7) 487.4 1.2 1.2 92.3 (39.6) 542.5 Minority interests £m 2.2 0.5 13.6 16.3 1.9 (0.9) (1.0) 16.3 Total equity £m 433.5 3.8 1.4 89.1 (37.7) 13.6 503.7 1.2 1.2 94.2 (40.5) (1.0) 558.8 27. Notes to the group cash flow statement (a) Reconciliation of net debt At 1 January (Increase)/decrease in cash, cash equivalents and overdrafts Decrease in loans due within one year (Decrease)/increase in loans due after one year (Decrease)/increase in finance lease obligations Loans acquired Finance leases acquired Currency translation adjustments At 31 December 2006 £m 435.9 (0.2) (6.6) (45.9) (7.9) 5.7 0.3 (2.9) 378.4 2005 £m 338.4 4.0 (1.8) 61.4 26.3 12.0 0.8 (5.2) 435.9 (b) Reconciliation of operating profit to net cash inflow from operating activities Continuing operations Operating profit Depreciation Goodwill impairment and intangible asset amortisation EBITDA Increase in inventories, excluding acquisitions and disposals Increase in trade and other receivables, excluding acquisitions and disposals (Decrease)/increase in creditors, excluding acquisitions and disposals Cash generated from continuing operations 2006 £m 119.5 106.2 7.2 232.9 (6.6) (23.3) (43.3) 159.7 2005 £m 111.2 93.5 6.6 211.3 (0.8) (30.5) 0.3 180.3 78 Moving you across Europe 2006 £m Discontinued operations Operating profit Depreciation EBITDA Increase in trade and other receivables Decrease in creditors Cash generated from discontinued operations Cash generated from operations Acquisitions (excluding cash Cash flow & overdraft) £m £m (0.2) (6.6) (45.9) (7.9) (60.6) 0.6 5.1 0.3 6.0 0.6 2.1 2.7 (1.6) (0.8) 0.3 160.0 2005 £m 10.2 23.6 33.8 (0.2) (6.0) 27.6 207.9 31 December 2006 £m (71.1) 115.0 256.1 78.4 378.4 (c) Analysis of net debt Cash, cash equivalents and overdrafts Loans due within one year Loans due after one year Finance leases 1 January 2006 £m (71.6) 122.9 297.1 87.5 435.9 Exchange differences £m 0.7 (1.9) (0.2) (1.5) (2.9) 28. Acquisitions and disposals (a) Analysis of the net cash outflow in respect of acquisitions Cash consideration (including expenses) Cash assumed Net cash outflow in respect of acquisitions Provisional fair value adjustments £m (0.1) (1.9) (0.3) (2.3) Total £m 20.9 (1.9) 19.0 (b) Current year acquisitions Property, plant and equipment Investments Inventories Trade and other receivables Cash and cash equivalents Finance lease obligations Trade and other payables Loans Deferred tax Other non-current liabilities Minority interest Goodwill Satisfied by cash Acquired book value £m 16.7 0.1 0.6 2.8 1.9 (0.3) (7.0) (5.7) (0.4) (0.5) 8.2 Net cost £m 16.7 0.1 0.5 2.8 1.9 (0.3) (8.9) (5.7) (0.7) (0.5) 5.9 1.0 12.6 19.5 Arriva plc Annual Report & Accounts 2006 79 NOTES TO THE ACCOUNTS continued 28. Acquisitions and disposals (continued) In February 2006 the group acquired Premier Buses Limited, the holding company of MK Metro Limited, for £6.8 million, resulting in goodwill of £1.8 million. In May 2006 the group acquired the German bus company Verkehrsbetriebe Bils KG for £3.2 million, resulting in goodwill of £1.8 million. During the year the group also increased its shareholding in Regentalbahn AG, in Germany, from 96.7 per cent to 100 per cent for £2.3 million, resulting in goodwill of £1.4 million. In December 2006 the group acquired the Spanish bus operator Esfera for £3.2 million, £0.7 million of which is deferred, resulting in goodwill of £2.9 million. Also in December the group acquired the Czech Republic bus operator Transcentrum Bus s.r.o. for £3.2 million, £0.5 million of which is deferred, resulting in goodwill of £2.9 million. In addition, smaller acquisitions were made in the year the total cost of which was £2.0 million, resulting in goodwill of £1.8 million. If all acquisitions had occurred at the start of the period the additional revenue and profit for the year would have been £37.1 million and £3.3 million respectively. The fair value adjustments in the table above relate mainly to the alignment to group accounting policies. The fair values are provisional, depending on the final determination of the value of related assets and liabilities. The final fair values are subject to completion of contractual discussions and settlement of balances and may change as a result after the balance sheet date. (c) Prior year acquisitions The total cost in the year relating to acquisitions from prior years was £1.4 million. This is additional consideration relating to Sippel, the German bus company acquired in February 2005. In addition, hindsight fair value adjustments were made in the year resulting from the final determination of the assets and liabilities as follows: £m Hindsight period adjustments: Investments Trade and other receivables Trade and other payables Other non-current liabilities Decrease in fair values Additional consideration paid 0.2 (0.3) 5.0 0.2 5.1 1.4 6.5 Goodwill based on provisional values Goodwill based on final fair values (d) Current year disposals Vehicle Rental £m 5.1 103.6 (75.3) 16.0 (2.0) (11.1) 36.3 (1.4) 20.0 54.9 54.9 75.3 130.2 22.5 29.0 The net assets disposed of were as follows: Goodwill Property, plant and equipment Cash, cash equivalents and overdrafts Other current assets Other liabilities Provisions Net assets disposed Directly attributable costs of disposal Profit on disposal Satisfied by cash Net cash inflow on disposal Consideration paid in cash and cash equivalents Cash, cash equivalents and overdraft balances disposed of 80 Moving you across Europe 29. Group undertakings Detailed below is a list of those subsidiaries which in the opinion of the directors principally affect the amount of the profit or the amount of the assets of the group. The group percentage of equity capital is 100 per cent and the country of registration is England and Wales in each case, except where indicated. All subsidiaries operate within England and Wales, except where indicated: Passenger Transport Arriva Croydon & North Surrey Limited Arriva Cymru Limited Arriva Derby Limited Arriva Durham County Limited Arriva East Herts & Essex Limited Arriva International Trains Leasing Limited Arriva Kent & Sussex Limited Arriva Kent Thameside Limited Arriva London North Limited Arriva London North East Limited Arriva London South Limited Arriva Manchester Limited Arriva Merseyside Limited Arriva Midlands Limited Arriva Midlands North Limited Arriva Noroeste SL2 Arriva North East Limited Arriva Northumbria Limited Arriva North West Limited APS (Leasing) Limited Arriva Personenvervoer Nederland B.V.3 Arriva Portugal Transportes LDA6 Arriva Scotland West Limited4 Arriva Skandinavien A/S1 Arriva Southern Counties Limited Arriva Sverige AB5 Arriva Tees & District Limited Arriva Teesside Limited Arriva The Shires Limited Arriva Trains Limited Arriva Trains Wales/Trenau Arriva Cymru Limited Arriva Yorkshire Limited Arriva Yorkshire West Limited Autobus Sippel Gmbh8 London Pride Sightseeing Limited MK Metro Limited Prignitzer Eisenbahn Gmbh8 Regentalbahn AG8 SAB Autoservizi S.r.L.7 SAB Autoservizi F.V.G. S.p.A.9 Sadem S.p.A.10 Stevensons of Uttoxeter Limited The Original London Sightseeing Tour Limited Transportes Sul do Tejo S.A.6 Verkehrsbetriebe Bils Gmbh8 Rental and Distribution of Buses and Coaches Arriva Arriva Arriva Arriva Arriva Bus Bus Bus Bus Bus and and and and and Coach Coach Coach Coach Coach Rental (1) Rental (2) Rental (3) Rental (4) Limited Limited Limited Limited Limited Investment Arriva Findiv Limited* Arriva International Limited* Arriva Motor Holdings Limited* Arriva Passenger Services Limited* British Bus Group Limited MTL Services Limited* Arriva Insurance Company (Gibraltar) Limited11* Arriva International (Northern Europe) Limited Arriva International (Southern Europe) Limited Property British Bus (Properties) Limited Except where marked by* shares are held by a subsidiary company 1 Registered and operates in Denmark 2 Registered and operates in Spain 3 Registered and operates in the Netherlands 4 Registered and operates in Scotland 5 Registered and operates in Sweden 6 Registered and operates in Portugal 7 Registered and operates in Italy 8 Registered and operates in Germany 9 Registered and operates in Italy (60% owned) 10 Registered and operates in Italy (80% owned) 11 Registered and operates in Gibraltar 30. Commitments Capital amounts contracted for but not provided amount to £1.7 million (2005: £25.5 million) for the group. At 31 December 2006 the group had total commitments under non-cancellable operating leases, including access charges to the rail infrastructure and leases for rail rolling stock, as follows: 2006 Land & buildings £m Within one year Later than one year and less than five years After five years 14.2 56.0 118.7 188.9 Other £m 155.7 527.1 1,076.3 1,759.1 Total £m 169.9 583.1 1,195.0 1,948.0 Land & buildings £m 13.1 50.4 159.3 222.8 2005 Other £m 128.1 505.2 708.8 1,342.1 Total £m 141.2 555.6 868.1 1,564.9 31. Post balance sheet events The group has contracted to acquire 85.12 per cent of the issued share capital of Osthannoversche Eisenbahnen AG (OHE) for a cash consideration of €30 million (£20.5 million) plus €30 million (£20.5 million) of debt, subject to certain conditions which are anticipated to be met during March 2007. OHE operates bus and rail services in northern Germany and also owns and manages road and rail freight operations. Arriva plc Annual Report & Accounts 2006 81 F I V E - Y E A R F I N A N C I A L S U M M A RY Assets employed Goodwill Other intangible assets Property, plant and equipment Other Unquoted investments 2002* £m 198.3 736.7 (36.9) 5.7 903.8 2003* £m 226.2 761.5 (64.6) 5.2 928.3 2004 £m 266.7 45.6 962.6 (381.7) 6.2 899.4 2005 £m 277.5 40.8 1,092.8 (341.0) 7.9 1,078.0 2006 £m 286.4 34.9 982.5 (285.1) 51.4 1,070.1 Financed by Share capital Reserves Minority interests Bank overdrafts Syndicated loans Other loans Short-term loans Obligations under finance leases Deferred tax liabilities 10.0 454.6 (6.2) 43.4 204.0 62.6 66.0 69.4 903.8 9.8 461.9 13.7 198.6 66.0 109.1 69.2 928.3 9.8 417.8 2.2 5.1 82.6 155.7 126.2 62.1 37.9 899.4 9.8 477.6 16.3 22.5 203.8 93.3 122.9 87.5 44.3 1,078.0 9.9 532.6 16.3 16.5 108.7 147.4 115.0 78.4 45.3 1,070.1 Trading Revenue Profit before taxation from continuing operations Taxation Profit after taxation from continuing operations Profit after taxation from discontinued operations Profit for the year Statistics Funds attributable to shareholders Equity shareholders’ funds per ordinary share Basic earnings per share Dividends per ordinary share 2,084.4 80.6 1.6 79.0 79.0 1,751.1 83.8 26.0 57.8 57.8 1,759.0 109.3 26.0 83.3 83.3 1,571.2 103.1 19.8 83.3 3.0 86.3 1,729.0 109.8 25.2 84.6 20.1 104.7 464.6 232.7p 38.0p 17.2p 471.7 241.9p 28.7p 18.0p 427.6 218.4p 42.6p 18.9p 487.4 247.5p 43.7p 19.84p 542.5 273.9p 51.8p 20.83p * The financial information for 2002 and 2003 has been prepared under UK generally accepted accounting practice. The discontinued operations relate to the vehicle rental operations. 82 Moving you across Europe PA R E N T C O M PA N Y F I N A N C I A L S TAT E M E N T S Company balance sheet at 31 December 2006 Prepared using UK generally accepted accounting practice (UK GAAP) notes Fixed assets Tangible assets Investments 2 3 2006 £m 8.2 726.9 735.1 Current assets Debtors Cash at bank and in hand 2005 £m 8.1 726.9 735.0 4 90.2 34.4 124.6 93.7 98.5 192.2 Creditors Amounts falling due within one year Net current assets Total assets less current liabilities Creditors Amounts falling due after more than one year Net pension liability 6 (18.1) 106.5 841.6 (18.9) 173.3 908.3 6 11 (514.2) (6.1) 321.3 (542.7) (7.1) 358.5 Represented by: Capital and reserves Called up equity share capital Share premium account Capital redemption reserve Special reserve Profit and loss account Equity shareholders’ funds 7 9 9 9 9 10 9.9 22.4 1.8 59.1 228.1 321.3 9.8 19.1 1.8 59.1 268.7 358.5 D R Martin S P Lonsdale | Directors Approved by the Board on 7 March 2007 Arriva plc Annual Report & Accounts 2006 83 PA R E N T C O M PA N Y A C C O U N T I N G P O L I C I E S Basis of preparation The separate financial statements of the company are presented as required by the Companies Act 1985. They have been prepared in accordance with applicable United Kingdom generally accepted accounting practice. The company prepares its financial statements on the historic cost basis of accounting as modified by the revaluation of certain tangible fixed assets. Changes in accounting policy The company has chosen to early adopt the amendment to FRS17, ‘Retirement benefits’ issued by the ASB in December 2006. The adoption of this amendment brings the accounting treatment for FRS17 more in line with that of IAS19. Tangible fixed assets Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment. Depreciation is calculated using the straight-line method to allocate the cost of each asset to its residual value over its estimated useful life as follows: Freehold properties Plant, company vehicles, fixtures & fittings 2% per annum on cost or valuation 3 - 10 years Investments Fixed asset investments in subsidiaries are shown at cost less provision for impairment. Impairment At each balance sheet date the company reviews the carrying amount of its tangible fixed assets to determine whether there are any indicators of impairment. If indicators of impairment exist then the recoverable amount of an asset is estimated and if this is less than its carrying amount, the difference is recognised in the profit and loss account as an impairment loss. Pensions The company operates retirement benefit schemes; both defined benefit and defined contribution schemes. The liability recognised in the balance sheet in respect of the company’s defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised past service costs. The defined benefit obligation is calculated using the projected unit credit method. Formal actuarial valuations are carried out on a triennial basis, with updated calculations being prepared at each balance sheet date by qualified independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The cost of providing future benefits (service cost) is charged to the profit and loss account as required. The return on scheme assets and interest obligation on scheme liabilities comprise a pension finance adjustment which is included in interest costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in the period they arise. Contributions payable under defined contribution schemes are charged to the profit and loss account as they arise. Share-based payments The company issues equity settled share-based payments to certain employees, which are measured at fair value at the date of grant. The fair value is expensed on a straight-line basis over the vesting period, based on the company’s estimate of shares that will eventually vest. The impact of revising original estimates, if any, is included in the profit and loss account, with a corresponding adjustment to reserves. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Dividend distribution Dividend distribution to the company’s shareholders is recognised as a liability in the company’s financial statements in the period in which the dividends are approved by the company’s shareholders. Deferred taxation The company accounting policy is to provide for deferred tax on all timing differences except those arising on the revaluation of fixed assets for which there is no binding agreement to sell or on the undistributed profits of overseas subsidiaries. Deferred tax is calculated at the rates at which it is estimated the tax will arise. The tax rates are those expected to arise based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. The deferred tax provision is not discounted to net present value. 84 Moving you across Europe N O T E S T O T H E PA R E N T C O M PA N Y A C C O U N T S 1. Arriva plc profit and loss account Arriva plc has not presented its own profit and loss account as permitted by Section 230 of the Companies Act 1985. The loss for the financial year dealt with in the accounts of Arriva plc is £1.1 million (2005: profit £35.1 million). 2. Tangible fixed assets Freehold land & buildings £m Cost or valuation At 1 January 2006 Additions Disposals At 31 December 2006 9.1 0.2 9.3 Plant, company vehicles, fixtures & fittings £m 2.5 5.2 (6.2) 1.5 Total £m 11.6 5.4 (6.2) 10.8 Comprising: Cost Valuation 1997 8.5 0.8 9.3 1.5 1.5 10.0 0.8 10.8 Accumulated depreciation At 1 January 2006 Charge for the year Disposals At 31 December 2006 Net book amounts At 31 December 2006 At 31 December 2005 1.4 0.2 1.6 2.1 0.6 (1.7) 1.0 3.5 0.8 (1.7) 2.6 7.7 7.7 0.5 0.4 8.2 8.1 3. Investments Shares in subsidiaries at cost £m 741.6 Shares in subsidiaries net book amount £m 726.9 Fixed asset investments At 1 January 2006 and at 31 December 2006 Impairment £m (14.7) Particulars of fixed asset investments are detailed in note 29 to the group financial statements. Arriva plc Annual Report & Accounts 2006 85 N O T E S T O T H E PA R E N T C O M PA N Y A C C O U N T S c o n t i n u e d 4. Debtors 2006 £m Amounts falling due within one year: Trade debtors Deferred tax (note 5) Prepayments and accrued income Other debtors Amounts falling due after more than one year: Amounts owed by group undertakings 0.6 0.2 0.3 33.9 35.0 55.2 90.2 2005 £m 0.4 0.2 0.2 40.7 41.5 52.2 93.7 5. Deferred taxation 2006 £m Accelerated capital allowances Other timing differences Deferred tax excluding that relating to pension liability Deferred tax on pension liability Deferred tax 1.6 (1.8) (0.2) (2.6) (2.8) 2005 £m 1.8 (2.0) (0.2) (3.1) (3.3) Factors that may affect future tax charges No deferred tax asset is provided in respect of the unremitted earnings of overseas subsidiaries unless a binding agreement exists at the balance sheet date to remit such earnings in the future. 86 Moving you across Europe 6. Creditors 2006 £m Amounts falling due within one year: Trade creditors Creditors for taxation and social security Other creditors Accruals and deferred income 1.4 1.5 7.4 7.8 18.1 Amounts falling due after more than one year: Other loans Amounts due to group companies Accruals and deferred income 481.1 33.1 514.2 2005 £m 0.5 2.9 7.4 8.1 18.9 60.0 446.1 36.6 542.7 Loans are repayable as follows: In more than two years, but not more than five years 2006 £m - 2005 £m 60.0 The company provides cross guarantees in respect of the bank borrowings of a number of the group's subsidiaries. Fair value of non-current liabilities The company considers there to be no material difference between the fair value of non-current liabilities and their carrying amount in the balance sheet. Borrowing facilities The company has the following undrawn committed floating rate borrowing facilities available at 31 December in respect of which all conditions precedent had been met at that date: 2006 £m Expiring within one year Expiring in more than two years 36.2 201.6 237.8 2005 £m 19.9 107.1 127.0 Arriva plc Annual Report & Accounts 2006 87 N O T E S T O T H E PA R E N T C O M PA N Y A C C O U N T S c o n t i n u e d 7. Called up equity share capital Authorised 2006 Ordinary shares of 5 pence each Number of shares Reconciliation of movement in issued share capital: Shares in issue 1 January 2006 Share allotments on exercise of options Shares in issue 31 December £14,500,000 290,000,000 2005 £14,500,000 290,000,000 Allotted – fully paid 2006 £9,904,472 198,089,442 2005 £9,846,118 196,922,357 196,922,357 1,167,085 198,089,442 195,749,903 1,172,454 196,922,357 Consideration of £1.2 million was received in respect of the share allotments in the year ended 31 December 2006. At 31 December 2006 there were outstanding options to receive allotments of 2,774,684 ordinary shares under the Executive Share Option Scheme, the Share Incentive Scheme and the Long Term Incentive Plan. The price for the vested share for the Long Term Incentive Plan is nil. The option exercise prices for the other schemes range from 175.0 pence to 613.4 pence. The options are exercisable up to March 2015. At 29 December 2006 the middle market quotation of the ordinary share, as derived from the Stock Exchange Official List, was 764.0 pence. The highest price attained by the ordinary share in 2006 was 764.0 pence and the lowest level during 2006 was 503.0 pence. 8. Share-based payments The grants and related accounting treatment adopted by Arriva plc under FRS20, 'Share-based payments', are identical to that adopted by the group under IFRS2, 'Share-based payments'. For details please refer to note 24 in the group financial statements. 9. Reserves Capital redemption reserve £m At 1 January 2006 Arising on issue of shares Loss for the year Dividends Actuarial gain on pension deficit Movement on deferred tax relating to pension liability Share-based payments At 31 December 2006 1.8 1.8 Share premium account £m 19.1 3.3 22.4 Special reserve £m 59.1 59.1 Profit and loss account £m 268.7 (2.2) (1.1) (39.6) 1.6 (0.5) 1.2 228.1 Total £m 348.7 1.1 (1.1) (39.6) 1.6 (0.5) 1.2 311.4 10. Reconciliation of movements in shareholders’ funds 2006 £m (Loss)/profit for the year Dividends New share capital subscribed Actuarial gain on pension deficit Movement on deferred tax relating to pension liability Share-based payments Net (reduction in)/addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds (1.1) (39.6) (40.7) 1.2 1.6 (0.5) 1.2 (37.2) 358.5 321.3 2005 £m 35.1 (37.7) (2.6) 3.8 4.4 (1.3) 1.4 5.7 352.8 358.5 88 Moving you across Europe 11. Pensions The accounting treatment under FRS17 'Retirement benefits' (including the early adoption of the amendment to FRS17), is more in line with that adopted by the group under IAS19 'Employee benefits'. For details please refer to note 21 in the group financial statements. At 31 December 2006 the company operated both defined benefit and defined contribution schemes, which are financed through separate Trustee administered funds managed by independent professional fund managers on behalf of the Trustees. Contributions to the defined benefit funds are based upon actuarial advice following the most recent of a regular series of valuations of the funds by their representative independent actuaries. Total pension cost The total pension cost for the company was £1.2 million (2005: £0.4 million). The pension costs in respect of the company's defined contribution scheme was £0.6 million (2005: £0.2 million). FRS17 ‘Retirement Benefits’ The calculations used to assess the FRS17 liabilities of the retirement benefit scheme are based on the most recent actuarial valuations, updated to 31 December 2006 by qualified independent actuaries. The schemes' assets are stated at their market value at 31 December 2006. The assumptions used are identical to those used for determining the group charge under IAS19. The amounts recognised in the balance sheet are determined as follows: Equities Bonds Other Total market value of assets Present value of liabilities Deficit Related deferred tax asset Net pension liability 2006 £m 38.3 12.7 0.3 51.3 (60.0) (8.7) 2.6 (6.1) 2005 £m 35.4 12.6 0.1 48.1 (58.3) (10.2) 3.1 (7.1) The costs of the scheme for the year ended 31 December were as follows: Analysis of the charge to operating profit: - Current service costs - Past service adjustment Total operating charge 2006 £m 0.4 0.5 0.9 2005 £m 0.3 0.3 Analysis of the credit to finance income: - Expected return on assets - Interest on liabilities Total finance credit Total charge before tax (3.1) 2.8 (0.3) 0.6 (2.9) 2.8 (0.1) 0.2 Arriva plc Annual Report & Accounts 2006 89 N O T E S T O T H E PA R E N T C O M PA N Y A C C O U N T S c o n t i n u e d 11. Pensions (continued) Analysis of movement in deficit in the scheme for the year ended 31 December: Gross deficit in the scheme at 1 January Contributions paid Current service cost Past service adjustment Total finance credit Actuarial gain Gross deficit in the scheme at 31 December 2006 £m (10.2) 0.5 (0.4) (0.5) 0.3 1.6 (8.7) 2005 £m (14.7) 0.3 (0.3) 0.1 4.4 (10.2) Analysis of amounts recognised in reserves: Difference between expected and actual return on assets Experience gains and losses arising on the scheme liabilities Effect of changing the financial assumptions Actuarial gain recognised in reserves 2006 £m 1.8 (2.1) 1.9 1.6 2005 £m 4.0 5.8 (5.4) 4.4 Actuarial gain as a percentage of scheme assets and liabilities at 31 December: Difference between expected and actual return on assets as a percentage of scheme assets Experience gains arising on the scheme liabilities as a percentage of the present value of scheme liabilities Total actuarial gain recognised in the reserves as a percentage of the present value of scheme liabilities 2006 % 3.5 3.5 2.7 2005 % 8.3 9.9 7.5 2004 % 1.6 0.7 0.5 S TAT E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. The directors are required to prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the company will continue in business. The directors confirm that suitable accounting policies have been used and applied consistently with the exception of the changes arising on the adoption of new accounting standards in the year as explained in the company accounting policies on page 84. They also confirm that reasonable and prudent judgments and estimates have been made in preparing the financial statements for the year ended 31 December 2006 and that applicable accounting standards have been followed. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company 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 the website Legislation in the UK concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions 90 Moving you across Europe I N D E P E N D E N T A U D I T O R S ’ R E P O RT T O T H E M E M B E R S O F A R R I VA P L C We have audited the parent company financial statements of Arriva plc for the year ended 31 December 2006 which comprise the Balance Sheet and the related notes. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. We have reported separately on the group financial statements of Arriva plc for the year ended 31 December 2006. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, 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. We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors' Report is consistent with the parent company financial statements. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the Chairman’s Statement, the Chief Executive’s Review, the Financial Review, the Corporate Responsibility Review, the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, the Corporate Governance Statement, the Five-Year Financial Summary and the other reports on pages 2 to 11. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • • • the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company’s affairs as at 31 December 2006; the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors' Report is consistent with the parent company financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 12 March 2007 Arriva plc Annual Report & Accounts 2006 91 FINANCIAL CALENDAR 2007/08 Annual General Meeting Meeting date Final ordinary dividend 18 April 2007 Record date Payment date Results for the 6 months to 30 June 2007 30 March 2007 1 May 2007 Announcement date Interim ordinary dividend 6 September 2007 Record date Payment date Results for the year ending 31 December 2007 14 September 2007 1 October 2007 Announcement date March 2008 - date to be confirmed CONTACT INFORMATION AND REGISTRAR DETAILS Secretary & Registered Office David Turner BA, FCIS Arriva plc Admiral Way Doxford International Business Park Sunderland SR3 3XP Tel: 0191 520 4000 www.arriva.co.uk Company no: 347103 Registered in England and Wales Registrar and Shareholder Information Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH Tel: 0870 889 3197 www.computershare.co.uk ADVISORS Auditors PricewaterhouseCoopers LLP 89 Sandyford Road Newcastle upon Tyne NE1 8HW Solicitors Dickinson Dees St Ann’s Wharf 112 Quayside Newcastle upon Tyne NE99 1SB Field Fisher Waterhouse 35 Vine Street London EC3N 2AA Herbert Smith Exchange House Primrose Street London EC2A 2HS Stockbrokers ABN Amro Hoare Govett 250 Bishopsgate London EC2M 4AA Merchant Bankers N M Rothschild & Sons Limited New Court St Swithin’s Lane London EC4P 4DU Financial Public Relations Tulchan Communications Sixth Floor Kildare House 3 Dorset Rise London EC4Y 8EN Deutsche Bank 1 Great Winchester Street London EC2N 2DB 92 Moving you across Europe Arriva plc Annual Report & Accounts 2006 Arriva plc Registered Office: Admiral Way Doxford International Business Park Sunderland SR3 3XP United Kingdom Tel +44 (0)191 520 4000 Fax +44 (0)191 520 4001 www.arriva.co.uk Designed and produced by Robson Brown Printed by Reed Print & Design