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Financial Review

Other financial results

Fuel

We use fuel swaps to hedge short term movements in the fuel price. These swaps cover a number of different positions including ultra-low sulfur diesel (ULSD) and gasoil in the UK, heating oil in North America and Euro denominated ULSD in Spain. For 2008 and 2009 we have hedged 58% and 31% of our volumes respectively.

Joint ventures and Associates

The Group has a number of associates and joint ventures in Spain and holds a 40% investment in Inter-Capital and Regional Rail Limited (“ICRRL”).

The results of the associates and joint ventures in Spain were a profit of £0.6m (2006: £0.2m) and a loss of £0.2m (2006: £0.2m loss) respectively.

The Group’s Eurostar contract with ICRRL was designated an onerous contract in 2006. As a result there is no charge to the income statement in 2007, but in 2006 the total charge was £29.6m, comprising our share of the ICRRL result of £3.9m and a £25.7m exceptional charge for the onerous contract. We have provided for the Eurostar losses to the end of the contract in 2010.

Finance cost

Net finance costs increased to £29.0m (2006: £24.9m), reflecting the £481.9m increase in net debt following the acquisition of Continental Auto in October 2007.

Included in the net finance cost is a £3.0m (2006: £2.1m) charge to unwind the discounting on provisions, most notably the ICRRL onerous contract. Adjusting for the discounting charge and comparing to normalised operating profit before depreciation and other non-cash items (“EBITDA”) of £282.9m (2006: £264.0m), the EBITDA finance cover was 10.9 times (2006: 11.6 times).

Amortisation of Intangible assets

Amortisation of £27.5m (2006: £27.8m) was charged on the intangible asset that arises from the Group’s right to operate its rail franchises £1.1m (2006: £1.6m) and on contracts acquired in Alsa £20.2m (2006: £20.1m), UK Bus £1.1m (2006: £1.6m) and North America £5.1m (2006: £4.5m).

Exceptional items

Exceptional charges totalled £15.8m, incurred on the Business Transformation program in North America (£8.2m), UK integration program (£4.2m), the Continental Auto integration (£2.6m) and the NXEC franchise mobilisation (£0.8m).

In 2006, exceptional items totalled a net income of £4.8m, comprising a credit of £6.7m in relation to defined benefit pension liabilities and charges of £1.9m in relation to the integration of Alsa.

The £16.2m profit on disposal of non-current assets arises from the sale of the operating lease on Stewart International Airport in October 2007. The £16.9m profit in 2006 resulted from the disposal of a 14% shareholding in Trainline Holdings Limited (£9.4m) and the disposal of a car park in Sheffield (£7.5m).

Taxation

The total tax charge of £37.6m (2006: £23.6m) on profit before tax of £149.9m (2006: £104.1m) represents an effective rate of 25.1% (2006: 22.7%).

The tax charge on normalised profit of £177.0m (2006: £156.1m) was £48.1m (2006: £39.2m), which represents an effective rate of 27.2% (2006: 25.1%). Reductions in jurisdictional tax rates mean that the expected tax rate on normalised profit before tax decreased by 1.0% to 31.3%. However, the effective tax rate has increased by 2.1% to 27.2% due to the expiry of certain tax efficient financing arrangements.

The total tax charge includes a tax credit on exceptional items of £10.5m (2006: £15.6m) which includes the deferred tax benefit of the Group’s non-deductible intangible asset amortisation.

Discontinued operations

An additional provision of £6.3m was recognised in relation to the Group’s Public Transit business which was disposed of in 2005. The Group provided an indemnity to the purchaser at the time of the disposal regarding an industry employment issue in California. The issue is close to resolution and this charge reflects the Directors’ best estimate of the Group’s liability. The charge of £2.9m on the face of the income statement comprises £6.3m of additional liabilities in relation to the disposed operations, offset by a tax credit of £3.4m.

Dividend

A final dividend of 26.40p per share will be paid in May 2008, bringing the total dividend for the year to 37.96p. This is a 9.2% increase in total dividends declared compared to 2006 reflecting the 9.7% increase in normalised diluted earnings per share. This dividend is covered 2.2 times (2006: 2.2 times) by normalised profits after tax.

In light of the consistent nature of our rail portfolio for the medium term and based on the Board’s confidence in the Group’s future prospects, it is proposed to announce a three year commitment on dividend growth of 10% per annum.

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