Consolidated profit and loss account - Stagecoach Group

Notes to the accounts 2003
Note 13 Fixed asset investments (continued)
The principal associate is: Country of Number of Nominal value of % held at
operation shares in issue share capital 30 April 2003
at 30 April 2003
in issue
at 30 April 2003
Road King Infrastructure Limited
China
^ ordinary shares 515.6m HK$51.6m 25.2
^ preference shares 0.4m HK$0.04m 100.0
The market value of the Group’s ordinary share investment in Road King Infrastructure Limited, a Bermudan incorporated company, listed
on the Hong Kong Stock Exchange, at 30 April 2003 was HK$480.2m (»38.5m) (2002 ^ HK$392.6m (»34.5m)). In February 2002, the Group
converted 100,000 of its 518,380 7.5% HK$1,000 convertible preference shares in Road King Infrastructure Limited to ordinary shares. The
remaining 418,380 preference shares were converted on 12 June 2003 which resulted in us having a 31.2% interest in Road King’s ordinary
shares. The equivalent market value of the Group’s ordinary share investment in Road King post-conversion of the preference shares would
be HK$661.1m (»53.0m). This calculation uses the market value of Road King’s shares at 30 April 2003 and the exchange rate prevailing at
that date. The coupon received on the preference shares has been included in the share of associates’ operating profits. The Group’s share of
operating profit is based on the most recent publicly available information, being the results for the year ended 31 December 2002.
The carrying value of the Group’s interest in Road King Infrastructure Limited as at 30 April 2003 was »62.0m.
The principal joint ventures are: Country of Number of Nominal value of % held at
incorporation/ shares in issue share capital 30 April 2003
operation at 30 April 2003 in issue
at 30 April 2003
Virgin Rail Group Holdings Limited United Kingdom 34.8m »3.5m 49
Trainline Holdings Limited United Kingdom 3.4m »3.4m 49
Virgin Rail Group Holdings Limited is the holding company of Virgin Rail Group Limited, which in turn is the holding company of
CrossCountry Trains Limited and West Coast Trains Limited. Trainline Holdings Limited is the holding company of thetrainline.com Limited.
The Virgin Rail Group Holdings and Trainline Holdings shareholders’ agreements provide for joint decision making on key matters and equal
representation on the Boards of both companies. As a consequence the investments have been accounted for as joint ventures. As part of
the original acquisition, the Group acquired a »20m shareholder loan to Virgin Rail Group Limited, now a subsidiary of Virgin Rail Group
Holdings Limited. The shareholder loan carries a 10% coupon and »10m was repaid on 28 April 2000.
Virgin Rail Group Limited is restricted from paying dividends until any shareholders loans payable by it have been repaid. Under an
agreement with the UK’s Strategic Rail Authority (‘‘SRA’’), Virgin Rail Group Limited, CrossCountry Trains Limited and West Coast Trains
Limited may not pay dividends prior to 1 March 2004.
As at 30 April 2002, the Group undertook an impairment review of its investment in Virgin Rail Group in accordance with FRS 11. The
directors concluded, at that time, no impairment write-down was required. However, for each of the five years following the initial
impairment review, the Group is required to review its initial projections in light of the actual cash flows. The Group has therefore
reviewed the projections made in connection with the 30 April 2002 impairment review. This indicated that the actual net cash flows
earned by the Group from its investment in Virgin Rail Group during the year ended 30 April 2003 were in line with those projected.
Virgin Rail Group’s two train franchises are presently operating with subsidy from the SRA on the basis of a one-year budget set by the
SRA. The value of the Group’s investment in Virgin Rail Group depends on the agreement of long-term commercial arrangements with the
SRA for the operation of Virgin Rail Group’s two franchises. Virgin Rail Group has not yet agreed terms for the long-term operation of the
franchises and it is not known with certainty when these arrangements will be agreed. In addition, Virgin Rail Group continues to be
significantly impacted by the performance of Network Rail. Network Rail is contractually responsible for upgrading certain railway
infrastructure, on which the future revenue growth of Virgin Rail Group’s train operations is dependent.
The directors believe that these uncertainties give rise to a need to undertake a fresh impairment review as at 30 April 2003.
In accordance with FRS 11, we have compared the carrying value of our net investment in Virgin Rail Group, with its estimated recoverable
amount, being the higher of net realisable value and value in use.
The Group has conducted this fresh review with reference to the terms agreed between Virgin Rail Group and the SRA on 19 July 2002 for
the future operation of the two franchises. There remains uncertainty over the timing of agreeing new long-term commercial arrangements
for each franchise and also around the level of shareholder return that will be achievable under such arrangements. The SRA has the right
to offer the CrossCountry franchise for competitive tender and this presents a further uncertainty. However, to date, the SRA has not
indicated that it intends to exercise this right. In conducting the impairment review as at 30 April 2003, the directors have made best
estimates of future cash flows to the expected end of the two franchises in 2012 after taking account of these factors. Any estimation of
value in use is subjective because it is based on estimates of future cash flows. Actual results can differ from those assumed and there can
be no absolute assurance that the assumptions used will hold true.
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