Annual Report and Accounts 2008
Other financial matters
Fuel
It is the Group's policy to hedge a proportion of future fuel usage against movements in fuel prices, in order to provide certainty and assist price recovery from customers, where possible. These swaps utilise a number of different market benchmarks, including ultra-low sulphur diesel (ULSD) and gasoil in the UK, heating oil in North America and Euro denominated ULSD in Spain.
On a constant volume basis, Group fuel costs in 2008 were £20 million higher than in 2007. This reflected the sharp increase in fuel price future contracts during the early part of 2008. For 2009, the Group has hedged almost 100% of its requirements at an expected cost of £28 million above 2008 (at constant volume). This reflects the higher priced outlook for fuel and oil when most of this usage was hedged in summer 2008. For 2010, to date the Group has hedged 48% of its requirements. With fuel future contracts priced below those achieved in 2009, this should reduce fuel costs in 2010.
Pensions
The Group's principal defined benefit pension schemes are all in the UK. These schemes have seen an increase in the combined deficit at 31 December 2008 to £45.0 million (2007: £29.8 million), reflecting the poor returns available recently on equity and bond markets.
The rail business operates an open element within the Railways Pension Scheme ('RPS'). Given the limited life of each franchise, the Group's main obligation is to pay the service contributions agreed with the scheme actuary over the period of the franchise only. The Group's RPS deficit on an IAS19 valuation basis is £38.7 million (2007: £18.8 million deficit).
The principal defined benefit schemes within Bus and Coach are closed to new members. The two bus schemes, the West Midlands Passenger Transport Authority Pension Fund and the Tayside Transport Superannuation Fund, have a combined deficit under IAS 19 of £3.6 million (2007: £5.1 million deficit). The National Express Group Staff Pension Plan has an IAS 19 deficit of £1.2 million (2007: £4.9 million deficit).
Financing and treasury management
The Group's treasury policy has been to adopt efficient financing structures that enable it to use its balance sheet strength to achieve the Group's objectives without putting shareholder value at risk. Having completed a period of acquisition and organic investment, and given that current difficult global funding markets may continue for some time, the Group is focusing its treasury policy and financial strategy on delivering strong liquidity, cash management and an effective capital structure, in order to manage its future reliance on uncertain capital markets.
The Group's treasury objective is to manage the risk for potential loss of shareholder value from certain financial risks. The Group's financial risk management objectives and policies are described in more detail in the notes to the financial statements.
At 31 December 2008, the Group had two principal bank debt facilities; an £800 million revolving credit facility maturing in June 2011 and a u540 million term loan facility. During the year, the maturity of the latter facility was extended to September 2009 with a one year extension to September 2010 at the Group's option. The headroom under the total committed facilities of the Group at 31 December 2008 was £143.8 million (2007: £199.4 million). The Group complied with all banking covenants during the year. As set out in the section 'Managing our financial platform'; the Group is focused on complying with its future financial covenants and on refinancing its debt as this becomes due.
As set out in the notes to 'Financial statements', the Group's net debt includes cash balances totalling £49.7 million (2007: £55.2 million), which cannot be withdrawn from the UK rail businesses. The franchise agreements for those train operating companies ('TOCs') restrict the withdrawal of cash, aimed at enabling a TOC to meet its working capital requirements on a stand alone basis. Cash can only be withdrawn by loan or dividend to the extent certain financial ratios are met.