| Risk description |
Potential impact |
Mitigation |
Group |
|
|
| Major accident or incident
(including terrorism or Act
of God) or pandemic |
Potential for serious injury, service
disruption and lost earnings |
- Rigorous, high profile health & safety programme throughout the Group
- Appropriate and regularly reviewed and tested contingency and disaster
recovery plans
|
| Economic environment |
Negative impact on the Group’s businesses and demand for services, in particular, revenues from rail franchises |
- Proactive cost control, revenue management and economic modelling of
new contracts
- Organisational structure of businesses supports close monitoring of prices,
capacity and demand
- London bus contracts secured for five to seven years
- Revenue support in rail
|
| Political and regulatory changes and availability of public funding |
Changes to laws and regulations, and further
reductions in the availability of government
financial support (including bus service
operators’ grants for fuel, concessionary fare
reimbursement and Government and local
authority contracts) could adversely impact
the Group’s operations and financial position |
- Closely monitor and understand the impact of proposals for change in the regulatory environment
- Actively participate in industry, trade and Government forums and maintain close relationships with key stakeholders
|
| Inappropriate strategy
or investment |
Reduction in economic and shareholder value |
- Comprehensive strategic discussions with main Board and advisers
- Extensive valuation and due diligence, supported by external expertise
- Discipline to “walk away” from opportunities
- Value adding investments are required to return in excess of the Group’s post
tax weighted average cost of capital
- Cautious approach to investment opportunities overseas
|
| Competition |
Loss of business from a number of
competitive sources |
- Work closely with stakeholders to manage their requirements including service
quality and price
|
| Labour costs and
employee relations |
A 1% increase in staff costs and salaries across
the Group would increase costs by £7.9m. Poor
employee relations or reduced availability of staff
could adversely impact reputation and revenue |
- Experienced approach to wage negotiations and fostering of good relationships
with employees and unions at operating company level
- Robust and regularly reviewed recruitment and retention policies, training
schemes and working practices
|
| Increased pension scheme
funding required |
The Group participates in a number of pension
schemes, including rail and non-rail defined
benefit schemes. Any funding shortfalls could
adversely impact the Group’s financial position |
- Rail pension schemes and obligations guaranteed by DfT at end of franchise
- Non-rail defined benefit schemes closed to new entrants
- Board participation in overall pensions strategy decisions for non-rail pensions
arrangements. Dedicated Investment Sub-Committee works with management
on de-risking of investments to mitigate volatility
|
| Fuel costs |
The Group’s bus and rail businesses are
exposed to fuel cost volatility, primarily diesel
for buses and electricity for rail traction.
Increases in fuel prices which are not fully
mitigated by the Group’s policies, or hedged
prices in excess of market prices, could
adversely impact the Group’s financial position |
- The Group forward buys prices for electricity for rail traction as appropriate and
regularly enters into forward swap contracts to buy fuel at fixed prices to cover all
of the requirements of the current financial year, at least 50% of the requirements
for the next financial year and at least 25% for the following financial year
|
| Insurance and claims |
The number and magnitude of claims falling
within the Group’s self-insured limits is
significantly higher or lower than expected |
- Comprehensive insurance cover, with self-insurance up to defined limits and purchases
above these limits from reputable global insurance firms
- Insurance and claims activity monitored closely
|
| Financing risk |
Loss of liquidity, credit risk on cash investments,
interest rate risk |
- Board approved treasury policy, which is regularly reviewed
- Three year cashflow and covenant forecasts monitored on a monthly basis
- Investment grade credit rating
- £200m sterling bond issue secures financing to September 2017
- Five year £275m revolving credit facility secures financing to February 2016
- Comprehensive, low risk cash investment policy
- 100% of net debt is subject to fixed interest rates
|
| Succession planning |
A failure to attract, or the loss of, key members
of senior management could adversely impact
the Group’s businesses and operations |
- The Group prioritises the attraction and retention of senior directors and
managers, including through the appointed Nomination Committee, to ensure
that the Group has the necessary expertise and continuity
|
| Dividend per share
is reduced |
Reduces from current full year level of
81.0p per share |
- Maintaining dividend per share is a key priority for the Board
- Supported by strong cashflows and balance sheet
|
| Service delivery issues
during Olympic Games |
Failure to comply with Olympic Service
Delivery Plan |
- Robust preparation and maintenance in advance
- Proactive relationships with relevant parties
|
| Information technology
failure or interruption |
Prolonged or major failure of information
technology systems could pose significant risk
to the ability to operate and trade |
- Process standardisation and continued investment in best practise systems
- Clear and tested business continuity plans
|
Bus Division |
| Economic environment or
government cuts reduces
demand for bus services |
A 1% loss of revenue results in a reduction
in operating profit of approximately £0.6m,
assuming all costs are variable |
- Improved revenue forecasting
- Management action plans to reduce costs in the event of a downturn
|
| Further reduction or removal
of government funding |
Including Bus Service Operators Grant
(BSOG) which will reduce by 20% in April
2012. BSOG totalled around £50m for the
Group in the year, with just over half in London |
- Engage and consult with the Government on the proposals for change
- Extensive management initiatives underway to manage and mitigate
further reductions
|
| London bus contracts not
renewed or reduction in
existing revenues through
withdrawal or re-pricing |
Adverse earnings impact |
- Well located depots, 85% capacity freehold
- Strong reputation for quality and cost control
- Contract retention rate averages over 95%
|
| Concessionary fares scheme
reimbursement rates reduce
and do not provide an
adequate economic return |
Concessionary fares accounted for around 20%
of the current year’s deregulated bus revenue |
- Almost all of our schemes have been agreed with local authorities
for 2011/2012
|
| Bus fuel prices increase |
An increase of ten pence per litre increases the
cost of fuel by approximately £11m |
- Rolling fuel hedging programme
- Fuel fully hedged for next financial year
- Good progress on hedging in following year
|
| UK Competition
Commission inquiry |
Changes arising from the inquiry adversely
impact the Group’s financial prospects |
- Around half of the Group’s bus revenues are in London, and therefore outside
the scope of this referral
- The Group’s deregulated operations amount to only approximately 6% of the
market which is the subject of the referral. These operations work closely with
the UK Competition Commission to ensure that the Group’s position is clearly
and strongly represented
|
Rail Division |
| Economic environment
reduces demand for
rail services |
A 1% loss of revenue results in a reduction
in operating profit of approximately £8m,
assuming all costs are fixed |
- Improved revenue forecasting
- Management action plans to reduce costs in the event of a downturn
- DfT revenue support in Southeastern franchise
- Revenue support available in London Midland from 11 November 2011 and
in Southern from 21 September 2013
|
| Inaccurate or erroneous
bid assumptions |
Adverse trends in passenger volumes and
inflation adversely affect the Group’s rail
businesses, results of operations and
financial position |
- Shared revenue risks with Govia, which is 65% owned by Go-Ahead and
35% by Keolis
- Some protection against economic downturn through revenue support
arrangements
- Significant management resource and financial investment in bidding for new
rail franchises
- Board approval of overall rail bidding strategy and key partners
|
| Rolling stock issues |
Delayed delivery of new rolling stock or faulty
equipment could ultimately result in our failure
to deliver franchise commitments |
- Work with reliable and trusted rolling stock manufacturers
- Adopt robust maintenance regimes and rolling stock plans to ensure appropriate
availability of trains
|
| Breach of rail
franchise agreements |
Failure to comply with the conditions of the
rail franchise agreements results in penalties,
including the potential termination of one
or more rail franchise agreements. This
could result in the Group losing the right to
continue operating the affected operations
and consequently the related revenues and
cashflows. The Group may also lose cash
balances or season ticket bonds set aside
to cover working capital requirements, and
performance bonds. Any such loss of revenues
or cashflow could adversely impact the
Group’s businesses, results of operations and
financial position |
- Compliance with franchise conditions closely managed and monitored on
a monthly basis to minimise risk of non-compliance
- Regular review and monitoring by Board
- Bonding severally shared with Go-Ahead at 65% and Keolis at 35%
|
| Loss of franchise |
Failure to retain a franchise upon its re-tender
could result in loss of earnings in the
rail division |
- Employ an experienced bid team with a high success rate
- Deliver on existing franchise commitments
|
| Earnings volatility impacts
Group’s financial strength |
Rail represents approximately one third of the
Group’s current year operating profit* |
- All rail operations held through Govia, which is 65% owned by Go-Ahead, and
35% by Keolis
|
| Profit improvement plans
in Southern franchise bid
not delivered |
Each 1% of revenue growth not achieved
is approximately £5m of operating profit*,
assuming all costs are fixed |
- Strong and experienced team assembled to deliver the new Southern franchise
- Comprehensive tracking of delivery against bid
|
* Before amortisation and exceptional items.