AA Intermediate Co Q1 Report

AA plc

30 June 2015

AA Intermediate Co Limited announces first quarter results

for the three months ended 30 April 2015

AA plc announces that the results for AA Intermediate Co Limited ('AA Intermediate Co') have been issued in compliance with the listing requirements for its Class B Notes. AA Intermediate Co is the parent company of the companies that provide security and guarantees under the Whole Business Securitisation ('WBS') financing arrangements entered into by the AA on 2 July 2013.

Once the Class B Notes are repaid on 31 July 2015, the quarterly reporting requirement for the AA Intermediate Co will cease. This is therefore the final quarterly report that will be issued by the AA.

AA Intermediate Co's results differ from the results of AA plc. The material differences relate to the consolidated assets and liabilities as follows:

1. Inter-company balances, which were £1,200m lower for AA plc than for AA Intermediate Co as all non-trading balances were eliminated in AA plc as part of the July 2013 financing transaction;

2. The sum of £45m of cash mainly consisting of net proceeds following the IPO and share issue in April 2015 less the repayment of the PIK notes.

While there are small differences between the revenue and EBITDA of AA Intermediate Co and AA plc arising from the trading of two minor subsidiaries (the AA's reinsurance company and a driving services company) which are not within the WBS, the overall consolidated trading performance is substantially comparable.

Summary of AA Intermediate Co first quarter results

Highlights

· These first quarter results, which are in line with management's expectations, demonstrate the robust performance of the Roadside Assistance business 

· This is a year of investment and consolidation as we begin the transformation of the AA in line with the strategy recently set out. Delivery of this strategy is firmly on track with some of the early infrastructure improvements already implemented. We are encouraged by the reception of our first TV brand marketing in June  

· The refinancing transaction undertaken during Q1 has generated significant one off finance charges and reduced the overall run-rate cost of our debt by more than £45m per annum. The refinancing will be completed with the repayment of the existing Class B notes on 31 July 2015

First quarter results for the three months ended 30 April 2015

Financial headlines

· Roadside Assistance revenue rose 3.3% (£5.8 million) reflecting continued growth in average income per Personal Member. This increase continued last year's trend. We have also contained the reduction in Personal Members to 0.8% over the quarter, largely as a result of improvements in our Stay AA retention programme.  

· Business customers in our Roadside Assistance business increased 2.2% during the quarter to 9,850,000 reflecting increased vehicle numbers in both manufacturer and fleet operations as the economy continues to improve. 

· The reduction in the number of free Home Services policies has lead to the 1.8% decline in overall Insurance policy volumes over the quarter. The decline in Insurance Services revenue also reflects a conscious policy to contain pricing in the increasingly competitive motor insurance segment. This approach is expected to increase future policy volumes. Development of the AA's underwriting operation is on plan and progressing well.  

· The lower Trading EBITDA margin of 41.7%, compared with 43.1% for the same period last year, reflects the planned investment in the business as set out in our strategy update in March. This includes the first tranche of expenditure to produce the new TV marketing campaign and increased Roadside Assistance costs which reflect investment in the training of our patrols in the use of our new diagnostics tool. As expected, we also incurred the additional costs of operating as a PLC.

· Since the period end, we have seen improving revenue and cost trends in our Roadside Assistance business as our planned improvements positively impact operations.  

· Cash conversion before exceptional items was 103% compared with 93.2% for the same period last year reflecting a favourable working capital contribution from the new driving school vehicle leasing arrangements.

Bob Mackenzie, Executive Chairman said: "We are making excellent progress in the AA's transformation: we have now launched our new brand advertising campaign and have already started to deliver the new IT system infrastructure which forms the foundation of our broader IT transformation. We remain excited about our future as a membership club serving a broader range of motorists' needs in the digital age and positioning the AA to realise the potential of our brand and our leading position in the market."

Enquiries

IR Jill Sherratt, Head of Investor Relations +441256 497057

James Curran, IR Manager and Analyst +441256 497079

Media Francesca Tuckett, Headland Consultancy +44207367 5222

Notes

1 Earnings before interest, tax, depreciation and amortisation excluding exceptional items, share-based payments, acquisition earn-out costs and items not allocated to a business segment;

2 Trading EBITDA divided by revenue arising within operating segment

3 Net cash inflows from operating activities before tax and exceptional items divided by Trading EBITDA;

4 Spot number of members at period end;

5 Average income for 12 months ended April 2015 and April 2014;

6 Last 12 months excluding business customers.

Management discussion and analysis

Introduction

The directors present the condensed financial statements of AA Intermediate Co Limited ("the Company") and its subsidiary undertakings (together "the Group") for the period ended 30 April 2015. The Company is an Obligor and a parent company of each of the other Obligors that provide security and guarantees under the financing arrangements entered into by the AA in July 2013, collectively known as a Whole Business Securitisation ("WBS"). The Company's immediate parent is AA Mid Co Limited. There is no material difference in the financial conditions and results of operations between the AA Intermediate Co Limited group and the AA Mid Co Limited group.

The Company's ultimate parent undertaking is AA plc. The material differences in the consolidated assets and liabilities of the AA plc group compared to the Group are in relation to (i) balances due from other group companies which were £1,200m lower for the AA plc group as all non-trading balances were eliminated as part of the July 2013 financing transaction and (ii) £45m of cash mainly consisting of net proceeds following the IPO and share issue in April 2015 less the repayment of the PIK notes.

Principal activity and review of business developments

The Group provides AA branded goods and services across the UK and Ireland. The AA's principal activity is the provision of Roadside Assistance to both its Personal Members and business customers (which in aggregate makes up over 70% of Group turnover). The AA is recognised nationally as 'the 4th Emergency Service'.

The other business segments that the AA operates in the UK are Insurance Services and Driving Services. The AA business strategy includes cross-selling Insurance Services to its Membership utilising its marketing database and multiple points of contact with its customers. The AA business in Ireland operates in all these areas however its trading performance is reported in a separate segment within this report.

The AA is focused on delivering the highest possible standards of customer service, quality products, stable and predictable profits, strong operating margins and high cash conversion. The Group continued to demonstrate all of these qualities during the three month period.

As the Group competes in a number of markets with different performance measures, the aggregate performance of the Group is measured using the financial measures as shown in the table below.

1 Trading EBITDA divided by revenue arising within operating segments

2 Cash inflow from operating activities before tax and exceptional items divided by Trading EBITDA

Management discussion and analysis (continued)

Key operating measures

We use several key operating measures to track the financial and operating performance of our business. None of these terms are measures of financial performance under IFRS, nor have these measures been audited or reviewed by an auditor, consultant or expert. All these measures are derived from the Company's internal operating and financial systems. These terms may not be directly comparable to similar terms used by competitors or other companies.

3Last 12 months excluding business customers

Roadside Personal Members have reduced by 5.2% compared to the same period last year, however, we have contained the reduction in Personal Members to 0.8% since 31 January 2015, largely as a result of improvements in our Stay AA retention programme. Average income per Personal Member has increased by 8.7% since last year and 1.5% since 31 January 2015. New business and renewal volumes have reduced but overall revenue increased due to a higher ATV from renewing customers. On-going improvements to the membership proposition to drive both improved new business and retention performance are being implemented.

The average numbers of business customers have increased by 16.6% compared to the same period last year, which reflects the new contract wins during the prior year including the VW Group, Hyundai and Porsche. Since 31 January, business customers have increased by 2.2% reflecting increased vehicle numbers across our manufacturer and fleet operations as the economy continues to improve.

Overall breakdowns attended remain broadly flat year on year.

Insurance Services policy numbers in force reduced by 5.6% compared to the same period last year, due to lower home services policy sales and renewals due to the strategic decision to offer fewer free home services policies. Policy numbers in force have also reduced from 2,163,000 for the year ended 31 January 2015 compared to 2,125,000 for the year ended 30 April 2015 due to lower home services policy sales and renewals.

Financing transactions in the period

On 13 April 2015 the Group issued £735.0m of new Class B2 loan notes with an interest rate of 5.5% and an expected maturity of 31 July 2022. Using the proceeds combined with existing cash resources, the Group will pay off all £655.0m of the existing Class B notes and has repaid £209.4m of the Senior Term Facility. The £209.4m repayment of the Senior Term Facility has been hedged with a matching interest rate swap. The repayment of the existing Class B notes is expected to take place on 31 July 2015.

Management discussion and analysis (continued)

The Group has recognised an early repayment penalty of £59.0m and written off debt issue fees of £14.9m relating to the repayment of the existing Class B notes and £0.7m of debt issue fees relating to the repayment of the Senior Term Facility.

The refinancing transaction undertaken during the quarter has reduced the overall run-rate cost of AA plc's debt package by more than £45.0m per annum.

Management discussion and analysis - three months ended 30 April 2015 and 30 April 2014

Revenue: Revenue decreased by £2.5m or 1.0% from £239.1m in the three months ended 30 April 2014 to £236.6m in the three months ended 30 April 2015. The decrease in revenue was primarily driven by a reduction in the Insurance and Driving Services segments as outlined below.

 Roadside Assistance: Roadside Assistance revenue increased by £5.8m or 3.3% from £174.2m in the three months ended 30 April 2014 to £180.0m in the three months ended 30 April 2015. The increase in revenue was primarily driven by continued growth in average income per Personal Member and higher business customers holdings from the new contract wins during the prior year including the VW Group, Hyundai and Porsche. Insurance Services: Insurance Services revenue decreased by £4.8m or 13.0% from £37.0m in the three months ended 30 April 2014 to £32.2m in the three months ended 30 April 2015. The decrease in revenue was primarily driven by lower motor insurance renewals in the period. The decrease in Insurance Services revenue also reflects a conscious policy to contain pricing in the increasingly competitive motor insurance segment. This approach is expected to increase future policy volumes. Development of AA plc's underwriting operation is on plan and progressing well.

Management discussion and analysis (continued)Driving Services: Driving Services revenue decreased by £3.4m or 18.2% from £18.7m in the three months ended 30 April 2014 to £15.3m in the three months ended 30 April 2015. The decrease in revenue was primarily driven by lower volumes of activity in the DriveTech business that provides speed awareness courses on behalf of Police Authorities and lower overall instructor numbers in the driving schools.

Ireland: Ireland revenue decreased by £0.1m or 1.1% from £9.2m in the three months ended 30 April 2014 to £9.1m in the three months ended 30 April 2015. The decrease in revenue was primarily driven by a strengthening of Sterling against the Euro. Underlying revenue increased year on year principally due to a strong performance in Motor Insurance.

Cost of sales: Cost of sales increased by £0.4m or 0.5% from £83.8m in the three months ended 30 April 2014 to £84.2m in the three months ended 30 April 2015. The increase in cost of sales was primarily driven by higher garaging and overtime costs in the Roadside Assistance segment as a result of Patrol downtime due to the rollout of the new diagnostics tool.

Administrative and marketing expenses: Administrative and marketing expenses increased by £22.0m or 33.7% from £65.3m in the three months ended 30 April 2014 to £87.3m in the three months ended 30 April 2015. The increase in administrative and marketing expenses was primarily driven by higher exceptional costs relating to Group reorganisation costs. Excluding these items, administrative and marketing costs increased by £7.3m as a result of the investment in a new TV advertising campaign and higher software amortisation costs as the Group invests in its IT infrastructure.

Share of profit on joint ventures: Share of profit on joint ventures increased by £0.2m or 100% from £nil in the three months ended 30 April 2014 to £0.2m in the three months ended 30 April 2015 due to the establishment of a new joint venture, AA Law Limited during the prior year.

Operating profit: Operating profit decreased by £24.7m or 27.4% from £90.0m in the three months ended 30 April 2014 to £65.3m in the three months ended 30 April 2015. The decrease in operating profit was primarily driven by lower Trading EBITDA as described below and increased exceptional items due to Group reorganisation costs.

Finance costs: Finance costs increased by £81.1m or 154% from £52.5m in the three months ended 30 April 2014 to £133.6m in the three months ended 30 April 2015. The increase in finance costs was driven by the recognition of the early repayment fee of £59.0m relating to the repayment of the existing Class B notes which will be paid on 31 July 2015 and the £15.6m write off of the debt issue fees relating to the redemption of the existing Class B notes and the £209.4m Senior Term Facility repayment.

Finance income: Finance income increased from £0.1m in the three months ended 30 April 2014 to £0.3m in the three months ended 30 April 2015. The increase in finance income was due to bank interest receivable from the higher cash balances now retained by the Group since the refinancing in July 2013.

Taxation: Taxation decreased by £24.2m from a charge of £7.4m in the three months ended 30 April 2014 to a credit of £16.8m in the three months ended 30 April 2015. The decrease in taxation was driven by the loss before tax in the three months to 30 April 2015 as a result of the lower Trading EBITDA, the early repayment fee for the existing Class B notes, the write off of existing Class B note issue fees and the increased Group reorganisation costs.

Management discussion and analysis (continued)

Trading EBITDA

Trading EBITDA is a non-IFRS measure and is not a substitute for any IFRS measure.

Trading EBITDA decreased by £4.4m or 4.3% from £103.0m in the three months ended 30 April 2014 to £98.6m in the three months ended 30 April 2015. The decrease in Trading EBITDA reflects the planned investment in the business as set out in our strategy update in March and was primarily driven by increased costs in the Roadside Assistance segment, lower revenue in the Insurance Services segment and increased Head Office costs as outlined below.

 Roadside Assistance: Roadside Assistance Trading EBITDA decreased by £0.5m or 0.6% from £86.1m in the three months ended 30 April 2014 to £85.6m in the three months ended 30 April 2015. Trading EBITDA margins decreased from 49.4% in the three months ended 30 April 2014 to 47.6% in the three months ended 30 April 2015. The decrease in Trading EBITDA reflects the cost of the first tranche of expenditure to produce the new TV marketing campaign and higher Roadside operations costs as a result of Patrol downtime due to training of the patrols in the use of our new diagnostics tool. This was partially offset by stable retention rates and increased average income per personal member as well as higher revenue from business customers as a result of new contract wins in the prior year.

 Insurance Services: Insurance Services Trading EBITDA decreased by £3.4m or 15.4% from £22.1m in the three months ended 30 April 2014 to £18.7m in the three months ended 30 April 2015. Trading EBITDA margins decreased from 59.7% in the three months ended 30 April 2014 to 58.1% in the three months ended 30 April 2015. The decrease in Trading EBITDA and Trading EBITDA margin was driven by lower income from fewer motor insurance renewals. Driving Services: Driving Services Trading EBITDA increased by £0.8m or 22.9% from £3.5m in the three months ended 30 April 2014 to £4.3m in the three months ended 30 April 2015 reflecting improvement from the renegotiation of the lease arrangements for driving school vehicles that resulted in them being reclassified as finance leases in the second half of the prior year. This benefit was partially offset by lower revenues from reduced volumes of police courses. Trading EBITDA margins increased from 18.7% in the three months ended 30 April 2014 to 28.1% in the three months ended 30 April 2015.Ireland: Ireland Trading EBITDA increased by £0.2m or 6.9% from £2.9m in the three months ended 30 April 2014 to £3.1m in the three months ended 30 April 2015. Trading EBITDA margins increased from 31.5% in the three months ended 30 April 2014 to 34.1% in the three months ended 30 April 2015. The Trading EBITDA performance is a result of strong cost management within the segment offsetting the impact of the strengthening of Sterling against the Euro. Head Office Costs: Head Office Costs increased by £1.5m or 12.9% from £11.6m in the three months ended 30 April 2014 to £13.1m in the three months ended 30 April 2015. The increase in Head Office Costs is primarily driven by incremental costs arising from the listing of the parent company and the new London office.

Management discussion and analysis (continued)

Consolidated statement of cash flows

Change in working capital: The change in working capital represented a cash outflow of £9.0m in the three months ended 30 April 2014 compared to a cash inflow of £8.3m in the three months ended 30 April 2015. This change in working capital movements between the periods was principally due to timing differences in trade debtor receipts and supplier payments.

Management discussion and analysis (continued)

Net cash flow from operating activities before tax: Net cash flow from operating activities before tax increased from a cash inflow of £91.4m in the three months ended 30 April 2014 to a cash inflow of £92.5m in the three months ended 30 April 2015. This was driven by the change in working capital described above partially offset by lower Trading EBITDA and an increase in Group reorganisation costs.

Investing activities: Cash outflow from investing activities was £7.3m in the three months ended 30 April 2014 compared to £10.6m in the three months ended 30 April 2015. The increase in cash outflow from investing activities was driven by investment in IT infrastructure.

Financing transactions: Net cash flow from financing transactions was a £nil in the three months to 30 April 2014 compared to a cash inflow of £525.6m in the three months ended 30 April 2015. This was due to the refinancing which took place in April 2015 with the issue of £735.0m of new Class B2 loan notes and repayment of £209.4m of the Senior Term Facility.

Interest paid on borrowings: Cash outflow from the interest paid on borrowings was £12.2m in the three months ended 30 April 2014 compared to £6.9m in the three months ended 30 April 2015. The decrease in interest paid on borrowings is due to the refinancing in May 2014 which has reduced interest costs.

Payment of finance lease capital and interest: Cash outflow from the payment of finance lease capital and interest was £2.7m in the three months ended 30 April 2014 compared to £6.8m in the three months ended 30 April 2015. The increase in cash outflow from payment of finance lease capital and interest was primarily driven by the reclassification of the driving school vehicle operating leases as finance leases as a result of the renegotiation of the commercial terms last year.

Cash flow, net debt and liquidity

1 Principal amounts of the Senior Term Facility and Class A notes less cash and cash equivalents excluding escrow funds

2 Principal amounts of the Senior Term Facility, Class A notes, Class B notes and finance leases less cash and cash equivalents

3 Ratio of Net Debt to Trading EBITDA for the last 12 months

4 Ratio of Net Senior Secured Debt to Trading EBITDA for the last 12 months

5 Ratio of last 12 months free cash flow to debt service relating to the Senior Term Facility and Class A notes.

6 Ratio of last 12 months free cash flow to debt service.

Cash generation for the Group has remained strong with net cash inflows from operating activities before tax and exceptional items of £101.6m in the three months ended 30 April 2015 (2014: £96.0m). Cash conversion of 103.0% (2014: 93.2%) benefitted from £7.0m of proceeds from sale of vehicles. Overall, net cash generation after debt service and refinancing in May 2014 and April 2015, has led to a further deleveraging of the Group. Net debt to Trading EBITDA for the last 12 months stood at 6.5 times and net senior secured debt to Trading EBITDA stood at 4.5 times as at 30 April 2015.

The Group has a cash balance of £106.7m, invested in AAA money market funds, giving overnight access and high liquidity. The Group has not drawn its Working Capital Facility and does not currently envisage needing to do so.

The Group is required to hold segregated funds as 'restricted cash' in order to satisfy regulatory requirements governing our insurance underwriting business and Irish subsidiaries. These restricted cash balances were £18.3m at 30 April 2015 (2014: £17.7m).

At 30 April 2015, the Group also had £747.9m of cash held in escrow from the proceeds of the issue of the Class B2 notes and the interest on the Class B2 notes to 31 July 2015. These funds will be used to repay the existing Class B notes on 31 July 2015 along with any early repayment charges.

Class A free cash flow to debt service was 3.5 times as at 30 April 2015 and Class B free cash flow to debt service was 2.3 times, showing substantial covenant headroom.

Consolidated income statement

All amounts relate to continuing operations.

The accompanying notes are an integral part of these condensed financial statements.

Consolidated statement of other comprehensive income

The accompanying notes are an integral part of these condensed financial statements.

Consolidated statement of financial position 

Signed for and on behalf of the Board by

Martin Clarke

Chief Financial Officer

The accompanying notes are an integral part of these condensed financial statements.

Consolidated statement of changes in equity

The accompanying notes are an integral part of these condensed financial statements.

Consolidated statement of cash flows

The accompanying notes are an integral part of these condensed financial statements.

Notes to the consolidated financial statements

1 Basis of preparation

a) Accounting policies

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34). Accordingly, they do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 January 2015.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 January 2015 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and have been applied consistently across all periods.

These financial statements do not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for the year to 31 January 2015 were approved by the board of directors on 26 May 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain any statement under Section 498 of the Companies Act 2006

b) Going concern

The Group has long-term contracts with a number of suppliers across different industries and is strongly cash generative. The Group's borrowings are long-term in nature and in addition to the cash balances at the reporting date the Group has agreed undrawn credit facilities. The Directors have considered this along with projected cash flows and have concluded that the Group has sufficient funds to continue trading for the foreseeable future. Therefore, the interim condensed consolidated financial statements have been prepared using the going concern basis.

c) Segmental analysis

The nature of the Group's operations means that for management's decision making and internal performance management the key performance metric is earnings before interest, tax, depreciation and amortisation (EBITDA) by trading segment which excludes certain unallocated items (referred to as Trading EBITDA). Items not allocated to a segment relate to transactions that do not form part of the on-going segment performance and include transactions which are one-off in nature. Trading EBITDA is further analysed as part of the segmental analysis in note 2.

d) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

2 Segmental information

With the exception of Ireland, all other segments operate wholly in the UK. Turnover by destination is not materially different from turnover by origin.

Exceptional items mainly relate to restructuring expenditure from the re-organising of Group operations and refinancing.

During the prior year, management responsibility for the Group's Media business was transferred from Driving Services to Roadside Assistance. As a result the above analysis has been restated to show the results from Media within the Roadside Assistance segment for all periods. For the period ended 30 April 2014, revenue of the Media business was £2.9m and Trading EBITDA was £0.7m.

2 Segmental information (continued)

For management purposes, the Group is organised into business units based on their products and services, with the exception of Ireland, which represents a separate geographical area. The Group has five reportable operating segments as follows:

· Roadside Assistance: This segment is the largest part of the AA business. The AA provides a nationwide service, sending patrols out to Members stranded at the side of the road, repairing their vehicles where possible and getting them back on their way quickly and safely.

· Insurance Services: This segment includes the insurance brokerage activities of the AA, primarily in arranging motor and home insurance for customers, its home emergency activities and its intermediary financial services business.

· Driving Services: This segment contains the AA Driving School and the British School of Motoring, which are the two largest driving schools in the UK, as well as AA Drivetech, which provides driver training and educative programmes.

· Ireland: This segment competes in the same segment types as the AA UK business, with the largest part of its business being Roadside Assistance and Insurance Services.

· Head Office costs: This segment includes IT, finance, property and other back office support functions.

Segment performance is primarily evaluated using the Group's key performance measure of Trading EBITDA. Trading EBITDA is profit after tax as reported adjusted for depreciation, amortisation, net finance costs, taxation, exceptional items, share-based payments and items not allocated to a segment.

Items not allocated to a segment relate to transactions that do not form part of the on-going segment performance and include transactions which are one-off in nature. In the three months ended 30 April 2015 these principally relate to the difference between the cash contributions to the pension schemes for on-going service and the calculated annual service cost.

Depreciation, amortisation, profit on disposal of joint venture, exceptional items, share-based payments, net finance costs and tax expense are not allocated to individual segments as they are managed on a group basis.

3 (a) Finance costs

3 (a) Finance costs (continued)

As at the period end, the Group has committed to repay the Class B notes of £655m. As a result, the Group has recognised an early repayment penalty of £59.0m (2014: £nil).

Amortisation of debt issue fees includes £0.7m (2014: £nil) that was immediately written off following the repayment of the Senior Term Facility and £14.9m (2014: £nil) that was immediately written off due to the commitment to repay the Class B notes early.

Following the repayment of £209.4m of the Senior Term Facility, the Group has transferred the fair value of the cashflow hedges related to the repayment of £7.6m (2014: £nil) to the income statement.

3 (b) Finance income

4 Tax

The major components of the income tax expense are:

Tax for the period has been calculated by applying the forecast effective tax rate for the full year to the profit before tax result for the period.

5 Cash flow from operating activities

The cash flows from operating activities are stated net of cash outflows relating to exceptional items of £9.1m (2014: £4.6m). This relates to restructuring expenditure costs from the re-organising of Group operations of £7.9m (2014: £3.7m) and onerous property provision lease costs in respect of vacant properties of £1.2m (2014: £0.9m).

6 Goodwill and other intangible fixed assets

7 Property, plant and equipment

8 Trade and other receivables

Trade receivables from fellow subsidiary undertakings at April 2015 and January 2015 are unsecured, payable within one month and bear no interest (April 2014: unsecured, bear no interest and have no repayment terms).

9 Cash and cash equivalents

Cash at bank and in hand includes £18.3m (April 2014: £17.7m, January 2015: £17.6m) held by and on behalf of the Group's insurance businesses which are subject to contractual or regulatory restrictions. These amounts are not readily available to be used for other purposes within the Group.

The proceeds from the issue of the Class B2 notes were placed into an escrow account that can only be used to repay the existing Class B notes and associated costs of early repayment.

10 Trade and other payables

10 Trade and other payables (continued)

Trade payables owed to group undertakings as at April 2015 and January 2015 arose under arrangements permitted by the financing transaction documents. These amounts are unsecured, are payable between one and three months and bear no interest (April 2014: unsecured, bear no interest and had no repayment terms).

11 Borrowings and loans greater than one year

12 Borrowings

1 The proceeds from the issue of the Class B2 notes were placed into an escrow account that can only be used to repay the existing Class B notes and associated costs of early repayment. 

2 The Class B notes are expected to be repaid by 31 July 2015.

12 Borrowings (continued)

A summary of the Group's refinancing transactions since July 2013 is shown below:

At 30 April 2015, the Senior Term Facility carried interest at a rate of LIBOR plus a margin of 2%. The variable element has been fully hedged using matching interest rate swap arrangements which fix LIBOR at 1.98% until 31 July 2018 and then at 3.00% until 31 January 2019. All other borrowings have fixed interest rates.

In order to show the Group's net borrowing, the notes and the issue costs have been offset. Issue costs are shown net of any premium on the issue of borrowings.

All of the Class A notes and Senior Term Facility are secured by first ranking security in respect of the undertakings and assets of AA Intermediate Co Limited and its subsidiaries. The Class A facility security over the AA Intermediate Co group's assets ranks ahead of the Class B notes. The Class B notes have first ranking security over the assets of the immediate parent undertaking of the AA Intermediate Co group, AA Mid Co Limited. There are restrictions on the ability of the AA Mid Co Limited group to pay a dividend until certain net debt to EBITDA and cashflow criteria are met.

Any early repayment of the Class A, Class B or Class B2 notes would incur a make-whole payment.

The Group has raised £735.0m of new Class B2 loan notes with an interest rate of 5.5% and an expected maturity of 31 July 2022. Using the proceeds combined with existing cash resources, the group will pay off all £655.0m of the existing Class B notes and has repaid £209.4m of the Senior Term Facility. The £209.4m repayment of the Senior Term Facility has been hedged with a matching interest rate swap. The repayment of the existing Class B notes is not expected to take place until 31 July 2015.

Following the £209.4m repayment of the Senior Term Facility in the period, amortisation of the associated issue fees has been accelerated and an additional £0.7m (April 2014: £nil) has been written off in the period.

13 Pensions

The Group operates two funded defined benefit pension schemes: the AA UK Pension scheme (AAUK) and the AA Ireland Pension scheme (AAROI). The assets of the schemes are held separately from those of the Group in independently administered funds. New entrants to the AAUK scheme accrue benefits on a career average salary basis. The AAUK scheme has final salary sections that are closed to new entrants but open to future accrual for existing members. The AAROI scheme is closed to new entrants and future accrual of benefits. The Group also operates an unfunded post-retirement Private Medical Plan scheme (AAPMP), which is a defined benefit scheme that is not open to new entrants.

In November 2013, the Group completed the AAUK pension scheme triennial valuations agreeing a deficit of £202m with the pension trustees and implementing an asset backed funding scheme. The asset backed funding scheme provides a long-term deficit reduction plan where the Group has an annual deficit reduction contribution of £12.5m increasing with inflation, over a period of up to 25 years from 29 November 2013 secured on the Group's brands and gave a one-off £198.0m tax deduction that the Group could utilise within two years. This compares with the traditional unsecured deficit reduction plan requiring the deficit to be removed over a substantially shorter period and would have resulted in significantly higher annual deficit contributions.

The valuations have been based on a full assessment of the liabilities of the schemes which have been updated where appropriate to 30 April 2015 by independent qualified actuaries

The amounts recognised in the balance sheet are as follows:

14 Fair values

Financial instruments held at fair value are valued using quoted market prices or other valuation techniques.

The fair values are periodically reviewed by the Group Treasury function. The following tables provide the quantitative fair value hierarchy of the Group's interest rate swaps and loan notes. The carrying values of all other financial assets and liabilities approximate to their fair values:

At 30 April 2015:

At 30 April 2014:

Valuation techniques include net present value and discounted cash flow models, and comparison to similar instruments for which market observable prices exist. Assumptions and market observable inputs used in valuation techniques include interest rates.

The objective of using valuation techniques is to arrive at a fair value that reflects the price of the financial instrument at each period end at which the asset or liability would have been exchanged by market participants acting at arm's length.

14 Fair values (continued)

Observable inputs are those that have been seen either from counterparties or from market pricing sources and are publicly available. The use of these depends upon the liquidity of the relevant market. When measuring the fair value of an asset or a liability, the Group uses observable inputs as much as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation as follows:

Level 1 - Quoted market prices in an actively traded market for identical assets or liabilities. These are the most reliable.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities. These include valuation models used to calculate the present value of expected future cash flows and may be employed either when no active market exists or when there are quoted prices available for similar instruments in active markets. The models incorporate various inputs including interest rate curves and forward rate curves of the underlying instrument.

Level 3 - Inputs for assets or liabilities that are not based on observable market data.

If the inputs used to measure the fair values of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level as the lowest input that is significant to the entire measurement.

15 Related parties

Transactions between AA Intermediate Co Limited and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed. There were no material transactions between the AA Intermediate Co Limited group and the rest of the AA plc group. There were no further transactions with related parties which had a material effect on the financial position or performance of the Company during the periods covered by this interim report.

16 Events after the reporting period

Further to the refinancing discussed in note 12, the repayment of the existing Class B notes is expected to take place by 31 July 2015.

As announced in the March 2015 Budget new anti-avoidance legislation will be introduced to reduce, in certain circumstances, the ability of companies to utilise brought forward losses after 18 March 2015. Until final legislation has been enacted it is uncertain whether the group's losses, and the £22m of deferred tax provided on them, will be affected by this change but we will continue to review the value of the asset as information becomes available going forward. 

Forward-looking statements

This document contains various forward-looking statements that reflect management's current views with respect to future events and anticipated financial and operational performance. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and the Group's actual financial condition, results of operations and cash flows, and the development of the industry in which it operates, may differ materially from (and be more negative than) those made in, or suggested by, the forward-looking statements contained in this document. In addition, even if its financial condition, results of operations and cash flows and the development of the industry in which it operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that they will materialise or prove to be correct. Because these forward-looking statements are based on assumptions or estimates and are subject to risks and uncertainties, the actual results or outcome could differ materially from those set out in the forward-looking statements.