AA Intermediate Co Q3 Report

AA Intermediate Co Limited announces third quarter results for the nine months ended 31 October 2014

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.

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 2013 financing transaction;

2. The £346m Senior PIK Toggle note liability and the additional sum of £35m of cash from the proceeds of the Senior PIK Toggle notes, which is held to pre-fund the next two interest payments on the Senior PIK Toggle notes, is applicable only to AA plc; and

3. The sum of £195m of cash mainly consisting of net proceeds following the IPO, which is not available to AA Intermediate Co.

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 trading performance of the companies is substantially comparable. A reconciliation between AA Intermediate Co's and AA plc's results is provided in the presentation on the AA website at www.theAAplc.com.

This performance underpins our confidence that AA plc is trading in line with market expectations.

AA INTERMEDIATE CO LIMITED

QUARTERLY REPORT

FOR THE THREE AND NINE MONTHS ENDED 31 OCTOBER 2014

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 31 October 2014. 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 on 2 July 2013. 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.

On 26 June 2014, the Company's parent undertaking, AA plc, was admitted to the London Stock Exchange. 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, (ii) the £346m Senior PIK Toggle note liability and £35m of cash from the proceeds of the Senior PIK Toggle notes which is held to pre-fund the next two interest payments on the Senior PIK Toggle notes, and (iii) £195m of cash mainly consisting of net proceeds following the IPO.

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 nine month period.

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 UK GAAP, 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.

1 Reported on a 12 month average basis

2 Last 12 months

3Last 12 months excluding business customers

Roadside Personal Members have reduced by 2.4% compared to the same period last year, while average income per Personal Member has increased by 4.0% over the same period. Online new business prices were increased during the first nine months of the year to more properly reflect the premium nature of our service, resulting in a short-term reduction in sales volumes. In addition, while retention performance has been stable, reduced Membership holdings in the nine months ended 31 October 2013 have affected the overall level of renewing Personal Members in the current period. On-going improvements to the membership proposition to drive both improved new business and retention performance will form an important part of the Management Buy-in team new corporate strategy.

The average numbers of business customers have increased by 4.0% compared to the same period last year, which reflects the new contract wins during the period including the VW Group, Hyundai and Porsche and which are expected to continue to increase over the next nine months.

Overall breakdowns attended remain broadly flat year on year.

Insurance Services policy numbers in force reduced by 7.7% compared to the same period last year, due to lower volumes of motor insurance and home services policy sales. However improved competitiveness for AA motor insurance has led to a relative stabilisation of total policy sales at 2,205 for the year ended 31 October 2014 compared to 2,290 for the year ended 31 January 2014, with the fall since year end mainly relating to the curtailment of an introductory offer to home services customers.

Financing transactions in the period

On 2 May 2014, the Group issued £250m of Class A4 notes with an interest rate of 3.78% and an expected maturity date of 31 July 2019. The proceeds from this note issuance were used to partially repay the Initial Senior Term Facility.

Contemporaneously, a New Senior Term Facility of £663m and New Working Capital Facility of £150m were put in place with the Group's key relationship banks replacing the Initial Senior Term Facility and Initial Working Capital Facility respectively. Following this, the Group wrote off £17.9m of debt issue fees relating to the Initial Senior Term Facility (see note 3a).

The margin on the New Facilities has been set at 2% per annum over LIBOR with a maturity date of 31 January 2019. Additional interest rate swaps have been entered into, fixing LIBOR at 1.98% until 31 July 2018 and then at 3.00% until 31 July 2019.

Principal Risks and Uncertainties

The Group follows a structured, proactive risk identification and assessment process that involves all of its Directors and which is updated on an on-going basis. The principal risks and uncertainties for the remainder of the financial year outlined below are in line with those identified in the Group's annual report for the year ended 31 January 2014.

The key risks that the Group manages are those that could impact on the perception of the AA brand in the eyes of its customers or the public generally, those posed by the operational challenges within its Roadside Assistance business, and the systems and processes that support the effective delivery of a high quality of service to customers. In addition, external factors, such as extremes in temperature, can significantly increase the workload and threaten customer service levels in the short term.

The AA seeks to manage threats to the perception of the AA brand through investment in operational capability and training to ensure the best possible service at the roadside for its customers and via a policy of active engagement with the media through its public relations activities. The operational resilience of systems and processes are tested on an on-going basis and supported by business continuity plans.

The AA operates as an intermediary in the personal lines insurance market which is subject to significant competition and is impacted by factors outside its immediate control. In addition, the continuously changing regulatory environment for our insured products and services requires constant monitoring to ensure continued compliance.

Extensive use of operational and financial information is made to monitor the performance of the business and the external environment allowing the management team to take action when appropriate. In addition, the AA has dedicated internal audit, risk management, quality monitoring, health and safety and regulatory compliance resources supporting the management team.

Management discussion and analysis

Revenue: Revenue increased by £1.1m or 0.5% from £244.0m in the three months ended 31 October 2013 to £245.1m in the three months ended 31 October 2014. The increase in revenue was primarily driven by growth in the Roadside Assistance segment as outlined below.

Roadside Assistance: Roadside Assistance revenue increased by £5.2m or 3.0% from £173.4m in the three months ended 31 October 2013 to £178.6m in the three months ended 31 October 2014. The increase in revenue was primarily driven by stable retention rates and increased average income per personal member.

Insurance Services: Insurance Services revenue decreased by £2.4m or 6.4% from £37.4m in the three months ended 31 October 2013 to £35.0m in the three months ended 31 October 2014. The decrease in revenue was primarily driven by lower income from fewer motor insurance customers as a result of a decline in the book in the year ended 31 January 2014. During the nine months ended 31 October 2014, motor policy sales have stabilised as a result of improved new business competitiveness.

Driving Services: Driving Services revenue decreased by £1.4m or 6.1% from £23.0m in the three months ended 31 October 2013 to £21.6m in the three months ended 31 October 2014. The decrease in revenue was primarily driven by lower volumes of activity in the AA Drivetech business that provides speed awareness courses on behalf of Police Authorities.

Ireland: Ireland revenue decreased by £0.3m or 2.9% from £10.2m in the three months ended 31 October 2013 to £9.9m in the three months ended 31 October 2014. The decrease in revenue was primarily driven by a strengthening of Sterling against the Euro.

Cost of sales: Cost of sales increased by £0.4m or 0.5% from £86.7m in the three months ended 31 October 2013 to £87.1m in the three months ended 31 October 2014. The increase in cost of sales was driven by a temporary shortfall in the number of patrols resulting in an increase in increasing overtime costs.

Administrative and marketing expenses: Administrative and marketing expenses increased by £3.3m or 4.7% from £70.3m in the three months ended 31 October 2013 to £73.6m in the three months ended 31 October 2014. The increase in administrative and marketing expenses is mainly due to the increase in amortisation of software development expenditure as the Group invests in its IT infrastructure.

Share of profit on joint ventures: Share of profit on joint ventures increased by £0.4m or 100% from £nil in the three months ended 31 October 2013 to £0.4m in the three months ended 31 October 2014 due to the establishment of a new joint venture, AA Law Limited.

Operating profit: Operating profit decreased by £2.4m or 2.8% from £87.2m in the three months ended 31 October 2013 to £84.8m in the three months ended 31 October 2014. The decrease in operating profit was primarily driven by the increase in administrative and marketing expenses as described above.

Finance costs: Finance costs decreased by £13.5m or 21.4% from £63.1m in the three months ended 31 October 2013 to £49.6m in the three months ended 31 October 2014. The decrease in finance costs relates to £8.8m of fees written off following the repayment of the Senior Term Facility in August 2013 and the impact of lower on-going amortisation of debt issue fees following the repayment of the Senior Term Facility since October 2013.

Finance income: Finance income increased from £0.1m in the three months ended 31 October 2013 to £0.2m in the three months ended 31 October 2014. The increase in finance income was due to higher bank balances held by the Group.

Taxation: Taxation decreased by £2.9m or 31% from £9.4m in the three months ended 31 October 2013 to £6.5m in the three months ended 31 October 2014. The decrease in taxation was driven by the effect of the tax change on opening balances in the three months ended 31 October 2013 (see note 4).

Trading EBITDA

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

Trading EBITDA remained flat in the period at £104.0m in the three months ended 31 October 2013 and the three months ended 31 October 2014. The increase in Trading EBITDA in Roadside Assistance was offset by a decrease in Trading EBITDA in Insurance Services and Driving Services as outlined below.

Roadside Assistance: Roadside Assistance Trading EBITDA increased by £4.3m or 5.2% from £83.2m in the three months ended 31 October 2013 to £87.5m in the three months ended 31 October 2014. Trading EBITDA margins increased from 48.0% in the three months ended 31 October 2013 to 49.0% in the three months ended 31 October 2014. The increase in Trading EBITDA wasdriven by stable retention rates and increased average income per personal member while the number of breakdowns attended remained broadly flat over this three month period.

Insurance Services: Insurance Services Trading EBITDA decreased by £3.3m or 14.5% from £22.8m in the three months ended 31 October 2013 to £19.5m in the three months ended 31 October 2014. Trading EBITDA margins decreased from 61.0% in the three months ended 31 October 2013 to 55.7% in the three months ended 31 October 2014. The decrease in Trading EBITDA was driven by lower income from fewer motor insurance customers. The decline in Trading EBITDA margin reflects the recent increased marketing costs associated with the stabilising of overall motor policy sales since year end.

Driving Services: Driving Services Trading EBITDA increased by £0.8m or 14.8% from £5.4m in the three months ended 31 October 2013 to £6.2m in the three months ended 31 October 2014 reflecting a £1.8m improvement from the renegotiation of the lease arrangements for driving school vehicles that has resulted in them being reclassified as finance leases offset by lower revenues from reduced volumes of police courses. Trading EBITDA margins increased from 23.5% in the three months ended 31 October 2013 to 28.7% in the three months ended 31 October 2014.

Ireland: Ireland Trading EBITDA remained flat at £4.1m in the three months ended 31 October 2013 and the three months ended 31 October 2014. Trading EBITDA margins increased from 40.2% in the three months ended 31 October 2013 to 41.4% in the three months ended 31 October 2014. 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. On a constant currency basis, Revenue improved by £0.5m and Trading EBITDA improved by £0.3m.

Head Office Costs: Head Office Costs increased by £1.8m or 15.7% from £11.5m in the three months ended 31 October 2013 to £13.3m in the three months ended 31 October 2014. The increase in Head Office Costs is primarily driven by incremental costs arising from the listing of the parent company.

Consolidated statement of cash flows

Change in working capital: The change in working capital represented a cash inflow of £6.9m in the three months ended 31 October 2013 compared to a cash inflow of £2.2m in the three months ended 31 October 2014. The change in working capital movements between the periods was principally due to the monthly pension deficit payments which are required under the asset-backed funding arrangements, put in place during Q4 2013.

Net cash flow from operating activities before tax: Net cash flow from operating activities before tax decreased from a cash inflow of £103.6m in the three months ended 31 October 2013 to a cash inflow of £99.5m in the three months ended 31 October 2014. This was principally driven by the change in working capital described above.

Tax paid: Cash outflow from tax paid was £0.1m in the three months ended 31 October 2013 compared to £1.4m in the three months ended 31 October 2014. These cash outflows relate to tax payments by AA Ireland as well as payments on account now being made by the UK business.

Investing activities: Cash outflow from investing activities was £5.7m in the three months ended 31 October 2013 compared to £9.5m in the three months ended 31 October 2014. The increase in cash outflow from investing activities was driven by an increase in expenditure on software development and equipment.

Financing transactions: Net cash flow from financing transactions was a cash outflow of £19.2m in the three months ended 31 October 2013 that related to financing transactions in July 2013 and August 2013. In the three months to 31 October 2014 there was a cash outflow of £0.7m relating to the debt issue fees on previous refinancing transactions.

Interest paid on borrowings: Cash outflow from interest paid on borrowings was £7.7m in the three months ended 31 October 2013 compared to £17.0m in the three months ended 31 October 2014. The decrease in interest paid on borrowings is due to the reduction in the Senior Term Facility balance where interest is paid at the end of each quarter. Interest on the loan notes is normally paid bi-annually in July and January.

Payment of finance lease capital and interest: Cash outflow from the payment of finance lease capital and interest was £4.5m in the three months ended 31 October 2013 compared to £11.2m in the three months ended 31 October 2014. The increase in cash outflow from payment of finance lease capital and interest was primarily driven by the reclassification of the lease on driving school vehicles as a finance lease.

Cash flow, net debt and liquidity

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

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 twelve months

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

5 Ratio of last 12months free cash flow to debt service relating to the Senior Term Facility and Class A notes. For the prior period, these are presented on a proforma basis as if the Group had entered into these facilities on 1 November 2012.

6 Ratio of last 12 months free cash flow to debt service. For the prior period, these are presented on a proforma basis as if the Group had entered into these facilities on 1 November 2012.

Cash generation for the Group has remained strong with net cash inflows from operating activities before tax and exceptional items of £321.9m (2013: £345.3m) in the nine months ended 31 October 2014. Overall, improved profitability combined with net cash generation after debt service, 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 at 4.9 times as at 31 October 2014.

The Group has a cash balance of £273.0m, 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 £16.7m at 31 October 2014 (2013: £20.8m).

Class A free cash flow to debt service was 3.3 times as at 31 October 2014 and Class B free cash flow to debt service was 2.2 times, showing substantial covenant headroom.

Signed for and on behalf of the Board by

Martin Clarke

Chief Financial Officer

16 December 2014

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes to the 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 2014.

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 2014 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 2014 were approved by the board of directors on 27 May 2014 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 costs incurred in the nine months ended 31 October 2014 of £29.8m includes £19.3m relating to costs as a consequence of the IPO of the Company's ultimate parent undertaking, AA plc. These costs mainly relate to the payment of bonuses to staff. In the nine months ended 31 October 2013 exceptional costs of £13.7m included £9.9m of costs relating to the financing transaction that took place on 2 July 2013 (see note 13). The remaining exceptional items of £10.5m in the nine months ended 31 October 2014 (2013: £3.8m) principally related to cost restructuring activities.

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. The Driving Services segment also includes the AA's publishing and related media activities.

· 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, exceptional items, share-based payments and acquisition earn-out costs, items not allocated to a segment and tax expense.

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 nine months ended 31 October 2014 these principally related to the difference between the cash contributions to the pension schemes for on-going service and the calculated annual service cost.

Depreciation, amortisation, net finance costs, share-based payments and acquisition earn-out costs, exceptional items and tax expense are not allocated to individual segments as they are managed on a group basis.

3 (a) Finance costs

Amortisation of debt issue fees includes £17.9m that was immediately written off following the repayment of the Senior Term Facility in May 2014 (see note 13). In the prior year, amortisation of debt issue fees includes £8.8m that was written off following repayment of £362.0m of the Senior Term Facility in August 2013.

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 excluding some exceptional items to the profit before tax result for the period (excluding some exceptional items).

Following the IPO of the Company's ultimate parent undertaking, AA plc, a deferred tax asset of £21.9m has been recognised on tax losses carried forward as the Group now expects to have sufficient taxable profits to be able to recover these losses.

Following the asset-backed funding arrangements on the AA UK pension scheme detailed in note 14, there was a £39.5m release of the AA UK pension deferred tax asset during the year to 31 January 2014. The remaining £12.9m of tax relief relating to this transaction is expected to be utilised in the year ending 31 January 2015.

5 Cash flow from operating activities

The cash flow from operating activities is stated net of cash outflows relating to exceptional items. Exceptional items relate to costs incurred as a consequence of the IPO of AA plc mainly the payment of bonuses to staff, re-financing of the Group's borrowings, restructuring expenditure costs from the re-organising of Group operations and onerous property provision lease costs in respect of vacant properties and are outlined below:

6 Goodwill and other intangible fixed assets

7 Property, plant and equipment

8 Trade and other receivables

Trade receivables from group undertakings at October 2013 and January 2014 are unsecured, payable within one month and bear no interest.

9 Amounts owed by/to parent undertakings

Amounts owed by/to parent undertakings are unsecured, have no repayment terms and bear no interest.

10 Cash and cash equivalents

Cash at bank and in hand - restricted includes £16.7m (October 2013: £20.8m, January 2014: £17.1m) 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.

11 Trade and other payables

Trade payables owed to group undertakings as at October 2013 and January 2014 arose under arrangements permitted by the financing transaction documents. These amounts are unsecured, are payable between one and three months and bear no interest.

12 Borrowings and loans

13 Borrowings

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

At 31 October 2014, 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. 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. Interest rate swaps are recognised in the Balance Sheet at fair value at the period end (see notes 8 and 12).

All of the Class A notes and Senior Term Facility are secured by first ranking security in respect of the undertakings and assets of the Group. The Class A facility security over the 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 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 ratios have been achieved.

The Class B notes have an initial non-call period of up to two years from the period end when no voluntary repayments can be made, after this there is a two year period when any voluntary early repayments would incur a make-whole payment. The Class A notes do not have a non-call period, however any voluntary early repayments would incur a make-whole payment.

14 Defined benefit pension scheme liabilities

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 £12.2m increasing with inflation, over a period of up to 25 years secured on the Group's brands and gave a one-off £198.0m tax deduction that the Group will finish utilising this year.

The amounts recognised in the balance sheet are as follows:

15 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, obligations under finance leases and loan notes. The carrying values of all other financial assets and liabilities approximate to their fair values:

At 31 October 2014:

At 31 October 2013:

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.

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.

16 Related parties

Following the listing of the ultimate parent undertaking, AA plc, on the London Stock Exchange, Acromas Holdings Limited sold all of its shares in AA plc and therefore the Acromas Holdings Limited group ceased to be a related party. Prior to the listing, all transactions with other companies within the Acromas Holdings Limited group were, and continue to be, governed by the Umbrella Services Agreement, which was put in place in connection with the financing transactions that closed on 2 July 2013.

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.

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.