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Exhibit WITNO0740129
Appendix 2
Post Office Limited
Audit, Risk and Compliance Board Sub-
Committee
Briefing Book
Half Year ended 23 September 2012
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Section Page
1. Glossary 3
2. Introduction 4
3. Accounting Policies 4
4. Primary Statements 5
5. Operating profit 8
6. Revenue 9
7. Costs and people 13
8. Quality of earnings 17
9. Exceptional items and provisions 18
10. Interest, cash, debt, funding, hedging and going concern 20
11. — POL funding analysis 22
12. Property, plant and equipment and non-current assets held for sale 24
13. Investments 25
14. Litigation and claims- potential claims regarding Horizon 26
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1 Glossary review
Below is a listing of key abbreviations used throughout this document with the full meaning
given:
Abbreviation Meaning
ATM Automated teller machine
BIS Department for Business Innovation & Skills
CWU Communications Workers Union
DVLA Driver & Vehicle Licensing Authority
DWP. Department of Work & Pensions
Eagle Deal in August 2012 to sell POFS to the Bank of Ireland,
restructure commission rates for personal financial
services and extend the contract to 2023
EC European Council
FRES First Rate Exchange Services
Gamma A contract variation made in 2007 with POFS generating
£100m cash and income over a number of years in
return for a series of commitments through to 2020.
Horizon Horizon Next Generation- Counter system
JV Joint venture
LTIP Long Term Incentive Programme
MDA Master Distribution Agreement - agreement for
distributing RM Mails products through POL outlets
MSA Master Services Agreement - agreement for services
provided between POL and RM post Separation
NBV Net Book Value
NS&l National Savings & Investments
NSP Network Subsidy Payment
NTP Network Transformation Programme
POCA Post Office Card Account
POFS Post Office Financial Services
POL Post Office Limited
POOC Project One Off Costs
RM Royal Mail
RMPP. Royal Mail Pension Plan
SGEI Services of General Economic Interest
UKBA United Kingdom Borders Agency
WCF Working Capital Facility
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2. Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the half
year ended 23 September 2012. It is a summary of the key data, trends and analyses to be
read in conjunction with the Trading Statement, which readers may find useful to further their
own understanding of the results for 2012-13. Post Office Limited has opted not to take
advantage of the Companies Act exemption from the preparation of consolidated accounts as
it is a wholly owned subsidiary within the Royal Mail Holdings plc group which prepares group
accounts. The Trading Statement therefore reports consolidated results.
Most of the analyses are based on the comparison of the half year's actual results to prior
year.
Comparison against budget is discussed in the Monthly Performance Report presented to the
Post Office Limited Board on a monthly basis.
3. Accounting policies
There have been no changes to the accounting policies in the current year that have had a
material impact on the financial information reported in the Annual Report and Financial
Statements.
4. Primary Statements
4.1 Post Office Limited consolidated Profit & Loss account.
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Post Office Limited consolidated Profit & Loss Account for the six months to 23 September 2012 and
25 September 2011
Sept 2012 Sept 2011 2011-12
Section £m £m £m
Continuing operations
Turnover 501 485 980
Network Subsidy Payment 103 90, 180
Revenue 6. 604 575 1160
People costs 72 (128) (123) (254)
Other operating costs 73 (437) (418) (875)
Share of post tax profit from joint venture and associates 22 22 34
Operating profit before operating exceptional items 5 61 56 61
Operating exceptional items 94 (21) (9) (39)
Operating profit 40 47 23
Profit/(loss) on disposal of fixed assets 94 (28) : 1
Profit before financing and taxation 12 47 24
Net interest payable a4 (a) (4) (6)
Net pensions interest 1 1 2
Profit before taxation 12 44 19
Taxation credit = = 10
Profit for the financial period from continuing operations 12 44 30
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4.2 Post Office Limited Cashflow Statement
Post Office Limited consolidated cashflow statement for the six months to 23 September 2012
Sept 2012 Sept 2011
£m £m
Cash flow from operating activities
Operating profit before exceptional items 61 56
Add back
Pension operating costs 13 12
Depreciation and amortisation 0 0
Share of ost fax profit from joint ventures (22) (22)
52 46
Working capital and other non-cash movements: 128 78
(Increase)/decrease in inventories (3) (a)
(Increase)/ decrease in receivables (42) (5)
Increase/(decrease) in payables 107 43
(Increase)/decrease in client receivables 3 0
Increase/(decrease) in client payables 33 45
Increase/(decrease) in non-exceptional 0 (4)
provisions
Pension operating costs paid (13) (14)
Receipt of Government Grant 200 0
Cash payments in respect of operating exceptional items (21) (21)
Operating exceptionals
Business transformation (47) (20)
Redundancy (2) (7)
Redundancy related pension costs 0 (2)
Other (2) (2)
Cash inflow from operations 346 92
Income tax received 11 12
Net cash inflow from operating activities 357 104
Cash flows from investing activities
Dividends received from associates and joint ventures 0 0
Proceeds from sale of property, plant and equipment 2 0
Proceeds from sale of associate company 3 0
Purchase of property, plant and equipment (14) (2)
Investment in Associate company (11) 0
Purchase of intangible assets (8) (6)
Net cash outflow from investing activities (25) (8)
Net cash inflow before financing activities 332 96
Cash flows from financing activities
Finance costs paid (1) (3)
Payment of capital element of obligations under finance lease contracts (3) (2)
Repayment of borrowings (250) (50)
Net cash outflow from financing activities (254) (55)
Net increase in cash & cash equivalents 78 41
Opening cash & cash equivalents 820 782
Cash & cash equivalents at the end of the period 898 823
Net cash inflow before financing activities 332 96
Finance costs paid (a) (3)
Movement in Network Cash (29) (44)
Free cash inflow 312 49
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4.3. Post Office Limited consolidated Balance Sheet
Post Office Limited consolidated balance sheet at 23 September 2012 and 25 September 2011
Sept 2012 Sept 2011. March 2012
£m £m £m
Fixed assets
Intangible assets - - -
Tangible assets 12 11 11
Investments in joint ventures and associates 90 118 90
Total fixed assets 102 129 101
Current assets
Stocks 9 6 6
Debtors - receivable within one year 226 236 227
Financial assets - investments. 119 82 62
Cash at bank and in hand 779 740 758
1,133 1,064 1,053
Current liabilities
Creditors - amounts falling due within one year (893) (655) (588)
Financial liabilities - interest bearing loans and borrowings (127) (325) (377)
Net current assets 113 84 88
Total assets less current liabilities 215 213 189
Creditors - amounts falling due after more than one year (8) (13) (8)
Provisions for liabilities and charges (18) (a9) (45)
Retirement benefit obligation 53 (315) (206)
Net assets/(liabilities) 242 (134) (40)
Capital and reserves
Called up share capital - - -
Profit and loss account 238 (179) (85)
Other reserves 4 45 45
Shareholder’s surplus/(deficit) 242 (134) (40)
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5. Operating profit
5.1 Operating profit bridge analysis
(— >)
29 4
a -— =a
(5)
£m 23
7 T 7 4
2011 Revenue Staff Costs Agents Costs Non People 2012
Costs
N /
5.2 Explanations for some of the movements above are as follows:
* Revenue explanation is in section 6.1.
* The £4.6m increase in Staff costs was mainly due to:
o. Pay awards, and higher Productivity & Bonus costs
o Higher temporary resource costs driven by recruitment to support various
projects and higher agency labour in Network. Year on year the headcount
figure has increased by 213.
« Agents’ cost are £3.5m lower than last year due to a one off payment of £400 made
in June 2011 to all agents to maintain stability in the network.
* Non people costs (including project one off costs) were higher by £22.6 mainly due to:
o £16.6m higher project one off costs (POOC),
o Last year’s costs included a £2.4m release relating to WHS TUPE transfers,
o £0.5m increase in compensation which includes a reassessment of the personal
injury provision,
o £1.8m increase in marketing expenditure,
o £1.7m increase in property costs,
o higher cost of sales by £1.8m mainly due higher UKBA volumes as a result of
rolling out more ID Services terminals and also due to higher Retail costs due
to the Olympic and Jubilee collectables, partially offset by;
o £1.9m lower Interbusiness costs as a result of Separation.
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6. Revenue
Sept 2012 Sept 2011
£m £m
Revenue
Extemal Revenue 432 406
Internal Revenue 172 169
Total Revenue 604 575
61 Post Office Limited - External revenue analysis
(— >
Post Office Limited External Revenue Bridge £m
432
13
7
—_— —
(4)
2011 Government Retail & Telephony ‘Financial Other Network 2013
Services Lottery Services ‘Subsidy
Payment
X yy,
The increase in year on year external revenue of £26.8m (7%) to £432.3m (2011 £405.5m)
is driven by the £13m increase in the Network Subsidy payment and an increase of £13.8m
in like for like income.
The following commentary gives further detail on the external revenue variances by category:
6.1.1 Government Services
The £0.8m (1%) decrease in Government Services revenue is principally due to:
* £2.2m lower DVLA revenues as volumes are below the minimum guaranteed income
levels and a one-off Service Level Agreement payment last year, and
* £1.0m adverse from falling numbers of POCA accounts through natural attrition and
migration of customers to bank accounts.
This was offset by
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* £1.9m higher revenues from the new UKBA contact.
6.1.2 Retail & Lottery
Retail and Lottery revenues have increased by £1.9m:
« Lottery is flat with last year, with both periods seeing high levels of rollovers,
* Retail up £1.9m benefiting from collectibles for the Olympic and Paralympic
games as well as the Jubilee.
6.1.3 Telephony
Year on year increase in Telephony of £2.1m (3.5%) has resulted from:
* 22k more customers, following last year’s Q4 marketing campaign, offset by;
* A decrease in E Top Up revenues of £0.8m is due to volume reduction.
6.1.4 — Financial Services
Financial Services income has increased by £3.3m (2.5%) year on year. This continues the
trend of increases in new products offsetting the decline of traditional products. The main
variances are:
* a £7.7m increase in POFS products particularly savings related products (Growth
Bonds, Instant Saver and Reward Saver - £2.6m, £1.8m and £1.4m favourable
respectively). This includes the benefit of the renegotiated commission rates
following the ‘Eagle’ deal, and
* a £0.2m increase in ATM revenue, driven by increased volumes as machines reach
maturity.
This was offset by
* a £1.7m decline in NS& revenues as NS&I look to provide some of their products,
particularly savings, through their own direct channel,
* a £1.5m decrease in Banking revenue from:
o a £1.6m fall from the Department of Work and Pensions (DWP) as volumes
continue to fall as the Government is migrating customers to other payment
methods, and
o a £0.4m fall in Santander business revenues due to rate reduction from
renegotiated contract, offset by
o anincrease of £0.5m in personal banking.
* flat revenues from Payment Services due to:
o a £0.7m decline from bill payments, as utilities and other bill payment clients
continue to migrate customers to other payment methods such as direct debit
and online, and
o a £0.7m increase in Postal Order income (including write back of uncashed
Postal orders over 2 years old).
10
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6.1.5 Other
Year on Year increase of £7.3m was due to:
* a £6.5m movement due to the MDA (agreement post Separation) excluding Mailwork
income from internal revenue (see 6.2.2). This will be corrected for year end, and
* an increase in Gamma income of £1.2m due to a change in the way the payments
are structured.
This was offset by
* a £0.4m reduction from marketing services, primarily Photo Booth income where
volumes and rates have reduced.
6.2 Post Office Limited - Internal revenue analysis
r
Post Office Limited Internal Revenue Bridge £m )
8
gE @a 172
169 (5)
2014 Mails Other 2012
XL J
The following commentary gives further detail on the £2.4m internal revenue variances:
6.2.1 Mails
The £7.7m (4.7%) increase in Mails Revenue is driven by strong volumes accounting for
£6.4m of the increase and £1.3m driven by price.
* Approximately £3.4m of the £6.4m volume variance was driven by stamp sales
ahead of the price rise in April.
* The new Mails Distribution Agreement resulted in a reduction in fixed fee of £15.7m
which is more than offset by increases in variable commissions of £17.0m resulting
in a net price variance of £1.3m.
11
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6.2.2 Other
The £5.3m decrease in other is due to:
* a £6.5m movement due to the MDA (agreement post Separation) excluding Mailwork
income from internal revenue. This will be corrected for year-end (see 6.1.5) offset
by £1.5m increase in Swindon Stores income as a result of Olympic stamp storage.
12
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7. Costs and people
This section discusses expenditure, excluding exceptionals.
71 Total costs analysis (excluding exceptionals)
The following provides a breakdown of costs for the half year ending 23 Sept 2012 compared
to the half year ending 25 Sept 2011:
Section Sept 2012 Sept 2011 Variance Variance
£m £m £m b
Expenditure - (pre- exceptional)
Wages & Salaries 89 87 (2) (2%)
Overtime 5 4 (1) (16%)
Productivity/Bonus 7 8 1 13%
Employers NI 9 9 (1) (8%)
Pensions 13 12 (a) (10%)
Projects (temp people resource) 1 1 (0) (30%)
Temporary Resource 4 2 (2) (79%)
STAFF COSTS 7.21 128 123 (5) (4%)
Agent costs 731 235 239 3 1%
Collection, Delivery & Conveyance Charges 73.2 1 1 (0) (10%)
Compensation 733 1 (2) (3) 126%
Property Facilities 734 3 2 (1) (53%)
Property Maintenance 73.5 3 2 (4) (31%)
Vehicles 7.3.6 1 1 (0) (20%)
Computers & Telephones 7.3.7 36 36 (0) (1%)
Consultancy, Marketing & Legal Fees 738 12 4 (8) (170%)
Staff & Agent Related Costs & Consumables 73.9 0 5 6 108%
Finance 7.3.10 9 7 (2) (32%)
Cost of Sales 73.41 58 56 (2) (3%)
Other Operating Costs 7.3.12 10 10 1 5%
Depreciation 7.3.13 0 0 (0) (151%)
Interbusiness Expenditure 7.3.14 41 43 2 5h
Group Overheads 7.3.15 7 10 3 28%
Projects (excluding temp people resource) 7.3.16 21 4 (16) (371%)
TOTAL OTHER OPERATING COSTS 73 437 418 (19) (5%)
TOTAL EXPENDITURE (Pre Exceptionals) 565 541 (24) (4%)
13
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7.2 People costs (2012 £128m vs 2011 £123m)
7.21 — Staff costs (2012 £128m vs 2011 £123m)
Staff costs have increased in total by £5m to £128m, representing 25% (2011 25%) of the
cost base. The number of people employed increased by 213 to 7,912 at 23 Sept 2012
(2011 7,699) primarily due to the Network Transformation Programme. NTP staff costs are
included within exceptional costs.
The staff cost movement comprises:
* A total increase of £2m (2%) in Wages and Salaries an increase reflecting impact of
the agreed pay awards.
* Employers NI has increased marginally.
* Pension costs have increased by £1m (10%) as a result of a change in the FRS 17
rate for the RMPP service cost to 18.2% (2011 17.1%) driven by market conditions at
25 March 2012 and due to the increase in staff.
* Productivity costs have decreased by £1m (13%) driven by the reduced LTIP costs.
* Temporary resource costs have increased by £1m (67%) driven by recruitment to
support various projects and higher agency labour in Network.
7.2.2 Staff numbers
The following analysis shows the movements in the number of people employed during the
year.
The staff numbers were as follows:
Period end employees Average employees
23 Sept 2012 25 Sept 2011 2012 2011
Total employees 7,912 7.699 7,867 7.722
7.2.3 Average cost per employee
The 2012 average number of employees of 7,867 includes 192 NTP employees who have
been excluded for the purposes of this calculation. The average annual cost per employee
based on the average number of people employed at 23 September 2012 of 7,675 excluding
NTP (2011 7,722) has increased by 5% to £33,355 (2010-11 £31,856) due to the pay
awards.
14
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73 Other Operating costs (2012 £437m vs 2011 £418m)
7.3.1 Agents costs (2012 £235m vs 2011 £239m)
23 Sept 2012 25 Sept 2011
Total Agents number 8,061 8,207
There were 8,061 Agents at the half year-end 23 September 2012 (2011 8,207). The 146
(2%) reduction in Agents is mainly due to natural attrition in the Post Office network.
The average annual cost per Agency branch (excluding VAT and NI) is £42,283 (2011
£43,394), a 3% decrease which is mainly due to a move away from fixed pay.
Total agents costs have decreased by £4m (1%) due to the one off payment made in 2011 of
£400.
7.3.2 Collection, Delivery & Conveyance charges have generally remained flat year on year.
7.3.3 Compensation costs have increased by £3m mainly due to a one off provision release
relating to the CWU TUPE claim for the WHS transfers in 2011-12 of £2m.
7.3.4 Property Facilities costs have increased by £1m due to external venue costs relating to
Post Office Vision events and cross company electricity charges.
7.3.5 Property Maintenance costs have increased by less than £1m due to the increased
number of Post & Go machines requiring annual maintenance.
7.3.6 Vehicles costs have remained flat.
7.3.7 Computers and Telephones costs have generally remained flat year on year.
7.3.8 Consultancy, Marketing & Legal Fees have increased by £8m mainly due to the higher
number of IT Programmes in 2011/12 requiring contractor/ consultancy individuals
and spend for ‘point of sale’ and rebranding. Note that the increase is charged to
projects through the Staff and Agent Related line below.
7.3.9 Staff and Agent related Costs & Consumables have decreased by £5m due to
increased number of programmes which has resulted to higher recharges to projects.
7.3.10 Finance costs have increased by £2m due to a one off purchase order benefit last year
of £0.5m and increased Bureau and ATM losses.
15
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7.3.11 Cost of Sales has increased by £2m driven by higher Retail costs due to the Olympic
and Jubilee collectables combined with higher UKBA volumes as a result of rolling out
more ID Services terminals and telephony sales campaign. The main reasons are
detailed below:
Cost of Sales
Sept 2012 Sept 2011 Variance Variance
£m £m £m % Comments
Home Phone 40 39 @) (28) Increase of £1m due to more customers,
‘ollowing marketing campaign
Retail 3 2 (1) (54%) _ Increased Sales
Financial Services 4 2 4 63% Decrease in Travel Insurance
Government Increase due to higher UKBA volumes as
415 14 (1) (8%) a result of rolling out more ID Services
Services terminals and higher ATM usage
Total 58 56 (2) (3%)
7.3.12 Other operating costs have remained flat.
7.3.13 Depreciation costs have remained flat.
7.3.14 Interbusiness expenditure has decreased by £2m due to reduced property and
facilities management charges.
7.3.15 Group overhead expenditure has decreased by £3m due to general reduction in
Group charges as a result of Separation.
7.3.16 Non people related project expenditure has increased by £17m due to the
acceleration of work towards full implementation of major transformation
programmes such as Brand Marketing, IT Delivery, Finance Roadmap and Front
Office of Government as well as the costs of separation from Royal Mail.
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8 Quality of Earnings
2012-13 2011-12 Growth
Post Office Limited (consolidated) £m £m £m %
Operating profit before exceptional items 61 56 5 o%
Network Subsidy Payment (103) (90) (13) (14%)
Project one off costs 22 5 v7 (340%)
Operating (loss) before project one off costs, exceptional items and NSP (20) (29) 9 31%
Litigation re 2007-08 (2)
Total adjustments C) (2)
Total adjusted operating (loss) before project one off costs, exceptional items and NSP (20) (G1) 14a 35%
Each item in the table is explained further below:
8.1
8.2
8.3
Network Subsidy Payment
The Network Subsidy Payment increased from £180m in 2011-12 to £210m in
2012-13. The Network Subsidy Payment has been accounted for as a government
grant in both years.
Project one off costs
Project one off costs are non exceptional costs of project activity in the year. They
increased in 2012-13 as the pace of implementation towards the new plan has
continued. These costs do not form part of the underlying business as usual
performance of the company.
Litigation relating to 2007-08
This cost relates to a provision for litigation relating to the CWU challenge regarding
the transfer of staff to WH Smith during 2007-08. £6m was raised in 2008-09 and
£4m of it released in 2009-10 when the CWU lost their challenge. All routes of
challenge were exhausted during 2011-12 and the remaining £2m was released.
17
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9. Exceptional items and provisions
9.1 Exceptional items and provisions summary
The following exceptional items were recognised in the consolidated income statement
for the six months ended 23 September 2012 and 25 September 2011
2012-13 2011-12
Exceptional items Section £m £m £m £m
Operating Exceptionals
Capital grants utilised 9.2 35 -
Restructuring costs: Network Transformation (14) -
Provision for restructuring: Severance 93 (6) (1)
IT & Change transformation costs 94 (3) -
Project Eagle exceptional costs of disposal 94 (1) -
Sub-total 11 (a)
Other operating exceptional costs:
Impairments. 95 (32) (8)
Total operating exceptionals (21) (9)
Non-operating exceptionals:
Loss on disposal of fixed asset investment 96 (30) -
Profit on disposal of property 97 2 =
Net Exceptional costs (49) (9)
9.2. Grants received at the start of 2012/13 arising from the 2010 Government Funding
Agreement have been designated by BIS towards POL’s capital expenditure and
agents’ compensation. The remainder of the grant offsets NTP operating costs. At half
year grants utilised of £35m - accounted for as exceptional income - matches £21m of
capex and £14m NTP opex.
9.3. Restructuring: severance (2012/13 £6m vs 2011/12 £1m)
Included in the £6m charge is £5m in respect of Crown Transformation, a programme
to return the Crown network to profit by 2014/15, and this phase of redundancy will
release c. 135 Crown staff.
9.4 Other charges (2012/13 £4m vs 2011/12 £nil)
Costs attributable to IT & Change Transformation programme, a commitment to
modernisation arising from the 2010 Government strategic plan, and Project Eagle,
the disposal of POL’s interest in the POFS associate investment, have been accounted
for as operating exceptionals.
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9.5 Impairments (2012/13 £32m vs 2011/12 £8m)
Impairments charged in exceptional items comprise:
Impairment Sep-12 Sep-11
Property, plant and equipment 11 2
Intangible fixed assets 10 6
Investment in associate company: Midasgrange Ltd 11 0
Total fixed asset impairments 32 8
Section 12.1 identifies the impaired capital expenditure as summarised above. The
increased investment in Midasgrange was for a C share and relates to the Gamma
arrangements. It was impaired to reflect the carrying value of nil. Subsequently the
investment has been disposed of.
9.6 Loss on disposal of fixed assets (2012/13 £39m vs. 2011/12 E£nil)
The associate investment with the Bank of Ireland - in Midasgrange Ltd (POFS) - was
disposed of in August 2012. The balance sheet carrying value at the time was £32.4m.
Sale proceeds were £2.7m and a loss on disposal of £29.7m has been included in the
half year results.
9.7 _ Profit on property disposals (2012/13 £2m vs 2011/12 £nil)
In September 2012 the freehold property of the former Crown office at Woking was
sold for £1.75m (NBV £24.0k). There were no equivalent disposals in the first half of
2011/12.
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10. ‘Interest, cash, debt, funding, hedging and going concern
10.1 Going concern
Post Office Ltd has net cash and cash equivalents of some £771m (March 2012 £443m) and
a borrowing facility of some £1,150m of which £127m (March 2012 £377m) was drawn
down. The improvement is driven by the receipt of £200m Government grant in addition to
the upfront receipt of the full year NSP of £210m.
The going concern position has been reviewed and the year-end assessment (below) is still
applicable.
10.2 Background
On 24 March 2010 a further funding agreement was agreed that provided up to £180m for
compensation for losses sustained in parts of the network in 2011-12 as well as providing
access to the working capital facility to 31 March 2016. These arrangements received State
Aid approval on 23 March 2011 though the working capital facility was limited until 31 March
2012.
A further funding agreement with Government was announced on 27 October 2010 which
provided for:
Funding of £410m for 2012-13 (recieved 2 April 2012)
Funding of £415m for 2013-14
Funding of £330m for 2014-15
Extension of the existing working capital facility of £1.15bn up to 31 March 2016.
eee ®
State Aid approval for the funding for 2012-13 to 2014-15 was received on 28 March 2012
and it was also recognised that the working capital facility was no longer deemed State Aid.
The going concern analysis is based on the latest strategic plan refresh prepared and noted by
the Post Office Limited Board and Royal Mail Holdings plc Board in October 2010. This was
updated to reflect the 2012-13 budget process and an updated view of the later years as at
March 2012. The Post Office Board approved the 2012-13 budget on 15 March 2012 and
has undertaken an initial review of the later years.
10.3. Assessment for POL
POL has finished implementing its 2005-11 strategic plan and has completed its closure
programme. It posted an operating profit before exceptional items for the first time for a
number of years in 2008-09 and has continued to do so but still operates with a cash
outflow. The 2011-15 plan is intended to reverse the trend of an increasing Network
Subsidy Payment (NSP).
The 2011-15 strategic plan, updated for latest views, has been shown in section 11 and
shows that POL has sufficient cash headroom to continue to trade. The available facility has
been defined to include network cash, ATM cash, ATM debtor, POCA debtor and SGEI
cheques. Headroom was increased as the result of a more widely defined criterion for use of
the Working Capital Facility (WCF). In the EC’s decision of 23 March 2011 they noted that
20
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“the WCF is provided on condition that it is used for financing the cash and near-cash
requirements involved in delivering the SGEls...” and not limited it to cash for cash-withdrawal
Services of General Economic Interest (SGEI) as previously. Therefore the WCF can now be
used to finance all SGEI working capital requirements in particular those associated with
HMRC cheques in January and July. This will mean the peak funding requirement from non-
WCF sources will no longer be required for those months. This change has had a positive
effect on all months of c£40m.
Other changes introduced in the one year funding deal for 2011-12 included the ability to
borrow up to £50m from other sources as well as the up to £50m in finance leases
previously allowed which would improve the headroom capacity if required.
10.4 Summary conclusion
Based on the analysis there is available borrowing headroom remaining until March 2015.
Royal Mail Group Limited is a key trading partner with POL and, in arriving at the conclusion
that POL is a going concern, the assumption is made that Royal Mail Group Limited is a going
concern or that an alternative mails provider would work similarly with POL providing a
similar level of income.
It is believed that POL will be able to meet its liabilities as they fall due in the foreseeable
future. It is therefore expected that the POL directors will consider it appropriate to continue
to prepare the accounts on a going concern basis.
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WITNO0740129
Exhibit WITNO0740129
11 POL Funding Analysis
Table 1 MARCH 2012 DRAFT
£m (cumulative apart from free cash flow) 2011-12 2012-13 = 2013-14 2014-15
Opening Funds (321) (336) (421) (451)
Borrowing Facilities 1,150 1,150 1,150 1,150
Restriction due to level of network cash (326) (400) (400) (400)
Borrowing from other sources - finance leases, bank overdraft etc 21 16 11 6
October 2010 plan free cashflow before assumed equity injection (45) (285) (245) (207)
Assumed equity injection per October plan 200 215 170
Closing Funds Headroom 509 345 310 268
Adjusted Headroom pre risk 509 345 310 268
Table 2 Risks, with management actions
£m (cumulative) 2011-12 2012-13 2013-14 2014-15
Headroom pre risk (as above) 509 345 310 268
Risk
New Govt income does not materialise (6) (18) (42)
Innovation income does not materialise (2) (7) (14)
Pension contribution rates increase (9) (18) (27)
Headroom post risks pre management actions 509 328 267 185
Management actions
Headroom post risks pre management actions (A) 509 328 267 185
Headroom pre further management actions 509 328 267 185
Further management actions
Headroom post further management actions (B) 509 328 267 185
Notes:
2011-12 shows the year end outturn and last years are the latest view of the strategic
plan.
Available facilities are defined as network cash, ATM cash, ATM debtor, POCA debtor and SGEI cheques.
Table 1
This table shows the October 2010 strategic plan cashflow updated for the 2012-13 budget and latest
reviews of subsequent years. It demonstrates positive headroom throughout the plan period.
Table 2
This table sets out the impact of theoretical downside scenarios if the plan does not generate
the income streams anticipated and if the pension scheme costs increase.
Clearly mitigating management actions could be initiated but there remains sufficient
headroom even if they are not taken. There are a range of management actions including
implementing non-staff cost saving initiatives and closing non NSP offices without
compensation, and the overriding principle is that management will take whatever action is
required to mitigate any risk that materialises.
22
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WITNO0740129
Exhibit WITNO0740129
There are further actions that could be taken but are not required. These include:
*
a a ee 2
Closure of the defined benefit fund replacing it with the existing defined contribution
scheme
Sell shareholding in First Rate
Defer settlement of bureau to First Rate
Sell BT book
Sell property
Sell bill payment business
Sell tax losses
Compulsory redundancy on statutory minimum terms
11.1 Net finance costs (interest) (2012/13 £1m vs 2011/12 £4m)
2012-13 2011-12
Finance costs & investment income £m £m
Interest received on investments - UK 0.5 0.3
Total finance income 0.5 0.3
Interest charged on Government borrowings (0.4) (1.5)
Interest payable on finance leases (0.7) (1.0)
Unwinding of discounts (0.5) (0.7)
Other finance costs (0.7) (0.5)
Total finance costs (2.3) (3.7)
Net finance cost (1.8) (3.4)
Interest payable on the BIS Loan has reduced due as the amounts borrowed have been lower
due to £200m capital grants received at the commencement of the financial year.
23
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WITNO0740129
Exhibit WITNO0740129
1a. Property, plant and equipment and intangible fixed assets
12.1 Net Book Values
The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed assets
was £12m (Sept 2011 £11m). The movements in the half year were as follows:
Land and Vehicles, plant Intangible fixed
buildings and fixtures assets Total
Movement in NBV £m £m £m £m
NBV at 25 March 2012 14 - - 14
Add capital expenditure 9 3 10 22
Less disposals (mainly property) - - - -
Less depreciation - - - -
Less impairment (8) (3) (10) (24)
NBV at 25 March 2012 12 : : 12
12.2 Assets held under finance leases
The value of equipment held under three finance leases is Enil (Sept 2011: £nil) having been
impaired in the years in which it was acquired. One finance lease - Supply Chain cash boxes -
capitalised and impaired in 2007-8 with an asset value of £2m, expires in the second half of
2012-13.
12.3. Capital expenditure
The following table summarises the capital expenditure to 23 September 2012:
Land and Vehicles, plant
buildings and fixtures Intangibles Total
Capital expenditure analysis £m £m £m £m
Network Transformation: property-
related 5 - - 5
Supply Chain property-related 1 - - 1
Property transfers ex RM 4 - - 1
Other property 2 - - 2
Technology roadmap - - 8 8
Pinpads 2 - 2
Secure vehicles - 1 - 1
Other (items <£1m) - 2 2
Total 9 3 10 22
All capex was impaired except the Property transferred from Royal Mail giving an impairment
charge of £21m.
24
13. Investments
13.1 Investments in joint ventures and associates
WITNO0740129
Investment in joint ventures and associates
WITNO0740129
Exhibit WITN00740129
Sept 2012 Sept 11
£m £m
90 118
Joint ventures
During 2012-13 and 2011-12 Post Office Limited’s joint venture investment was a 50%
interest in First Rate Exchange Services Holdings Limited with a carrying value of £90m
(2011 £96m), whose principal activity is the provision of Bureau de Change.
Associates
During 2012-13 and 2011-12, Post Office Limited’s associate investment was a 49.99%
interest in Midasgrange Limited with a carrying value of £nil (2011 £22m), whose
principal activity is the provision of personal financial products. Midasgrange Limited
trades as Post Office Financial Services and is a company registered in the United
Kingdom. During the period POL waived £11m due under Gamma in return for a C share.
The share was deemed of nil value and was immediately impaired. This investment was
disposed of in August 2012 by the sale of POL’s interest to the Bank of Ireland.
13.2 Movements in investments in JV and associate (consolidated for information)
Associate:
Midasgrange
Joint
venture:
(POFS) FRES Total
£m £m £m
At 25 March 2012 22 68 90
Increased investment in Midasgrange 11 0 11
Share of profit/ (loss) after tax 0 22 22
Sub Total 33 90 123
Sale proceeds (3) (3)
Loss on disposal of investment (30) (30)
At 23 September 2012 ie} 90 90
13.3 The loss on disposal of investments of £28m includes the £30m loss above, offset by a
£2m profit made on the sale of property as covered in section 9.7.
25
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WITNO0740129
Exhibit WITNO0740129
14. Litigation and Claims- Potential Claims regarding Horizon.
14.1 Post Office Ltd has received notification of five potential claims from former
subpostmasters. Each of these subpostmasters had their appointments terminated
following the discovery at audit of significant cash losses at their respective branches.
Two of the subpostmasters were subsequently prosecuted and pleaded guilty to false
accounting.
14.2 Each has claimed wrongful termination of contract on the basis that the losses are
alleged to have arisen due to the unfairness of the system devised by Post Office Ltd
and/or have been generated by a computer error in the Horizon system. More
specifically, it is alleged that (a) the accounting procedures in place are unfair in that
they do not permit subpostmasters to properly verify losses which are alleged to have
been incurred, (b) the Horizon system itself contains inherent defects and/or (c) the
training and support for subpostmasters using the system is inadequate,
14.3 Each subpostmaster is claiming circa £150,000 by way of damages.
14.4 Four of the claims remain at the pre-action stage (i.e. there are no live court
proceedings). Post Office Ltd has strongly denied liability and rebutted the allegations
made. The fifth claim was struck out by the Court and cannot be pursued further.
14.5 The last correspondence received on these matters was in December 2011. Post
Office Ltd is not aware of any further substantive steps having been taken to advance
these claims through the Courts since that date.
14.6 Post Office Ltd continues to receive challenges to the integrity of the Horizon system
and it is possible that further claims may be received. Reports in the press have
previously suggested that solicitors Shoosmiths may have consulted on between 85
and 150 potential cases in total.
14.7 Several subpostmasters have also made complaints about Horizon to Members of
Parliament. Post Office Ltd has commissioned an independent third party, Second
Sight Support Services Ltd, to investigate an initial sample of sixteen cases where
allegations have been made that the Horizon system is the source of unresolved
accounting shortages. That investigation is ongoing.
14.8 Post Office Ltd is also actively considering proposals from Justice for Subpostmasters
Alliance, an organisation “established to raise awareness of the issues within the Post
Office Horizon system”, to develop a system by which individual subpostmasters can
raise concerns with Horizon within a “no blame” framework.
14.9 On the basis of the evidence to date, no provision has been made and it is not
considered appropriate to make any disclosure on this matter. This position is being
actively monitored.
26