Financial Review

CURRENCY TRANSLATION

The movement of exchange rates during the year had the effect of reducing revenue and trading profit by £10 million and £6 million respectively. Currency translation also gave rise to an £89 million decrease in the value of net assets as a result of year-on-year movements in the exchange rates. Set out in the table below are the principal exchange rates which affect the Group's profits and net assets.

Per £ Sterling
	2013		2012
	Average	Year end	Average	Year end
Principal exchange rates
United States Dollar	1.57	1.65	1.59	1.61
Euro	1.18	1.19	1.23	1.22
UAE Dirhams	5.75	6.08	5.82	5.92
Australian Dollar	1.62	1.86	1.53	1.55
Brazilian Reais	3.38	3.89	3.10	3.29
Argentinian Peso	8.57	10.70	7.21	7.92
Source: Bloomberg

RECONCILIATION OF UNDERLYING GROWTH TO REPORTED GROWTH

The table below reconciles the reported and underlying revenue and trading profit growth rates:

		Trading profit £ million
	Revenue £ million
2012 – As reported	1,583	381
Currency	(10)	(6)
2012 pass-through fuel	(40)	1
2013 pass-through fuel	42	(2)
Poit Energia acquisition (Note 1)	12	2
Growth	(14)	(24)
2013 – As reported	1,573	352
As reported growth	–%	(8)%
Underlying growth (2012 adjusted for revenue from London Olympics of £60 million)	4%	1%

		Trading profit £ million
	Revenue £ million
2011 – As reported	1,396	338
Currency	(6)	(1)
2011 pass-through fuel	(108)	(2)
2012 pass-through fuel	40	(1)
Poit Energia acquisition (Note 1)	33	3
Growth	228	44
2012 – As reported	1,583	381
As reported growth	13%	13%
Underlying growth (2012 adjusted for revenue from London Olympics of £60 million and 2011 adjusted for revenue from Asian Games and London Olympics of £6 million)	14%	6%

Note 1: The values for Poit Energia in the 2011/12 table above were based on nine months (i.e. from date of acquisition on 16 April 2012 to 31 December 2012) whereas the values in the 2012/13 table are based on three months (i.e. from 1 January 2013 to 16 April 2013).

The Definition and calculation of Non GAAP measures section defines underlying in more detail.

INTEREST

The net interest charge at £25 million was similar to last year. Although net debt decreased by £230 million year-on-year, average net debt was at a similar level in 2013 as 2012. Interest cover*, measured against rolling 12-month EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), remains very strong at 26 times (2012: 25 times) relative to the financial covenant attached to our borrowing facilities that EBITDA should be no less than 4 times interest.

TAXATION

Tax strategy

Our tax strategy is to manage all taxes, both direct and indirect, such that we pay the appropriate amount of tax in each country where we operate, whilst ensuring that we respect the applicable tax legislation and to utilise, where appropriate, any legislative reliefs available.

This tax strategy is aligned with the Group's business strategy and is reviewed and endorsed by the Board. In addition, the profile of our tax risk is reviewed by the Board on a regular basis. Responsibility for tax strategy and risk management sits with our Chief Financial Officer. Day to day delivery of the strategy is executed by a global team of tax professionals who are regionally aligned with our business and who are based in a variety of locations where they work closely with the Aggreko operations, local tax authorities and local advisors.

We recognise the importance of the tax we pay to the economic development of the countries in which we do business and we aim to be transparent with our stakeholders in terms of the geographic spread of where we pay tax by showing a regional breakdown of this at Figure 2 below.

Given the varied nature of the tax environment in many of the 100 countries in which we operate, local compliance and governance is a key area of focus for Aggreko. This is particularly so for our Power Projects business, where we will generally only be in a country for a relatively short period of time. The complexity and often uncertain nature of tax rules in certain countries means we seek to manage our tax affairs proactively by engaging with local tax authorities and advisors as appropriate, to agree and confirm our tax positions in a timely manner.

Total taxes

In 2013, Aggreko's worldwide operations resulted in direct and indirect taxes of £173 million (2012: £187 million) being paid to tax authorities. This amount represents all corporate taxes paid on operations, payroll taxes paid and collected, import duties, sales taxes and other local taxes.

The breakdown of the £173 million by type of tax is shown in Figure 1.

Figure 2 shows where the £68 million (2012: £83 million) corporate tax was paid, broken down by region. Overall our indirect tax payments were largely flat with £105 million paid in 2013 (2012: £104 million). Within this, payroll taxes collected were £7 million lower relating to the value of the 2010 LTIP vesting when compared to the 2009 LTIP. Payroll taxes paid increased by £5 million reflecting the increased headcount across the Group and increased rates of personal tax in certain jurisdictions. Finally, the £7 million increase in sales tax is driven by Brazil, in part due to the full year impact of the acquisition of Poit Energia.

In January 2013, the business was reorganised into three regions – Asia Pacific and Australia ('APAC'), the Americas and Europe, Middle East and Africa ('EMEA').

Tax charge

The Group's effective corporation tax rate for the year was 26% (2012: 26%) based on a tax charge of £87 million (2012: £94 million) on profit before taxation of £333 million (2012: £360 million).

Further information, including a detailed tax reconciliation of the current year tax charge, is shown at Note 9 in the Annual Report and Accounts.

Reconciliation of income statement tax charge and cash tax paid

The Group's total cash taxes borne and collected was £173 million which differs from the tax charge reported in the income statement of £87 million. The income statement tax charge figure comprises corporate taxes only. These two figures are reconciled below:

	£ million
Cash taxes paid	173
Non-corporate taxes	(105)
Corporate tax paid	68
Movements in deferred tax	(5)
Corporate tax movements through equity	5
Other*	19
Corporate tax charge per income statement	87

*Other includes refunds and payments in respect of prior years and timing differences where payment for the 2013 tax liability is not due until future periods.

DIVIDENDS

If the proposed final dividend of 17.19 pence is approved by shareholders, it will result in a full year dividend of 26.30 pence (2012: 23.91 pence) per ordinary share, giving dividend cover (Basic EPS divided by full year declared dividend) of 3.5 times (2012: 4.2 times) and is consistent with our strategy of reducing our dividend cover towards 3 times over time.

CASHFLOW

The net cash inflow from operations during the year totalled £603 million (2012: £479 million). This funded total capital expenditure of £228 million which was down £212 million on the prior year. Of the £228 million, £205 million was spent on fleet which was split evenly between the Power Projects and the Local businesses. Within Power Projects, a substantial portion of the spend was on converting over 300 of our diesel sets to our new G3+/HFO engine which we launched at the time of our March 2013 strategy review. Net debt at 31 December 2013 was £230 million lower than the previous year mainly driven by the lower capital expenditure. As a result of the decrease in net debt, gearing* (net debt as a percentage of equity) at 31 December 2013 decreased to 32% from 57% at 31 December 2012 while net debt to EBITDA* decreased to 0.6 times (2012: 0.9 times).

There was a £25 million working capital outflow in the year (2012: £164 million outflow) mainly driven by an increase in accounts receivable balances. The increase in accounts receivable balances is mainly driven by our Power projects business where debtor days increased to 95 days (2012: 90 days). This increase reflects the reduced volume of Japanese and Military contracts where customers tended to pay faster than the average Power Projects debtor. Overall, the Power Projects bad debt provision at 31 December 2013 of £49 million was £4 million lower than at 31 December 2012 reflecting improved cash collections in the second half of the year.

NET OPERATING ASSETS

The net operating assets of the Group (including goodwill) at 31 December 2013 totalled £1,598 million, £110 million lower than 2012. The main components of net operating assets are:

£ million
			Movement
	2013	2012	Headline	Constant currency1
Rental fleet	1,082	1,194	(9)%	(5)%
Property and plant	83	82	–	4%
Inventory	149	178	(16)%	(13)%
Net trade debtors	285	293	(3)%	5%
1 Constant currency takes account of the impact of translational exchange movements in respect of our businesses which operate in currency other than Sterling.

A key measure of Aggreko's performance is the return (expressed as operating profit) generated from average net operating assets (ROCE*). The average net operating assets in 2013 were £1,694 million, up 7% on 2012. In 2013, the ROCE decreased to 21% compared with 24% in 2012. This decrease was driven by the Power Projects business, mainly due to a lower level of diesel fleet utilisation and a reduction in Japan and Military revenues partially offset by a movement in the provision for bad debts.

PROPERTY, PLANT AND EQUIPMENT

Rental fleet accounts for £1,082 million, or around 93%, of the net book value of property, plant and equipment used in our business; the great majority of equipment in the rental fleet is depreciated on a straight-line basis to a residual value of zero over eight years, although we do have some classes of non-power fleet which we depreciate over ten years. The annual fleet depreciation charge of £257 million (2012: £222 million) relates to the estimated service lives allocated to each class of fleet asset. Asset lives are reviewed regularly and changed if necessary to reflect current thinking on their remaining lives in light of technological change, prospective economic utilisation and the physical condition of the assets.

SHAREHOLDERS' EQUITY

Shareholders' equity increased by £95 million to £1,140 million, represented by the net assets of the Group of £1,503 million before net debt of £363 million. The movements in shareholders' equity are analysed in the table below:

Movements in shareholders' equity
	£ million	£ million
As at 1 January 2013		1,045
Profit for the financial year	246
Dividend1	(66)
Retained earnings		180
New share capital subscribed		1
Purchase of own shares held under trust		(1)
Employee share awards		(2)
Actuarial losses on retirement benefits		(5)
Currency translation difference		(89)
Movement in hedging reserve		9
Other2		2
As at 31 December 2013		1,140
1 Reflects the final dividend for 2012 of 15.63 pence per share (2012: 13.59 pence) and the interim dividend for 2013 of 9.11 pence per share (2012: 8.28 pence) that were paid during the year. 2 Other mainly includes tax on items taken directly to reserves.

The £246 million of post-tax profit in the year represents a return of 22% on shareholders' equity (2012: 26%) which compares to a Group weighted average cost of capital of 9%.

PENSIONS

Pension arrangements for our employees vary depending on best practice and regulation in each country. The Group operates a defined benefit scheme for UK employees, which was closed to new employees joining the Group after 1 April 2002; most of the other schemes in operation around the world are varieties of defined contribution schemes.

Under IAS 19: 'Employee Benefits', Aggreko has recognised a pre-tax pension deficit of £6 million at 31 December 2013 (2012: £4 million) which is determined using actuarial assumptions. The £2 million increase in the pension deficit is mainly driven by an increase in expectations for future inflation which has increased the defined benefit liability of the Scheme. This has been partially offset by the additional contribution of £2.5 million paid by the Company in January 2013 in line with the Recovery Plan agreed for the Scheme following the actuarial valuation at 31 December 2011.

The main assumptions used in the IAS 19 valuation for the previous two years are shown in Note 28.A6 of the Annual Report & Accounts. The sensitivities regarding these assumptions are shown in the table below.

Assumption	Increase/ (decrease)	Deficit £ million Change	Income statement cost £ million Change
Rate of increase in salaries	0.5%	(2)	–
Rate of increase in pension increases	0.5%	(7)	(1)
Discount rate	(0.5)%	(13)	(1)
Inflation (0.5% increases on pensions increases, deferred revaluation and salary increases)	0.5%	(12)	(1)
Longevity	1 year	(2)	–

CAPITAL STRUCTURE AND DIVIDEND POLICY

The intention of Aggreko's strategy is to deliver longterm value to its shareholders whilst maintaining a balance sheet structure that safeguards the Group's financial position through economic cycles. From an ordinary dividend perspective our objective is to provide a progressive through cycle dividend recognising the inherent lack of visibility and potential volatility of our business.

Given the proven ability of the business to fund organic growth from operating cashflows, and the nature of our business model, we believe it is sensible to run the business with a modest amount of debt. We say 'modest' because we are strongly of the view that it is unwise to run a business which has high levels of operational gearing with high levels of financial gearing. Given the above considerations, we believe that a Net Debt to EBITDA ratio of around 1 times is appropriate for the Group over the longer term. Absent a major acquisition, or the requirement for an unusual level of fleet investment, this level gives us the ability to deal with the normal fluctuations in capital expenditure (which can be quite sharp: +/–£200 million in a year) and working capital, and is well within our covenants to lenders which stand at 3 times Net Debt to EBITDA.

At the end of 2013, Net Debt to EBITDA had decreased to 0.6 times compared to 31 December 2012 when the ratio of Net Debt to EBITDA was 0.9 times.

With respect to our ordinary dividend policy, our policy is to move dividend cover from the 4 times and greater levels of previous years towards a level of around 3 times over time. The proposed dividend increase of 10% takes us towards that target, and at the end of 2013 dividend cover was 3.5 times.

ADDITIONAL RETURN TO SHAREHOLDERS

With the strong cash generation seen during the year, our net debt at the end of 2013 has fallen to £363 million which is 0.6 times our 2013 EBITDA of £636 million; accordingly the Board believes that it is appropriate to supplement the ordinary dividend with an additional return to shareholders of approximately £200 million, which would result in adjusted net debt at the end of 2013 being £563 million or 0.9 times 2013 EBITDA. Subject to shareholder approval, each shareholder will receive a return of value of 75 pence in respect of each existing ordinary share they hold on 27 May 2014.

As was the case in our previous return of value in 2011, when shareholders received £149 million (55 pence per share), the return will be made by way of a B share scheme, which will give shareholders a choice as to when, and in what form, they receive their proceeds from the return of value. Notably, it should allow most individual UK taxpayers to receive the return in the form of a capital receipt, if they so wish. The B share scheme will be accompanied by a share consolidation designed to maintain comparability of share price and return per share of the ordinary shares before and after the creation of the B shares.

A circular will be sent to shareholders setting out the details of these proposals later in March.

TREASURY

The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates, interest rates, and credit risk. The Group has a centralised treasury operation whose primary role is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise, and that financial risk arising from the Group's underlying operations is effectively identified and managed.

The treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed annually. Financial instruments are only executed for hedging purposes, and transactions that are speculative in nature are expressly forbidden. Monthly reports are provided to senior management and treasury operations are subject to periodic internal and external review.

Liquidity and funding

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 31 December 2013, these facilities totalled £846 million in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. During the year committed bank facilities of £332 million were arranged. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA; at 31 December 2013, these stood at 26 times and 0.6 times respectively. The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 17 in the Annual Report & Accounts. Net debt amounted to £363 million at 31 December 2013 (2012: £593 million) and, at that date, un-drawn committed facilities were £489 million.

Interest rate risk

The Group's policy is to manage the exposure to interest rates by ensuring an appropriate balance of fixed and floating rates. At 31 December 2013, £287 million of the net debt of £363 million was at fixed rates of interest resulting in a fixed to floating rate net debt ratio of 79:21 (2012: 52:48).

Foreign exchange risk

The Group is subject to currency exposure on the translation into Sterling of its net investments in overseas subsidiaries. In order to reduce the currency risk arising, the Group uses direct borrowings in the same currency as those investments. Group borrowings are predominantly drawn down in the principal currencies used by the Group, namely US Dollar, Canadian dollar, Euro and Brazilian Real. The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated in foreign currencies and uses forward contracts and forward currency options, where appropriate, in order to hedge net currency flows.

Credit risk

Cash deposits and other financial instruments give rise to credit risk on amounts due from counterparties. The Group manages this risk by limiting the aggregate amounts and their duration depending on external credit ratings of the relevant counterparty. In the case of financial assets exposed to credit risk, the carrying amount in the balance sheet, net of any applicable provision for loss, represents the amount exposed to credit risk.

Insurance

The Group operates a policy of buying cover against the material risks which the business faces, where it is possible to purchase such cover on reasonable terms. Where this is not possible, or where the risks would not have a material impact on the Group as a whole, we self-insure.

* The Definition and calculation of Non GAAP measures section explains this in more detail.