SUMMARY OF RESULTS

Continuing businesses include the Group’s portfolio of PFI/PPP infrastructure assets, the central bidding activities and Octagon Developments. The discontinued operations include the residual liabilities relating to the disposed construction and house building businesses, including the run off of liabilities in the Group’s captive insurance company.
The significant events that have influenced the results for 2005 are noted below:

CONTINUING OPERATIONS

Interest income in PFI/PPP Project Companies mainly represents the interest receivable on financial asset balances. John Laing accounting policy is to set the financial asset interest rate for the term of the project agreement at or soon after financial close. This rate is normally higher than the average cost of senior project debt, up to a maximum of 300 basis points (‘bps’) above the long-term gilt rate.
The interest rate on the debt of PFI/PPP Project Companies is, in almost all circumstances, fixed on financial close, either through the issue of a long dated bond or through the purchase of an interest rate swap where the project has been financed using variable rate bank debt.
Since the interest rate on PFI/PPP Project Company debt has been largely fixed, the impact of changes to interest rates on the finance cost is minimal. There is, however, an impact on the investment income on monies held on deposit both at Group level and in PFI/PPP Project Companies. Such an effect has not been, and is unlikely to be, significant in the context of the Group income statement.
Interest on corporate debt was charged at 175 bps above LIBOR prior to arranging new debt facilities in December 2004, from which date the margin on new facilities was reduced to 100 bps. Debt issue costs of £1.2 million brought forward in respect of the cancelled facilities were written off in 2004 and debt issue costs of £0.9 million on the new facilities were capitalised. The Group has operated with net deposit balances throughout 2005 such that the primary interest rate exposure is to changes in deposit rates. Use of facilities has been largely restricted to the issue of letters of credit in support of forward funding commitments on PFI/PPP projects. These are charged at the relevant debt margin, i.e. 175 bps until December 2004 and 100 bps thereafter.

FOREIGN CURRENCY
The Group has a relatively small balance sheet exposure to foreign currency fluctuations and no currency hedges were in place at 31 December 2005. However, the Board has an agreed policy of hedging foreign currency investments with a Sterling equivalent value in excess of £5.0 million. The Board intends to draw foreign currency borrowings to match significant foreign currency investments as and when such investments are made, normally upon completion of the construction phase on PFI/PPP projects.
As the Group increases the scale of its overseas investment activity it is likely that the value of foreign currency investments and the matching foreign currency borrowings will increase.
The Group seeks to cover significant transactional exposures arising from receipts and payments in foreign currencies, where appropriate and cost effective. The value of such exposures and the corresponding hedges has been relatively low and is expected to continue as such. No foreign currency transaction hedges were in place as at 31 December 2005.

CASH FLOWS
The Board monitors the cash flows relevant to the Group’s recourse funds for the purpose of assessing the adequacy
of financial resources. In particular the Board pays close attention to the sums committed to and invested in PFI/PPP Project Companies and the cash distributions thereon.
Divisional management monitors the cash flows within PFI/PPP Project Companies, since this provides a good indication of the operating performance at Project Company level.
During 2005 the Group received distributions and capital repayments of £35.4 million from PFI/PPP Project Companies (2004 – £18.2 million), including a special dividend. Such a special dividend is unlikely to be repeated at the same level in the future.
The Group also realised significant cash on the sale of PFI/PPP assets to the now well developed secondary market. The Board expects there to be a continuation of asset sales to the secondary market. It is probable that the flow of future asset sales will be irregular, giving rise to some volatility in terms of both cash flow and profits across different accounting periods.
The following table analyses cash flows affecting the recourse funds separately from those affecting non-recourse funds.
A summarised presentation of the projections of future running yields from the existing portfolio of PFI/PPP assets is set out on page 23.
Cash generated from the portfolio of PFI/PPP assets will primarily be re-employed in the business through further bid development.

The consolidated balance sheet incorporates a deferred tax asset of £58.7 million (2004 – £58.1 million) on the IAS19 deficit relating to post retirement obligations. This reflects the tax deduction that the Board believes will be available on future pension contributions and post retirement medical insurance premiums.
The consolidated balance sheet also includes a deferred tax liability of £24.9 million on the net fair value adjustment to financial instruments of £83.4 million (2004 – £nil).

CRITICAL ACCOUNTING POLICIES

International Financial Reporting Standards (‘IFRS’)
The financial statements for the year ended 31 December 2004 and the preceding years were prepared in accordance with UK Accounting Standards. The Group has complied with International Accounting Standards (‘IAS’) and IFRS, insofar as they have been adopted by the EU, for the year commencing 1 January 2005 and the 2004 comparatives have been restated. In order to assist with understanding the impact of the transition we prepared a separate publication “John Laing – Implementation of International Accounting and Financial Reporting Standards”. This includes a reconciliation of the 2004 key financial statements on the two bases of UK GAAP and IAS. A copy of the separate publication was posted to shareholders and is available on the website, www.laing.com.
The Group has had concerns about the application of IAS39 in relation to service concessions and raised these concerns, along with other industry participants, with IFRIC early in 2005. IFRIC took these concerns into consideration when issuing, for comment, draft interpretation guidelines on accounting for service concessions in May 2005. The guidelines partially assisted in that they placed an interpretation on service concessions that removed them from the leasing standard. However, the draft guidelines attempted to set an accounting model for service concessions within the existing framework of IAS39 and this received considerable criticism. The draft guidelines have not been codified. The Group believes that a new IFRS is required to deal specifically with accounting for service concessions and that it should, in specific circumstances, override IAS39. Until such a standard is developed, the implementation of existing IFRS must continue and this will lead to continued volatility in the balance sheet fair values of financial instruments that may not reflect commercial reality.

Accounting for the results of PFI/PPP Project Companies
The Group accounts are compiled using consistent accounting policies for all of our PFI/PPP projects. In many instances this requires the restatement of Project Company accounts to comply with John Laing policies for asset and revenue recognition. These restatements are principally concerned with ensuring that assets in PFI/PPP Project Companies are recognised as financial assets where there is limited volume or property value risk to the revenues of the Project Company, and to ensure that major maintenance costs are built into the financial asset on a systematic basis to spread the related costs over the life of the concession. Where financial asset accounting is employed, the Group’s income is generated from interest receivable on the asset and from a profit margin on the services provided by the Project Company to the public sector client.
If Project Companies are exposed to significant revenue risk, e.g. if revenues are derived from real tolls, or if the project returns are dependent upon significant residual property values, the assets are generally recognised as fixed assets, which are fully depreciated over the concession length.
The following table sets out the basis of revenue and asset recognition for the Group’s 48 PFI/PPP projects and the net book value of assets employed in each of our key sub-sectors: