REG-FirstGroup PLC: Statement re further rail agreements with UK government

FirstgroupAnnouncement

21/09/2020 07:05

FirstGroup plc
Further rail agreements with UK Government

FirstGroup plc (FirstGroup or the Group) is pleased to announce that the
Department for Transport (DfT) has extended the emergency funding arrangements
for the UK rail industry for the next six to 18 months.

New Emergency Recovery Measures Agreements (ERMAs) came into force yesterday
for our South Western Railway (SWR), TransPennine Express (TPE), and West
Coast Partnership (WCP, comprising HS2 shadow operator and Avanti West Coast)
operations.

The ERMAs replace the Emergency Measures Agreements, which were put in place
by the DfT in March to provide continuity for rail passengers and the industry
during the coronavirus pandemic, and are similar in operation. During the term
of the ERMAs, the DfT will continue to waive the revenue, cost and contingent
capital risk of the train operating companies (TOCs) and will pay them a fixed
management fee. There is also the potential for an additional
performance-based fee, based on measures including punctuality, passenger
satisfaction and financial performance. The overall fee potential is a maximum
of 1.5% of the cost base of each franchise prior to the pandemic. The fixed
fee and overall fee potential for each TOC is lower under the new ERMAs
compared with the Emergency Measures Agreements, and more heavily weighted to
performance delivery. The ERMAs make no material changes to the ring-fenced
cash or working capital mechanisms in place for these operations.

The new ERMA for WCP, which commenced operations in December 2019 and was
performing well prior to the pandemic, is in place to the end of March 2022.
The new SWR and TPE ERMAs are in place to the end of March 2021, with the
potential in the case of TPE to be in place until September 2021 in certain
circumstances. In addition, all three include options to extend their duration
by a further half year at the DfT’s discretion. As announced earlier this
month, the Emergency Measures Agreement for Great Western Railway (GWR) has
already been extended to at least 26 June 2021.

The DfT has also stated it intends to begin discussions with the TOCs to
transition to new, directly-awarded contracts for the longer term, which would
come into effect at the end of the ERMAs.

To this end, each of the ERMAs requires that by mid-December 2020 the TOC
agrees with the DfT whether, and if so, how much parent company support or
other payments are required to terminate the pre-existing franchise
agreements. If any such termination sums are agreed, they would fall due at
the end of the ERMA term, at which point the pre-existing franchise contract
would also terminate by agreement. However if the termination sum for a TOC
cannot be agreed by mid-December then the DfT has the right to terminate that
ERMA early, with the TOC reverting to substantially all of the pre-existing
franchise terms, from mid-January 2021. Assuming the termination sums are
agreed, the DfT intends to negotiate a new direct award contract under which
the TOC will deliver passenger rail services following the end of the ERMA.

Commenting on today’s announcement, FirstGroup Chief Executive Matthew
Gregory said:
“The Government has extended its funding of the rail industry whilst demand
for services remains heavily affected by coronavirus, and we are pleased that
the vital nature of rail services to communities and local economies is being
recognised.

“Passengers can be confident that public transport is safe and across our
rail networks we have increased service levels to provide more capacity as
schools restart and many more workplaces and other facilities reopen. We are
now operating around 90% of the rail services we were prior to the pandemic.
We will continue to bring all our expertise to bear alongside Government and
industry partners to deliver the next phase of recovery of the rail network.

“Together with the earlier GWR extension, these agreements reinforce our
balance sheet position and provide a potential path for our rail business to
move onto a new contractual footing over time, with a more appropriate balance
of risk and reward for all parties. We have long advocated for a more
sustainable long-term approach to the railway, with passengers at its centre,
and we look forward to working constructively with the DfT to make this a
reality.”

Notes
Passenger volumes on our First Rail operations have increased modestly from
the lows of c.95% below pre-pandemic levels on average in late March and
April, but still remain c.70% below across our operations.

Termination assessments
As noted, the ERMAs require that by mid-December 2020 each TOC agrees with the
DfT appropriate terms to terminate the pre-existing franchise agreements that
were overlaid with the Emergency Measures Agreements in March. The objective
is to agree if and how much parent company support (PCS) or other sums would
have been payable had the pandemic not occurred. The amounts will be based on
the financial status of each franchise prior to the pandemic and the DfT’s
assessment, acting reasonably, of their potential trajectory for the remainder
of the franchise term under those pre-existing agreements in the absence of
the pandemic. The assessments will take account of the franchise agreement
change mechanisms and certain other input from the TOCs. Assuming the
termination sums are agreed, any required payments would only fall due at the
end of the ERMA term, at which point the pre-existing franchise contract would
also terminate by agreement.

The PCS and additional funding commitments under each pre-existing franchise
agreement, plus the performance bonds, less any monies already paid by the
parent into the TOC will continue to be the maximum remaining cash exposure of
the parent company under this assessment. As at 31 March 2020, the relevant
commitments of the three TOCs is shown below, together with the total
accounting provisions for losses on their franchise agreements that have been
provided for:

 As at 31 March 2020, £m                                     SWR (70% share)     TPE  WCP (70% share)   Total 
 PCS and additional funding commitments                                 82.2   168.8             92.4   343.4 
 Performance bond (typically callable on default)                       11.2    17.1             14.0    42.3 
 PCS/additional funding commitments already paid into TOCs            (49.0)  (42.5)                -  (91.5) 
 Maximum remaining cash exposure                                        44.4   143.4            106.4   294.2 

Note: the operations also have season ticket bond commitments, but these are
cash collateralised within each TOC.

 £m                                                        SWR (70% share)    TPE  WCP (70% share)   
 Initial accounting provisions for losses (IAS 17 basis)             102.1  106.3                -   

The TPE ERMA has the potential to be extended to 19 September 2021 (with the
further six month option at DfT discretion beyond that) if the termination
assessment indicates that no default would have taken place (i.e. PCS would
not have been fully utilised) over the franchise term.

Ring-fenced cash
For the duration of the ERMAs, the TOCs will continue to maintain ring-fenced
cash balances. As at 31 March 2020, TPE had £49.8m of ring-fenced cash, SWR
had £244.9m, and West Coast Partnership had £50.4m.

Fees
Subject to DfT consent which cannot be unreasonably withheld, and specific
restrictions introduced under the ERMA terms, fees earned through the
Emergency Measure Agreements and ERMAs are permitted to be withdrawn by the
parent company annually.

GWR
As announced on 1 September 2020, the Emergency Measures Agreement in respect
of Great Western Railway (GWR) was extended under its previous terms until at
least 26 June 2021. The PCS and performance bond commitments associated with
GWR are each £10m, and cash ring-fenced within the TOC was £266m as at 31
March 2020. GWR’s original Emergency Measures Agreement was signed on the
same day as the new franchise agreement in March, and the DfT’s option to
extend it formed part of that contract. This process and timing is different
from our other three rail franchised operations which were already on
established franchise agreements before adopting Emergency Measures Agreements
as a result of the pandemic.

Contacts at FirstGroup:
Faisal Tabbah, Head of Investor Relations
Stuart Butchers, Group Head of Communications
corporate.comms@firstgroup.com
Tel: +44 (0) 20 7725 3354

Contacts at Brunswick PR:
Andrew Porter, Tel: +44 (0) 20 7404 5959

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per DTR
6 Annex 1R: 2.2, 3.1. This announcement contains inside information. The
person responsible for arranging the release of this announcement on behalf of
FirstGroup is Keith Hubber, Group General Counsel and Company Secretary.

Figures presented in this announcement are not audited. Certain statements
included or incorporated by reference within this announcement may constitute
‘forward-looking statements’ with respect to the business, strategy and
plans of the Group and our current goals, assumptions and expectations
relating to our future financial condition, performance and results. By their
nature, forward-looking statements involve known and unknown risks,
assumptions, uncertainties and other factors that cause actual results,
performance or achievements of the Group to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Shareholders are cautioned not to place undue
reliance on the forward-looking statements. Except as required by the UK
Listing Rules and applicable law, the Group does not undertake any obligation
to update or change any forward-looking statements to reflect events occurring
after the date of this announcement.

About FirstGroup
FirstGroup plc (LSE: FGP.L) is a leading provider of transport services in the
UK and North America. With £7.8 billion in revenue in 2020 and around 100,000
employees, we transported 2.1 billion passengers. Whether for business,
education, health, social or recreation – we get our customers where they
want to be, when they want to be there. We create solutions that reduce
complexity, making travel smoother and life easier. We provide easy and
convenient mobility, improving quality of life by connecting people and
communities. Each of our five divisions is a leader in its field: In North
America, First Student is the largest provider of home-to-school student
transportation with a fleet of 43,000 yellow school buses, First Transit is
one of the largest providers of outsourced transit management and contracting
services, while Greyhound is the only nationwide operator of scheduled
intercity coaches. In the UK, First Bus is one of Britain's largest bus
companies with 1.4 million passengers a day in 2020, and First Rail is one of
the country's most experienced rail operators, carrying 340 million passengers
in the year. Visit our website at www.firstgroupplc.com and follow us
@firstgroupplc on Twitter.

About First Rail
FirstGroup is one of the most experienced rail operators in the UK and the
only one to run every type of railway – long distance, regional, commuter
and sleeper operations. We carried more than 340m passengers almost 10bn miles
last year. We operate four passenger franchises – Avanti West Coast, Great
Western Railway, South Western Railway and TransPennine Express – and one
open access service, Hull Trains. We also operate the London Trams network on
behalf of Transport for London, carrying around 27 million passengers a year.
As well as Avanti services, the West Coast Partnership also includes the
‘shadow operator’ for future high speed rail services which will design,
develop and mobilise operations for the new line working with HS2 Ltd and the
Department for Transport.



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