REG-FirstGroup PLC: Update On Train Operating Company Contracts

FirstgroupAnnouncement

10/12/2020 07:05

FIRSTGROUP PLC

UPDATE ON TRAIN OPERATING COMPANY CONTRACTS

FirstGroup plc (‘FirstGroup’ or ‘the Group’) has reached agreement
with the Department for Transport (‘DfT’) on next steps for the South
Western Railway (‘SWR’) and West Coast Partnership train operating
companies, the latter of which comprises Avanti West Coast and the shadow
operator for HS2 (together, ‘Avanti’).

As announced on 20 September, these two companies are currently operating
under Emergency Recovery Measures Agreements (‘ERMA’) which were put in
place by the DfT to provide continuity for rail passengers and the industry
during the coronavirus pandemic. The ERMA for Avanti is in place to the end of
March 2022 and the SWR ERMA is in place to the end of March 2021. Both can be
extended by a further half year at the DfT’s discretion.

As previously stated, the ERMAs required the train operators and the DfT to
agree whether any payment is required to terminate the pre-existing franchise
agreements, and if so how much, based on a pre-coronavirus trajectory
financial model. The DfT and FirstGroup have agreed that no termination sum is
required for Avanti, which commenced operations in December 2019 and was
performing well prior to the pandemic. Agreement has also been reached for a
termination sum for SWR, which requires a further FirstGroup contribution of
£33.2m. This represents the Group’s share of parent company support and
additional funding commitments under the franchise agreement, less amounts
already paid into the operating company, and which will be paid at the end of
the ERMA term. The full exposure to SWR performance bonds and parent company
support has already been provided in our accounts. The pre-existing franchise
agreements will therefore terminate at the end of the ERMA term for SWR and
Avanti. Agreement of the termination sums significantly reduces the overall
financial risk within the First Rail franchise portfolio.

Following agreement of the termination sums we are now negotiating new
directly awarded management contracts with the DfT, which will come into
effect at the end of the ERMAs, under which each incumbent train operator will
deliver passenger rail services. The DfT have indicated that these new
National Rail Contracts would last to 1 April 2023 for SWR, and to 1 April
2026 for Avanti, each with extension periods of up to two further years at the
DfT’s discretion.

Our TransPennine Express (‘TPE’) rail franchise is also operating under an
ERMA, and the process to agree the franchise termination sum for TPE has been
extended to the end of January 2021 by the DfT. As also previously announced,
the existing Emergency Measures Agreement for Great Western Railway
(‘GWR’) has already been extended to June 2021.

Commenting on today’s announcement, FirstGroup Chief Executive Matthew
Gregory said:

“We welcome this agreement, which marks a further evolution of the
contractual framework for our SWR and Avanti train operating companies, both
in the context of providing resilient services throughout the coronavirus
pandemic and also a more sustainable long-term approach. These new directly
awarded management contracts will focus on passengers and operational
performance, with a more appropriate balance of risk and reward. We look
forward to working constructively with the DfT to make this a reality, and to
use our expertise and understanding of the needs of our customers to deliver
improvements that we know passengers want.”

“We have acted flexibly to ensure continuity of service while implementing
social distancing, as well as enhanced cleaning protocols and innovative
technology to improve the customer experience. Passengers and employees alike
can be confident that our trains are safe. We are now operating around 90% of
the rail services we were prior to the pandemic. We will continue to bring all
our experience to bear alongside Government and industry partners to deliver
the next phase of recovery of the rail network.”

Notes

Termination assessments

As previously announced, the ERMAs require that each train operating company
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 are 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 take into account
the franchise agreement change mechanisms and certain other input from the
operating companies.

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 train operating company are the maximum remaining cash
exposure of the parent company under the termination sums process conducted by
the DfT in respect of SWR, TPE and Avanti. Following this announcement, the
relevant commitments to FirstGroup of the three train operating companies are
shown below, together with the total accounting provisions for losses on their
franchise agreements that have been provided for:

 £m                                                                                          Avanti (70% share)  SWR (70% share)     TPE   Total 
 Maximum remaining cash exposure as at 31 March 2020                                                      106.4             44.4   143.4   294.2 
 PCS and additional funding commitments not required                                                     (92.4)                -     TBD  (92.4) 
 Performance bond (limited exposure risk)                                                                (14.0)           (11.2)  (17.1)  (42.3) 
 Maximum remaining cash exposure following Avanti and SWR agreements; TPE to be determined                    -             33.2   126.3   159.5 

Note: the operations also have season ticket bond commitments, but these are
covered by cash resources within each Train Operating Company. The TPE
termination sum agreement process has been extended to end of January 2021 by
the DfT, and any termination sum for TPE may be subject to discounting.

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

Ring-fenced cash

For the duration of the ERMAs, the train operating companies will continue to
maintain ring-fenced cash balances. As at 19 September 2020, GWR had £258.4m
of ring-fenced cash, SWR had £164.9m, TPE had £47.9m and West Coast
Partnership had £75.5m.

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 train operating company
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 / Simone Selzer, Tel: +44 (0) 20 7404 5959

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per DTR
6 Annex 1R: 3.1.

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 the year to 31 March
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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