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FIRSTGROUP PLC - New National Rail Contracts for SWR and TPE

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·10-min read
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FIRSTGROUP SIGNS NEW NATIONAL RAIL CONTRACTS
FOR SOUTH WESTERN RAILWAY AND TRANSPENNINE EXPRESS

FirstGroup plc (‘FirstGroup’ or ‘The Group’) is pleased to announce the agreement of National Rail Contracts (‘NRCs’) with the Department for Transport (‘DfT’) for its South Western Railway (‘SWR’) and TransPennine Express (‘TPE’) train operating companies. The new NRCs will commence on 30 May 2021, when the current Emergency Recovery Measures Agreements (‘ERMAs’) come to an end.

  • New NRCs for SWR and TPE have a two-year term to May 2023 with options to extend by up to two further years to May 2025

  • FirstGroup bears no revenue risk and very limited cost risk under an annual budget agreed with DfT; there is also no significant contingent capital risk

  • Annual fees on NRCs consist of a fixed management fee plus performance fee based mainly on the delivery of customer-focused performance metrics

National Rail Contracts are a new contract structure for agreements between train operating companies and the DfT and the contracts for both SWR and TPE are among the first wave of NRCs to be announced. NRCs replace the previous revenue risk-based franchising system. The NRCs have a primary two-year term to the end of May 2023 for both SWR and TPE, and both have an option to be extended by up to two further years at the DfT’s discretion.

Under the NRCs the DfT will retain all revenue risk and substantially all cost risk. For the Group’s 70% share of the First MTR joint venture for SWR the fixed management fee is £3.3m per annum and there is the opportunity to earn an additional fee of up to £9.9m which is the maximum attainable performance fee. For TPE the fixed management fee is £2.3m per annum and there is the opportunity to earn an additional fee of up to £5.2m which is the maximum attainable performance fee. The punctuality and other operational targets required to achieve the maximum level of performance fee are designed to incentivise the highest level of performance for customers.

The NRCs achieve a more appropriate balance of risk and reward between FirstGroup and the Government. They carry no significant contingent capital risk, with the Group’s contingent capital for both the SWR and TPE NRCs totalling £15m, 50% of which is bonded. There are limited scenarios in which this contingent capital can be called upon, primarily in the event of early termination of the contracts by the operator.

Both train operating companies will work collaboratively with industry partners and stakeholders to build back patronage, while delivering plans to upgrade our service offering. These plans include the introduction of flexible commuter tickets and continuing to facilitate a move towards electronic and mobile ticketing, smartcards and improved apps for both companies.

FirstGroup’s ambition is to be the partner of choice for low- and zero-emission transport. The Group recently became the first bus and rail operator in the UK to formally commit to setting an ambitious science-based target for reaching net zero emissions by 2050 or earlier. Sustainability is at the heart of the NRCs and both SWR and TPE will develop a decarbonisation policy and roadmap towards achieving net zero emissions in accordance with this goal.

As the largest UK operator with four passenger rail contracts expected to run to at least 2023, FirstGroup is well placed to benefit from the Government’s transition of the passenger rail industry to a commercial structure which is lower-risk and more predictable. The transition to a new model is expected to create a successful railway system that works better for passengers and taxpayers, while generating more resilient and consistent returns for shareholders.

As previously announced, the West Coast Partnership ERMA is in place until the end of March 2022 and we are discussing an NRC with duration of up to 31 March 2032 (with the core and extension periods to be determined). The existing Emergency Measures Agreement for GWR has already been extended to June 2021, and the underlying GWR direct award runs to 1 April 2023 with an extension option of up to one year.

Commenting, Matthew Gregory, FirstGroup Chief Executive, said:
“We welcome the announcement today by the Secretary of State of a plan for the future of the UK rail industry with the expertise, innovation and experience of private sector rail operators at the heart of the model. The National Rail Contracts agreed for SWR and TPE leave us well-placed for lower risk, cash generative rail operations on those two networks. We have long called for this transition to a new contract structure with a far better balance of risk and reward, and which benefits customers by a clearer focus on performance, including the introduction of a new set of passenger service metrics.

“As the country begins the process of ‘building back better’ the essential role of public transport has never been clearer and our leading position in the sector means that we have an important role. Our rail services have a vital part to play in driving economic growth, combating climate change and supporting the development of vibrant and sustainable communities.”

Notes

SWR plans under the National Rail Contract

SWR will deliver improvements for customers and communities across their network during the NRC period, including:

  • the introduction of a new suburban fleet of trains from Alstom

  • pioneering next-generation on board 5G Wi-Fi from evo-rail – SWR will be the first rail company to receive this technology developed in house by First Rail

  • continued high levels of performance, investment in stations and depots and further steps made to improve the accessibility of the railway

  • further steps to improve sustainability of the business, with development of a zero net carbon roadmap

  • working with BTP and other partners to safeguard children and vulnerable people on the network

  • continuing to deliver an enhanced apprenticeship programme.

TPE plans under the National Rail Contract

In the NRC period, TPE will continue to be at the heart of transformation plans for rail in the North of England and into Scotland, including:

  • the final roll out of new Nova fleets of trains across the network, offering greater capacity and flexibility

  • continued high levels of performance, investment in stations and further steps made to improve the accessibility of the railway

  • further steps to improve sustainability of the business, with development of a zero net carbon roadmap

  • being a key partner in the significant infrastructure boost to be delivered through the TransPennine Route Upgrade due to begin this year and be delivered by 2028 which will provide a major enhancement to rail services for the region

  • Following the retirement of Liz Collins as Interim Managing Director, from 1 June, the TPE business will be led by Matthew Golton as Managing Director. Matthew has three decades of experience in the rail sector, including recently as GWR’s Interim Managing Director, and will bring this to bear at TPE as the business realises the significant benefits of major rail investment across the region.

Key financial terms for the National Rail Contracts

  • The DfT retains all revenue risk.

  • The DfT retains cost risk up to the agreed annual business plan budgetary levels, with change protections. Under the NRC, the operating company bears the risk of costs in excess of the agreed annual budget unless agreed in advance with the DfT. Contractual change mechanisms exist that allow the budget to be increased for items outside of the operating company’s control or changes requested by the DfT.

  • The Performance Based Fee is scored against four categories (Operational Performance, Customer Satisfaction, Finance and Business Management). There is a mix of quantitative metrics and qualitative assessments with three levels (‘below acceptable’, ‘acceptable’, ‘good’) – ‘acceptable’ rating results in approximately two thirds of the performance-based fee element being payable

  • The NRCs make provision for additional incentive fees to be earned for participation in significant industry change projects outside normal operation, for example supplying project delivery expertise to help deliver the TransPennine Route Upgrade programme due to start this year and be delivered by 2028.

  • The NRCs make no structural changes to the ring-fenced cash mechanism or the working capital cap-and-collar mechanism in place; no significant change is anticipated to the ring-fenced cash range in TPE but the SWR range is expected to reduce marginally.

  • The Group will also remain obliged under its contingent capital commitments for the two existing franchise agreements until the expiration of the relevant bonds in December 2021 (for TPE) and October 2022 (for SWR), plus the TPE parent company support remaining after payment of the termination sum announced on 11 May 2021, until final settlement of any net assets or liabilities between TPE and the DfT relating to the previous franchise period. Thereafter, the contingent capital liability will be £15m in total.

  • SWR and TPE will continue to be fully consolidated in the Group accounts with the net cost of operations and capex to be funded in advance by the DfT.

  • The Group will receive an annual dividend from the train operating companies reflecting the post-tax net management and performance fees. These dividends are expected to be paid in September following the completion of the audited accounts of the train operating companies.

A conference call for investors and analysts will be held at 9:00am today – attendance is by invitation. Please email corporate.comms@firstgroup.com in advance of the call to receive joining details. To access the presentation to be discussed on the conference call, together with a pdf copy of this announcement, go to www.firstgroupplc.com/investors. A playback facility will also be available there in due course.

Contacts at FirstGroup:
Faisal Tabbah, Head of Investor Relations
Stuart Butchers, Group Head of Communications
Tel: 020 7725 3354
corporate.comms@firstgroup.com

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

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

About FirstGroup
FirstGroup plc (LSE: FGP.L) is a leading provider of transport services in the UK and North America. With £7.8bn in revenue in the year to 31 March 2020 and around 100,000 employees, we transported 2.1bn 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. Visit our website at www.firstgroupplc.com and follow us @firstgroupplc on Twitter.

About SWR
Operating over 1,500 services each weekday across the network, SWR employs more than 5,000 employees and provides commuter inter-urban, regional and long distance services to passengers in South West London and southern counties of England and Island Line services on the Isle of Wight, as well as providing connectivity to the ports and airports in the region. As well as commuters and business travellers, SWR transports leisure travellers across the region, to many tourist and heritage sites, and the numerous major sporting and social events that take place along the route every year.

About TPE
TransPennine Express is an intercity rail provider with a vision to Take the North Further. We are delivering an investment of over £500m that will transform travel and customer experience across the North and into Scotland. This includes the introduction of 220 brand new state of the art Nova carriages, providing new routes, services and will increase capacity by over 80 per cent on a seven day a week timetable.

Figures presented in this announcement are not audited. Certain statements included or incorporated by reference within this announcement are, or may be deemed to be, forward-looking statements. These forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this announcement and include, but are not limited to, statements regarding FirstGroup and its intentions, beliefs or current expectations concerning, among other things, the business, results of operations, prospects, growth and strategies of the Group, or parts thereof. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of operations of the Group, or parts thereof, and the developments in the industries in which they operate, may differ materially from those described in, or suggested by, the forward-looking statements contained in this announcement. A number of factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, changes in law and regulation, currency fluctuations, changes in business strategy and political and economic uncertainty. Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this announcement reflect FirstGroup’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to FirstGroup and its operations, results of operations and growth strategy. Other than in accordance with its legal or regulatory obligations (including under the Listing Rules, the Disclosure Guidance and Transparency Rules and the Prospectus Rules), the Group is not under any obligation and the Group expressly disclaims any intention or obligation (to the maximum extent permitted by law) to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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