Update On Train Operating Company Contracts

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

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Contacts at Brunswick PR:

Andrew Porter / Simone Selzer, Tel: [phone]

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.

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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.