FirstGroup plc (LON:FGP) has announced that a new National Rail Contract (‘NRC’) has been agreed with the Department for Transport (‘DfT’) for the West Coast Partnership (‘WCP’), which is a partnership between FirstGroup (70%) and Trenitalia UK Ltd (30%).
The WCP NRC comprises Avanti West Coast (‘Avanti’) and the West Coast Partnership Development (‘WCPD’), the shadow operator for the HS2 programme. Key terms of the new contract are as follows:
- The new NRC will commence on 15 October 2023, when WCP’s current contractual agreement ends.
- The contract is for nine years and has a minimum core three-year term to 18 October 2026, following which a further six years until 17 October 2032, subject to ongoing DfT approval.
- The NRC is a management contract under which the DfT retains all revenue risk and substantially all cost risk.
- WCP will earn a fixed management fee of £5.1m per annum to deliver the contract with the opportunity to earn a variable fee of up to £15.8m per annum based on a number of criteria. Punctuality and other targets required to achieve the maximum variable fee are designed to incentivise the highest level of performance. Fees are also linked to milestones in WCPD’s programme.
Since the introduction of Avanti’s new timetable in mid-December 2022, the operator has delivered a significant recovery in operational performance, and customer satisfaction. Over the last six months, cancellations that Avanti is responsible for stabilised at below 2% of scheduled services.
Avanti is working through a £117m refurbishment programme for its 56-strong electric Pendolino fleet which is delivering a step change in onboard customer experience. Further improvements for customers have included the introduction of a new Standard Premium travel class, a new low-cost flexible ticket and initiatives to support customers who require additional assistance.
FirstGroup’s ambition is to be the partner of choice for low- and zero-emission transport. As part of the new contract, WCP will continue to develop and implement initiatives to reduce its impact on the environment and, as such, Avanti has placed a £350m order for 23 brand new electric or bi-mode Hitachi trains. These trains will reduce our carbon footprint, and the operator will continue its work to improve air quality and increase waste recycling.
Commenting, Graham Sutherland, FirstGroup Chief Executive Officer, said:
“Our West Coast Partnership team has worked hard over recent months to deliver improvements for Avanti passengers, including an increase in the number of services in the timetable and high levels of reliability for customers. The new National Rail Contract agreed today will allow our team to use its expertise on further improvements. These include programmes to refurbish the existing fleet and to introduce new, more environmentally friendly trains, which will encourage more passengers to return to the network and help deliver the UK’s decarbonisation agenda.”
Notes
Additional background on financial terms of the WCP National Rail Contract
- The DfT retains all revenue risk, and substantially all cost risk up to the agreed annual business plan budgetary levels, with contractual change mechanisms that allow the annual budget to be increased for items outside of the operating company’s control, like inflation, or changes requested by the DfT.
- The Variable Fee is scored against five performance categories (Operational Performance, Customer Satisfaction, Financial Performance, HS2 Shadow Operator Delivery and HS2 Shadow Operator Financial Management). There is a mix of quantitative metrics and qualitative assessments with three levels (‘below acceptable’, ‘acceptable’, ‘good’) – an ‘acceptable’ rating results in approximately 65% of the Variable Fee element being payable.
- The fixed fee and variable fee potential remains flat for the contractual term and is only subject to escalation only after the core term and only if CPI inflation is outside agreed bands.
- The NRC makes provision for additional incentive fees to be earned for participation in significant industry change projects outside normal operation to be agreed between WCP and the DfT.
- Combined with operating Avanti West Coast, WCP also acts as the shadow operator for the HS2 programme. The shadow operator role involves the development, mobilisation and the eventual operation of high-speed services.
- The Group is obliged to retain its share of the £45m parent company support and £10m Performance Bond for the previous WCP agreement until final settlement of any net assets or liabilities between WCP and the DfT relating to it. Thereafter, the Group’s contingent capital reduces to its share of the £14m in total, half of which is bonded.
- WCP will continue to be fully consolidated in the Group financial statements, with the net cost of operations and capex to be funded in advance by the DfT.
- FirstGroup financial statements for FY 2024 will include Right of Use assets of c.£0.3bn recognised under IFRS 16 rules. Other impacts under IFRS 16 compared to an IAS 17 basis include EBITDA +c.£160m, EBIT +c.£10m and interest cost +c.£10m.
