5 February 2018
Rail franchising update
Stagecoach Group plc ("Stagecoach") notes the statement by the UK Secretary of State for Transport today regarding rail franchising matters and in particular that:
· Consistent with the plan announced by the Department for Transport ("DfT") in December 2016, the DfT and our joint venture, Virgin Rail Group ("VRG"), have agreed a new West Coast rail franchise to run from 1 April 2018 until potentially 31 March 2020.
· A Stagecoach subsidiary has been shortlisted to bid for the next competitively tendered East Midlands franchise, currently planned to begin in August 2019.
· The DfT will continue to explore entering into new commercial terms with Virgin Trains East Coast ("VTEC") on the continued operation of the East Coast franchise subject to certain criteria being met.
As detailed below in this statement, the outcome of the ongoing discussions between VTEC and the DfT might result in further cash and non-cash exposures in the Stagecoach consolidated financial statements in addition to those already accounted for. That could result, all other things being equal, in Stagecoach's consolidated non-rail net debt being up to around £19m higher than previously forecast.
The DfT has previously announced that a Stagecoach subsidiary is shortlisted to bid for the new South Eastern franchise. Stagecoach is also announcing today that it intends Alstom to join that shortlisted bid, subject to receiving formal consent from the DfT.
Confirmation of new West Coast franchise
The DfT announced in December 2016 that it was seeking to agree a contract with VRG to provide services on the West Coast Main Line to transition to the planned new West Coast Partnership. The current West Coast franchise is due to end on 31 March 2018.
Stagecoach is pleased to confirm that VRG has now agreed a new West Coast franchise with the DfT. It will commence on 1 April 2018 and run potentially until 31 March 2020, with the final 12 months at the DfT's discretion.
Passengers and taxpayers will benefit from a package of improvements, including:
· introduction of free WiFi for all passengers on board Pendolino trains
· all ticket machines to offer contactless payment
· new investment to improve stations and the travelling environment on trains
· extra help and improved accessibility for customers at stations
· better customer information during disruption
· new apprenticeship opportunities, including for train driver roles
The contract includes substantial planned premium payments to the DfT as well as revenue and profit share arrangements with the DfT. VRG expects to make a modest profit margin under the franchise.
Stagecoach, Virgin Group and SNCF, bidding as West Coast Partnership Limited, have been shortlisted for the West Coast Partnership franchise. Stagecoach has a 50% share in the bid vehicle, with a 30% share held by SNCF and the remaining 20% owned by Virgin. The DfT plans that the franchise will include current West Coast services and the first few years of operation of High Speed 2 services.
East Midlands franchise shortlist
Stagecoach is also pleased to confirm that its subsidiary, Stagecoach East Midlands Trains Limited, has been shortlisted by the DfT to receive an invitation to tender for the new East Midlands rail franchise.
The East Midlands franchise incorporates intercity and regional passenger services, with around 470 train services a day. It includes intercity train services on the Midland Main Line linking Leicester, Nottingham, Derby and Sheffield with London St Pancras. A network of local lines serves destinations such as Grantham, Lincoln and Mansfield. The franchise also provides services to Luton Airport Parkway and East Midlands Parkway stations.
The Stagecoach Group has operated the network under the East Midlands Trains brand since 2007. The new franchise is due to start in August 2019.
Virgin Trains East Coast franchise update
Virgin Trains East Coast ("VTEC") is continuing to progress a £140m investment programme for customers. In the latest Transport Focus survey, the business achieved the highest passenger satisfaction rating of any franchised UK rail operator. Additionally, franchise premium payments to the DfT are significantly higher than when the route was operated in the public sector. The average four-weekly premium payments made during VTEC's operation of the franchise are over 30% higher than those made during the period of public ownership. This step-change in delivery for both passengers and taxpayers has been achieved despite a challenging economic environment, increasing political uncertainty, significantly lower rates of growth across the UK rail network over the past two years and sustained poor performance by Network Rail. VTEC is pursuing claims against Network Rail for sustained poor performance.
Consistent with the Government's model of UK rail franchising, the East Coast franchise includes a contractual commitment by Stagecoach to fund VTEC up to an agreed amount in circumstances where the business does not meet its original financial plan. This was agreed prior to the commencement of the franchise in accordance with the Government's specification during the procurement process and Stagecoach has met its contracted funding commitments. Those commitments include £165m of funding that has already been provided by Stagecoach and Virgin to VTEC.
As previously indicated, a significant element of the expected passenger revenue growth and associated payments to Government from 2019 was linked to expanded timetables, reduced journey times and extra services. These developments were predicated on a package of extensive Network Rail infrastructure enhancements. It has been clear for some time that significant elements of these enhancements will either be delayed or not progressed. As a result, it has also been clear for some time that looking forward the franchise contract, including premium payments to DfT, needs to change to reflect these materially changed circumstances.
The Secretary of State for Transport announced on 29 November 2017 new plans for the wider UK rail network. This included the introduction of a new public-private partnership on the East Coast route from 2020 under a new competitively tendered East Coast Partnership franchise. Since that announcement, VTEC has been in discussion with the DfT about the transition to the new East Coast Partnership franchise. Stagecoach notes the comments by the UK Secretary of State for Transport today that he intends to ensure that any new commercial terms agreed with VTEC for its continued operation of the East Coast rail services will be on a "not for profit" basis but that a fee would be payable at the end of the contract period based on VTEC meeting specified obligations.
Since announcing its interim results on 6 December 2017, Stagecoach has seen a hardening of the DfT's negotiating position, coinciding with increased media and political scrutiny around Government contractual relationships with the private sector generally and on rail specifically. The comments by the UK Secretary of State for Transport reflect an evolution of the DfT's position on the East Coast franchise.
We remain focused on seeking to reach an agreement with the DfT to facilitate the transition to the new East Coast Partnership franchise and to address a number of contractual matters relating to the changed circumstances affecting the current franchise contract. The DfT has advised us that it also wishes to reach such an agreement, whilst maintaining a robust position in discussions.
As previously reported, we have already impaired intangible assets and provided for losses in relation to the current Virgin Trains East Coast franchise agreement. The amount already provided is based on a forecast that assumes that the £165m loan commitment from Stagecoach to VTEC is funded in full. The DfT is now seeking that in addition to that £165m, Stagecoach and Virgin fund an amount relating to the performance bond outstanding in respect of Virgin Trains East Coast. To the extent that was agreed, it could result in a further net cash outflow of up to around £19m (Stagecoach's 90% share) from Stagecoach to VTEC or the DfT in addition to the amounts already assumed in the Stagecoach consolidated financial statements.
In addition, the DfT is now seeking that an amount be payable by VTEC to the DfT in due course to reflect the fact that VTEC has residual net assets arising under the existing franchise (excluding any liabilities of Virgin Trains East Coast in respect of loans from Stagecoach). While that would not require any additional funding from Stagecoach to VTEC, it could result in an additional one-off net expense in the Stagecoach consolidated financial statements of up to around £75m (Stagecoach's 90% share).
We are continuing our discussions with the DfT, which includes seeking to understand the detailed implications of the statement made today by the Secretary of State for Transport.
In summary, while discussions with the DfT are ongoing and no agreement has yet been reached, applying the DfT's current stated position could result in Stagecoach funding up to a further £19m (net of Virgin's 10% share) in cash and incurring a further consolidated expense of up to around £94m (including the up to around £19m of cash funding, net of Virgin's 10% share). All other things being equal, this could result in Stagecoach's consolidated non-rail net debt by the end of calendar year 2018 being up to around £19m higher than previously forecast but the other elements of any expense should not affect non-rail net debt.
South Eastern rail franchise bid
Stagecoach is one of three bidders shortlisted to bid for the new South Eastern franchise. We are pleased to confirm today our intention to form a relationship with Alstom Transport UK Limited (part of the Alstom SA Group) for that rail franchise, subject to DfT consent. It is intended that Alstom will hold 20% of the share capital of the train operating company if our bid for the franchise is successful.
Around a third of all rail journeys in the UK are made on Alstom trains, including the flagship Pendolinos that run on the West Coast route. The company has played a key part in delivering British rail infrastructure projects such as HS1, Crossrail, Network Rail's signalling and electrification systems and Nottingham Tram as well as many London Underground trains. Last year, Alstom opened the UK's largest and most sophisticated centre for train modernisation in Widnes. Internationally, Alstom is responsible for projects ranging from the original Eurostar and France's high speed TGVs, to Melbourne's suburban trains in Australia and the world's first hydrogen powered train.
Commenting on the new rail developments, Stagecoach Chief Executive, Martin Griffiths, said: "Our partnership with Virgin on West Coast has delivered two decades of investment, innovation and a step-change in customers' experience of rail travel. The new West Coast contract will build on that and ensure a strong foundation for the start of the new West Coast Partnership franchise.
"We are also pleased to have been shortlisted for the new East Midlands franchise. At East Midlands Trains, we are proud of the improvements we have delivered for customers and our people over the past 10 years, and we look forward to working with local stakeholders on our plans to maximise the benefit of the railway for the regional economy.
"Virgin Trains East Coast is progressing a £140m investment programme for customers and delivering significant payments to the taxpayer. Contrary to much misinformed recent comment, we have neither walked away from the East Coast franchise nor asked for, or received, any special treatment. We have accepted our share of risk agreed with the Government at the time the franchise was let. At all times, we have acted with professionalism and integrity by fulfilling Stagecoach's obligations to fund the franchise, even in challenging times and with changed circumstances. We are also continuing our discussions with the Department for Transport about new contractual arrangements to facilitate the transition to the planned new East Coast Partnership in 2020.
"Our proposal for a collaboration with Alstom to bid for the South Eastern rail franchise aims to combine Alstom's knowledge of infrastructure and rolling stock, with our operational expertise and customer service focus. The proposed arrangement supports our vision of delivering a more integrated and innovative rail service for the customers and local communities who depend on what is one of the busiest rail networks in the UK."
Nick Crossfield, Managing Director, Alstom UK & Ireland, said: "We know Stagecoach well from our work together on the fantastic Pendolino fleet on the West Coast route. Now, we have the opportunity to form an even closer partnership with this unique bid for the South Eastern franchise. It's the first time two companies like ours have joined up like this, and together, we can offer a better service to passengers and communities along the route."
For further information, please contact:
Stagecoach Group plc
Investors and analysts
Ross Paterson, Finance Director
Bruce Dingwall, Group Financial Controller
Steven Stewart, Director of Corporate Communications
Notes to Editors
· Stagecoach is an international public transport group, with operations in the UK, the United States and Canada. The Group employs around 34,000 people, and operates around 11,000 buses, coaches, trains and trams.
· Stagecoach is one of the UK's biggest bus and coach operators with over 8,000 buses and coaches on a network stretching from south-west England to the Highlands and Islands of Scotland. Low-cost coach service, megabus.com, operates a network of inter-city services across the UK.
· Stagecoach is a major UK rail operator, running the East Midlands Trains network. It also has a 49% shareholding in Virgin Rail Group, which operates the West Coast rail franchise, and a 90% shareholding in Virgin Trains East Coast, which operates the East Coast rail franchise.
· Stagecoach operates the Supertram light rail network in Sheffield.
· In North America, Stagecoach operates around 2,200 buses and coaches in the United States and Canada. megabus.com operates a network of inter-city coach services in North America. Stagecoach is also involved in operating commuter, transit, contracted, charter, airport shuttle and sightseeing services.
This information is provided by RNS