STAGECOACH GROUP PLC
27 November 2014
STAGECOACH-VIRGIN AWARDED INTERCITY EAST COAST RAIL FRANCHISE
Stagecoach Group ("Stagecoach") welcomes today's (27 November 2014) announcement by the Department for Transport ("DfT") of its intention to award the new InterCity East Coast ("ICEC") rail franchise to Stagecoach's venture with Virgin, Inter City Railways Limited ("ICR").
Passengers can look forward to new services, quicker and more frequent journeys whilst taxpayers will get a bigger return than they receive under the current temporary East Coast arrangements.
ICR will transform the customer experience for around 20 million journeys a year on one of the UK's major inter-city rail routes, blending the experience, culture and service-focus of both Stagecoach and Virgin. Stagecoach holds 90% of the share capital of ICR and Virgin holds the remaining 10%.
The new franchise will start in March 2015 and is planned to run until 31 March 2023, with the option for a one-year extension at the DfT's discretion. It includes a commitment to deliver £2.3bn* in real terms in premium payments to the Government between 2015 and 2023, providing a higher return to the taxpayer than under the current arrangements.
The franchise is set to see more than £140m invested in delivering an improved service and a more personalised travel experience for passengers. Trains will operate under the 'Virgin Trains East Coast' brand.
Highlights for customers, stakeholders and staff
· Faster journey times - regular services to Leeds in two hours and Edinburgh in four hours
· New trains - 65 new 'Super Express' trains from 2018 with an early multi-million-pound train refresh programme for existing fleet
· Better connections - extra and new direct services to London from key locations in Scotland and England and more weekend services
· More services - a 50% increase in capacity by 2020 with total fleet capacity increased by 12,200 seats
· Better value fares - 10% cut in Standard Anytime fares on long-distance journeys to and from London and Stevenage
· Investment in people - a fresh approach to recruitment, including new apprenticeships and the introduction of a new National Academy for Rail Professional Education with bases in York, Derby and London. Major investment in staff development and training, a new innovation council and giving employees ways to own a share of the business through employee share incentive arrangements
· New technology - new website, smartphone apps, interactive touchscreen information points at major stations, portable technology for staff, free WiFi on trains and stations.
· Personalised travel - journeys built around individual customers, with at-seat food ordering, simpler ticket purchase and reservations, new Nectar loyalty programme
· Improved customer rights and support - new Passengers' Charter with easier and faster compensation for customers through automated delay repay service; commitment to improved satisfaction scores with new independent passenger surveys, benchmarks and published results to drive satisfaction with stations, trains and customer service; and a dedicated customer and communities improvement fund
· Station enhancements - planned investment of over £25m in stations and car parks with new open plan customer zones introduced for combined ticket purchase and information, more car parking spaces, extra cycle facilities and improved security
· Improved accessibility - investment in disability improvements, including induction loop and tactile station maps
· Community engagement - apprenticeships for young people, graduate and ex-offenders programmes, dedicated communities fund, support for small businesses and regeneration in disadvantaged areas.
Ownership of and accounting for investment in Inter City Railways Limited
Stagecoach holds 90% of the share capital of ICR and Virgin holds the remaining 10%.
Stagecoach will continue to account for ICR as a subsidiary in its consolidated financial statements and Virgin's interest in ICR will be presented as a minority interest in those consolidated financial statements.
As part of the franchise award, ICR is expected to purchase the entire share capital of East Coast Main Line Company Limited ("East Coast") from Directly Operated Railways Limited (a company owned by the UK Government) for a consideration of around £11m, to be settled in cash. East Coast is the current train operating company for the East Coast franchise. We expect the purchase to complete around March 2015.
According to its latest audited, statutory financial statements, the gross assets of East Coast as at 31 March 2014 were £150.3m and its profit before tax for the year then ended was £9.5m. The business is led by Managing Director, Karen Boswell, and a senior management team.
Investment
ICR and East Coast plan to procure more than £140m of investment over the duration of the franchise, including significant investment in rolling stock and other franchise improvements. We currently expect around £100m of this to be direct capital expenditure by East Coast with the balance being assets funded by rolling stock companies and leased to East Coast. Separately, the DfT has procured 497 new vehicles for the franchise as part of its Intercity Express Programme, which have been financed by Agility Trains East. Agility Trains will design, build, maintain and service the rolling stock and maintenance facilities for these vehicles. These vehicles will be leased during the life of the franchise.
Franchise capital requirements and guarantees
Stagecoach Group plc will underwrite "risk capital" of around £232m at the start of the new franchise. Under the agreed contractual arrangements between the groups, Stagecoach Group plc would recover from Virgin Group 10% of any "risk capital" that is actually called or drawn. The initial risk capital comprises the following:
- A £20m performance bond has been issued by a bank in connection with the franchise and Stagecoach Group plc has indemnified the bank. The amount of the performance bond will increase broadly in line with the retail prices index.
- A season ticket bond of around £5m is to be issued prior to the start of the franchise and Stagecoach Group plc will indemnify the bond issuer. The amount of the season ticket bond will increase broadly in line with season ticket sales.
- Stagecoach Group plc has committed to providing "parent company support" of up to £165m to East Coast to the extent necessary to enable East Coast to meet its franchise obligations, including the obligations to maintain financial ratios specified in the franchise agreement. A bank has issued a bond to underwrite 50% of the "parent company support", and Stagecoach Group plc has indemnified the bank.
- Stagecoach Group plc has given a commitment to provide loans of up to £35m to fund capital expenditure and working capital of East Coast. Our current financial projections are that these loans will be made but repaid during the first few years of the franchise.
- Stagecoach Group plc has given guarantees of around £7m in connection with rolling stock leases through to December 2019.
Shareholder return
We expect to earn a return commensurate with the risk profile and duration of the franchise. Financial returns could be lower in the early years of the franchise as we deliver the main investments linked to our programme of passenger improvements. A profit sharing arrangement will apply whereby a proportion of profit in excess of pre-specified thresholds will be payable to the DfT. A Gross Domestic Product ("GDP") adjustment arrangement will also apply whereby amounts are receivable by the franchise from the DfT where UK GDP is below certain pre-defined levels and likewise, amounts are payable by the franchise to the DfT where UK GDP is above certain pre-defined levels. A 2% "deadband" will apply on this GDP arrangement, with Government bearing 90% of variances outwith that deadband.
Virgin Brand and Marketing Expertise
We expect East Coast to benefit from the use of Virgin branding and expertise in marketing support for the duration of the franchise. Amounts will be payable by East Coast to Virgin related to the growth in revenues and profitability of East Coast.
Full details of plans to transform services for InterCity East Coast passengers are available here: http://stagecoach.com/media/news-releases/2014/2014-11-27.aspx
The franchise award is subject to a standard "standstill" period of at least 10 days, after which it is expected to be formally confirmed and the contract signed by the DfT. In addition, the Competition and Markets Authority is required by law to carry out a "Phase 1" review of all UK rail franchise awards.
Martin Griffiths, Chief Executive of Stagecoach Group, said: " Passengers using the East Coast mainline will benefit from hundreds of millions of pounds of infrastructure investment and service improvements over the next decade. Together with Virgin, our innovative plans will give customers new services, faster and more frequent trains, and easier, more personalised journeys.
"We will be investing in the committed East Coast people who will be joining our team, as well as delivering major programmes to help young people, communities and small businesses along one of Britain's most important routes. We will match world-class customer service by giving a big boost to taxpayers with increased payments to Government."
Patrick McCall, Senior Partner, Virgin Group, said, "We're delighted to have been chosen to run the East Coast franchise. Our long term partnership with Stagecoach has seen a revolution in customer service standards, great product innovation, reduced journey times and improved timetables on the West Coast mainline. We plan to deliver similar success on the East Coast and are looking forward to working with the team there to build on their achievements.
"Our partnership will concentrate on areas for which Virgin is famous, such as looking after our customers and our people. We have a great opportunity to blend the successes of the East Coast and the West Coast lines to create a great experience for all. Together with these new ideas and initiatives, passengers will begin to see those Virgin touches on each and every journey."
ENDS
* The committed premium payments of £2.3bn represents the forecast premium payments over the core franchise period to 31 March 2023, expressed in 2014/15 prices and discounted using the UK Government's "real" discount rate of 3.5% per annum. Actual premium payments are subject to change in accordance with the contractual arrangements.
For further information, please contact:
Stagecoach Group plc www.stagecoachgroup.com
Investors and analysts
Ross Paterson, Finance Director | 01738 442111 |
Bruce Dingwall, Group Financial Controller | 01738 442111 |
Media
Steven Stewart, Director of Corporate Communications | 01738 442111 or 07764 774680 |
John Kiely and Will Swan, Smithfield Consultants | 020 7360 4900 |
Martin Griffiths, Chief Executive, Ross Paterson, Finance Director and Bruce Dingwall, Group Financial Controller, will be hosting a conference call for analysts and investors at 8:30am today (27 November 2014). Dial-in details will be e-mailed to analysts and investors by Smithfield Consultants. The presentation slides will shortly be available from the Group's website,www.stagecoachgroup.com
This information is provided by RNS
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