FirstGroup reaches termination fee deal over TransPennine franchise

(Sharecast News) - FirstGroup has reached agreement with the Department for Transport (DfT) on the termination fee payable for the TransPennine Express (TPE) train operating company, it announced on Tuesday.
The FTSE 250 passenger transport company said a condition of the Emergency Recovery Measures Agreements (ERMA) put in place by the DfT to provide continuity on the railways during the Covid-19 pandemic was that train operators and the department would work to agree whether any payment would be required to terminate the existing franchise agreements based on a pre-pandemic trajectory financial model.

It said the DfT and FirstGroup had now agreed the financial impact of the termination for TPE, which would require a further contribution of £6m from the firm, over and above the £42.5m already paid into the operating company.

The DfT had extended the TPE ERMA term until 19 September, following their conclusion that no event of default would have taken place had the pandemic not occurred, although the department and FirstGroup were working towards entering into a National Rail Contract before that date.

As at 31 March 2020, £80m remained of the group's contingent capital exposure to the TPE contract that had been provided for in the accounts as an impairment of right-of-use assets under IFRS16.

Following the new agreement, that impairment provision would be released, and would be credited to the income statement as an adjusting item in the group's accounts for the year ended 31 March.

The company said the TPE deal was the final termination agreement for its train operating companies, following agreements reached for a contribution on South Western Railway (SWR) of £33.2m, and of nil on the West Coast Partnership, as announced on 10 December.

Following the new agreement, the group said it was working towards agreeing directly-awarded National Rail Contracts for the West Coast Partnership, TPE and SWR with the DfT, which would come into effect by the end of their respective ERMAs, when the pre-existing franchise agreements would terminate.

The board said the settlement reduced the overall financial risk within the First Rail portfolio.

The ERMA for SWR was in place until the end of May, and the West Coast Partnership ERMA until the end of March 2022.

It said the latest indications from the DfT were that the new National Rail Contracts would have a core period to the end of May 2023 for TPE and SWR, and up to 31 March 2032 for the West Coast Partnership.

As it had previously announced, the existing Emergency Measures Agreement for Great Western Railway (GWR) had already been extended to June, and the underlying GWR direct award would run to 1 April 2023 with an extension option of up to one year.

There would be no termination sum on GWR given the contract was entered into after the transition to the Emergency Measures Agreements.

On 23 April, FirstGroup announced the proposed sale of First Student and First Transit, saying that £345m in cash would be retained for the discharge of certain liabilities, including for the rail termination sums over SWR and TPE.

At that time, made an assumption as to the TPE termination fee, and said on Tuesday that the final agreement now reached was about £50m better than that assumption.

The board said it was committed to keeping the group's balance sheet position under review, and in addition to its already-announced proposed return of value to shareholders it said it would consider the potential for making further additional distributions in due course.

"We welcome this agreement with the DfT, and are continuing to discuss a long-term National Rail Contract for TPE which will focus on passengers and operational performance, with a more appropriate balance of risk and reward," said chief executive officer Matthew Gregory.

"We are working closely with the Government and our other partners to ensure that TPE continues to provide the safe and vital services that are essential to communities across the North of England and Scotland."

At 0831 BST, shares in FirstGroup were up 0.2% at 73.6p.