Rail franchise award FirstGroup plc South Western - Monday 27 March 2017

FirstGroup plc
                                                            South Western
                                                                 Rail franchise award

                                                                Monday 27 March 2017

27 March 2017   FirstGroup South Western rail franchise award

Overview

▪ Delighted to be selected by the Department for Transport (DfT) to operate the South Western
  franchise for at least seven years from 20 August 2017

▪ £1.2bn will be invested to raise the quality of every aspect of train journeys on the South
  Western network, through state of the art trains, more seats and services, quicker journey
  times, improved stations and more flexible fare options

▪ Look forward to working with customers and community groups, employees, local authorities
  and Transport for London to give them a real stake in the future of rail travel in the region

▪ FirstGroup and 70:30 JV partner MTR have committed to a bid that will deliver the tangible
  improvements that customers and stakeholders have told us they want. That approach
  combined with realistic growth prospects, the DfT's efficient allocation of risk and sensible
  bonding requirements will produce a franchise that provides value for money for passengers
  and a fair deal for taxpayers

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The South Western franchise today

▪ Critical part of the national rail infrastructure
     − Services from London Waterloo to destinations throughout south-west London and
       counties in southern England
     − Key termini include Portsmouth, Weymouth, Exeter, Bristol, Reading. Also includes the
       Isle of Wight Island Line service
     − Significant commuter patronage but major inter-urban, regional and long distance as well

▪ Key facts (current franchise)
     − Passenger revenue (2015/16): £991m
     − Revenue CAGR (2007-16): 6.9%
     − Passenger journeys (2015/16): 235m
     − 1,700 trains per weekday
     − 370 trains
     − 186 stations
     − 4,800 employees

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Delivering for passengers

▪    State of the art trains
     − 750 new, spacious train carriages for the Windsor, Reading and London Suburban routes by December
       2020
     − 18 additional, fully refurbished trains (90 carriages) on the London-Portsmouth route from December
       2018
     − 52,000 more peak seats per day at London Waterloo (22,000 morning and 30,000 evening seats)
       compared to today's services by December 2020
     − Rest of our mainland fleet will be refreshed and will have free, more reliable Wi-Fi, at-seat charging
       points and free infotainment as well as real time travel and connection information screens

▪    Additional and faster services
     − Faster journey times from December 2018 to stations including Hounslow, Reading, Southampton,
       Bournemouth, Weymouth, Portsmouth and Salisbury
     − Double the service to both Reading and Windsor throughout the day; double the off-peak service
       between Southampton and Portsmouth and re-introduction of through services between Portsmouth,
       Southampton, Bournemouth and Weymouth to aid regional connectivity
     − Significantly improve weekend services with more than 400 extra Sunday trains across the network

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Delivering for passengers
▪    Easier tickets and fares
     − Introduce simpler fares with mobile and smart ticketing, including flexible season tickets and new lower
       fares for 16-18 year olds
     − Introduction of an easy-to-use ‘delay repay’ scheme for the first time on the network
     − New passenger app will be a key gateway to all travel options throughout the region

▪    Station improvement
     − £90m invested in our stations, including a major refurbishment at Southampton Central
     − Car parks will be extended at key locations with at least 1,500 extra spaces and new electric vehicle
       charging points
     − Station buildings used to host community projects and independent retailers
     − Passengers will also benefit from this summer’s London Waterloo platform extension project that is
       scheduled for completion within days of the start of the new franchise. Further capacity at Waterloo will
       be introduced at the end of 2018 when the former Waterloo International platforms are fully
       redeveloped and brought back into use

▪    People and communities
     − Increase engagement with customers, employees, local authorities and community groups to give them
       a real stake in the future of rail travel in their area
     − £2.6m annual fund to support community projects across the franchise from April 2020
     − Plan to introduce the biggest rail operator apprenticeship scheme in Britain
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Franchise process

▪ JV with MTR, operator of Hong Kong's highly-regarded mass transit system and with
  experience of operating London Overground and TfL Rail on behalf of Transport for London
     − Franchise Train Operating Company is owned 70:30 by FirstGroup and MTR respectively
     − All costs, risks and rewards shared accordingly
     − FirstGroup financial presentation: will consolidate 100%, with MTR share of profit and
       cash flowing out to 'non-controlling interests' in the accounts

▪ Disciplined bidding process maintained
     − Robust economic and cost assumptions, based on both JV partners' industry experience
       and external advice
     − Extensive analysis of growth and efficiency opportunities as well as downside risks
     − Rigorous governance process including internal and external challenge to our plans

▪ Bid submitted in September 2016

▪ DfT assessed bid on weighted price and quality scores

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Key franchise terms

▪ Operates from 20 August 2017 for seven years, with an extension option of up to 11 months
  at DfT discretion

▪ Robust exogenous risk mitigation mechanisms:
     − GDP protection – variable revenue support/sharing to extent that UK Gross Domestic
       Product deviates (beyond a 'nil band') from expected baseline throughout the franchise
     − CLE protection – variable revenue support/sharing to extent Central London Employment
       deviates (beyond a 'nil band') from expected baseline throughout the franchise

▪ Profit share mechanism with DfT

▪ Total premium of £2.6bn NPV in real terms* to Government

* Net present value of forecast premium payments over the seven year core franchise period, expressed in 2017/18 prices and
discounted using the DfT's 'real' discount rate of 3.5%

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Franchise financial commitments

▪ Loan facilities provided by JV shareholders to support working capital and capital investment:
     − Minimum agreed funding commitment of up to £30m – shareholder loan
     − £88m subordinated contingent loan facilities, of which 50% bonded

▪ £15m performance bond

▪ Cash received by franchise from season ticket payments backed by a bond of up to £80m

▪ All these commitments shared 70:30 between FirstGroup and MTR

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Financial returns

▪ Expecting to achieve margins comparable with the recent overall industry average

▪ Operating cash flow after capital expenditure is expected to be slightly positive in Year 1 and
  thereafter cash flow should largely reflect share of operating profit, subject to timing of capital
  expenditure
     − Of the capital invested, c.£80m will be directly funded by the franchise operator

▪ Expected working capital inflow of c.£100m principally relating to season ticket monies,
  treated as restricted cash

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Expected franchise timeline
                                          2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26
                                          Apr Mar Apr Mar Apr Mar Apr Mar Apr Mar Apr Mar Apr Mar Apr Mar Apr Mar

Franchise start (August 2017)
Waterloo modernisation
Class 442 trains introduced –
refurbished to 'as new'

New timetable: faster mainline journeys
and higher suburban frequency

More reliable Wi-Fi provision
Southampton Central upgrade
New Metro trains introduced
Smart ticketing
Infotainment on all trains
New timetable: greater suburban
capacity and faster

Station improvements completed
11 period extension at DfT discretion

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Next steps

                ▪ Customary 'standstill period' of ten days before award formally confirmed and
                  contracts signed

                ▪ Competition and Markets Authority required by law to carry out a 'phase one
                  review', as with other UK rail franchise awards

                ▪ Experienced team from across FirstGroup and MTR working on mobilisation plans

                ▪ Plans to meet local stakeholders in the coming months to consult on details of
                  customer benefits in their areas

  Confident our disciplined bidding process has developed a proposal that will deliver for
  South Western passengers, while achieving a good deal for the taxpayer and
  appropriate risk-adjusted returns for our shareholders

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Disclaimer

                Certain statements included or incorporated by reference within this presentation may constitute “forward looking statements"
                in respect of FirstGroup plc's operations, performance, prospects and/or financial condition. Such statements are based on
                our current expectations and beliefs concerning future events and are subject to a number of known and unknown risks and
                uncertainties that could cause actual events or results to differ materially from any expected future events or results referred
                to in these forward looking statements. Such statements are also based on numerous assumptions regarding our present and
                future strategy and the environment in which we operate, which may not transpire. We undertake no obligation to update any
                forward looking statements contained in this presentation or any other forward looking statements we may make.

                Nothing in this presentation should be construed as a profit forecast. Past performance cannot be relied upon as a guide to
                future performance and persons needing advice should consult an independent financial adviser.

                Nothing contained in this presentation is intended to constitute an invitation or inducement to engage in investment activity for
                the purposes of the prohibition on financial promotions in the UK Financial Services and Markets Act 2000. In making this
                presentation available, FirstGroup plc makes no recommendation to buy, sell or otherwise deal in shares of FirstGroup plc or
                in any other securities or investments whatsoever and you should neither rely nor act upon, directly or indirectly, any of the
                information contained in this presentation in respect of any such investment activity.

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