Metronet Update
1/4/2008
Invensys announces outcome of discussions with Metronet
Summary
As part of the arrangements being put in place following Metronet entering into administration last year, London Underground Limited (LUL) has decided to rescope the new signalling work for the Sub Surface Lines (SSL). This has resulted in a cash payment due today from Bombardier to Invensys of £95 million and a reduction in the Westinghouse Rail Systems Limited (WRSL) order book of £550 million in respect of work that would have been carried out mainly in the period 2010 to 2014. This development has provided Invensys with a significant opportunity to win the rescoped contract when it is retendered in accordance with public procurement rules. Invensys has the certified engineering capacity and the capabilities to meet LUL’s vision for the London Underground. Invensys’ other signalling work on the SSL and the Victoria Line, representing around £180 million of revenue, is unaffected by this change.
Ulf Henriksson, Chief Executive of Invensys, commented:
“We view this development as a great opportunity to demonstrate our commitment to LUL and share a vision with LUL of developing an efficient solution that meets the needs of LUL and the people of London. Our work so far on the SSL and Victoria Lines is on or ahead of schedule which demonstrates WRSL’s reputation for delivery.
“In addition to our ongoing involvement with LUL, I expect the Rail Group to make continued progress throughout its business with double digit revenue growth and materially improved margins over the next two years.
“For the Group as a whole, we have made further progress in the final quarter of our financial year and we remain confident that we have a sound platform for growth next year.”
Background and contractual changes
Following Metronet entering into PPP administration on 18 July 2007, Westinghouse Rail Systems Limited (WRSL), part of the Invensys Rail Group (IRG), has now reached a series of agreements in respect of all its contracts with Bombardier, a member of the Metronet consortium, for signalling on the London Underground.
WRSL’s existing contract with Bombardier for work to install new signalling on the Victoria Line will remain with Bombardier and is expected to be transferred intact as part of the statutory transfer of Metronet in Administration to ‘new’ Metronet. Work remains on schedule for delivery of the planned performance upgrades in 2012. WRSL’s signalling upgrade technology (Distance To Go – Radio) was successfully trialled during engineering hours on 7 February 2008 and is due to be trialled during passenger hours in summer 2008.
WRSL understands that, in order to reduce future maintenance and driver training, LUL has decided to rescope the new signalling work for SSL. As a result WRSL’s existing contract with Bombardier for SSL signalling has been rescoped and LUL has asked WRSL only to continue to work on changes to SSL’s existing signalling system to allow new trains to operate on those lines. WRSL’s existing contract with Bombardier will be novated to Metronet and amended to reflect the agreed rescoping, resulting in a cash settlement due today of £95 million from Bombardier. The revised contract will then be recommended for transfer to “new” Metronet. The new contract for the upgraded SSL signalling will be retendered in accordance with public procurement rules and WRSL fully intends to participate in the future retendering which LUL has strongly encouraged it to do.
The ongoing contracts are subject to the successful implementation of the statutory transfer scheme being proposed by the Administrator of Metronet, including approval of the High Court. LUL has agreed to recommend the proposed transfers and a copy of a joint LUL, Bombardier and WRSL press release is attached.
Tim O’Toole, Managing Director of London Underground, said:
“I look forward to the successful commissioning of WRSL’s new signalling system on the Victoria Line and to the completion of its work on the existing signalling system on SSL and hope WRSL will participate in the re-tender of the signalling system for SSL.”
Disposal
On 31 March 2008, IRG sold its North American rail logistics business Burco to a US company, Railroad Controls Limited, for $31 million. Burco was not core to IRG’s signalling and related systems operations. In the year ended 31 March 2007, Burco reported external revenue of $128 million and operating profit of $5 million. Burco will be treated as a discontinued operation in the Group’s results.
Overall financial implications
The cash payment from Bombardier to WRSL of £95 million will be treated as operating exceptional income in the Group’s income statement. However due to the rescoping of the planned new signalling work on SSL and prior to the retendering of this work, WRSL’s long term order book will be reduced by around £550 million in respect of work that would have mainly been carried out in the period from 2010 to 2014. IRG’s order book remains strong at around £700 million and IRG believes that there is a significant opportunity to win the rescoped contract for the SSL signalling system.
IRG expects that these changes to its contractual arrangements will have no effect on its expectation of achieving double digit revenue growth from continuing operations in 2008/09 and 2009/10. With the disposal of Burco and improved sales mix, IRG expects a material improvement in operating margin during this period.
For further information please visit www.invensys.com