FirstGroup
Annual Report 2021

Plain-text annual report

Connecting people and communities F i r s t G r o u p p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 1 FirstGroup plc Annual Report and Accounts 2021 We provide easy and convenient mobility, improving quality of life by connecting people and communities. FirstGroup is a leading private sector provider of public transport. Our services are a vital part of society – transporting customers for business, education, health, social or leisure purposes. We create solutions that reduce complexity, making travel smoother and life easier. Our businesses are at the heart of our communities, and the essential services we provide are critical to delivering wider economic, social and environmental goals. Cautionary comment concerning forward-looking statements This Annual Report and Accounts includes forward-looking statements with respect to the business, strategy and plans of FirstGroup and its current goals, assumptions and expectations relating to its future financial condition, performance and results. Generally, words such as ‘may’, ‘could’, ‘will’, ‘expect’, ‘intend’, ‘estimate’, ‘anticipate’, ‘aim’, ‘outlook’, ‘believe’, ‘plan’, ‘seek’, ‘continue’, ‘potential’, ‘reasonably possible’ or similar expressions are intended to identify forward-looking statements. By their nature, forward-looking statements involve known and unknown risks, assumptions, uncertainties and other factors which may cause actual results, performance or achievements of FirstGroup to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are not guarantees of future performance, and shareholders are cautioned not to place undue reliance on them. Forward-looking statements speak only as of the date they are made and except as required by the UK Listing Rules and applicable law, FirstGroup does not undertake any obligation to update or change any forward-looking statements to reflect events occurring after the date of this Annual Report and Accounts. We operate a fleet of almost 9,000 buses and rail vehicles across the UK We had revenues of approximately £4.3bn in the UK last year We carried almost 700,000 passengers per day in the UK, despite the pandemic Contents Strategic report Group overview Our markets Chairman’s statement Year in review Strategic framework Chief Executive’s report Financial summary Business model Business review Financial review Responsible business Stakeholder engagement Key performance indicators Climate-related financial disclosures Non-financial reporting statement Principal risks and uncertainties Viability and going concern We are a major employer, with more than 30,000 people in the UK Governance report Board of Directors Chairman’s report Corporate governance report Nomination Committee report Audit Committee report Board Safety Committee report Remuneration Committee report Remuneration at a glance Remuneration in context Annual report on remuneration Directors’ remuneration policy Directors’ report and additional disclosures Directors’ responsibility statement 04 06 08 10 12 13 17 18 20 28 35 46 52 57 61 62 72 76 80 82 97 99 106 108 112 113 117 132 142 145 Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Note to the consolidated cash flow statement – reconciliation of net cash flow to movement in net debt Notes to the consolidated financial statements Independent auditors’ report Group financial summary Company balance sheet Statement of changes in equity Notes to the Company financial statements Shareholder information Glossary 148 149 150 151 152 153 154 223 233 234 235 236 241 243 0101 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportStrategic report In this section, we explain who we are, our business model and strategic objectives, the markets in which we operate, key events in the year and how we performed against our KPIs. We also set out the principal risks that may affect our business and strategy. 02 FirstGroup Annual Report and Accounts 2021Strategic reportStrategic report Group overview Our markets Chairman’s statement Year in review Strategic framework Chief Executive’s report Financial summary Business model Business review Financial review Responsible business Stakeholder engagement Key performance indicators Climate-related financial disclosures Non-financial reporting statement Principal risks and uncertainties Viability and going concern 04 06 08 10 12 13 17 18 20 28 35 46 52 57 61 62 72 03 FirstGroup Annual Report and Accounts 2021Strategic reportA leading UK public transport operator We are a market leader in public transport in the UK through our First Bus and First Rail divisions, which generated more than 60% of our revenue in 2020/21. Following the sale of our North American contract divisions (see right), the Group has a strong platform on which to create sustainable value, and is well-positioned to help deliver wider economic, social and environmental goals at a key inflection point for public transport in the UK. Going forward, the Group will be a sustainable and cash generative business with a well-capitalised balance sheet, a strategy focused on the future and an operating model that will support an attractive dividend for shareholders at the appropriate time. As part of our Mobility Beyond Today sustainability framework launched during the year, we are formally committed to operating a zero emission First Bus fleet by 2035 and not to purchase new diesel buses after 2022. Furthermore, First Rail will help deliver the UK Government’s goal to remove all diesel-only trains from service by 2040. Aberdeen Stirling Glasgow Edinburgh Belfast Newcastle Dublin Manchester Bradford York Leeds Hull Sheffield Stoke-on-Trent Leicester Norwich Continuing operations: UK First Bus First Bus is the second largest regional bus operator in the UK, transporting hundreds of thousands of passengers a day. We serve two-thirds of the UK’s 15 largest conurbations, with a fifth of the market outside London. We are a leading operator in the majority of our markets, including major urban areas such as Glasgow, Bristol and Leeds. First Rail First Rail is the UK’s largest rail operator, with many years of experience running all types of passenger rail: long-distance, commuter, regional and sleeper services. We have four Department for Transport-contracted operations (Avanti, GWR, SWR, TPE) and two open access routes (Hull Trains and a new East Coast service launching in autumn 2021). 465,000 passenger journeys a day in 2020/21 (affected by pandemic 2019/20: 1.36m) 220,000 passenger journeys a day in 2020/21 (affected by pandemic 2019/20: 930,000) Fleet of 5,000 Fleet of 3,750 Cork Worcester Birmingham Oxford Swansea Ipswich buses operated rail vehicles operated Cardiff Weston-super-Mare Bristol Bath Slough Chelmsford London London Basildon Southampton Brighton Weymouth Portsmouth Penzance Truro Plymouth 14,500 employees 53 17,500 employees 420 depots and outstations stations operated See page 20 See page 22 Avanti West Coast (Avanti) Great Western Railway (GWR) South Western Railway (SWR) TransPennine Express (TPE) Hull Trains First Bus operations 04 FirstGroup Annual Report and Accounts 2021Strategic reportNorth American operations On 21 July 2021 we completed the sale of our North American contract divisions First Student and First Transit to EQT Infrastructure for $4.6bn. Through this transaction, which followed a strategic review by the Board of all options to unlock value and a comprehensive and competitive sale process, the Group will return value to shareholders, address its longstanding liabilities and make a substantial contribution to its pension schemes, while ensuring the ongoing business has the appropriate financial strength and flexibility to deliver on its goals. Greyhound remains non-core and we continue to pursue all exit options for it while de-risking its liabilities and actively managing its substantial property portfolio for value. “The sale of First Student and First Transit recognises the full strategic value for these long-term businesses.” David Martin, Chairman Continuing operations: non-core Discontinued operations 10,000 passenger journeys a day in 2020/21 (affected by pandemic 2019/20: 40,000) Fleet of 1,200 buses operated 2,500 employees First Transit First Transit is one of the largest private sector providers of public transit management and contracting in North America. See page 27 First Student First Student is the largest provider of student transportation in North America – twice the size of the next largest competitor. Industry-leading safety programmes, strong customer relationships and service record are key differentiators. See page 26 Adjusted operating profit1 (as % of Group) Number of employees (as % of Group) Greyhound The only national operator of scheduled intercity coaches in the US, with a unique nationwide network and iconic brand. See page 25 Key figures Revenue (as % of Group) First Bus First Rail Greyhound First Student – discontinued First Transit – discontinued 10% 53% 5% 18% 14% First Bus First Rail Greyhound First Student – discontinued First Transit – discontinued 15% 43% 0% 22% 20% First Bus First Rail Greyhound First Student – discontinued First Transit – discontinued 16% 20% 3% 42% 19% 1 Greyhound adjusted operating loss of £(10.3)m in FY21; Group items of £(32.5)m allocated to divisions. 05 FirstGroup Annual Report and Accounts 2021Strategic reportFor more information on the market environment for each of our divisions, please go to the Business review section starting on page 20. Our markets Public transport networks are the lifeblood of vibrant towns and cities, and they are essential to achieving global net-zero carbon ambitions. Although the pandemic reduced demand in all our markets, and it is too early to predict how that demand will return, our services are essential to restoring economic growth, combating climate change, and improving quality of life. This was underlined throughout the last year by the support given to us by local and national governments to ensure we could continue to run vital routes and networks for key workers. The UK Department for Transport (DfT) has published major policy strategies for both bus and rail in spring 2021, demonstrating its commitment to public transport. Our services make a vital contribution to the economy (worth a direct Gross Value Added (GVA) contribution of £1.4bn in 2019/20) – for every £10 of GVA directly generated by FirstGroup in the UK, a further £18 of GVA is supported in the wider economy.1 Our partners have increasingly clear sustainability ambitions. These, and our deep stakeholder engagement and local expertise, make us the partner of choice for innovative and sustainable transport, accelerating the transition to a zero carbon world. As society seeks to recover from the pandemic and ‘Build Back Better’, we will play a key role in providing more environmentally sustainable, value for money transport connections. Liveable cities Green jobs Public transport jobs are green jobs – for our own employees and those in the public transport industry supply chain – and they are becoming even greener as we invest in the latest zero emission technologies and innovation. The UK Government predicts that zero emission vehicles could support 40,000 jobs by 2030, with exports of new technologies having the potential to add £3.6bn GVA by 2030. For every ten jobs directly generated by FirstGroup in the UK, a further 11.5 jobs are supported in the economy. Also, we support a range of small and medium enterprises – around a tenth of the £1.86bn we spent on procurement from UK-based firms in 2019/20 was spent on small firms, supporting more than 1,500 full-time equivalent (FTE) jobs in these businesses.1 11.5 jobs supported for every ten we directly employ £1.9bn FirstGroup spend on UK supply chain Nearly 85% of the UK population live in towns and cities. This gives rise to a demand for easy-to-use public transport services in urban areas in response to congested roads, deteriorating air quality and higher costs of motoring. Many urban dwellers are choosing not to drive at all. As economies re-open, low-carbon public transport that reduces congestion and improves air quality will be crucial to sustaining healthy, connected communities. Poor air quality, made worse by congestion, has a particular impact on the health of our communities and many urban areas are starting to restrict the most polluting vehicles and prioritise public transport to address the problem. We will continue to innovate and invest in our fleets in order to help improve air quality in the areas where we operate. 75 cars could be taken off the road by passengers using one First Bus double deck service Making the shift – read about our sustainability aims for: More people using bus and rail services, increasing ridership and taking private car journeys off the road on page 36. 1 Data from CEBR study of FirstGroup social and economic value to the UK. 0606 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021 Green jobs Public transport jobs are green jobs – for our own employees and those in the public transport industry supply chain – and they are becoming even greener as we invest in the latest zero emission technologies and innovation. The UK Government predicts that zero emission vehicles could support 40,000 jobs by 2030, with exports of new technologies having the potential to add £3.6bn GVA by 2030. For every ten jobs directly generated by FirstGroup in the UK, a further 11.5 jobs are supported in the economy. Also, we support a range of small and medium enterprises – around a tenth of the £1.86bn we spent on procurement from UK-based firms in 2019/20 was spent on small firms, supporting more than 1,500 full-time equivalent (FTE) jobs in these businesses.1 11.5 jobs supported for every ten we directly employ £1.9bn FirstGroup spend on UK supply chain Demographics Many parts of the communities we serve – those in education, retired or those unable to drive themselves – have always been more reliant on public transport and these groups are growing, in part due to an aging population, increased urbanisation and a greater desire to make sustainable travel choices. While some may reassess the frequency and purpose of their travel habits as we emerge from the pandemic, our customers will always want to visit friends and family affordably, students will still need to go to school or university and many in the global workforce will still need to commute to jobs that cannot be done at home. Indeed, early indications are that there is an increased demand for rail and bus travel for leisure, even as commuting takes longer to recover. These emerging patterns can be turned to our advantage: a smoother spread of passenger demand through the day would enhance the efficiency of our fleet usage. Smarter customer solutions Our transport systems are mirroring the world at large in becoming smarter, more connected and increasingly demand responsive. The UK Government’s recent National Bus Strategy (NBS) and Rail White Paper rightly focus on the importance of flexible, easy-to-understand and integrated fares to encourage the use of rail and bus services. We work with our industry and government partners to offer more convenient and innovative experiences for customers in the shape of flexible ticketing, real-time travel info, and mobile or contactless ticket options. We are leaders in the operation and maintenance of electric and autonomous vehicles, while continuing to invest in the technology and services to support connected and on-demand travel. Climate change The climate emergency is the greatest long-term challenge of our time, and requires co-operation and action on a local, national and international level. The vital role of public transport has never been clearer in helping to address the challenges of climate change, facilitating modal shift from private cars to buses and trains with lower per-passenger mile environmental impact. We are committed to help deliver a more sustainable future for the communities we serve and accelerate the transition to a zero carbon world. To that end, we are trialling, testing and investing in new technologies to transition our own vehicles to zero carbon – for instance, we estimate that by 2035, First Bus services will emit just 3% of their current carbon dioxide emissions. Carbon emissions in UK transport sector, by type (%) Cars Vans HGVs Buses Trains Other 60.6 17.4 17 2.7 1.5 0.8 Source: CCC Sixth Carbon Budget 2019, Surface Transport: Emissions by transport type. See pages 35 to 51 for more information on our Group-wide strategic framework for sustainability, and pages 57 to 60 for our latest carbon and energy performance. Zero carbon – read about our sustainability aims for eliminating the emissions associated with our operations on pages 38 and 39. Stronger economies Thriving local economies rely on public transport. The UK Government has committed to ‘levelling up’ towns and cities which have been ‘left behind’, by increasing funding and other direct investment. Examples of this government funding include the £4.8bn Levelling Up Fund, which will invest in infrastructure such as town centres and local transport, and the £1bn Towns Fund. Our reach as a national operator means we play a direct role in supporting sustainable economic activity. FirstGroup directly provides employment to people living in 355 of the 374 local authority districts in the UK, including areas of high deprivation, or where other employment opportunities are more limited. For instance, in Scotland, Glasgow is the most deprived local authority as well as our most significant employee hub in the country, where we employ 800 workers from the city, supporting £33.2m in associated GVA for the city.1 0707 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportChairman’s statement This has been a very active and significant year in FirstGroup’s evolution. This time last year I said that concluding the process to sell First Student and First Transit was our core objective, as the best route to enhance the long-term value of our businesses, while respecting our commitments to all our stakeholders. I was very pleased we completed the sale of these businesses in July 2021 to EQT Infrastructure for a full strategic value, which looks beyond the pandemic and reflects the high quality and long-term nature of these attractive assets. The sale process The sale followed a comprehensive and competitive process overseen by the Board, in order to seek the best possible price for First Student and First Transit, which was well-publicised for more than a year. Through the sale process, the businesses were widely marketed, and the Group and our financial advisers actively engaged with more than 40 potential buyers. In the context of a competitive process to seek the most attractive proposal, an earnout structure was agreed for First Transit which would benefit continuing shareholders in the Group. This reflects First Transit’s strong prospects for future performance, not least in light of recent ambitious plans for investment in infrastructure and public transportation in the US. Under the earnout FirstGroup will receive up to a further $240m (c.£175m), payable on the third anniversary of the sale (following an independent valuation), or sooner if the business is sold by EQT Infrastructure to a third party. The earnout has been initially fair valued at $140m for accounting purposes, applying discounted cash flow methodology. Shareholder approval As a substantial transaction, the sale required approval of a majority of shareholders in general meeting, which was received in May. As noted at the time, I and the whole Board take very seriously our responsibility to understand the different views and perspectives of investors, and recognise that a number of shareholders did not vote in favour of the resolution. As FirstGroup enters a new and exciting phase in its development, the Board and I look forward to continuing an open and constructive dialogue with all shareholders as we look to the future. Use of proceeds As previously set out, the Group has a number of longstanding liabilities. In determining the use of proceeds of the sale the Board has sought to balance returning value to shareholders while also making a necessary and substantial contribution to the UK pension deficit, reducing its debt (including repayment of the Covid Corporate Financing Facility (CCFF) to the UK Government) and addressing other longstanding liabilities. In parallel, the Board carefully considered the appropriate capital structure and distribution policy for the ongoing Group, and it concluded that a well-capitalised, de-risked balance sheet will provide FirstGroup with flexibility to navigate end-market uncertainty at this point in the pandemic recovery, pursue its strategy going forward and support a progressive annual dividend commencing during the financial year ending March 2023, as described in more detail below. The Board has announced its intention to increase the proposed return of value to shareholders from the initial £365m to £500m (equivalent to c.41p per share) in light of the higher cash proceeds received due to the final adjustments for working capital and debt and debt-like items in the First Student and First Transit sale, the greater clarity for First Rail resulting from agreement in May of the Group’s final rail franchise termination sum and the signing of the National Rail Contracts for SWR and TPE, as well as improving cash flow expectations for the continuing Group as a result of further easing of pandemic restrictions in our core UK bus and rail markets. The estimated pro forma adjusted net debt of c.£100m for the ongoing Group following the sale and uses of proceeds is therefore unchanged. The Board remains committed to keeping the balance sheet position of the ongoing Group under review and will consider the potential for further additional distributions to shareholders in due course, following crystallisation of the First Transit earnout, resolution of the legacy liabilities related to Greyhound and the potential release of monies from pension escrow (up to £117m). The Board also notes the capacity to increase gearing over time, as end market conditions and hence business performance improves. The proposed return of value is expected to be undertaken in the autumn of 2021, with the distribution mechanism to be announced in due course in consultation with shareholders. David Martin Chairman “ The ongoing Group has significant opportunities ahead of it as a focused UK public transport leader and I look forward to the future with confidence.” 08 FirstGroup Annual Report and Accounts 2021Strategic reportThe future of the Group FirstGroup has a clear purpose to provide vital transport services that connect communities – taking customers where they need to go for business, education, health, social or recreational purposes. FirstGroup’s public transport services offer efficient, cost effective and convenient travel options for passengers, both within and between the UK’s congested towns and cities. Public transport services are also critical long-term green infrastructure, as demonstrated during the coronavirus pandemic, and are fundamental to achieving the goals of the communities they serve, the economy and wider society. The connections offered by the ongoing Group’s services are a critical enabler of vibrant local economies and can play an important role in the UK’s regional ‘levelling up’ agenda. Of course, Westminster and the devolved governments in other parts of the UK have also recognised that transitioning more travellers to low and then zero carbon transport services is also critical to meeting the challenge of climate change, and have put in place substantial funding and strategies which will enhance our investments in our business in the years to come. In addition to the Group’s services being a critical enabler for society meeting its broader environmental, social and governance (ESG) objectives, the Group’s own Mobility Beyond Today sustainability framework commits to making progress across a number of key areas. As a transport operator, the most important element is the Group’s commitments to a zero emission trajectory for its vehicle fleets (see the First Bus and First Rail business reviews for more detail), which will increase its EU Green Taxonomy eligibility year by year. Taken together, I believe that the increasingly supportive UK policy backdrop and the growing focus on innovating to enhance passenger convenience and the sustainability of our business points to a potential inflection point for the ongoing Group’s growth potential. The Board As a natural consequence of the sale of First Student and First Transit and as the Group enters a new strategic phase, the composition and background of the Board will evolve. Matthew Gregory has informed the Board of his intention to step down as Chief Executive and as an Executive Director at the conclusion of the AGM on 13 September 2021. Accordingly, Matthew will not be seeking re-election at the AGM. I will become interim Executive Chairman at the conclusion of the AGM until a permanent Chief Executive is appointed. A comprehensive search is underway to select a new Chief Executive for the Group. Matthew and I will work closely together to ensure a smooth handover process. Given his knowledge and experience of the Group, Matthew will also be available to support me over the coming months, including with certain matters associated with completing the transition to the ongoing UK-focused Group. On behalf of the Board I would like to thank Matthew for his significant contribution to FirstGroup since joining in 2015, initially as CFO and then stepping forward to take up the post of Chief Executive in 2018. Matthew has been instrumental in delivering the Board’s strategy to rationalise our portfolio of businesses, culminating in the transformational sale of First Student and First Transit. Matthew was also responsible for delivering margin improvements particularly in First Student and First Bus, as well as First Rail’s successful Avanti West Coast bid, which restored FirstGroup to its leading position in UK passenger rail. Under his leadership, the Group adeptly responded to the unprecedented challenges created by the coronavirus pandemic. He leaves FirstGroup a more focused, resilient and flexible organisation, well positioned to benefit from the many opportunities ahead. On behalf of the Board, I would like to thank Matthew for all that he has achieved and wish him every success for the future. Jane Lodge and Peter Lynas joined the Board as Non-Executive Directors on 30 June 2021, while David Robbie stood down from the Board on the same date. On behalf of the Board I would like to thank David for his significant contribution over the past three years, including acting as interim Chairman for a period in 2019. I would also like to welcome Jane and Peter to the Board. They join at a pivotal time and I am confident that their considerable experience and knowledge will enable them both to make a strong contribution to the Group. I am also pleased to welcome Anthony Green, who was elected Group Employee Director and appointed to the Board on 15 September 2020. He has been a First Bus employee since 2009 and brings an important perspective to Board discussions. We will continue to oversee an orderly and appropriate evolution of the Board in order to ensure it has the right balance of skills, experience and diversity for the Group’s future needs. Our people The effects of the coronavirus pandemic will continue to be felt throughout our business and the communities we serve for some time to come. During the year the Group has continued to respond to the evolving situation swiftly and decisively. I am particularly proud of the dedication and fortitude shown by all our employees during this immensely challenging time. They have more than risen to the challenges presented and stepped up to support our customers and communities each and every day. We are deeply saddened by the loss of employees in each of our divisions due to coronavirus. On behalf of the Board and everyone at FirstGroup, I offer our sincere condolences and ongoing support to their families, friends and colleagues. Conclusion There remains a fundamental need for people to travel safely and conveniently for business, education, social or recreational purposes which is essential to sustainable and thriving economies and communities. The vital role of public transport in the UK has never been clearer and following the sale, FirstGroup is in prime position to deliver on its goals, with a well-capitalised balance sheet and an operating model that will support an attractive dividend for shareholders commencing during the financial year ending March 2023. The ongoing Group has significant opportunities ahead of it as a focused UK public transport leader and I look forward to the future with confidence. David Martin Chairman 27 July 2021 09 FirstGroup Annual Report and Accounts 2021Strategic reportYear in review Our businesses are at the heart of our communities, and constantly evolving for our customers. Some key moments from a landmark year are highlighted here. March 2020 ■ Rapid escalation of the coronavirus outbreak in our key markets, leading to government-imposed lockdowns and a corresponding reduction in service volumes for our businesses ■ Emergency Measures Agreements (EMAs) put in place by the UK Government for train operating companies May 2020 ■ New developments introduced to help First Bus passengers safely plan their journey including a live capacity tracking and passenger counting facility June 2020 ■ New direct award agreement signed to ensure continuity of GWR services for at least three years ■ Action for Children UK charity partnership wins at Business Charity Awards August 2020 ■ First Transit was selected as the autonomous vehicle provider for the Fort Carson Smart Transportation Testbed ■ Avanti operated the UK’s first fully wrapped Pride train staffed entirely by an LGBTQ+ crew ■ Hull Trains resumed operations after suspension during the first UK-wide lockdown; the services would be suspended again during the subsequent two lockdowns April 2020 July 2020 September 2020 ■ Announcement of UK Government funding for bus industry to operate crucial services for key workers through the pandemic ■ Liquidity further enhanced through £300m issuance under the UK Government’s CCFF scheme ■ GWR names train after NHS fundraiser Captain Sir Tom Moore ■ Commitment announced to operate ■ First Student expands Canadian a wholly zero emission bus fleet across the UK by 2035 and not to purchase any new diesel buses after December 2022 ■ Further innovations added for First Bus passengers, including capacity tracking of wheelchair spaces and the ability for key workers to book seats on vital bus services ■ UK’s largest electric Park&Ride bus fleet launched in York operations by acquiring WUBS Transit in Ontario ■ Janette Bell appointed as Managing Director of First Bus, succeeding Giles Fearnley ■ New arrangements put in place for operation of rail companies, with Emergency Recovery Measures Agreements (ERMAs) succeeding EMAs for Avanti, SWR and TPE ■ Anthony Green joined the Board as Group Employee Director 10 FirstGroup Annual Report and Accounts 2021Strategic reportOctober 2020 ■ World’s first hydrogen-powered double-decker bus launched in Aberdeen ■ First electric bus since the 1950s introduced in Glasgow; first ever zero emission bus fleet for West Yorkshire launched in Leeds ■ Three First Bus employees recognised in Queen’s Birthday Honours for services to the community during the pandemic November 2020 ■ First Transit partners with Moovit for Mobility as a Service (Maas) solutions January 2021 ■ First Student and First Transit partner with NextEra Energy to electrify school and municipal transit fleets in North America ■ First Transit partners with Lyft on management of a bike share scheme in Portland, Oregon ■ First Bus completes the retrofit of 1,000th mid-life bus to the Euro VI low emission standard December 2020 February 2021 ■ FirstGroup named in the Clean200 list of cleanest public companies worldwide ■ Partnership announced with Arrival to become the first operator of their ground-breaking zero emission bus on existing routes ■ Avanti launches a smartcard for West Coast customers ■ FirstGroup becomes the first UK-based transport operator to sign up to support the Task Force on Climate-related Financial Disclosures (TCFD) ■ Claire Mann appointed as new Managing Director of SWR ■ Agreement reached on termination sums allowing Avanti and SWR to transition from previous franchise model to new directly-awarded contracts ■ Three major properties sold for gross proceeds of $137m as part of programme to rationalise Greyhound’s property portfolio March 2021 ■ First Glasgow announce plans to introduce £9m fleet of 22 new electric vehicles to the city in time for the UN COP26 Climate Change Conference in November 2021 ■ First Rail launches evo-rail 5G Wi-Fi service providing a pioneering on-board bandwidth increase April 2021 ■ Sale of First Student and First Transit announced, together with plans for using the proceeds to return value to shareholders; make a substantial contribution to the UK pension deficit; reduce debt (including repayment of the CCFF loan); and address other longstanding liabilities ■ FirstGroup becomes first UK public transport operator to commit to an ambitious science-based target on net-zero May 2021 ■ FirstGroup signs new National Rail Contracts (NRCs) for SWR and TPE June 2021 ■ Flexible season tickets launched by our train companies ■ Jane Lodge and Peter Lynas appointed to the Board; David Robbie stands down July 2021 ■ Sale of First Student and First Transit to EQT Infrastructure completed ■ Proposed return of value to shareholders increased to £500m ■ Matthew Gregory informs Board of intention to step down as Chief Executive after AGM. 11 FirstGroup Annual Report and Accounts 2021Strategic reportOur future strategic framework A key milestone in our strategy to unlock value for shareholders was achieved this year with the sale of First Student and First Transit. Going forward, the Group’s services will have a fundamental role to play in delivering the UK’s economic, social and environmental objectives, as well as providing a vital service that is an essential part of the daily lives of many people in communities across the UK. Following the sale of First Student and First Transit, the Board expects FirstGroup to be a strong platform for further value creation at a key inflection point for the public transport industry. Going forward, our platform for future value creation will support our clear social purpose: Investment case for the ongoing Group Our clear social purpose 1 2 3 4 5 Leading positions in bus and rail transport in the UK Inflection point for growth, underpinned by supportive government and social policies Digital innovation to attract more customers, enhance business efficiency and flexibility First Bus: ready to complete trajectory to 10% margin post-pandemic First Rail: well placed for lower risk, long-term and cash generative rail operations 6 Opportunities from adjacent markets in UK bus and rail and in new geographies over time Public transport networks are the lifeblood of vibrant towns and cities; essential drivers of local economies and vital to achieving global net-zero carbon ambitions. ■ Public transport has proved its essential role at the heart of communities – we are critical long-term green infrastructure, shown by both Government and stakeholder support throughout the pandemic ■ By connecting people and communities we provide more equitable access to jobs, education, services and people, which is key to economic vitality, growth and quality of life in areas we serve ■ The UK Government’s commitment to becoming net-zero carbon by 2050 requires zero emission public transport solutions. We are vital to combatting climate change, reducing congestion, and helping to lower carbon and air emissions by taking private car journeys off the roads 7 Critical enabler of society’s ESG goals, accelerating the transition to a zero carbon world ■ We are a major employer and part of the green jobs revolution – public transport jobs are green jobs, and increasing as we invest in the latest zero emission technologies and innovation ■ Both customers and partners have increasingly clear sustainability ambitions. Our deep stakeholder engagement and local expertise mean we are the partner of choice for safe, innovative and sustainable transport, accelerating the transition to a zero carbon world. 12 FirstGroup Annual Report and Accounts 2021Strategic reportChief Executive’s report Matthew Gregory Chief Executive “ In this landmark year, FirstGroup has more than risen to its challenges. We have delivered on our strategic objectives, protected our financial stability, and supported our communities with essential services while helping to shape the future of public transport in the UK.” The Group has faced a number of significant challenges in the past year and has responded quickly and robustly. As a transportation business, all of our operations were heavily affected by the actions taken by governments and society to respond to the coronavirus pandemic. We stayed close to our customers and stakeholders, adapted our services flexibly in accordance with their needs, and maintained our financial stability. Alongside this, we also progressed our strategic plans, culminating in the sale of First Student and First Transit which completed in July 2021. This transformational transaction refocuses the Group on our leading public transport operations in the UK and sets the scene for long-term sustainable value creation. Protecting our passengers and employees Our first priority remains the health and safety of the Group’s passengers, employees and communities. We continue to follow all appropriate public health authority guidance and have adopted and also developed best practice in areas such as enhanced cleaning and decontamination of vehicles, depots and terminals. We take great pride in the way our colleagues and teams across the Group have provided direct assistance and support to those most in need, right at the heart of our communities. Very sadly, we have lost employees in the year as a result of the pandemic, and we offer our deepest condolences to their loved ones and colleagues. Adapting services to support our customers and communities By the start of this financial year, the Group had experienced an average passenger volume reduction of c.90%, with international lockdowns in place and all North American schools we served closed. However, many of our customers and government partners worked with us to adjust capacity to fit demand while preserving our ability to restore service quickly as required. Since then, passenger activity has increased in all divisions, albeit at differing rates, but remains substantially below pre-pandemic levels in many areas. Across all divisions we adapted rapidly, both operationally and commercially, to support our customers and communities. We have reduced our fixed cost base wherever possible and rigorously focused on variable cost and capital expenditure control to mitigate the impact of lower revenues. Operational highlights – continuing operations Given the impact of social distancing rules and government travel guidance on passenger volumes, operating our UK bus and rail networks at scale during the year would have been commercially unviable and many could have ceased. However, recognising the essential nature of public transport connections to local economies, Westminster and the devolved governments put in place comprehensive emergency measures to procure continuity of critical rail services and to maintain industry-wide bus capacity at a time of significantly reduced demand and with social distancing restrictions in place. First Bus and other regional bus operators have effectively provided their assets and expertise to operate a government-funded bus system over the last financial year on a broadly cash break-even basis. The Government has recently announced a recovery funding package of £226.5m which will reinforce delivery of local bus services across England as passenger numbers rebuild. The funding package will support the industry’s transition away from the COVID-19 Bus Service Support Grant (CBSSG) programme which has been in place since May 2020 and will formally come to an end in England on 31 August 2021 with the introduction of the new package. We are encouraged that passenger volumes have recovered to c.60% of pre-pandemic levels in recent weeks, particularly since social distancing restrictions on public transport began to be eased from early April. Meanwhile we have continued to enhance the ease, convenience and value for money of our services through further digitisation, and our increased capability to analyse our passenger numbers and routes in real-time will stand us in good stead as we realign our routes and networks to post-pandemic demand conditions. We are also working hard with local transport authorities in our areas to implement the National Bus Strategy which was announced in March, and we continue to work towards our commitment of a zero-emission bus fleet by 2035. For example, we have started to transform our Glasgow Caledonia depot into the largest electric vehicle charging hub in the UK, with the first phase to complete ahead of the UN COP26 Climate Change Conference which takes place in Glasgow in November 2021. 13 FirstGroup Annual Report and Accounts 2021Strategic reportChief Executive’s report continued Throughout the year our First Rail contracts were operated under the terms of the emergency arrangements put in place by the UK Government in response to the pandemic. In May 2021 we agreed the final payment with the DfT to terminate our pre-existing franchise contracts by agreement, which then enabled TPE and SWR to agree National Rail Contracts later that month. These run to 2023 with potential extensions to 2025 and are the first contracts awarded under the Government’s new model offering a more appropriate balance of risk and reward for rail operators, passengers and the taxpayer. Under the new agreements, operators no longer take passenger revenue risk, instead receiving a fixed fee for operating the service, with the opportunity to earn additional fees based on performance. We are now discussing similar contracts for Avanti (potentially extending to 2032) and for GWR. The final agreement reached with the DfT for the TPE franchise termination was c.£50m better than the assumption made by the Group in setting aside cash for the discharge of the rail termination sums at the time of the announcement of the First Student and First Transit sale. We welcomed the publication in May 2021 of the UK Government’s longer-term ambitions for the future of the UK rail industry. As the largest UK passenger rail operator, we look forward to helping to bring to reality the Williams-Shapps Plan for Rail, which puts the expertise, innovation and experience of private sector rail operators at the heart of the new model for improving service delivery for passengers in the coming years. We are proud that all our train operating companies delivered top marks on all the passenger service metrics assessed to-date under the emergency measures regime. Greyhound volumes have improved modestly since the start of the calendar year and the business is now operating just over half of its pre-pandemic mileage. As the market leader, we responded to the very challenging conditions with capacity adjustments aligned to demand, yield management actions and $60m in fixed cost reductions to maintain a level of service for passengers, while our competitors withdrew from the market. Negotiations with state agencies to secure CARES Act emergency grants for vital intercity bus connections have been modestly ahead of our expectations and further funding is expected to come through under the Biden administration’s recent legislative activities. In May 2021 we announced the closure of Greyhound Canada after more than a year of services being suspended due to the pandemic. Greyhound Canada made significant outreach efforts to the provincial and federal government to request financial support for the industry, but operations could not continue in the absence of that financial support. In December 2020 we announced the sale of three surplus Greyhound properties for gross proceeds of $137m and continue to actively monetise the remainder of the property portfolio. Greyhound remains non-core and sale discussions are ongoing, but the process has been affected by the pandemic’s impact on this passenger volume-based business. As clarity improves in its end-markets, we will look to exit the business. Operational highlights – discontinued operations The proportion of First Student’s bus fleet operating either full service or on a hybrid basis increased, to 87% of pre-pandemic levels in early June before schools in some regions began closing for the summer holidays. During the year most of our schools where we were not fully operational have been supporting us with agreements to make either full or partial payments to ensure that we are in a position to deliver increased services rapidly when needed. Between services in operation and these agreements with our customers, we secured c.71% of our pre-pandemic home-to- school revenue in the year. Alongside this activity we also achieved a good outcome to the bid season, with retention rates in line with our expectations of 88% of ‘at risk’ contracts or 95% of the whole contract portfolio, and several important new business wins. Most of First Transit’s contracts are to provide essential services, so provision during the year was not reduced as significantly as in some other parts of the Group. Where service levels did change we worked closely with clients to agree contractual amendments. While the rate of recovery varies by sub- segment, overall First Transit operated c.70% of services and recovered c.86% of revenues in the year compared with pre-pandemic levels. The division’s ‘at risk’ contract retention rate was 89% in the year and it delivered a number of new business wins across both traditional markets and new mobility services. Group financial performance was significantly ahead of our expectations at the pandemic’s outset Revenue from continuing operations was in line with the prior year at £4,641.8m (2020: £4,642.8m). Excluding the new Avanti contract, revenue decreased by £567.4m as a result of the pandemic. Adjusted operating profit from continuing operations was £101.9m (2020: £69.7m), an increase of £16.9m excluding the incremental Avanti contribution of £15.3m. For First Bus and First Rail this largely reflects the terms of the UK Government-procured emergency arrangements to enable socially distanced travel, while in Greyhound it comprised the drop through of lower revenues offset by reduced variable costs, the substantial fixed cost actions and CARES Act grants for vital bus service connections. Reduced activity levels due to the pandemic in the discontinued operations were mitigated by cost savings, better than expected revenue recoveries from customers and higher service levels in the final quarter, with the businesses contributing £2,203.2m (2020: £3,111.8m) in revenue and £107.5m (2020: £187.1m) in adjusted operating profit to the Group. Statutory operating profit from continuing operations was £224.3m (2020: loss of £(215.2)m) reflecting £122.4m of net adjusting items compared with £(284.9)m in 2020, and statutory EPS was 6.5p (2020: (27.0)p). The Group’s new alternative performance measure of Rail-adjusted EBITDA (First Bus and non-contracted First Rail EBITDA, plus contracted Rail net attributable earnings, minus central costs) was £87.1m in the year. Substantial cash flow in period, significantly ahead of expectations The Group’s adjusted cash flow of £284.0m (2020: £97.4m) was well ahead of initial expectations, reflecting our actions to maintain liquidity and financial strength despite the passenger volume reductions. Some capital expenditure was deferred, which in the case of the discontinued operations was partially reflected in the terms of the sale. First Bus anticipates c.£90m in capital expenditure in FY22, some of which was deferred from the last financial year, with £30m spent in FY21. The Group also secured £109.5m in cash proceeds from the sale of properties in the year, principally from Greyhound. 14 FirstGroup Annual Report and Accounts 2021Strategic reportStable liquidity and balance sheet reinforced Adjusted net debt (bonds, bank debt and other debt net of cash (excluding First Rail ring-fenced cash) before IFRS 16 leases) reduced by £76.6m in the year to £1,414.3m (2020: £1,490.9m). IFRS 16 lease liabilities (which are predominantly First Rail rolling stock leases which expire when the relevant operations cease) decreased to £1,850.0m (2020: £2,381.9m), with the majority of the decrease relating to payments made under the rolling stock lease agreements. Taken together, reported net debt including IFRS 16 lease liabilities decreased to £2,625.8m (2020: £3,260.9m). Net debt: EBITDA was 1.6x (2020: 1.3x) on the basis relevant to the Group’s bank covenant tests, comfortably ahead of the enhanced headroom agreed with our lenders last November. As at 27 March 2021 the Group’s undrawn committed headroom and free cash (before First Rail ring-fenced cash) was £1,130.6m (March 2020: £585.7m), reflecting cash generation in FY21 and new facilities entered into during the year, notably a £300m bridge to the CCFF and new finance leases and supplier credit facilities. Since the last liquidity update in December 2020, the Group has repaid the £350m April 2021 bond mainly funded from drawdown of the £250m bridge facility entered into in March 2020, secured £102m in cash proceeds from the sale of Greyhound properties announced at the end of December 2020, while operating cash flow in the second half of the financial year was positive and ahead of our expectations. In March the Group renewed the £300m in commercial paper issued through the UK Government’s CCFF scheme for a further year and secured a £300m committed bridge facility from the CCFF maturity in March 2022, thereby providing adequate financial resources for the short to medium term. Following receipt of the proceeds of sale of First Student and First Transit, the Group has begun the process of settling the majority of its outstanding financial indebtedness, including repaying the CCFF and cancelling the £300m committed bridge facility. Following all the funds flows previously outlined, the ongoing Group expects to have pro forma adjusted net debt of c.£100m. Momentum to build during current financial year as sale completes and pandemic travel restrictions diminish Overall, we expect our financial performance in the current financial year to provide a strong foundation for delivering the Group’s previously announced financial policy framework (as set out in the Financial review on page 28) – including commencing regular dividend payments during FY23. First Bus’ contribution to adjusted operating profit in FY22 will be dependent on the pace at which passenger volumes build back. First Rail earnings in FY22 will be driven by the contractual arrangements now in place. Greyhound is expected to exceed its FY21 contribution in light of encouraging recent volume trajectory. Central costs are expected to be c.£5m lower in FY22, reflecting half a year of progress towards the £10m per annum reduction target following completion of the First Student and First Transit sale. Further ahead, the Group has committed to commencing paying a regular dividend during FY23, supported by our expectations for a 10% margin in First Bus on increasing revenues, as passenger volumes return to between 80-90% of pre-pandemic levels over the first year after restrictions on public transport are lifted. First Rail’s profitability will be driven by our delivery against performance targets under the new National Rail Contracts whilst we expect to add further earnings from opportunities adjacent to our core rail operations. Portfolio rationalisation and the opportunities for the ongoing Group Following completion of the sale of First Student and First Transit, FirstGroup is a leader in public transport in the UK, with a clear social purpose through its vision to provide easy and convenient mobility, improving quality of life by connecting people and communities. The core of the ongoing Group is our First Bus and First Rail divisions, which are both leaders in their respective sectors of the UK public transport industry, with substantial operational experience, strong stakeholder relationships, deep expertise and a growing track record of using technology to innovate for passengers. As described in more detail in the divisional reviews, both divisions are experiencing substantial – and in many ways very positive – changes in their operating environment, with the National Bus Strategy and new developments in the rail contracting model in line with the recently announced Williams-Shapps Plan for Rail offering new opportunities. Opportunities Our goal is to continue to deliver for our passengers and wider society. We aim to make sure our services are attractive travel choices for customers, with increasingly sophisticated and easy-to-use journey planning tools, a range of ticket products catering to a wide range of needs, and reduced complexity and cost compared to other travel options (in particular owning, maintaining, insuring and parking a private car in the UK’s increasingly crowded towns and cities). FirstGroup’s transport services allow flexible and easy to access travel on Wi-Fi enabled vehicles to and from key destinations in towns and cities across the UK. Travel connections are also fundamental to stronger local economies, expanding the scale and interconnectivity of neighbourhoods, cities and whole regions with each other. With the UK’s increasingly crowded and congested cities, the most cost-effective way to enhance those connections – and level up regional opportunity – is through a dynamic public transport service sector. The ongoing Group’s services are also a more efficient use of infrastructure space with lower emissions than other forms of travel in urban areas. Responsible business Governments worldwide are also increasingly focused on making it easier for public transport providers to support the response to the climate change challenge. FirstGroup expects its services to make an important contribution to achieving this goal in two ways. Firstly, by facilitating a modal shift of passengers out of their cars and into public transport, because the per passenger mile emissions of a typical train or double-decker bus today are significantly lower than the equivalent number of private vehicles. Secondly, FirstGroup is committed to accelerating the transition of its own fleets to zero-emissions in the coming years (see the First Bus and First Rail business reviews), supporting a commensurate growth in green jobs, manufacturing and new business models such as vehicle-to-grid power, for example. Both divisions of the ongoing Group will therefore make a significant contribution to delivering the UK’s climate change commitments. 15 FirstGroup Annual Report and Accounts 2021Strategic reportChief Executive’s report continued In addition, the Group has also committed to implementing the Task Force on Climate- Related Financial Disclosures (TCFD) recommendations in this year’s Annual Report, a year ahead of the regulatory mandate. FirstGroup was also the first UK road and rail operator to formally commit to setting a science-based target (SBT) for reaching net zero emissions by 2050 or earlier, in accordance with the SBT initiative. We are also working to create a more diverse and inclusive business in what has been a ‘traditional’ sector. Our development programmes continue to increase the proportion of women in senior management roles, from 23% in 2019 to 28% in 2021, and following recent appointments, the female proportion of the Group’s Board has increased to 36%. FirstGroup has also recently signed up to the ‘Change the Race Ratio’ programme, which commits the Group to taking action to increase our racial and ethnic diversity and create an inclusive culture. Detailed targets and action plans are in development, and the Group will publish its first ethnicity pay gap report in FY22. Alongside top decile ratings in our sector globally from multiple ESG ratings providers, FirstGroup is a longstanding constituent in the FTSE4Good Index and was recognised with a place in the 2021 Clean200 report, which ranks the world’s largest publicly-listed companies by their total clean energy revenues from products and services that provide solutions for the planet and define a clean energy future. We are the only passenger transport operator based in Europe to be listed in this year’s report. ■ Opportunities from adjacent markets in UK bus and rail and in new geographies over time: Leveraging the Group’s considerable industry knowledge, skills and experience ■ Critical enabler of society’s ESG goals, accelerating the transition to a zero carbon world: Principally through facilitating modal shift from cars and through FirstGroup’s commitments to transition to a zero-emission bus fleet by 2035, to cease purchasing further diesel buses after December 2022 and to support the UK Government’s goal to remove all diesel-only trains from service by 2040. Having delivered the substantial portfolio rationalisation strategy and with FirstGroup now positioned to emerge from the pandemic as a resilient and robust business, I have decided the time is right for me to move on to new opportunities. In this landmark year the Group has more than risen to its challenges. We have delivered on our strategic objectives, protected our financial stability, and supported our communities with essential services whilst helping to shape the future of public transport in the UK. The ongoing Group will have a fundamental role to play in delivering the UK’s economic, environmental and social objectives, as well as providing a vital service that is an essential part of the daily lives of many people in communities across the UK. With a well-capitalised balance sheet and an operating model that will support an attractive dividend for shareholders, FirstGroup is well placed to capitalise on the considerable opportunities ahead, helping communities and economies build back better and more sustainably. Matthew Gregory Chief Executive 27 July 2021 FirstGroup’s investment case Going forward, we expect FirstGroup to be a strong platform for further value creation based on the following: ■ Leading positions in bus and rail transport in the UK: First Bus is a leader in regional bus operations outside London with a c.20% market share and strong positions in most of its local areas of operation. First Rail is the largest passenger rail operator in the UK by revenue with c.27% of the national passenger rail sector ■ Inflection point for growth, underpinned by supportive government and social policies: Public transport operators play a vital role in meeting local and national objectives, including net zero carbon, green jobs, reduced congestion, improved air quality, and the ‘levelling up’ agenda, particularly in left behind towns and regions, as well as the recovery in economic and social activity following the pandemic ■ Digital innovation to attract more customers, enhance business efficiency and flexibility: Enhancements to stimulate passenger growth, by delivering FirstGroup’s vision to provide easy and convenient mobility, improving quality of life by connecting people and communities ■ First Bus: ready to complete trajectory to delivering a 10% margin in the first full financial year after pandemic- related social distancing restrictions on public transport end: With network realignment, service delivery efficiencies, data-driven pricing and other actions to drive passenger revenue growth and margin improvement, as described further in the First Bus business review on page 20 ■ First Rail: well placed for lower risk, long-term and cash generative rail operations: As the largest incumbent operator with four UK passenger rail contracts expected to at least 2023, First Rail will benefit from the UK Government’s transition of the passenger rail industry’s commercial structure to a lower-risk and more predictable model, with a more appropriate balance of risk and reward, as described further in the First Rail business review on page 22 16 FirstGroup Annual Report and Accounts 2021Strategic reportFinancial summary Mar 2021 (£m) Mar 2020 (£m) Continuing Dis- continued Total Continuing Dis- continued Total Continuing Revenue 4,641.8 2,203.2 6,845.0 4,642.8 3,111.8 7,754.6 Adjusted1 operating profit 101.9 107.5 209.4 69.7 187.1 256.8 (1.0) +32.2 Change (£m) Total (909.6) (47.4) Dis- continued (908.6) (79.6) +70bps (110)bps (20)bps (70.5) (4.4)p +186.6 +76.6 Adjusted1 operating profit margin Adjusted1 profit before tax Adjusted1 EPS Adjusted cash flow2 Adjusted net debt3 Statutory Revenue 1.5% 6.0% 2.2% 4.9% 3.1% 39.4 2.4p 284.0 1,414.3 Mar 2021 (£m) Continuing Dis- continued Total Continuing Dis- continued 3.3% 109.9 6.8p 97.4 1,490.9 Mar 2020 (£m) Total 4,641.8 2,203.2 6,845.0 4,642.8 3,111.8 7,754.6 Operating profit/(loss) 224.3 61.5 Profit/(loss) before tax EPS Net debt – Bonds, bank and other debt net of cash – IFRS 16 right of use lease liabilities 285.8 115.8 6.5p 2,625.8 775.8 1,850.0 (215.2) 62.5 (152.7) (299.6) (27.0)p 3,260.9 879.0 2,381.9 ‘Continuing’ refers to the continuing operations comprising First Bus, First Rail, Greyhound and Group items. ‘Discontinued’ refers to discontinued operations, being First Student and First Transit. 1 ‘Adjusted’ figures throughout this document are before rail termination sums net of impairment reversal, gain on disposal of properties, impairment of land and buildings, strategy costs and certain other items as set out in note 4 to the financial statements. 2 ‘Adjusted cash flow’ is described in the table shown on page 31. 3 ‘Adjusted net debt’ excludes First Rail ring-fenced cash and IFRS 16 lease liabilities from net debt. Financial overview ■ Resilient performance in light of travel restrictions and other pandemic effects – Group adjusted operating profit reduction held to £47.4m despite a Group revenue decline of £909.6m year-on-year: ■ £101.9m adjusted operating profit from continuing operations (comprising First Bus, First Rail, Greyhound and Group items) was in line with our expectations for these divisions (2020: £69.7m) ■ Reduced activity levels in the discontinued operations (First Student and First Transit) mitigated by cost savings, better than expected revenue recoveries from customers and higher service levels in Q4 ■ £224.3m statutory operating profit ■ Net debt and cash flow stronger than initially expected, strong liquidity preserved: disciplined capital and operating expenditure control, supplemented by Greyhound property sales ■ Expect to build momentum in the current financial year, providing a solid foundation for delivering financial framework objectives – including commencing regular dividend payments – in 2022. from continuing operations (2020: loss of £(215.2m) reflects £122.4m of net adjusting items compared with £(284.9m) in 2020: ■ Includes £71.1m profit on sale of Greyhound properties and £95.7m reversal of prior year impairments for SWR and TPE rail contracts net of rail termination sums ■ Partially offset principally by £16.6m in property impairments, £15.2m in costs associated with the rationalisation of the Group and £11.2m self-insurance provision increase in Greyhound due to further hardening of the insurance market in North America 1717 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportBusiness model As a transport operator our business model is designed to deliver value for a range of stakeholders by providing convenient, value for money transport services. Following the sale of the North American contract businesses, FirstGroup is focused on delivering its core transport services in the UK. We are influenced by... The world we live in and the need for sustainable transport solutions What we do Our core UK businesses Our key inputs Our people Vehicle fleets, depots, stations and terminals Relationships with key local authority and national government stakeholders Reputation for safe and reliable transport services A stable financial platform First Bus One of the largest bus operators in the UK with a fifth of the market outside London. First Rail One of the UK’s largest and most experienced rail operators. See pages 20-24 for more information Continuing operations: non-core Discontinued operations Greyhound Nationwide operator of scheduled intercity coaches. First Student The largest provider of student transportation in North America. First Transit One of the largest private sector providers of public transit management and contracting. See pages 25-27 for more information Underpinned by our Vision and Values We provide easy and convenient mobility, improving quality of life by connecting people and communities Committed to our customers Dedicated to safety Supportive of each other Accountable for performance Setting the highest standards How we manage the business Throughout the year the Group has been managed in accordance with the longstanding leadership and governance structures, KPIs, risk management framework and remuneration approach summarised elsewhere in this report. Following completion of the sale of the North American contract businesses, the remaining Group’s approach and structures in each of these areas will be reviewed and reported on in the 2022 Annual Report. For more information on the overall governance of the Group in 2021 see pages 74-149. See pages 52-56 for more information on the Group’s KPI performance in the year. See pages 62-71 for more information on our principal risks and uncertainties. See pages 108-141 for our Directors’ remuneration report. 1818 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021By following our five strategic drivers… In the year our divisions continued to execute their individual commercial strategies, which they developed in accordance with the Group’s five strategic drivers: 1 Focused and disciplined bidding in our contract businesses 2 Driving growth through attractive commercial propositions in our passenger revenue businesses 3 Continuous improvement in operating and financial performance 4 Prudent investment in our fleets, systems and people 5 Maintain responsible partnerships with our customers and communities … and acting in accordance with our sustainability framework… t a i n ability stra t e Mobility Beyond Today s ur s u O C o n n e g y s m unitie c tin g people a n d m o c we create value for a range of stakeholders Customers Innovating to deliver safe, reliable and easy-to-use travel services for millions of passengers each year Our people Boosting productivity and skills through training and apprentices, to nurture, develop and grow talent Investors Sustainable financial performance, cash generation and value creation Communities Support stronger economies and local communities Government Efficient and reliable transport services helping to meet wider policy objectives such as net-zero emissions and air quality Strategic partners and suppliers Dynamic industry ecosystem with opportunities for productive long-term relationships £3.9bn aggregate economic footprint 2 10% of spend on suppliers on SMEs2 £2bn of savings through reduced road congestion1,2 1.75m tonnes of CO2e avoided through our services2 …which is aligned to six core UN SDGs… See page 35 for more information on our sustainability framework. 1 Based on the value of travellers’ time lost and increase in vehicle operating costs associated with delays to journeys caused by congestion. 2 Data from CEBR study of FirstGroup social and economic value to the UK. 1919 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportContinuing operations: First Bus Market review and trends Local bus services in the UK (outside London) have been deregulated since the 1980s, with most services provided by private operators, though a small number of local authority-owned operators still exist. In local bus markets, operators set fares, frequencies and routes commercially while operating some socially necessary services under local authority contracts. In a typical year around 2.6bn passenger journeys are made on bus services outside London, generating approximately £4.3bn in revenue. Partnerships between operators and local authorities are a core principle for the industry and government, to support service delivery, minimise congestion and drive innovation and investment. There is a growing recognition at all levels of government that buses have a huge role to play in achieving social and environmental ambitions and improving local economies. This was recently demonstrated by the National Bus Strategy announced in March 2021, which includes a multi-billion pound funding package to support simpler fares, improved services and thousands of new green buses via local authority-led enhanced partnerships or franchising. Customers Bus market revenues principally comprise passenger ticket sales and concessionary fare schemes (reimbursements by local authorities for passengers entitled to free or reduced fares). A significant proportion of customers use bus services to commute (to work or education), to shop and for leisure. Income is also generated through tendered local bus services and bespoke contracts such as Park&Ride schemes. Competitors The UK bus market (outside London) is deregulated and highly competitive with hundreds of operators; consequently we face competition in all markets in which we operate. Through the year operators have both entered and left the market. The main competitor is the private car. Market attractions ■ Growth potential from strategies tailored to specific customer segments enhancing convenience and supporting clean air strategies ■ Opportunities in the youth demographic where car ownership is falling ■ Bus travel diversified by journey purpose. Revenue Adjusted operating profit Adjusted operating margin Average number of employees 2021 2020 £698.9m £835.9m £36.6m £46.1m 5.2% 5.5% 14,500 16,500 First Bus reported revenue of £698.9m (2020: £835.9m), reflecting the effects of the coronavirus pandemic during the year. Government guidelines to avoid all but essential travel throughout the year meant like-for-like passenger revenue during the year as a whole was 49% lower, with commercial passenger volumes 66% lower, although volumes were higher at times during the various periods of lockdown easing. We are encouraged that passenger volumes have recovered to c.60% of pre-pandemic levels in recent weeks, particularly since certain social distancing restrictions on buses in England started to be eased in early April. We worked very closely with local authorities and other partners throughout the year to ensure that key workers were able to rely on our services for their essential journeys during the pandemic. The UK Government and devolved administrations put in place a range of measures which were in place throughout the year to secure continuity of service on these crucial routes which would otherwise have had to cease. Measures included the rolling CBSSG and its successor programme in England, mirrored by similar arrangements in Scotland and Wales. Under these arrangements, First Bus is paid the costs of operation less revenue received from customers and other public sector monies. Recoverable costs include all reasonable operational costs including depreciation and allocated debt finance together with pension deficit funding. Fixed costs were also reduced by £3.0m in the year. As a result of these agreements, the division reported adjusted operating profit of £36.6m (2020: £46.1m), which is calculated before debt finance costs and pension deficit contributions which pay down the balance sheet deficit. Reported statutory profit was £30.8m (2020: £32.4m), principally reflecting the adjusted operating profit partially offset by the impairment of land and buildings. Digital transformation In recent years our digital transformation has placed First Bus at the forefront of the industry, including for real-time passenger volume data capture, GPS functionality and ticketing. We now have an enhanced capability to Janette Bell Managing Director, First Bus ■ Support passengers’ travel needs as pandemic restrictions ease ■ Progress ambitious zero carbon fleet plans ■ Further progress toward 10% margin objective ■ Medium-term growth from adjacent opportunities and National Bus Strategy Approximate First Bus market share of UK market outside of London (%) First Bus Others 20 80 2021 approximate revenue by type (%) Commercial passenger revenue Concessions Tenders Other 27 28 4 41 20 FirstGroup Annual Report and Accounts 2021Business Reviewassess passenger flows, and make subsequent commercial decisions, with greater speed and precision. Throughout the pandemic this allowed us to continuously adjust services in consultation with local stakeholders to ensure they met travel demands. Going forward, this data will be fundamental in enabling us to continue to shape our networks to align with evolving customer needs and trends while being commercially sustainable. This will be particularly relevant during the eight-week transitional period before the CBSSG scheme ends following the lifting of social distancing restrictions on public transport. In the year we also used our new digital platforms to develop a technical solution to mitigate bridge strike risks. Customer experience Our digital transformation has included enhancements to the customer experience. During the year, we were the first operator to introduce innovative functionality to our mobile app and websites, enabling customers to check the real-time available capacity on an approaching bus, including the wheelchair space. Furthermore, this technology allows customers to check how busy their bus is likely to be on any day of the week and time of day. Two-thirds of all ticket transactions now involve our mobile app or other contactless payment methods. Daily and weekly contactless ‘tap and cap’ fares are now being rolled out to multiple locations across the network, while in September 2020 we were the first national bus operator to introduce Express Mode for Apple Pay across all networks. National Bus Strategy Buses are vital to help deliver wider economic, social and environmental goals and we fully support the UK Government’s National Bus Strategy (NBS), published in March, which provides a clear framework and £3bn in funding for bus operators and local government to promote bus use in England, including funding allocated for 4,000 new zero emission buses across the country. We are working with local transport authorities in our areas to develop the Bus Service Improvement Plans and Enhanced Partnerships as outlined in the NBS, which will align services to the needs of local bus customers and enable access to the funding available to help deliver them in the coming years. We already work closely and effectively with local authorities and the partnership approach will enable us to build on these strong local relationships as we move toward recovery and work to improve customer experience. Fleet decarbonisation During the year we announced our commitment to operate a wholly zero emission bus fleet across the UK by 2035 and will not purchase further diesel buses after December 2022. In January, we began operating the world’s first fleet of hydrogen powered double-decker buses in Aberdeen, supported by funding from the city council, Scottish Government and the EU. In Yorkshire we introduced new electric double-decker buses to our all-electric York Park&Ride fleet as well as new electric buses for Leeds, in partnership with local and regional authorities. In Glasgow a partnership between First Bus and Transport Scotland announced in March will replace 126 of the oldest buses in our fleet with electric vehicles for the city, in addition to the 24 buses already in operation or on order. Ahead of the UN COP26 Climate Change Conference which takes place in Glasgow in November 2021, this ambitious collaboration will also begin transforming our Caledonia bus depot, the UK’s largest, into one of the country’s biggest electric fleet charging stations, with the potential for 162 vehicles to be recharged at a time. In January we completed the retrofit of our 1,000th bus to the Euro VI low emission standard, and just under half of our fleet now meet this benchmark. As zero emission bus technology is developing rapidly, we are working with a number of vehicle manufacturers to evaluate and shape the key attributes of these vehicles. In February 2021, for example, we announced that we will be the first operator in the UK to trial the unique vertically integrated electric bus technology from Arrival. First Bus medium-term outlook Passenger volume and revenue levels following the pandemic are difficult to forecast with any certainty. However, our current expectation is that volumes will recover to c.80-90% of pre-pandemic levels during the first year after social distancing restrictions on public transport end, with further growth thereafter. We expect that the effect of any initial volume reductions due to post-pandemic changes in customer behaviour will be mitigated over time by targeted network changes, the profound support for modal shift and increasing bus patronage provided by the NBS, as well as our new data-driven pricing strategy and ticketing innovations. First Bus has a significant level of operational gearing and this, together with the operational and engineering efficiency programmes we have in place as well as cost improvements to the business already made, means that we expect to deliver 10% margins in the first full financial year after pandemic- related social distancing restrictions on public transport end, in a range of potential passenger volume scenarios. We are also building on our existing platform of contracted fleet services for commercial customers in order to deliver further revenue growth and capital efficiency. We are also well positioned to develop solutions in the nascent UK market for Mobility as a Service (MaaS), thanks to collaboration with First Transit colleagues. Looking ahead, we are already a leader in the industry for low emission vehicles and look forward to playing our part in decarbonising the UK economy. Bus networks are key to supporting modal shift particularly from cars to sustainable, zero carbon public transport, a key part of the UK’s climate change goals. As recognised in the NBS, there is also a significant, growing role for buses to help deliver on national and local government commitments to reduce congestion and air pollution, improve city connectivity and ‘level up’ parts of the country through improved economic infrastructure and opportunity. Buses are the most flexible, value for money solution for providing the critical public transport services which are so essential to local economies and communities. The fundamentals for a resurgent bus business are sound, and we look forward to playing an important role in a robust, and environmentally sustainable, recovery. Our bus network and driver management system We were the first bus operator to introduce an advanced data analytics system from Optibus. This system reduces the time required to create and amend bus schedules, and uses machine learning to optimise both driver and vehicle hours. We are due to complete deployment of Optibus across First Bus in the current year. 21 FirstGroup Annual Report and Accounts 2021Strategic reportContinuing operations: First Rail Market review and trends Passenger rail services are primarily provided by private train operating companies (TOCs) through contracts awarded by the relevant authority, but may also be provided on an open access basis. The majority of the service elements provided to customers are mandated as part of the contract and others are left to commercial judgment. Rail track and infrastructure (signalling and major stations) are owned and managed by Network Rail, and TOCs typically lease rolling stock from leasing companies and most stations (which they manage) from Network Rail. The UK’s passenger rail contracting system is currently undergoing a transition to a new structure with operators more heavily incentivised to improve passenger service metrics and a lower risk/lower reward financial profile. Customers Rail markets are generally categorised into three sectors: London and south- east commuter services; regional; and long distance. Certain networks also offer sleeper services. Parts of GWR fall into all four categories. SWR customers are largely commuters. TPE and Avanti are mainly long-distance intercity operations, and Hull Trains caters to long-distance and leisure travellers. Competitors The main competitor to rail in the UK is the private car. On some passenger flows there is competition from other rail services and, to a lesser extent, from long-distance coach services and airlines. First Rail bids for contracts against other current UK rail operators and public transport operators from other countries. Market attractions ■ More than £10bn of contract-backed passenger revenue in a typical year through 20 major contract opportunities ■ New contracts have no revenue risk and clear performance-based fee opportunities, with low capital intensity ■ Regulated environment, with limited cost risk protected by annual budgeting ■ Historically high levels of passenger numbers across the UK pre-pandemic. Revenue £3,619.9m £3,203.7m 2021 2020 Adjusted operating profit Adjusted operating margin Average number of employees £108.1m £70.4m 3.0% 2.2% 17,500 14,000 First Rail revenue increased to £3,619.9m (2020: £3,203.7m) reflecting a full year of the Avanti contract, which commenced operations in December 2019. Tramlink is also reported within First Rail for the first time, with the comparative restated accordingly. Excluding Avanti and Tramlink, like-for-like passenger revenues decreased by 84%, with passenger volumes 79% lower due to the effects of the pandemic. Passenger volumes increased to some extent during periods of lockdown easing throughout the year, and stand at c.42% of pre-pandemic levels on average as of mid-July, although under the new contractual arrangements in place during the year and going forward in the industry, changes in revenue no longer affect our financial performance. We continue to work closely with the DfT on the level of service provision as government guidance changes, and in the summer of 2020, and again from May 2021, we increased services to c.90% of prior levels to support increased travel activity. The UK Government acted quickly to ensure the country’s vital rail networks could continue to operate during the pandemic by introducing Emergency Measures Agreements (EMAs) which were in place for much of the first half of the year. Under these agreements, the DfT waived revenue, cost and contingent capital risk and our TOCs were paid a fixed management fee to operate at agreed service levels, as well as a performance-based fee. The EMAs were superseded in autumn 2020 by Emergency Recovery Measures Agreements (ERMAs) for Avanti, SWR and TPE which were similar in structure, the principal differences being that fees have a lower overall potential and were more heavily weighted to performance delivery. In the first phase, we were very pleased to have scored the highest performance marks across all categories for all four of our rail contracts. Steve Montgomery Managing Director, First Rail ■ Manage service levels as the pandemic restrictions ease ■ Complete transition to new National Rail Contracts ■ Continue to develop ancillary revenue streams ■ Support UK Government as industry completes evolution toward new long-term model Passenger revenue base by operating company (%) 37 27 25 10 1 69 12 19 GWR SWR Avanti TPE Hull Trains and other Passenger revenue base of First Rail operations (%) Leisure Business Commuter 22 FirstGroup Annual Report and Accounts 2021Business ReviewAdjusted operating profit was £108.1m (2020: £70.4m), which reflects the fees paid, including a first-time contribution from Avanti, the settlement of historical claims mainly in GWR in H1 and a £(10.2)m loss from Hull Trains open access reflecting its suspension during parts of the year. The division reported a statutory operating profit of £203.8m (2020: £69.3m), including a partial reversal of prior year impairments for SWR and TPE following agreements reached on rail franchise termination sums and other amounts due to the DfT (see below). Contracted Rail net attributable earnings in the year – being the Group’s share of contracted rail fee income available for dividend distribution up to the parent company – was £42.3m. Transition to National Rail Contracts Each ERMA required us to agree with the DfT what, if any, remaining payments were required to conclude the pre-existing franchise agreements, a process which Avanti, SWR and TPE have now completed (there is no termination sum process for GWR given that this contract was entered into after the transition to the EMAs). These termination sums are paid at the end of the ERMA term, at which point the pre-existing franchises also end, and allowed us to move forward with discussions on new National Rail Contracts (NRCs). The SWR and TPE ERMAs duly expired at the end of May 2021 and the two TOCs are now operating under the first two NRCs to be agreed. Both have been awarded for a two-year term to the end of May 2023 with an option to be extended by up to two further years at the DfT’s discretion. Under the NRCs the DfT will retain all revenue risk and substantially all cost risk. There is a fixed management fee and the opportunity to earn an additional performance fee. For the Group’s 70% share of the First MTR joint venture for SWR the fixed management fee is £3.3m p.a. and there is the opportunity to earn an additional fee of up to £9.9m p.a. which is the maximum attainable performance fee. For TPE the fixed management fee is £2.3m p.a. and there is the opportunity to earn an additional fee of up to £5.2m p.a. which is the maximum attainable performance fee. Punctuality and other operational targets required to achieve the maximum level of performance fee are designed to incentivise service delivery for customers. The NRCs achieve a more appropriate balance of risk and reward between FirstGroup and the Government. They carry no significant contingent capital risk and there are limited scenarios in which this contingent capital can be called upon, primarily in the event of early termination of the contracts by the operator. SWR and TPE will continue to be fully consolidated in the Group accounts with the net cost of operations and capex to be funded in advance by the DfT. The Group will receive an annual dividend from the TOCs reflecting the post-tax net management and performance fees. These dividends are expected to be paid each September following the completion of the TOC audited accounts. For Avanti, the ERMA is in place to the end of March 2022 and can be extended by a further six months. We are discussing an NRC which could last up to 31 March 2032, with the core and extension periods to be determined. Meanwhile the DfT recently exercised its option to extend the EMA for GWR until 12 December 2021, subsequent to which it is expected that GWR will move on to an NRC in due course. Open access operations Hull Trains was not eligible for the EMAs or ERMAs, and as a result the service was temporarily suspended on three occasions during the year when nationwide lockdowns took place, but has now been restored with encouraging passenger volumes returning. We are on course to launch a second open access service between London and Edinburgh in autumn 2021. This will provide a value for money and sustainable way to travel between the two capitals, where domestic air travel currently has a significant share of journeys. Reflecting start-up costs for East Coast and the uncertain demand environment, we expect our open access operations to record a c.£20m loss in the current financial year, before making a profit contribution from FY23. Customer experience innovation As travel restrictions ease, our TOCs are working collaboratively with industry partners and stakeholders to build back patronage, while delivering plans to upgrade our service offering. These plans include the introduction of flexible commuter tickets and continuing to facilitate a move towards electronic and mobile ticketing, smartcards and improved apps. New functionality includes the ability for Avanti passengers to have refreshments delivered to them without leaving their seat. Avanti has also become the first UK TOC to offer an additional class of travel as part of its services. Standard Premium will give customers greater choice of facilities, and is initially available to buy as an upgrade on the day of travel with advance tickets on sale later this year. Innovation and adjacent rail opportunities In the year we developed and deployed new technology such as next generation onboard 5G Wi-Fi from evo-rail, developed in-house by First Rail. This pioneering system was first trialled on the Isle of Wight, and later this year will be installed on a 70km section of the SWR mainline, followed in 2022 by a roll out on the London to Birmingham section of Avanti’s network. Our industry-leading cloud technology and analytics systems have allowed us to integrate real-time data from several systems on to a single platform branded Mistral Data that enables our teams to identify and resolve potential problems before they arise. The platform also provides information to our customers via website and mobile app channels on the formation and facilities available on each train, which gives customers the ability to plan their journey with confidence. During the year we further integrated a variety of customer-facing and back office functions into our passenger service centre, which was built based on scalability and the latest technology. The shared service centre operates at a lower cost than our previous outsourcing arrangements and provides a single service for customer queries across several First Rail operations. We continue to provide our consultancy experience as ‘shadow operator’ to the HS2 infrastructure project. During the last financial year we completed more than 40 deliverables, including technical and financial baseline reviews of operational plans for HS2, a fresh view of the travel market on the West Coast corridor and employee engagement planning. 23 FirstGroup Annual Report and Accounts 2021Strategic reportIn addition, the rail division has potential for further growth through the skills and expertise developed in a range of related areas, such as designing and operating open access services, deploying new rail technology and customer-facing innovation and the division will also seek to build on its consultancy experience as ‘shadow operator’ to the HS2 infrastructure project. In summary, First Rail’s profitability will be driven by our delivery against performance targets under the new National Rail Contracts whilst we expect to add further earnings from opportunities adjacent to our core rail operations. Overall, as the UK passenger rail industry continues its evolution to a more successful railway system that works better for passengers and taxpayers, we believe that First Rail is well placed to generate more resilient and consistent returns for shareholders in tandem. evo-rail 5G Wi-Fi gives improved connectivity and enhances customer experience Our evo-rail next generation onboard 5G Wi-Fi technology has been developed in-house by First Rail. This pioneering system enables rapid and reliable internet connectivity on the railways. It was first trialled on the Isle of Wight, and will soon be installed on sections of both the SWR mainline and the Avanti network. It has a substantial addressable market in the UK and internationally. First Rail continued Fleet decarbonisation First Rail has an important contribution to make in meeting the challenges of climate change and we are working with our partners to reduce carbon emissions, for example through the introduction of electric trains to replace diesel where possible. Our expertise and capability will help the Government deliver its ambition to remove all diesel-only trains from service in the UK by 2040. GWR have recently taken delivery of the UK’s first tri-mode train which can use overhead wires, third rail or diesel power. Plans to upgrade the SWR fleet continue with new suburban rolling stock starting to enter service this year and a new depot at Feltham was completed in order to stable this fleet. New all-electric and bi-mode trains will also be introduced by Avanti next year to replace diesel-only trains in the current fleet. First Rail medium-term outlook For some time we have advocated for a longer-term approach to the railway with passengers at the core, underpinned by a more sustainable balance of risk and reward for all parties, and welcomed the Williams- Shapps Plan for Rail published in May 2021. In it the UK Government outlined its ambitions for the future of the UK rail industry with the expertise, innovation and experience of private sector rail operators at the heart of the model. As the largest UK operator with four passenger rail contracts expected to run to at least 2023, we are well positioned to work closely with industry partners, including the DfT, to bring this to reality in the coming years. First Rail has operated 20% of the UK passenger rail market by revenue since 2007 on average, and currently has a c.27% market share. As such, we can draw on a strong track record of delivery on major projects to enhance passenger experience, including fleet introductions, major timetable changes, capital projects on behalf of Network Rail, customer service innovations and managing the impact of significant infrastructure changes from network electrification through to route upgrades. 24 FirstGroup Annual Report and Accounts 2021Business ReviewContinuing operations: Greyhound (non-core) Revenue $422.6m $766.0m 2021 2020 Adjusted operating profit Adjusted operating margin Average number of employees $(12.1)m $(15.3)m (2.9)% (2.0)% 2,500 5,500 Market review and trends The pandemic dramatically impacted demand for intercity bus service, with many carriers completely suspending service for several months. Greyhound continued to operate almost all of its national network at substantially reduced capacity, providing essential services to many rural areas with no other travel options. Demand is slowly returning, particularly for non-essential leisure travel. Greyhound’s prior initiatives to improve onboard service and provide the only nationwide intercity bus network have positively positioned the the business to meet the growing demand, with focus on our mid- to long-distance network. Customers North American intercity coach firms serve a wide range of customers, many of whom prioritise value and whose primary purpose is to visit friends and family. Direct point-to-point short-distance services attract a younger, urban demographic with less interest in maintaining a private car, while mid- to long-distance services meet the needs of a variety of customers where fewer options exist. Competitors Intercity coach services compete with many other modes of mid- to long-distance travel across North America, including airlines and the private car. The intercity coach market is highly competitive, especially point-to-point services in dense travel corridors such as the US north east and north west, where coach also competes with air and rail. Market attractions ■ Private car use becoming less attractive to customers, due to increasing urbanisation, congestion and overall costs of motoring ■ Target demographics are responsive to innovation through technology, value-for- money offering and the environmental impact of car ownership ■ Underutilised services may be part- funded by transport authorities. Greyhound’s revenue was $422.6m or £323.0m (2020: $766.0m or £603.2m) in the year as a result of the effects of the pandemic on passenger demand. US passenger revenues were 59% lower year-on-year, while we suspended our remaining operations in eastern Canada in May 2020 due to limited demand and the closure of the US border, and permanently shut it down in May 2021. Total revenue for the whole division decreased by 45% year-on-year. As previously noted, during the early part of the financial year, Greyhound’s overall passenger revenues were c.20% of pre- pandemic levels and passenger volumes were c.15%. Greyhound led its industry as the only major coach operator that continued to provide any service for passengers. In the US during the first quarter, Greyhound operated c.45% of its pre-pandemic timetabled mileage, sufficient to maintain the integrity of its US network and provide ongoing service to hundreds of rural communities, many with no other form of intercity transportation. Greyhound was able to do so through rapid management action including commercial initiatives, optimising pricing, managing capacity and cost (principally through reduced variable costs, furlough as well as $60m in fixed cost reductions) to match lower demand levels, and utilising employee retention tax credits as appropriate. Greyhound also secured $130m of the US CARES Act funding made available to state agencies to maintain operation of intercity rural bus services in the year, modestly ahead of our expectations. Over the course of the year, Greyhound flexed operating mileage in response to volatile passenger demand in different parts of the country as the impact of the pandemic continued to be felt. Historically low airline fares have also had an impact on coach passenger demand. Since the start of the calendar year, US passenger revenue has increased through improved volumes and higher yields, reaching c.60% of pre-pandemic levels in early July 2021. Passenger mileage travelled in early July is just over half of pre-pandemic levels. As a result of these actions, Greyhound was able to largely offset the substantial reduction in revenue, recording an adjusted operating loss of $(12.1)m or £(10.3)m (2020: $(15.3)m or £(11.6)m) in the year. Excluding the closure costs and other losses associated with Greyhound Canada, Greyhound in the US generated $1.8m in adjusted operating profit in the year (2020: loss of $(14.9)m). The division reported a statutory profit of £41.6m (2020: £(253.4)m loss) after £71.1m in profit on sales of property described below partly offset by a £11.2m charge for historic insurance claims. Greyhound continues to rationalise its property portfolio by moving operations to intermodal transport hubs or new facilities better tailored to its needs when the opportunity arises. During the year 15 surplus locations were sold, resulting in profit on certain property sales (net of leaseback, property tax and selling costs) of $101.2m or £71.1m (2020: $1.7m or £1.3m). The largest was the sale of Greyhound’s oversized legacy garage and customer terminal facility in the downtown Arts District of Los Angeles, California to a subsidiary of Prologis, Inc. Under the agreement Greyhound received net $88m in cash and will lease back the facility for two years, during which time Greyhound will complete the moves of its terminal and garage operations. The book value of the remaining properties in the portfolio is $78.6m. A number of other property sales processes are underway. In the year, Greyhound has continued to upgrade its offering for passengers, offering industry-leading streaming entertainment on all buses and new web and mobile functionality to manage bookings. In light of the demand environment, new vehicle investment has been very substantially reduced. Together with disciplined fleet management, operational and maintenance changes have resulted in further improvements to punctuality, emissions and other non-financial metrics. Greyhound outlook Greyhound remains non-core and FirstGroup continues to pursue all exit options for the business in order to conclude the Group’s portfolio rationalisation strategy. Greyhound’s financial performance will continue to be supported by tight cost control and recoveries of federal grants for operating key coach services, and is expected to exceed its FY21 contribution in light of the recent passenger volume trajectory. As set out in the announcement of the sale of First Student and First Transit, a portion of the net disposal proceeds will be utilised to de-risk Greyhound’s legacy pension and self-insurance liabilities. The Group will continue to actively manage the Greyhound property portfolio for value alongside Greyhound’s reduced residual liabilities. Emerging from the pandemic, Greyhound is primarily focused on our mid- to long-distance services, utilising short- distance services to support the national network. Greyhound remains focused on actively managing operating mileage in response to changing demand as the pandemic’s impact on our customers’ travel plans recedes. 25 FirstGroup Annual Report and Accounts 2021Strategic reportDiscontinued operations: First Student Market review and trends North America’s c.14,000 school districts deploy around 520,000 yellow school buses and tens of thousands of smaller ‘vans’ to provide home-to-school transportation for millions of students. The yellow school bus market is estimated to be worth around $26bn per annum with special education transport a further $4bn. More than a third of the yellow bus fleet is outsourced by school districts to private operators, with the remainder operated in-house. Demand for home-to-school services is principally driven by the size of the school age population. School districts are funded from state and local sources, including property tax receipts, and their budgets (of which transport is a small part), tend to be linked to the economic climate. Customers School districts’ obligations to provide student transportation are determined by criteria set at state level. Contracts are typically three to five years in duration after which they are often competitively retendered, and specify fixed or annually indexed pricing, meaning that private operators bear cost risk. In addition to customers outsourcing for the first time (‘conversion’), and the price indexation, growth is also driven by additional routes due to population growth or other factors (‘organic growth’). Special education transport is a smaller but faster growing segment of the home-to-school market. Competitors The private outsourced market is highly fragmented, with only three companies operating fleets of more than 10,000 buses; they account for c.40% of the outsourced market. Fifteen other operators have fleets of more than 1,000 buses, and the remaining 45% of the outsourced market is operated by more than 1,000 small local operators. ‘Share shift’, or winning contracts previously managed by other providers, together with acquisitions, offer further growth potential. 26 Revenue $1,617.7m $2,474.9m 2021 2020 Adjusted operating profit Adjusted operating margin Average number of employees $78.1m $205.9m 4.8% 8.3% 37,500 48,000 In all, c.$110m of capital expenditure and payroll tax payments under the US Federal Insurance Contributions Act (FICA) have been deferred as a consequence of the pandemic, which will subsequently reverse under the buyers’ ownership as operating conditions normalise. The division reported a statutory profit of £62.1m (2020: £89.4m) including a £10.2m benefit from an improved position on historical insurance claims. In the bid season for the 2020/21 school year, First Student maintained its leading position in the market, supported by our excellent safety record and consistently high customer satisfaction scores, which resulted in a contract retention rate of 88% on contracts up for renewal, or 95% across the entire portfolio of multi-year contracts. Given the immense complexity of school start-up in the pandemic, our driver recruitment, retention and safety programmes have responded well to the challenges posed by the pandemic for the school bus industry and its employee dynamic, though we continue to track our employee levels closely as activity levels rebuild. Despite the pandemic, First Student continued its bolt-on acquisition activities and driver technology innovation, as well as extending its leadership in zero emission school bus operations in North America. In January 2021, First Student announced a collaboration with NextEra Energy Resources, the world’s largest generator of renewable energy from the wind and sun and a world leader in battery storage. The collaboration aims to jointly foster innovation, accelerate the mass adoption of zero emission school bus vehicles and also develop early mover capability in the nascent vehicle-to-grid power management, energy storage and ancillary grid services markets in North America. First Student revenue was $1,617.7m or £1,226.2m (2020: $2,474.9m or £1,940.4m), a decrease of $857.2m reflecting the near-total closure of schools due to the pandemic prior to the start of the financial year. The reduction was partially offset by recovery of a substantial proportion of our expected home-to-school revenues by agreement with our school board customers, such that by the end of the 2019/20 spring term, we were recovering c.55% of budgeted home-to-school revenues, or an effective recovery rate of 78% including labour and fuel savings. Some schools restarted full in-person teaching at the start of the 2020/21 academic year in August/September 2020, but many continued to review and alter their back-to-school plans in light of dynamic local conditions throughout the second half of the financial year. Overall, the trend has been for increasing home-to- school services either full time or as a mixture of in-person and online teaching, although some of our school customers were able to operate all-online, principally in the larger urban districts which form a relatively significant part of our portfolio. The proportion of First Student’s bus fleet operating either full service or on a hybrid basis was 87% in early June before schools in some regions began closing for the summer holidays, and between services in operation and agreements with our customers, we were securing c.95% of pre-pandemic home-to-school revenue. At the adjusted operating level, profit decreased by only $127.8m to $78.1m or £55.8m (2020: $205.9m or £158.8m), reflecting our industry-leading levels of agreements with customers noted above and the extensive cost actions we have undertaken to mitigate the reduced activity levels. These include variable cost savings, temporary salary reductions, removing all non-essential contract employees, together with some more permanent reductions in back office headcount where unavoidable. Where appropriate, First Student has also made use of the employee retention tax credits in the US (and wage subsidies in Canada) available to all businesses whose operations were disrupted by government order. All non-contracted capital expenditure was reviewed early in the pandemic and deferred, reprofiled or converted to leasing where consistent with customers’ requirements. As a result of the reduced level of operating activity throughout the year for many of our customers, the division’s normal seasonal build-up of working capital took place later than normal, and has not fully normalised. FirstGroup Annual Report and Accounts 2021Business ReviewDiscontinued operations: First Transit Market review and trends In aggregate, transit markets are worth around $33bn per annum in North America, of which approximately a third is outsourced. Private providers manage, operate, maintain and organise transportation services for clients under contracts that typically last for three to five years. The market includes fixed route bus services (c.$19bn segment, of which around a fifth is outsourced), paratransit/ non-emergency medical transportation (NEMT) and related services (c.$8bn segment, around three-quarters outsourced), shuttle services (c.$3bn segment, around two-thirds outsourced), and vehicle maintenance services (c.$4bn segment, more than a third outsourced). Customers Customers contracting out fixed route and paratransit services, are typically municipal transit authorities. These contracts typically are to operate and manage vehicle fleets owned by the client. Institutions such as universities, hospitals, airports and private companies are the main clients for the shuttle segment, and often require provision of the vehicle fleet. Vehicle maintenance services include contracts for private and public sector clients such as municipal fire and police departments. Customer demand for a broader range of mobility services solutions is increasing. Competitors First Transit has c.12% of the outsourced market in North America, which accounts for c.38% of the total market. The outsourced transit market is fragmented, though First Transit has two large competitors, MV Transportation, Inc. and Transdev North America. Revenue $1,277.4m $1,488.4m 2021 2020 Adjusted operating profit Adjusted operating margin Average number of employees $69.1m $36.2m 5.4% 2.4% 17,000 20,000 First Transit continues to build on its portfolio of both existing and emerging mobility services contracts, benefiting from its reputation for safe, innovative and best value solutions for clients and another improvement in its already strong customer service scores, which reached a five-year high in 2021. These included particularly strong responses from clients in the categories of working with them during the pandemic, technology adding value, safety and quality of service for passengers. The contract retention rate on ‘at risk’ business in the year was stable at 89% (2020: 89%), and included retention of five important multi-year contracts with long-term clients (Houston, Texas, Met Council, Minnesota, Hartford, Connecticut, New Jersey Transit and City of Pasadena, California). Despite extended bidding cycles due to the pandemic, First Transit secured new business wins in its traditional sectors such as MARTA in Atlanta, Georgia in H1 and Pinellas Suncoast Transit Authority, Florida and Access Services in Los Angeles, California in H2. In emerging mobility services, First Transit has extended its partnership with Lyft to provide wheelchair accessible vehicles to several US cities in the year, as well as operation of bikeshare services in Portland, Oregon. The business has also continued to build on its strong position in the maintenance and operation of autonomous vehicles (AV), electric vehicles (EV), and in January 2021 announced plans to collaborate with NextEra Energy Resources to target the rapid growth of EV capabilities in its markets. Overall, First Transit is well placed for further growth, not least in light of the Biden administration’s plans for further investment in infrastructure and public transportation. First Transit continued to maintain a high level of service throughout the year, as its services provide essential transportation options for passengers needing to travel to work, university, for medical and other essential travel. While passenger ridership volumes were more than 50% lower year-on-year, our clients required us to continue to maintain significant levels of service for the communities we serve throughout the year. First Transit worked closely with many clients where service levels did change to make contractual amendments such as additional payments to cover fixed costs or altered productivity requirements. Overall, First Transit’s revenue was $1,277.4m or £977.0m (2020: $1,488.4m or £1,171.4m), a decrease of 14.2%. While the rates of recovery in activity levels have varied by sub-segment since March 2020 and we have been flexible in both increasing and decreasing activity levels in conjunction our clients to adapt to local developments, as of June, First Transit was operating c.87% of pre-pandemic services overall (compared with c.60% at the low point). Net revenue recovery was running at c.95% of pre-pandemic expectations in June, reflecting the service levels and customer arrangements in place. Adjusted operating profit was $69.1m or £51.7m (2020: $36.2m or £28.3m), or an increase of $32.9m compared with the prior year. This equates to an adjusted operating margin of 5.4% (2020: 2.4%). This performance reflects a number of factors, including the contractual variations negotiated with customers noted above, substantial variable cost savings, including temporary furloughing of some employees and salary reductions in the year, and a reduction in fixed costs by $10m in the year. The division also made use of fiscal tax credit programmes available to all companies to protect jobs where appropriate, and also benefited from the non-recurrence of prior year legal judgment costs (2020: $3.5m). Statutory profit was £20.5m (2020: loss of £(21.9)m), reflecting a charge of £31.2m for the deterioration of historic insurance claims. The division continued to drive further cost efficiencies from lean maintenance, predictive analytics, procurement, systematic employee engagement and retention programmes and further shared service efficiencies. First Transit is not as capital intensive as some of the Group’s other businesses as for the most part it operates vehicles procured and owned by customers, but non-essential capital expenditure was deferred or halted in light of the pandemic. 27 FirstGroup Annual Report and Accounts 2021Strategic reportFinancial policy framework As part of the announcement of the sale of First Student and First Transit, a financial policy framework for the ongoing Group for the financial year ending in March 2023 (FY23) and beyond was set out as follows: Metric Objective Revenue ■ First Bus: planning for a range of post-pandemic scenarios; central case envisages passenger volumes recover to c.80-90% of pre-pandemic levels during first 12 months after social distancing restrictions on public transport end, with further growth thereafter ■ First Rail: opportunities to build on the base business of four contracted operations with no revenue risk Profitability ■ First Bus: targeting a 10% margin in the first full financial year after social distancing restrictions on public transport end (FY23 on UK Government‘s current plans) ■ First Rail: profitability driven by delivering against performance targets under the NRCs while adding earnings in adjacent rail opportunities ■ Other: central cost reduction of at least £10m p.a. from FY23; interest c.£50m p.a. (of which c.60% IFRS 16); UK corporation tax rate (currently 19% increasing to 25% for FY24) Investment ■ First Bus: c.£90m p.a. from FY22, mainly driven by zero emission bus fleet commitments ■ First Rail: expected to continue to be cash capital-light under the NRCs Leverage ■ Targeting leverage ratio of less than 2.0x adjusted net debt: Rail-adjusted EBITDA1 in the medium term Dividend ■ Intention to pay regular dividends to shareholders commencing during FY23 ■ Targeting annual dividend around 3x covered by Rail-adjusted Profit After Tax2, assuming normalisation of trading conditions post-pandemic 1 First Bus and non-contracted First Rail EBITDA, plus contracted Rail net attributable earnings, minus central costs. 2 First Bus and non-contracted First Rail adjusted operating profit, plus contracted Rail net attributable earnings, minus central costs, minus treasury interest, minus tax. In summary, the ongoing Group is expected to be a sustainable and cash generative business with a well-capitalised balance sheet, and an operating model that will support an attractive dividend for shareholders. Group revenue Revenue from continuing operations was in line with prior year at £4,641.8m (2020: £4,642.8m). Excluding the new Avanti contract which commenced in December 2019, revenue from continuing operations decreased by £567.4m as a result of the pandemic. Avanti revenue was £897.6m for the year (2020: £331.2m). Revenue from discontinued operations was £2,203.2m (2020: £3,111.8m), reflecting the reduced activity levels due to the pandemic, partially offset by recoveries from some customers. Overall Group revenue in the full year decreased by 11.7% or £909.6m to £6,845.0m (2020: £7,754.6m). Group adjusted operating performance Adjusted operating profit from continuing operations was in line with expectations at £101.9m (2020: £69.7m), an increase of £16.9m excluding the Avanti contribution of £29.6m (2020: £14.3m). For First Bus and First Rail this largely reflects the terms of the UK Government-procured emergency arrangements to enable socially distanced travel, while in Greyhound it comprised the drop through of lower revenues offset by reduced variable costs, substantial fixed cost actions and CARES Act grants for vital bus service connections. Financial review Ryan Mangold Chief Financial Officer “ We now have substantially greater clarity about the resilience of our businesses and the changes to contractual arrangements in First Rail and, following the completion of the sale of First Student and First Transit, the Group has a well-capitalised balance sheet with upside potential providing greater business flexibility.” 2828 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021First Bus First Rail Greyhound Group items2 Continuing operations First Student First Transit Discontinued operations Total North America in USD Greyhound (continuing) First Student First Transit Discontinued operations Total North America 52 weeks to 27 March 2021 52 weeks to 28 March 2020 Adjusted operating profit1 £m Adjusted operating margin1 % Revenue £m 698.9 3,619.9 323.0 – 4,641.8 1,226.2 977.0 2,203.2 6,845.0 $m 422.6 1,617.7 1,277.4 2,895.1 3,317.7 36.6 108.1 (10.3) (32.5) 101.9 55.8 51.7 107.5 209.4 $m (12.1) 78.1 69.1 147.2 135.1 5.2 3.0 (3.2) 2.2 4.6 5.3 4.9 3.1 % (2.9) 4.8 5.4 5.1 4.1 Revenue £m 835.9 3,203.7 603.2 – 4,642.8 1,940.4 1,171.4 3,111.8 7,754.6 $m 766.0 2,474.9 1,488.4 3,963.3 4,729.3 Adjusted operating profit1 £m Adjusted operating margin1 % 46.1 70.4 (11.6) (35.2) 69.7 158.8 28.3 187.1 256.8 $m (15.3) 205.9 36.2 242.1 226.8 5.5 2.2 (1.9) 1.5 8.2 2.4 6.0 3.3 % (2.0) 8.3 2.4 6.1 4.8 1 ‘Adjusted’ figures throughout this document are before rail termination sums net of impairment reversal, gain on disposal of properties, impairment of land and buildings, strategy costs and certain other items as set out in note 4 to the financial statements. The statutory operating profit including discontinued operations for the year was £285.8m (2020: loss of £(152.7)m) as set out in note 4. 2 Central management and other items. Tramlink is now reported in First Rail. Adjusted operating profit from discontinued operations was £107.5m (2020: £187.1m) with the impact of reduced activity levels due to the pandemic mitigated by cost savings, better than expected revenue recoveries from customers and higher service levels in the final quarter. Overall Group adjusted operating profit decreased by £47.4m to £209.4m (2020: £256.8m). The shareholder circular relating to the sale of First Student and First Transit published on 10 May 2021 stated that “adjusted operating profit for the year ended 31 March 2021 will be ahead of the top of the range of analyst consensus forecasts of approximately £171 million”, subject to completion of the audit process. Subsequent to this profit forecast being made, the further increase in North American insurance provisions described below was reclassified as an  adjusting item for the purposes of adjusted operating profit as well as further revenue recovery recognition agreed with customers. Note that software amortisation of £11.3m (2020: £16.1m) is no longer classed as a separately disclosed item and has been charged to divisional and Group adjusted results and the prior periods are restated accordingly. Group central costs for FY22 are anticipated to reduce by c.£5m from FY21 levels, reflecting the previously announced annual run rate reduction of c.£10m after completion of the First Student and First Transit sale. Reconciliation to non-GAAP measures and performance Note 4 to the financial statements sets out the reconciliations of operating profit/(loss) and loss before tax to their adjusted equivalents. The adjusting items are as follows: Other intangible asset amortisation charges The charge for the year was £4.1m (2020: £4.9m). Strategy costs The charge of £37.2m (2020: £58.2m) comprises £22.0m costs incurred to date related to the sale of First Student and First Transit, £7.0m for the proposed sale of Greyhound, £6.9m of costs related to restructuring in Greyhound Canada, including the cost of severance, legal costs, lease termination costs and other costs of closure. £1.3m relates to other costs associated with the rationalisation of the Group. North American insurance provisions FirstGroup North American insurance arrangements involve retaining the working loss layers in a captive and insuring against the higher losses. Based on our actuaries’ recommendation and a second additional, independent actuarial review, last year we increased our reserve to $657m. During this financial year we have continued to see a deteriorating claims environment with legal judgments increasingly in favour of plaintiffs and punitive in certain regions. In this hardening motor claims environment, we have seen further significant new adverse settlements and developments on a number of aged insurance claims, and as a result our actuaries have increased their expectation of the reserve required on historical claims. Partially offsetting this, there has been a significant change in the market-based discount rate used in the actuarial calculation from 0.8% to 1.65%. 2929 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportFinancial review continued In light of the continued change in claims environment we have increased the provision to provide more protection for historical claims, and the resulting self-insurance reserve level is above the midpoint of the actuarial range. These changes in accounting estimates combined with the discount rate movement has resulted in the Group recording an additional charge of $44.8m or £32.2m (2020: $175.2m or £141.3m); of this charge, $15.6m or £11.2m relates to Greyhound and $29.2m or £21.0m relates to discontinued operations. The charge comprises $57.0m or £41.0m relating to losses from historical claims (of this, $18.6m or £13.4m relates to Greyhound and $38.4m or £27.6m relates to discontinued operations) and a credit of $12.2m or £8.8m relating to the change in the discount rate (of this, $3.0m or £2.2m relates to Greyhound and $9.2m or £6.6m relates to discontinued operations). It is expected that the majority of these claims will be settled over the next five years. Following these charges, the provision at 27 March 2021 stands at $659m (2020: $657m) compared with the actuarial range of $554m to $723m (2020: $551m to $683m). Of the total provision at 27 March 2021, $156m relates to Greyhound and $503m relates to discontinued operations. The charge to the adjusted operating profit for the current period reflects this revised environment and the businesses continue to build the higher insurance costs into their bidding processes and hurdle rates for investment. The Group also actively evaluates alternatives to reduce insurance risk and ongoing expense, and continues to make improvements to claims management processes. It has been agreed that the self-insurance provisions for First Student and First Transit will transfer under the sale of those businesses with no further purchase price adjustment and part of the proceeds from the sale will be used to de-risk the residual self-insurance provisions of Greyhound. Gain on disposal of properties Greyhound recognised a profit of £71.1m on sale of properties in the year (2020: £1.3m). A gain of £51.6m was recognised on the disposal of property in Los Angeles, California. A gain of £20.2m was recognised on the disposal of property in Denver, Colorado, while a loss of £0.7m was recognised on disposal of a number of other properties in Canada. 3030 Impairment of land and buildings An impairment charge of £10.0m has been booked in respect of the Aberdeen headquarters and £6.6m for First Bus premises in Southampton. Rail termination sums net of impairment reversal The Group has agreed franchise termination sums with the DfT in respect of all our obligations under the ERMAs. These are included in adjusting items, together with the agreed settlement and other adjustments under the net asset clauses of the ERMA and the release of the impairment provisions relating to SWR and TPE as at 28 March 2020. Discontinued operations With the announcement of the agreed sale of First Student and First Transit to EQT Infrastructure on 23 April 2021 and subsequent completion on 21 July, the financial results of the disposal group have been reclassified as discontinued operations on the face of the income statement and the balance sheet and cash flow statement adjusted accordingly. The transaction has been structured on a ‘locked box’ basis as of 27 March 2021, with all economic benefits or costs for the buyer’s account from that date onwards, albeit these will continue to be disclosed as discontinued operations up to the point of transaction completion. Group statutory operating performance Statutory operating profit from continuing operations was £224.3m (2020: loss of £(215.2)m) reflecting £122.4m of net adjusting items compared with £(284.9)m in 2020, as noted above. Finance costs and investment income Net finance costs were £170.0m (2020: £146.9m) with the increase principally due to the increase in lease interest from £42.6m in 2020 to £73.1m in 2021. This increase was mainly due to the new rolling stock leases in relation to the start of the Avanti operation from December 2019 and the GWR DA-3 rolling stock lease liabilities from March 2020. Net finance costs for FY22 are estimated to be c.£100m including IFRS16 lease interest but excluding anticipated debt make-whole costs of c.£65m. Profit before tax Adjusted profit before tax as set out in note 4 to the consolidated financial statements was £39.4m (2020: profit £109.9m) including discontinued operations. An overall credit of £76.4m (2020: £(409.5)m) for adjustments principally reflecting gains on property disposals of £71.1m (2020: £9.3m), Rail termination sums net of impairment reversal credit of £95.7m (2020: £nil), North America self-insurance reserve charge of £32.2m (2020: £141.3m), strategy costs of £37.2m (2020: £58.2m), impairment on land and buildings £16.6m (2020: £nil) and other intangible asset amortisation charges of £4.1m (2020: £4.9m), resulted in a profit before tax including discontinued operations of £115.8m (2020: loss before tax of £(299.6)m). Tax The tax charge, on adjusted profit before tax, for the year was £4.2m (2020: £24.6m), representing an effective tax rate of 10.7% (2020: 22.4%). The reduced effective rate is due to reduced deferred tax on US state taxes and the comparatively lower profits. There was a tax charge of £30.6m (2020: credit of £39.6m) relating to other intangible asset amortisation charges and other adjustments, partly offset by the write back of previously unrecognised deferred tax assets of £10.1m (2020: a charge of £40.0m). The total statutory tax charge was £24.7m (2020: £25.0m) representing an effective tax rate on the statutory loss before tax of 21.3% (2020: (8.3)%). This rate is different from the effective tax rate on adjusted profits primarily because the underlying profit is higher so the reduced deferred tax on US state taxes has less impact and certain adjustments are not tax deductible. The actual tax paid during the year was £4.5m (2020: £2.9m) and differs from the tax charge of £24.7m primarily due to refunds received during the year in respect of prior years and payments to be made post-year end. The ongoing Group’s effective tax rate is expected to be broadly in line with UK corporation tax levels (currently 19% and increasing to 25% from 1 April 2023). EPS Adjusted EPS was 2.4p (2020: 6.8p). Basic EPS was 6.5p (2020: (27.0)p). FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Shares in issue As at 27 March 2021 there were 1,206.4m shares in issue (2020: 1,210.8m), excluding treasury shares and own shares held in trust for employees of 15.4m (2020: 8.7m). The weighted average number of shares in issue for the purpose of basic EPS calculations (excluding treasury shares and own shares held in trust for employees) was 1,203.6m (2020: 1,210.9m). Capital expenditure Road cash capital expenditure was £112.2m (2020: £283.4m) and comprised First Student £50.6m (2020: £191.5m), First Transit £16.2m (2020: £18.8m), Greyhound £14.9m (2020: £38.8m), First Group America £nil (2020: £1.5m), First Bus £30.1m (2020: £30.1m) and Group items £0.2m (2020: £2.7m). First Rail capital expenditure was £116.5m (2020: £115.7m) and is typically matched by franchise receipts or other funding. In addition, during the year we entered into leases in the Road divisions with capital values in First Student of £37.5m (2020: £75.1m), First Transit of £17.0m (2020: £13.8m), Greyhound of £9.0m (2020: £21.3m) and First Bus of £4.6m (2020: £6.3m) and Group items £0.3m (2020: £0.4m). During the year First Rail entered into leases with a capital value of £105.2m. Gross capital investment (fixed asset and software additions plus the capital value of new leases) was £516.1m (2020: £2,326.5m) and comprised First Student £211.5m (2020: £331.9m), First Transit £37.2m (2020: £30.5m), Greyhound £14.7m (2020: £65.4m), First Bus £28.6m (2020: £52.6m), First Rail £223.8m (2020: £1,842.9m) and Group items £0.3m (2020: £3.2m). The balance between cash capital expenditure and gross capital investment represents new leases, creditor movements and the recognition of additional right of use assets in the year. Adjusted cash flow The Group’s adjusted cash flow of £284.0m (2020: £97.4m) was well ahead of initial expectations, reflecting our actions to maintain liquidity and financial strength despite the passenger volume reductions. Some capital expenditure and working capital outflows were deferred, which in the case of the discontinued operations were reflected in the terms of the sale. First Bus cash flows were affected by the timing of a c.£70m CBSSG settlement from DfT, which is expected during FY22. The Group also secured £109.5m in cash proceeds from the sale of properties in the year, principally from Greyhound. The foreign exchange gain in the year in part reflects the hedging strategy put in place for the net proceeds of the First Student and First Transit sale. The adjusted cash flow is set out below: 52 weeks to end March EBITDA Other non-cash income statement charges Working capital Movement in other provisions Pension payments in excess of income statement charge Cash generated by operations Capital expenditure and acquisitions Proceeds from disposal of property, plant and equipment Proceeds from disposal of business Interest and tax Lease payments now in debt/other Adjusted cash flow Foreign exchange movements Inception of new leases Lease payments now in debt Other non-cash movements Adjustment on transition to IFRS 16 Movement in net debt in the period 2021 £m 1,169.5 9.6 166.1 72.7 (59.2) 1,358.7 (391.0) 119.0 – (152.1) (650.6) 284.0 78.5 (210.2) 644.1 (161.3) – 635.1 2020 (restated) £m 1,108.9 8.8 71.5 (64.5) (38.8) 1,085.9 (352.8) 30.5 16.2 (126.1) (556.3) 97.4 (24.1) (1,828.1) 549.2 (2.0) (1,168.2) (2,375.8) 3131 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic report Financial review continued Net debt The Group’s adjusted net debt at 27 March 2021, which excludes the impact of IFRS 16 and the capitalisation of Right of Use Assets and First Rail ring-fenced cash was £1,414.3m (2020: £1,490.9m). Reported net debt was £2,625.8m (2020: £3,260.9m) after IFRS 16 and including First Rail ring-fenced cash, as follows: Analysis of net debt Sterling bond (2021) Sterling bond (2022) Sterling bond (2024) CCFF Bank loans and overdrafts Supplier financing Lease liabilities Senior unsecured loan notes Loan notes Gross debt excluding accrued interest Cash First Rail ring-fenced cash and deposits Other ring-fenced cash and deposits Net debt excluding accrued interest IFRS 16 lease liabilities – Road IFRS 16 lease liabilities – Rail IFRS 16 lease liabilities – total 27 March 2021 Continuing £m Discontinued £m 349.9 323.4 199.8 298.2 620.1 – 1,784.4 198.8 0.7 3,775.3 (784.3) (638.5) (16.1) 2,336.4 66.8 1,655.8 1,722.6 – – – – – 159.2 188.5 – – 347.7 (50.0) – (8.3) 289.4 127.4 – 127.4 28 March 2020 (restated) Total Group £m 348.7 322.7 199.8 – 656.3 – 2,473.1 219.8 9.4 4,229.8 (319.5) (611.9) (37.5) 3,260.9 283.3 2,098.6 2,381.9 Total Group £m 349.9 323.4 199.8 298.2 620.1 159.2 1,972.9 198.8 0.7 4,123.0 (834.3) (638.5) (24.4) 2,625.8 194.2 1,655.8 1,850.0 Net debt excluding accrued interest (pre-IFRS 16) 613.8 162.0 775.8 879.0 Adjusted net debt (pre-IFRS 16 and excluding First Rail ring-fenced cash) 1,252.3 162.0 1,414.3 1,490.9 Under the terms of the First Rail contractual agreements, cash can only be distributed by the TOCs up to the amount of their retained profits. The ring-fenced cash represents cash that is in the TOCs at the balance sheet date. First Rail ring-fenced cash increased by £26.6m to £638.5m in the year principally due to the pre-funding of working capital flows noted elsewhere. Funding and risk management Liquidity within the Group has remained strong. At 27 March 2021, there was £1,130.6m (2020: £585.7m) of undrawn committed headroom and free cash, being £346.1m (2020: £348.6m) of committed headroom and £784.5m (2020: £237.1m) of net free cash after offsetting overdraft positions. This reflects the previously disclosed issuance of £300m in commercial paper through the UK Government’s CCFF scheme in April 2020 which was renewed for a further year in March 2021, cash flow in the period and the timing of working capital movements in First Student. Subsequent to the year end the Group completed the sale of First Student and First Transit for net cash proceeds of c.£2.3bn that is being applied to significantly deleverage the balance sheet with pro forma adjusted net debt of c.£100m after all funds flows relating to the transaction. The Group expects to settle £1.8bn of outstanding debt including the CCFF commercial paper, the 2022 bond and other debt, incurring c.£65m in make-whole costs; to contribute £220m in cash and transfer £117m into escrow in respect of the UK Bus and Group pensions schemes; to apply a total of c.£260m for Greyhound legacy liability de-risking and other short-term capital requirements; and to make the proposed £500m return of value to shareholders in due course. Following the transaction, the majority of our debt has either been repaid, or will be repaid after required notice periods have elapsed, including under the £800m Revolving Credit Facility. Once these repayments have taken place, the remaining drawn facilities will include the £200m 2024 bond and fleet finance leases in First Bus and Greyhound. The £800m revolving credit facilities remain in place for up to three months and the Group is in discussions with its banking group for a more suitable facility going forwards for a smaller remaining Group. 3232 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021The Group does not enter into speculative financial transactions and uses only authorised financial instruments for certain financial risk management purposes. The covenant relief obtained in November 2020 will no longer be required once the USPP is repaid in August. All other debt on which relief had been obtained has either been repaid and cancelled, or, in the case of the Revolving Credit Facility, we have advised the agent that the relief no longer applies. For the March 2021 covenant test the net debt: EBITDA ratio was 1.6x and the fixed charge cover ratio was 1.6x, well within the original covenant ratios. Interest rate risk We seek to reduce our exposure by using a combination of fixed rate debt and interest rate derivatives to achieve an overall fixed rate position over the medium term of at least 50% of net debt. Fuel price risk We use a progressive forward hedging programme to manage commodity risk. As at 27 March 2021, 44% of our ‘at risk’ UK crude requirements for the current year in the UK (1.7m barrels) were hedged at an average rate of $61 per barrel, 17% of our requirements for the year to end March 2023 at $55 per barrel, and 1% of our requirements for the year to end March 2024 at $62 per barrel. Greyhound’s fuel exposure is largely unhedged because its competitors – passenger cars and the airlines – do not hedge their fuel exposure, so Greyhound’s pricing is responsive to fuel price changes. Foreign currency risk ‘Certain’ and ‘highly probable’ foreign currency transaction exposures including fuel purchases for the UK divisions may be hedged at the time the exposure arises for up to two years at specified levels, or longer if there is a very high degree of certainty. The Group does not hedge the translation of earnings into the Group reporting currency (pounds Sterling) but accepts that reported Group earnings will fluctuate as exchange rates against pounds Sterling fluctuate for the currencies in which the Group does business. During the year, the net cash generated in each currency may be converted by Group Treasury into pounds Sterling by way of spot transactions in order to keep the currency composition of net debt broadly constant. Foreign exchange The most significant exchange rates to pounds Sterling for the Group are as follows: US Dollar Canadian Dollar 52 weeks to 27 March 2021 52 weeks to 28 March 2020 Closing rate Effective rate Closing rate Effective rate 1.38 1.74 1.39 1.75 1.25 1.74 1.29 1.72 Pensions We have updated our pension assumptions as at 27 March 2021 for the defined benefit schemes in the UK and North America. The net pension deficit (comprising continued and discontinued operations) of £313m at the beginning of the period was £296m at the end of the year, with UK Bus schemes increasing from £93m to £164m, and North America decreasing from £218m to £129m. The main factors that influence the balance sheet position for pensions and the principal sensitivities to their movement at 27 March 2021 are set out below: Discount rate Inflation Life expectancy Movement +0.1% +0.1% +1 year Impact Reduce deficit by £32m Increase deficit by £27m Increase deficit by £90m 3333 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportFinancial review continued The Trustee and Company have finalised the 2019 funding valuation for the First UK Bus Pension Scheme. Taking into account the parent company guarantee provided by FirstGroup plc, the funding deficit of £271m at the valuation date is lower than that of the previous triennial valuation (£302m as at April 2016), but higher than the balance sheet position on an accounting basis at the relevant date. The funding shortfall on a targeted low dependency basis (with a discount rate of gilts +0.5% per annum) at the reporting date is estimated to be c.£170m higher than the deficit reported in these financial statements. We are now actively engaging with the Trustee on strategic discussions in relation to a long-term funding target for the Scheme, including liability management options, covenant, de-risking the investment strategy and securing member benefits. Such a long-term funding target (often referred to as low dependency or self-sufficiency) is not Balance sheets – net assets/(liabilities) First Bus First Rail Greyhound Discontinued operation – First Student Discontinued operation – First Transit Divisional net assets Group items Net debt Taxation Total defined precisely but may be achieved by setting a funding target in line with a discount rate for liabilities in the range of Gilts to Gilts +50bps. In our opinion, funding the Scheme to such a level within a reasonably short time horizon, while taking actions to reduce exposure to investment risk, is both realistic and achievable – especially given the rate at which the Scheme is now maturing following closure first to new entrants and then subsequently to ongoing accrual. Such a lower risk, low dependency funding target could be c.£100m higher than the value of liabilities in the funding valuation. In November, an annuity buy-in was completed for all the current pensioners in the Aberdeen LGPS. The pensioners represent £230m, or 70%, of our Scotland LGPS pension liabilities, and removing our exposure to that risk represents a material reduction to the Group’s overall ongoing pension risk. As part of the sale of First Student and First Transit, memoranda of understanding have been agreed with the Group Pension Scheme and Bus Pension scheme whereby £220m of cash will be contributed to the Bus Scheme and £117m in total put into escrow that could be released back to the Group depending on future triennial valuation outcomes. Balance sheet Net assets have decreased by £22.6m since 28 March 2020. The principal reasons for the decrease are actuarial losses on defined benefit pension schemes (net of deferred tax) of £33.8m and unfavourable translation reserve movements of £110.9m partly offset by the profit for the year of £91.1m and favourable derivative hedging movements net of tax of £28.0m. As at 27 March 2021 Continuing £m Discontinued £m 328.1 925.6 (54.5) – – 1,199.2 (38.1) (2,336.4) (13.5) (1,188.8) – – – 2,381.1 298.0 2,679.1 (10.0) (289.4) (36.8) 2,342.9 Total Group £m 328.1 925.6 (54.5) 2,381.1 298.0 3,878.3 (48.1) (2,625.8) (50.3) 1,154.1 As at 28 March 2020 Total Group £m 379.5 1,348.7 (130.8) 2,549.2 372.0 4,518.6 (35.2) (3,260.9) (45.8) 1,176.7 Post-balance sheet events ■ On 23 April announced sale of First Student and First Transit (see discontinued operations note 21) and completed the sale on 21 July ■ Cancelled the £300m bridge facility that matures in March 2022 ■ Repaid Sterling bond 2021 of £350m on 15 April ■ Repaid a further £527m of indebtedness and contributed £220m to UK Bus Pension Scheme in applying some of the sale proceeds from the sale of First Student and First Transit ■ Following the sale of First Student and First Transit, the letters of credit, surety bonds and parent company guarantees relating to those businesses have been cancelled or in the process of being released ■ Agreed termination sum with the DfT relating to the TPE franchise ■ Signed National Rail Contracts for SWR and TPE in May for initial two-year term with the DfT having an option to extend the respective contracts for a further two years to May 2025 ■ Agreed with the DfT the extension of the Emergency Measures Agreement for GWR to December 2021 ■ Announced the closure of Greyhound Canada on 15 May. Ryan Mangold Chief Financial Officer 27 July 2021 3434 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Responsible business Our ambition is to be the partner of choice for innovative and sustainable transport, accelerating the transition to a zero carbon world. We are committed to building a business for the long term, actively managing the most important issues we face from an ESG perspective. These issues go to the heart of what we do as an organisation. We have a critical role in creating a connected, healthy, zero carbon world, contributing to local prosperity and growth, reducing congestion on the roads, improving air quality and helping to lower carbon emissions. Mobility Beyond Today Our strategic framework for sustainability Climate leadership This year, FirstGroup became the first public transport operator in the UK to formally commit to setting an ambitious, science-based target aligned with limiting global warming to 1.5°C and to reaching net-zero emissions by 2050 or earlier. Our interim targets to net-zero will be independently verified by the Science Based Targets initiative (SBTi) and will be published in early 2022 (see pages 38 and 60 for further details). This builds on our previously announced commitments to transition to an entirely zero emission bus fleet by 2035 (and not to purchase new diesel buses after 2022) and we support the UK Government’s proposal to take all diesel-only trains out of service by 2040. ESG performance in 2020/21 We continue to be recognised as a leader in evaluations, ratings and rankings of our ESG performance. During the year we were included in the 2021 Clean200 report, which ranks the world’s largest publicly-listed companies by their total clean energy revenues from products and services that provide solutions for the planet and define a clean energy future. We are the only passenger transport operator based in Europe to be included in this year’s report. We were also the only UK transport company recognised in the S&P Global Sustainability Yearbook 2021, ranked within the top 15% of the sector globally. We scored in the 98th percentile in our sector in the FTSE4Good Index, and maintained our longstanding participation in the CDP global disclosure programme. 1 Our three priority areas drive our sustainability ambitions: Innovating for our customers Our innovative solutions ensure we deliver the transport of choice for our customers, passengers and communities 2 Read more on pages 36-37 s u t a i n abilitystrate g y O ur s Being the partner of choice for low and zero emission transport Our business delivers low and zero emission transport solutions to help combat climate change and improve local air quality Read more on pages 38-39 Mobility Beyond Today C o n n e c tin g people a n d m o c s m unitie 3 Supporting our people Our workforce is diverse, healthy, supported, engaged and has the skills required now and in the future Read more on pages 40-42 Form genuine, enduring local relationships with the communities we serve Read more on pages 50-51 Our foundations underpin our framework: Hold the highest ethical standards Read more on page 93 Foster continuous improvement in safety towards our goal of zero harm Read more on pages 43-45 Embed environmental management to reduce our impact on the environment Read more in our Environmental Performance Report We identified our strategic priorities through robust materiality assessment and extensive dialogue and consultation with both internal and external stakeholders. with the needs and perspectives of our stakeholders continuing to inform our plans. See pages 46-49 for more information on our stakeholder engagement through FY21. We recognise this is a process that will continually evolve and so too will our work, 35 FirstGroup Annual Report and Accounts 2021Strategic reportResponsible business continued Innovating for our customers We want more people than ever to join us in travelling on our bus and rail services, taking cars off the road, and that means providing services that have innovation, ease and convenience at their core. Our aims Making the shift More people using bus and rail services, increasing ridership and taking private car journeys off the road. Innovation Embracing new technologies and ways of working to deliver easy and convenient mobility solutions for our customers. Using our influence Collaborating and partnering with stakeholders to shape the sustainable communities of the future. 36 Making the shift We already play a critical role in reducing congestion on our roads, improving air quality and helping to lower carbon emissions. Independent analysis from CEBR of the positive impact of FirstGroup services in the UK shows that First Bus and First Rail deliver over £2bn in annual savings through reduced congestion and more than 1.75m tonnes of avoided carbon emissions per year thanks to customers choosing to travel on our services over alternative modes including private cars, taxis and planes. In the UK, statistics show that bus and coach transport accounts for only 3% of greenhouse gas emissions produced by the transport sector, while rail accounts for just 1.4% of transport emissions despite carrying 10% of all journeys (pre-pandemic). FirstGroup are already amongst the top 200 global public companies ranked by green revenues in 2020. We have firm commitments to drive down our emissions further, and strong governance and management processes in place to ensure progress. But just as importantly, we are focused on helping more people make the shift to our bus and rail services, and getting more people back on to public transport following the pandemic. Clearly this is environmentally desirable, but public transport is also vitally important for social inclusion, acting as a leveller for access to education, jobs and health facilities, and driving social mobility and cohesion. For example, a quarter of UK households do not have access to a car, rising to 45 per cent of low-income homes, while 40% of jobseekers say that a lack of personal transport or poor public transport is a key barrier to employment. FirstGroup provides services (and creates jobs) in many of the UK’s most deprived areas – in fact FirstGroup directly provides employment in 355 of the 374 Local Authority Districts (94.9%) in the UK. Public transport is vital to prosperity. In FY20, FirstGroup supported £1.46bn of business turnover in the UK economy, where firms relied on FirstGroup services in their production processes. Simplifying end-to-end journeys and supporting active travel To increase ridership and take more private journeys off the road, we strive to improve and simplify end-to-end passenger journeys, and to increase the integration of active travel, including cycling and walking, in our networks. This year, GWR installed hundreds of secure bike spaces to allow even more people to choose a sustainable way of getting to and from the station, reducing road traffic congestion and improving access to the benefits of sustainable travel by rail. In November 2020, we launched a new partnership between First Transit and urban mobility app providers, Moovit, enabling passengers to plan and pay for all stages of their journey. The app works across different modes of transport – including bus, train, subway, car-sharing, bikes and scooters – to provide comprehensive urban mobility information, such as multimodal trip planning, real-time arrival information, service alerts, booking, contactless payments, and e-tickets. Accessible journeys We are committed to making our services accessible and we make every effort to support customers with disabilities or restricted mobility. We recognise that access to public transport services is often fundamental to such customers’ independence. For example, user research has shown that individuals with a disability or mobility issue are more dependent on buses, using them approximately 20% more frequently than non-disabled people. We work with both national and local disability groups and FirstGroup Annual Report and Accounts 2021Strategic reportcontinue to invest in making our services more accessible to those with disabilities. We accomplish this through both better employee training, more accessible vehicles, and technology enhancements. An example of the latter is the capacity tracking functionality of our First Bus app which now provides live tracking information and capacity including information on available wheelchair spaces onboard our bus services. Across First Rail, our operating companies have been rolling out disability awareness training for all customer-facing employees as part of an industry-wide commitment. More than 8,200 employees have already been trained, equipping them to provide the best possible service to all our disabled passengers. Combining excellent customer service with innovation To encourage more people to use bus and rail services, we continue to invest in innovations to improve customer service, delivering more convenience, smarter, easier and more flexible ticketing, better real-time information and improved onboard amenities. We completed the rollout of our smartcard schemes across our operating companies, with the launch of a new scheme in Avanti this year. This was alongside a new information service to give real-time journey updates for passengers through the on board service ‘Track My Train’. We also became the UK’s first rail company to provide super-fast onboard 5G Wi-Fi through evo rail, created in-house by First Rail. Developed in partnership with Blu Wireless, Network Rail and the DfT, our innovative end-to-end 5G solution allows passengers to enjoy consistent, fast Wi-Fi connectivity on train journeys for streaming, rapid browsing, and connectivity to cloud-based applications. Following a successful large-scale pilot on the Isle of Wight’s Island Line in our SWR franchise, our 5G technology will be installed on a 70km section of the SWR mainline, followed by Avanti later in the year. Using our influence Public transport is public-facing, often the topic of political debate and subject to significant interaction with government at local, regional and national level. Our influencing goals are to advocate for innovation and investment in sustainable mobility, and to argue for sustainable transport infrastructure decisions that help reduce congestion, enhance customer experience and decrease journey times. We achieve this by engaging broadly and deeply with a wide range of stakeholders and policymakers. At Group level, we have long-established and strong relationships with government officials and departments, as well as positive engagement with ministers. We work with both Government and opposition policy teams and advisers, as well as significant political influencers, including Parliamentary and Congressional committee members. Our experience, expertise and market-leading positioning is recognised when we intervene in policy debate and allows us to engage meaningfully with decision-makers to promote the most effective form of private sector transport provision in our respective markets. We also engage with policymakers and seek to influence the development of policy both directly, and through the membership of sector trade organisations in the UK and North America, who engage with national or federal government and regulators to promote a positive policy environment for private sector transport. In First Bus we work closely with our local authority partners to pursue formal and informal partnerships which help us deliver better services through measures which cut road congestion and give priority to buses. In First Rail, we deploy Regional Development Managers within our operating companies who liaise with local and regional government, local businesses, user groups and others. This commitment to, and experience of, effective local and regional partnerships, underpins our approach to the partnership options set out in the Government’s new National Bus Strategy, as well as our engagement with the devolved nations, to ensure that the experience and expertise of private operators remains central to the delivery of public transport services. In the UK, we engage with, and support through formal membership, a number of business advocacy organisations, sustainability lobby groups and public transport campaigns. By working through these alliances, we amplify our influence on policy issues – this year particularly around post-pandemic recovery and transport decarbonisation in the context of the UK’s journey to become net-zero by 2050. We continue to work with stakeholders and engage directly with Government ahead of the UN COP26 Climate Change Conference taking place in November. This is not only because the venue is Glasgow, where we are the leading bus operator and which is a major destination for two of our rail companies, but because of the importance of modal shift and fuel innovation to decarbonising transport and achieving net-zero emissions. This year, First Rail Managing Director, Steve Montgomery, was appointed Chair of the Rail Delivery Group (RDG), providing leadership at a critical time to support engagement and support for rail industry reform. In rail, we are also represented on the Sustainable Rail Executive, convened by the Rail Safety and Standards Board (RSSB), alongside DfT and other key stakeholders, and chair RSSB’s Sustainable Rail Leadership Group, helping to set air quality and climate change goals, tools and guidance for the rail industry to transition to a lower-carbon future. We comply with the Lobbying (Scotland) Act 2016 regulations and key personnel are registered with the UK Lobbying Register. FirstGroup’s gifts and hospitality policy is strictly adhered to when engaging with stakeholders at all levels. In line with Company policy, we do not make political donations in the UK, and the US businesses only participate directly in the political process on limited occasions. In the US, all political donations are approved by our US General Counsel to ensure that they comply with all relevant laws and are properly disclosed. Greyhound has a political action committee, which pools campaign contributions from members or employees and donates those funds to campaign on ballot initiatives or legislation, but it is not heavily used. More information on our stakeholder engagement strategies can be found on pages 46-49. 37 FirstGroup Annual Report and Accounts 2021Strategic reportResponsible business continued Being the partner of choice for low and zero emission transport We are taking action to combat climate change and improve local air quality by delivering low and zero emission mobility solutions for our customers. One of our key aims is to eliminate the carbon emissions associated with our operations in line with the latest climate science. Our aims Zero carbon Eliminating the carbon emissions associated with our operations. Air quality Improving local air quality in our towns and cities through our cleaner fleets. Climate resilience Incorporating climate adaptation measures to improve the resilience of our services. 38 The vital role of public transport has never been clearer in helping to address the challenges of climate change. We are therefore committed to delivering a more sustainable future for the communities we serve. We actively manage our greenhouse gas emissions across our business and are working to eliminate the carbon emissions associated with our operations. Zero carbon Work and investment has continued to progress in both our UK and North American operations with the expansion of our battery, electric and hydrogen fuel cell vehicle fleets. The coronavirus pandemic has significantly reduced our passenger and service volumes resulting in a 40% reduction in our carbon emissions from FY20. In prior years, FirstGroup had reduced its gross carbon emissions by an average of 3% per year since our 2016 base-year, a trajectory we expect will have continued despite difficult operating circumstances. First Bus already plays a leading role in the operation of low and zero emission vehicles. In 2020 we announced our commitment to achieving a fully zero emission fleet by 2035. This year we have expanded our fleet of electric buses across our services including in Leeds, Glasgow and the country’s biggest electric Park&Ride fleet in York. We have secured funding to introduce a further 148 buses to the existing electric bus fleet in Glasgow and announced our partnership with Arrival to become the first operator of their ground-breaking zero emission bus. We have a 99 strong fleet of biomethane buses in Bristol. We have also introduced the world’s first hydrogen powered double-decker fleet in Aberdeen. Similarly, our First Rail operations are also continuing efforts in this space. The electrification of our First Rail routes has contributed to a 33% reduction in carbon emissions per passenger kilometre since 2016, and progress is set to continue as the UK rail network is progressively electrified. Electrification has vastly reduced our carbon emissions both in real terms and per vehicle Climate leadership through science-based targets In April 2021, FirstGroup became the first bus and rail operator in the UK to formally commit to setting an ambitious, science- based target aligned with limiting global warming to 1.5°C and to reaching net-zero emissions by 2050 or earlier. This provides us with a clearly defined path to reduce emissions across the Group in the UK that aligns with the Paris Agreement goals and the latest climate science. It will involve undertaking an evaluation of our carbon emissions across our value chain to publish a target in early 2022. FirstGroup Annual Report and Accounts 2021Strategic reportkilometre, with 73% of our kilometres now powered by electric traction (2020: 68%). However, to continue to reduce our carbon emissions further we need to maintain our work with Government, Network Rail and other key stakeholders in support of further electrification of the UK network and, where electrification is not going to be possible, to support the case for other low or zero carbon alternatives to running diesel trains. Sustainability is a key focus in all of our contracts with the DfT and we will continue to ensure carbon-related metrics are included in further contracts and negotiations in future. This year First Student and First Transit announced the launch of a joint framework agreement with the world’s largest generator of renewable energy from the wind and sun, NextEra Energy Resources, pursuing the electrification of tens of thousands of school and public transportation vehicles across the US and Canada. 73% of our rail kilometres are now powered by electric traction Electric Diesel 73% 27% Air quality Air quality has a significant impact on the health of our communities, and many cities and towns are already working to place restrictions on the most polluting vehicles and prioritise public transport. An important aspect of improving local air quality is to make the shift away from car journeys, and to invest in convenient and cost-effective low emission public transport networks. Alongside our long-term commitment to transition our business to become net-zero, we also have programmes in place to reduce the emissions of air pollutants from our existing fleet. Through the process of contract renewal, new contracts and planned fleet replacement, we are replacing our older, higher emission fleet with new models. This year in First Bus we also reached the milestone of installing more than 1,000 Exhaust After-treatment Systems (EATS) to older diesel vehicles to achieve the Euro VI low emissions standard and contribute to improving air quality in the communities and for the customers we serve. These systems are designed to remove air pollutants such as nitrous oxides (NOx) and particulate matter (PM) before they can be emitted. Using an ‘air emissions inventory’ approach, in alignment with UK Government methodologies, we have been able to demonstrate a reduction in NOx and PM emissions from our fleets thanks to investments in technologies like this. As we transition our fleets to zero emissions, our air quality impacts will increasingly be associated with our vehicle brakes and tyres, i.e. non-exhaust emissions. In First Bus we have this year secured funding to work with industry partners to identify opportunities for reducing emissions from these sources and to inform future policy and regulation in this area. We are also driving cross-industry research into the impact rail transport can have in reducing NOx emissions through our leadership of the rail industry’s Air Quality Steering Group. Climate resilience Greater and more frequent adverse weather caused by climate change increases the risk of service disruption, and of reduced customer demand, with consequent financial impact. Understanding the physical risks of climate change on our business, including our operations, infrastructure, people and customers, means taking into account the likely increase in extreme weather events and the consequent impacts on our service reliability, energy supply and our supply chain. The likely impacts, and the opportunities to mitigate these risks, will vary depending on the geographic location of our individual businesses. We already have severe weather action plans and procedures in place across the Group. This year, as part of our work to address the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), we have begun to review and identify areas of the business that will require further and more detailed analysis of the longer-term physical climate-related risks. Arrival partnership A key part of our transition to a zero emission bus fleet will be achieved through working with vehicle manufacturers. This year we were excited to announce that we are partnering with electric vehicle manufacturer, Arrival, to begin trials of its zero emission bus. This will be the first time the buses are tested on public roads and will be used on existing First Bus routes, helping us bring some of the most innovative zero emission vehicles on the market onto the UK’s streets for our customers and partners. The single-decker Arrival bus is designed to be up to 40% lighter than other battery-electric buses on the market. It features a passenger seating capacity of 36 across the entire flat floor, allowing greater accessibility, as well as more usable standing space and ability for passengers to travel more comfortably. In addition to this, while we take steps to ensure that climate impacts are taken into account for our own assets, we also need to work with wider stakeholders to understand the risks and mitigations that are required for the infrastructure we rely on to deliver our services. In our TCFD section on pages 57-60 we go into more detail about how we are exploring these risks and opportunities. 39 FirstGroup Annual Report and Accounts 2021Strategic reportResponsible business continued Supporting our people We employ many thousands of people in depots, stations and offices, providing vital services which connect people and communities. Our people are at the heart of our business, and we are extremely proud of the way they have kept customers moving during the pandemic. Throughout the last 12 months, while our primary concern has been the protection of customers and colleagues and adapting to new ways of working, we have continued to invest in attracting, developing and retaining customer-oriented and skilled people. Diversity and Inclusion To better understand and meet the needs of the diverse customers and communities we serve, we are committed to increasing the diversity of our workforce. We recognise that attracting and retaining people with different backgrounds and experience requires an inclusive culture where everyone feels valued and respected. While we are proud of the progress being made in many areas, we acknowledge there is still more to do to in order to create an inclusive workplace for everyone. The public transport industry remains male-dominated, so increasing gender diversity has been a key area of focus. Despite the impact of the pandemic on our businesses during the year, we have made further progress on the four commitments we set out in 2017, namely to: ■ increase the number of female applicants for all roles ■ encourage more women to stay and progress ■ support and develop more women into higher paying roles ■ ensure men are aware of the role they play in creating an inclusive workplace that is welcoming to women. More information can be found in our 2020 Gender Pay Gap Report. Overall, this year the proportion of female colleagues in the Group was broadly unchanged at 40.1% (2020: 40.5%). The proportion of women in senior management positions has continued to increase. In previous years, we have used the Companies Act definition of ‘senior manager’ and under this measure, female senior managers have risen again from 26.3% to 28.1% since last year’s report. Using the Hampton-Alexander definition (women on the company’s Executive Committee and direct reports to the Executive Committee) we stood at 21.7%, at October 2020. As a result of more recent appointments up to 31 March 2021, this has improved further to 22.7%. At Board level, at 31 March 2021, 30% of our Non-Executive Directors were women. With the appointment of Jane Lodge on 30 June 2021, female representation on the Board increased further to 36.4%. Our women’s development programmes continue to increase the number of women in management roles. ‘Step Up’ encourages women in frontline jobs to prepare for and attain their first supervisory or line management role; of the 120 women who have attended since 2019, 28% have already been promoted. In 2020, we piloted a new programme, ‘Step Forward’, supporting women in junior managerial roles to move into middle management jobs. This programme has been similarly successful, with 35% of participants being promoted since attending. Our aims Diversity and inclusion We value diversity and inclusion, and our workforce represents the communities we serve, increasing effective participation and equal opportunities. Skills for the future Our people have the skills, expertise and knowledge to drive the transition to a sustainable future. Wellbeing Our culture means that our employees are supported towards good mental and physical wellbeing. 40 FirstGroup Annual Report and Accounts 2021Strategic reportGender diversity As at 27 March 2021 Total employees1 2021 100,807 40.1% 40,463 2020 112,394 40.5% 45,557 2019 108,722 40.0% 43,438 Senior managers Companies Act definition2 2021 28.1% 392 110 2020 384 2019 370 26.3% 101 23.2% 86 Senior managers Hampton-Alexander definition3 as at 30 October 2020 2020 69 21.7% 15 2019 62 2018 60 19.4% 12 21.7% 13 Board directors 2021 30.0% 3 10 2020 10 2019 10 30.0% 3 20.0% 2 Female Male 59.9% 60,344 59.5% 66,837 60.0% 65,284 71.9% 282 73.7% 283 76.8% 284 78.3% 54 80.6% 50 78.3% 47 70.0% 7 70.0% 7 80.0% 8 1 In 2021, the gender of 69 of our employees was unknown (2020: 54; 2019: 0). 2 Companies Act definition: ‘any employee who has responsibility for planning, directing or controlling the activities of the company or a strategically significant part of the company’. Includes directors of subsidiaries. 3 Hampton-Alexander definition: ‘Executive Committee and direct reports’. We are also committed to improving the ethnic diversity of our workforce. As recent signatories to ‘Change the Race Ratio’, we have committed to taking action which will increase the racial and ethnic diversity of our Board and senior leadership, be transparent on targets and actions, and create an inclusive culture where talent from all diversities can thrive. We look forward to publishing our targets and action plans later this year. Work is underway to create our first UK ethnicity pay gap report, as we recognise the power of this data to drive progress on diversity and fairness issues. As part of our preparatory work, we have engaged our Employee Directors and will be running a series of campaigns with the aim of helping employees to overcome any reluctance or concerns about disclosing their ethnicity. A key area of focus this year has been increasing the ethnic diversity in our UK management teams. To support the career progression of employees from Black, Asian and minority ethnic (BAME) backgrounds, our rail division has created two new development programmes: ‘Reach Up’ and ‘Reach Forward’, which have both been designed to increase the number of BAME employees progressing into managerial roles. Eighty colleagues are now participating in these programmes, with further events planned in FY22. This year, our divisions have strengthened their governance and leadership focus on how we can improve workforce diversity. In First Bus we have conducted a benchmarking exercise of relevant diversity policies, practices and culture to inform a divisional diversity and inclusion strategy. We welcome the insight this has given us and have established an Equality, Diversity and Inclusion Governance Board to provide regular review, support and challenge to our work in this area. We will report fully on our progress next year. In our North American businesses, we established a Diversity & Inclusion Council, formed jointly by First Student and First Transit, and including colleagues from different departments and locations across the US and Canada. The Council meets monthly to advise senior leadership on how to promote and advance an inclusive work environment. The learning from this model is being shared across the Group. Forbes has recently named FirstGroup as one of the most diverse employers in the US. We are committed to supporting disabled employees, with regard to training, career development and promotion. Across the Group, full and fair consideration is given Increasing workforce diversity As part of our commitment to increase the number of female employees at FirstGroup, we have continued to expand the ways in which we promote available job opportunities. Examples include partnering with job platforms like WORK180 and VERCIDA, which are aimed at jobseekers who wish to work for employers with a clear commitment to diversity, inclusion and wellbeing. GWR has used these platforms to promote career opportunities in traditionally male-dominated roles, such as train drivers, to a more diverse audience. These and other efforts are continuing to make a difference, with the percentage of women hired up from 21.4% to 22.8% compared with the previous year, despite the number of vacancies being substantially reduced as a result of the pandemic. to applications for employment from people with disabilities. As part of our plan to support more people with disabilities to enter the workforce, GWR has been working with the charity Whizz-Kidz, providing online mentoring and training support for young people in the local community who have mobility impairments, and encouraging them to consider careers in the rail industry. Throughout our UK businesses we operate a wide variety of employee networks covering different strands of diversity, providing support to underrepresented groups and advising senior management on ways to improve workforce diversity and foster an inclusive culture. During the year, Avanti launched an internal mentoring scheme, with more than 30 trained mentors providing development support to 41 FirstGroup Annual Report and Accounts 2021Strategic reportResponsible business continued over 60 colleagues from underrepresented groups including disabled people, colleagues from the LGBTQ+ community, women and people from ethnic minority backgrounds. As a consequence of positive feedback, the programme is now being expanded. Skills for the future Each of our divisions provides training to enable our employees to deliver great service for our customers, and invests in the skills we need for the future. The changing nature of transport and mobility, particularly new vehicle technologies and energy transition, requires us to adapt the way we develop, operate and maintain our services. To deliver that change, we need a healthy, engaged, agile and diverse workforce with the skills and expertise for a zero carbon economy, ready to innovate and deliver mobility for the future. We are proud to support green job creation in the UK and North America as we deliver the transition to zero emission public transport. The UK Government predicts that zero emission vehicles could support around 40,000 jobs through the supply chain by 2030, which we see reflected in our investment in new vehicles, cleaner energy and in training and development for drivers and engineers for our zero emission fleets. Our apprenticeship programmes are an important way of growing the engineering and operational skills which are vital to our business, and we currently have 273 apprentices in training across First Bus and First Rail. Independent analysis of the value of our apprenticeship programmes shows over £4.25m in net output added to the economy thanks to our apprentices over the past year. As part of the continuous improvement of our programmes, during the year 60 of our managers in First Bus received training to help them provide the best possible development support to the apprentices in their teams. First Bus and First Rail are signatories to Tomorrow’s Engineers Code, a campaign which brings together employers, education, and professional bodies to increase the number and diversity of young people choosing careers in engineering. It aims to do this in a variety of ways, showcasing the wide variety of job opportunities available, and how engineers use their skills to build a better world. By targeting inspiring activities at under-served and underrepresented groups, the Code seeks to ensure all young people have the opportunity to consider a career in engineering, regardless of their background. 42 To attract and retain the skills we need, we offer a competitive wage reflecting local market demands and conditions. In First Rail, both TPE and Tram Operations Ltd. are accredited Living Wage Employers and pay the Real Living Wage (RLW) to employees and to third-party contractors working directly for the Company in accordance with the Living Wage Foundation rates of pay. GWR, SWR and Avanti also pay the RLW to directly employed colleagues. 97.4% of employees in First Bus, are paid at or over the RLW. Wellbeing Recognising the pandemic has been a very difficult and uncertain time, we have continued to provide support to employees on all aspects of their welfare. This has included taking steps to protect our most vulnerable employees and providing technology and associated systems support to enable colleagues to work effectively at home wherever the nature of their role made this possible. Pages 43-45 detail how the comprehensive safety measures we put in place at the start of the pandemic have been maintained and enhanced during the year. We have also increased our focus on mental health, expanding the number of trained mental health first aiders, and adding digital tools to provide relevant resources and support materials. For example, in First Bus we launched a wellbeing hub on our Employee Portal and colleague app, with guidance on mental and physical health, nutrition and financial advice. In North America, in First Student and First Transit we launched the ‘You First’ wellness campaign, encouraging the use of our emergency assistance programme and support on a wide range of matters from stress and financial concerns to alcohol and substance abuse. We have also implemented Headversity, a set of easily accessible resources giving employees and their families tools to assist mental wellbeing and resilience. To maintain engagement and reduce social isolation, we have used multiple channels to keep in touch with our employees and share important information. The Chief Executive and divisional leaders have continued to film regular updates for employees throughout the year, alongside business-specific communications issued via the intranet, email, newsletters, management briefings and our employee apps. Employee Engagement The ‘From Platform to Boardroom’ scheme has been amazing to me. The advice, guidance and knowledge amassed has helped me decide my career path. I have pursued a Diploma with the Institution of Railway Operators, and now I have been accepted for a Quest Operations Manager Level 5 Apprenticeship. Mau Nteteka, GWR The knowledge and insight of our frontline colleagues is key to helping us improve the customer experience. Through GWR’s reverse mentoring scheme ‘From Platform to Boardroom’ customer-facing employees and senior managers work together to share ideas on improving our service. The scheme has also provided development opportunities for the frontline employees involved. All our businesses carry out regular ‘Your Voice’ surveys giving employees the opportunity to share their views on the way they are managed, and how likely they are to recommend FirstGroup as an employer. These surveys are anonymous, and managed by an external specialist company to encourage candid feedback. Three of our UK rail operating companies, GWR, TPE and Avanti had surveys scheduled before the start of the pandemic. Their engagement results had all increased since their previous surveys, with scores ranging from 71% to 87%, well ahead of the UK transport sector norm (67%). As large numbers of employees were on furlough during the year, some of our businesses deferred the surveys they had planned for 2020. These will now take place in FY22. FirstGroup Annual Report and Accounts 2021Strategic reportDedicated to safety, always front of mind – safety is our way of life Dedication to safety is one of our five values, and our commitment to the safety of our customers, our employees and all third parties interacting with our business remains unwavering. By its nature, the transport industry involves safety risk, with many millions of customers travelling on our services every year. This is why we take seriously our duty of care to ensure that our customers and other stakeholders can use our services safely and that our employees have a safe place to work. While the industry we operate in has significant inherent safety risk, we are determined to achieve our long-term goal of zero harm. We maintain robust safety management systems throughout the Group, with a clear focus on ensuring compliance with policies, processes, and procedures. Be Safe, our safety behavioural change programme, builds on this, making safety a personal core value for every employee. Alongside this, we continue to invest in sophisticated technology solutions to assist our teams in delivering first class safety, reducing incidents and monitoring and managing performance. We are proud of the safety culture we have worked hard over many years to establish. Coronavirus Since the start of the coronavirus pandemic, our priority above all else has been to safeguard the health and wellbeing of our customers and colleagues as we continue to run vital services. We have followed all appropriate public health authority guidance, and ensured we have adequate safety and protective equipment in place. We have pioneered best practice in areas such as enhanced cleaning and decontamination of vehicles, depots and terminals. As a transport provider, our frontline teams are themselves key workers, providing transportation to essential workers to and from their workplaces throughout the UK and North America. We are extremely proud of our colleagues across the Group and we recognise their dedication, professionalism, and commitment in making this possible. There have been countless examples of our people from across the Group providing direct assistance and support to those most in need, right at the heart of the communities we serve. More information on our community engagement this year can be found on pages 50-51 of this report. The wellbeing of our colleagues will always be of paramount importance and we are grateful for the efforts of everyone in the steps they have taken to manage our response to the pandemic. Our response Our approach to the pandemic evolved quickly from its onset and matured with a robust management framework established within each division, overseen at Group level. This included divisionally-led working groups that fed up through the management structure, which then in turn informed a regular review process with each business. A similar process was established for the corporate centre, and a cross-functional team considered all relevant matters such as guidance in public health, safety or employment law. The situation remains highly dynamic and is kept under close and constant review. Measures have been in place throughout the year covering: ■ Employee equipment: We have worked closely with government, health authorities and regulators, as well as our customers, unions and other stakeholders to stay at the forefront of evolving guidance and advice on safety equipment for our employees. At the start of the pandemic, we rapidly mobilised effective supply chains to ensure that our employees could be provided with appropriate equipment in line with the latest guidance for our different operating environments and role requirements. Across all divisions we have made face coverings, hand sanitiser and anti-viral wipes available to employees. ■ Cleaning protocols for our vehicles and buildings: We enhanced our already stringent vehicle cleaning protocols across all divisions, using antiviral products and disinfectants to sanitise high touchpoint areas at increased frequencies. We have been at the forefront of trialling and deploying new products developed to address the coronavirus pandemic and give extended periods of protection against the virus. ■ Social Distancing: We enabled social distancing on all our vehicles where this was possible through a variety of methods, and throughout all our workplaces, depots, terminals and stations. We have encouraged and enabled our customers to use contactless or card payment where possible. In June 2020 we launched an update to our First Bus mobile app that enables customers across the UK to live track not only the 43 FirstGroup Annual Report and Accounts 2021Strategic reportResponsible business continued location of their next bus but also its available capacity. Wherever possible employees have been working from home throughout lockdown periods. ■ Covid Marshals: As the pandemic continued, and lockdowns and other restrictions were loosened and then tightened again, it became evident that one of our biggest challenges would be to ensure that individuals did not become weary of the guidance, either forgetting to follow it or no longer applying as much diligence to the measures in place; so called ‘behavioural fatigue’, which has been a challenge to many organisations and communities throughout the pandemic. To combat this we introduced Covid Marshals across our locations, initially in First Bus and First Rail. These Marshals were empowered to ensure compliance with all measures initially through encouragement and support, but with firmer measures if required. Covid Marshals have been welcomed across the business, and by trade unions, being seen as further evidence of the ongoing support we are giving to our frontline colleagues. ■ Open and regular communication: Each business has kept a regular pace of information flow and engagement with colleagues, supplemented by updates from the Group. ■ Site inspections and audits: We have instituted virtual safety tours and the usual checks and audit regimes have been enhanced and increased in frequency across all divisions. This has ensured the required measures are in place in each location and provided assurance that they remain at the standard required. ■ Wellbeing: We have continued to provide support to frontline employees on wellbeing, particularly mental health. Divisions have built on the extensive existing wellbeing programmes, tailored to their business attributes and needs. For example, in First Bus, our new three-year strategy considers the whole person approach – physical health and safety, mental health, wellbeing, and financial health. ■ Support for community vaccination programmes: Our vital role at the heart of our communities has been shown throughout the pandemic, helping customers to safely make essential journeys. This has included First Cymru working in partnership with Swansea City Council to operate a free shuttle service to and from a hospital vaccination centre; supporting Network Rail’s volunteering efforts in the set-up of a mass vaccination facility centre in Exeter, and putting in place additional station stops to help those travelling to the vaccination centre at Newbury Racecourse. First Bus – enhanced risk management against bridge strikes How it works ■ Industry collaboration and best practice: As a leader in all our markets we have been at the centre of industry efforts to tackle the unique challenges posed by the pandemic. This has included taking the lead on preparing a driver risk assessment alongside the Confederation of Passenger Transport UK (CPT) for the UK bus industry, as well as working with the Rail Delivery Group (RDG) and other rail operators in the UK, and the National School Transportation Association (NSTA) and the American Public Transportation Association (APTA) in North America. Whilst coronavirus restrictions are beginning to lift in many of our key markets, we have not slowed our pandemic response efforts. We continue to prioritise and manage the measures in place to limit the spread of the virus, and its impact on our people and our business. Thankfully bridge strike incidents, where a bus collides with a bridge, are infrequent, but when they do occur they can have serious consequences. Thanks to a new technical solution in First Bus, we are reducing the risk of these incidents. Using the GPS capability of our Ticketer ticket machines onboard our buses, we can now provide an in-cab audio warning to the driver when they are in close proximity of a bridge that is lower than the height of the vehicle. This also triggers an alert to the depot to provide an immediate response and to commence an investigation into the near miss. In addition to this, in partnership with the Institute of Transport Studies at Leeds University we are working to better understand the psychology and behavioural drivers behind why these incidents occur, to help us further design out risk. 44 1 Ticketer holds data on bus height and bridge height 2 Alert will sound in the cab, triggered when the bus comes within 125m of a low bridge GPS 125m 3 All events are reported through to the depot manager and a near miss investigation begins FirstGroup Annual Report and Accounts 2021Strategic reportBe Safe Be Safe is our Group-wide approach to embed safety as a personal core value for all colleagues through behaviour change. The central elements of our Be Safe programme, including daily conversations (touchpoints) to reinforce good safety behaviours, have proved even more important for safety engagement in light of the coronavirus pandemic. Weekly Be Safe debrief sessions for managers and supervisors have continued throughout the lockdown period, respecting social distancing measures by bringing teams together via remote-working IT tools. These weekly debriefs, where Be Safe touchpoints are reviewed, are used for knowledge sharing and to strengthen understanding around best practice. Safety leadership and governance Strong leadership from the top is a key feature of our safety culture. Our Executive Safety Committee (ESC), chaired by the Chief Executive, oversees the Group’s safety strategy and the performance, procedures and practices of our divisions and operating companies. It supports the Board Safety Committee in promoting a positive safety culture across the Group. Discussions also take place monthly at business review meetings with each division. The ESC monitors relevant legislation and updates to standards as part of our control framework and commitment to maintaining safety compliance. Other key activities for the ESC this year include: ■ updating the Group Health & Safety Policy ■ reviewing the coronavirus response, in particular reviewing lessons learned during the pandemic and how these will be factored into future safety plans ■ setting of appropriate safety targets ■ reporting on the wide-ranging wellbeing activities in place and planned across the Group ■ sharing best practice across the divisions. using Radio Frequency Identification beacons, the first of its kind. ■ Greyhound: During the year we increased our focus on ‘BackSafe’ training to help reduce the risk of strain injuries caused by material handling and push/pull/twist injuries. Vehicle safety software DriveCam continued to be used to improve safety behaviours behind the wheel. ■ First Student: A new tool called ‘Mobile Manager’ was developed this year in First Student. This tablet-based mobile application draws information from various systems and identifies driver performance, including on safety, each day. ■ First Transit: This year we delivered Be Safe refresher training to 500 managers and supervisors in First Transit, fitted an enhanced version of DriveCam that allows live streaming to 45% of our fleet and introduced a Professional Operator Development Programme training across our fixed route fleets. Our response to the pandemic demonstrates that safety is an ever-present focus for the Group. We are constantly striving for ways to build on our achievements and make the safest possible environment for customers, employees and all those who interact with our business. Each period the ESC looks at safety assurance across the Group, including reports from security and risk teams. The ESC also undertakes in-depth reviews of performance. Information on our approach to safety governance can be found in the Governance section of this report, which starts on page 74, and in our Board Safety Committee Report on pages 106-107. Information on employee health and wellbeing can be found on page 42. Despite the year being dominated by activities in response to the pandemic, other safety initiatives and measures have continued to be developed and implemented around the Group, including: ■ First Bus: This year we undertook an in-depth review into incidents of collisions with low bridges in First Bus, resulting in industry-leading new preventative measures and campaigns (see page 44 for more information on our work to reduce the risk of bridge strikes). ■ First Rail: As well as being at the forefront of developing and testing new cleaning technologies to protect customers and colleagues from coronavirus, we also maintained our robust safety management systems and approach through multiple changes to network frequencies and operations this year. Tram Operations Ltd. in Croydon were highly commended at the Rail Business Awards and won the UK Tram category for the introduction of Physical Prevention of Over Speed (PPOS), which is an on-tram automatic braking system, 45 FirstGroup Annual Report and Accounts 2021Strategic reportStakeholder engagement We interact with a huge range of stakeholders every single day. Building strong relationships with them involves listening and working in collaboration. Here is a summary of how we engage with some of our largest stakeholder groups. Please see page 96 of the Governance Report for our Section 172 statement and page 86 for the decisions taken by the Board during the year 46 Stakeholder group Customers The needs of our customers are unique to each journey and requirements constantly evolve. Listening, identifying future needs and being able to respond quickly is critical. Our teams use a variety of channels and approaches to engage with customers, assessing satisfaction and gathering feedback. See pages 36-37 Investors The Group welcomes open, meaningful discussion with shareholders on all matters. We have proactively engaged throughout the year with institutional, private and employee shareholders on a range of matters. Being fully aware of the range of views of our shareholders is a key aspect of good corporate governance and supports our commitment to ensuring that we promote the success of the Company for the long-term benefit of our members as a whole. See page 91 Government Strong engagement with Government at all levels is essential to our businesses in both the UK and North America. At Group level, we have long-established relationships with Government officials. See page 37 Why we engage them How we engage with them Key activities from the year ■ Improve customer experience ■ Regular customer and passenger ■ Modified and Covid-secure services and satisfaction ■ Respond to customer feedback ■ Adapt to changing customer needs ■ Build long-lasting and trusted relationships with our customers satisfaction surveys to identify what we do well and where we can improve ■ Robust customer feedback processes through online and traditional channels ■ Customer panels and events ■ Ongoing dialogue with customer representative groups ■ Monthly customer updates by the Chief Executive to the Board ■ Expanded paperless ticketing in First Rail services ■ Capacity information and wheelchair access information for First Bus customers ■ Developed and deployed next generation onboard 5G Wi-Fi from evo rail, developed in-house by First Rail, to improve on-board information services for our rail customers ■ Introduction of Express Mode for Apple Pay across all First Bus networks ■ Daily and weekly contactless ‘tap and cap’ fares are now being rolled out to multiple locations across First Bus ■ Listen and respond to shareholders’ statements ■ Keep investors informed of key business activities and decisions concerns and interests ■ Strengthen the long-term success of the Company ■ Presentations from Executive Directors ■ We increased the tempo of trading and other ■ Annual report, website and regulatory ■ Ongoing dialogue and individual engagement with shareholders by many Board members, including Chairman, Executive Directors, Senior Independent Director and the Chair of the Remuneration Committee ■ Engagement via the Investor Relations market updates in light of the pandemic’s impact on travel ■ Significant engagement with shareholders in relation to the First Student and First Transit transaction, as well as on the mechanism for the proposed return of value ■ Engaged with major shareholders to discuss the proposed remuneration policy (see page 91) function with potential and existing ■ Increasing engagement with shareholders investors and other market participants and other market participants on the Company’s ESG activities ■ To advocate for policy solutions which ■ Engagement with industry forums ■ Post-pandemic economic recovery ■ Direct engagement with policymakers ■ Played a leading role in the Rail Delivery ensure optimal operation of public transport by private operators, thus supporting sustainable economic growth and social mobility ■ To ensure clear communication and understanding of the consequences of policy decisions at different levels of Government ■ To aid effective delivery of public transport at the operational level ■ Strong links with devolved national, regional, state and local Governments ■ Regular surveys of political stakeholders ■ Joining the Confederation of British Industry (CBI) and the Scottish Council for Development and Industry (SCDI) to better influence wider Government policy development. Group (RDG) and the Confederation of Passenger Transport (CPT) discussion on rail and bus sector reform respectively ■ Collaborated with advocacy groups, such as the Scottish Business Climate Collaboration (SBCC), to share our views on the UN COP26 Climate Change Conference FirstGroup Annual Report and Accounts 2021Strategic reportWe interact with a huge range of stakeholders every single day. Building strong relationships with them involves listening and working in collaboration. Here is a summary of how we engage with some of our largest stakeholder groups. Please see page 96 of the Governance Report for our Section 172 statement and page 86 for the decisions taken by the Board during the year Stakeholder group Customers The needs of our customers are unique to each journey and requirements constantly evolve. Listening, identifying future needs and being able to respond quickly is critical. Our teams use a variety of channels and approaches to engage with customers, assessing satisfaction and gathering feedback. See pages 36-37 Investors The Group welcomes open, meaningful discussion with shareholders on all matters. We have proactively engaged throughout the year with institutional, private and employee shareholders on a range of matters. Being fully aware of the range of views of our shareholders is a key aspect of good corporate governance and supports our commitment to ensuring that we promote the success of the Company for the long-term benefit of our members as a whole. See page 91 Government Strong engagement with Government at all levels is essential to our businesses in both the UK and North America. At Group level, we have long-established relationships with Government officials. See page 37 Why we engage them How we engage with them Key activities from the year ■ Improve customer experience ■ Regular customer and passenger ■ Modified and Covid-secure services and satisfaction ■ Respond to customer feedback ■ Adapt to changing customer needs ■ Build long-lasting and trusted relationships with our customers satisfaction surveys to identify what we do well and where we can improve ■ Robust customer feedback processes through online and traditional channels ■ Customer panels and events ■ Ongoing dialogue with customer representative groups ■ Monthly customer updates by the Chief Executive to the Board ■ Keep investors informed of key business activities and decisions ■ Presentations from Executive Directors ■ Annual report, website and regulatory ■ Listen and respond to shareholders’ statements concerns and interests ■ Strengthen the long-term success of the Company ■ Ongoing dialogue and individual engagement with shareholders by many Board members, including Chairman, Executive Directors, Senior Independent Director and the Chair of the Remuneration Committee ■ Engagement via the Investor Relations function with potential and existing investors and other market participants ■ Expanded paperless ticketing in First Rail services ■ Capacity information and wheelchair access information for First Bus customers ■ Developed and deployed next generation onboard 5G Wi-Fi from evo rail, developed in-house by First Rail, to improve on-board information services for our rail customers ■ Introduction of Express Mode for Apple Pay across all First Bus networks ■ Daily and weekly contactless ‘tap and cap’ fares are now being rolled out to multiple locations across First Bus ■ We increased the tempo of trading and other market updates in light of the pandemic’s impact on travel ■ Significant engagement with shareholders in relation to the First Student and First Transit transaction, as well as on the mechanism for the proposed return of value ■ Engaged with major shareholders to discuss the proposed remuneration policy (see page 91) ■ Increasing engagement with shareholders and other market participants on the Company’s ESG activities ■ To advocate for policy solutions which ensure optimal operation of public transport by private operators, thus supporting sustainable economic growth and social mobility ■ To ensure clear communication and understanding of the consequences of policy decisions at different levels of Government ■ To aid effective delivery of public transport at the operational level ■ Engagement with industry forums ■ Post-pandemic economic recovery ■ Direct engagement with policymakers ■ Strong links with devolved national, regional, state and local Governments ■ Regular surveys of political stakeholders ■ Joining the Confederation of British Industry (CBI) and the Scottish Council for Development and Industry (SCDI) to better influence wider Government policy development. ■ Played a leading role in the Rail Delivery Group (RDG) and the Confederation of Passenger Transport (CPT) discussion on rail and bus sector reform respectively ■ Collaborated with advocacy groups, such as the Scottish Business Climate Collaboration (SBCC), to share our views on the UN COP26 Climate Change Conference 47 FirstGroup Annual Report and Accounts 2021Strategic reportStakeholder engagement continued Performing sustainably We participate in evaluations, ratings and rankings of our ESG performance. These provide insights to investors on our non-financial performance and demonstrate how we manage our ESG risks and opportunities in a way that positions us strongly for the future. We have been recognised for our ESG leadership, having been named in the FTSE4Good Index Series for the 18th consecutive year. Our above-average results (compared to our industry peers) in the CDP global disclosure rating also demonstrate our commitment to climate change mitigation, adaptation and transparency. 48 Stakeholder group Our employees Many thousands of FirstGroup employees work in depots, stations and offices to deliver great service to our millions of passengers. We have a broad range of mechanisms through which our employees have the opportunity to make their voices heard and inform the direction and governance of our business. See pages 40-42 Communities We have well-developed mechanisms in place to help us listen to and understand the needs of our communities, and we incorporate their feedback into our decision-making processes. See page 50-51 Strategic partners and suppliers We work with more than 22,000 suppliers globally on goods and services that help us deliver value to our customers and shareholders. Our suppliers range from global companies to small, independent businesses and we have dedicated teams of procurement specialists within our divisions to build and maintain our relationships with them, making sure they understand our needs. Why we engage them How we engage with them Key activities from the year ■ Ensure our people have the skills and ■ Regular ‘Your Voice’ employee knowledge needed to deliver our services engagement surveys now and in the future ■ Dialogue with employee representatives, ■ Maximise the benefits of the expertise including Employee Directors and and experience of our employees in trade unions delivering our services ■ Inductions, onboarding sessions and ■ To create a safe and inclusive working employee handbooks environment for all of our employees ■ Increase effective participation and equal opportunities ■ Multiple internal communications channels, including our intranet, briefings, newsletters and our employee mobile apps ■ Improve customer experience and ■ Individual performance reviews and satisfaction development discussions ■ Strengthened our governance and leadership focus on how we can improve workforce diversity ■ Expanded the number of trained mental health first aiders in the business to support employee mental health through the pandemic ■ Improving diversity and inclusion, including through strengthened governance and leadership engagement on diversity and inclusion ■ Creation of two new development programmes designed to increase the number of BAME employees progressing into managerial roles ■ Maintain our position at the heart of ■ We conduct regular surveys to help us ■ Despite our normal fundraising efforts being our communities understand a diversity of views and enhance hampered by coronavirus restrictions, in ■ To understand the needs of our communities our engagement activities to enhance our engagement activities and ■ We also commit our time, skills and improve our services resources to help those charitable causes important to our communities, both locally ■ Support social inclusion and respond to the needs of our communities and nationally total, FirstGroup and our employees donated £1.6m during FY21, as measured by the London Benchmarking Group model for community impact. See page 54 for a more detailed breakdown of our contribution ■ Strengthen understanding and optimise value ■ Build long-term relationships ■ Monitor, manage and mitigate risks in our supply chain ■ Increase sustainability and ethical standards in our supply chain ■ We use a collaborative relationship ■ Our business continues to be certified to ISO management system to provide us with clear, consistently applied processes to 44001:2017 standards and we have expanded the number of programmes track performance we operate of this nature ■ Regular supplier relationship meetings to ■ Implement more than 30 separate value strengthen collaboration and identify and manage risks improvement projects which focus on delivering value across areas such as availability, capacity, customer satisfaction, technology and innovation ■ Developed an internal environmental management system for suppliers where ISO 44001 may not be appropriate FirstGroup Annual Report and Accounts 2021Strategic report Performing sustainably We participate in evaluations, ratings and rankings of our ESG performance. These provide insights to investors on our non-financial performance and demonstrate how we manage our ESG risks and opportunities in a way that positions us strongly for the future. We have been recognised for our ESG leadership, having been named in the FTSE4Good Index Series for the 18th consecutive year. Our above-average results (compared to our industry peers) in the CDP global disclosure rating also demonstrate our commitment to climate change mitigation, adaptation and transparency. Stakeholder group Our employees Many thousands of FirstGroup employees work in depots, stations and offices to deliver great service to our millions of passengers. We have a broad range of mechanisms through which our employees have the opportunity to make their voices heard and inform the direction and governance of our business. See pages 40-42 Communities We have well-developed mechanisms in place to help us listen to and understand the needs of our communities, and we incorporate their feedback into our decision-making processes. See page 50-51 Strategic partners and suppliers We work with more than 22,000 suppliers globally on goods and services that help us deliver value to our customers and shareholders. Our suppliers range from global companies to small, independent businesses and we have dedicated teams of procurement specialists within our divisions to build and maintain our relationships with them, making sure they understand our needs. Why we engage them How we engage with them Key activities from the year ■ Ensure our people have the skills and ■ Regular ‘Your Voice’ employee ■ Strengthened our governance and knowledge needed to deliver our services now and in the future ■ Maximise the benefits of the expertise and experience of our employees in delivering our services ■ To create a safe and inclusive working environment for all of our employees ■ Increase effective participation and equal opportunities engagement surveys ■ Dialogue with employee representatives, including Employee Directors and trade unions ■ Inductions, onboarding sessions and employee handbooks ■ Multiple internal communications channels, including our intranet, briefings, newsletters and our employee mobile apps ■ Improve customer experience and ■ Individual performance reviews and satisfaction development discussions leadership focus on how we can improve workforce diversity ■ Expanded the number of trained mental health first aiders in the business to support employee mental health through the pandemic ■ Improving diversity and inclusion, including through strengthened governance and leadership engagement on diversity and inclusion ■ Creation of two new development programmes designed to increase the number of BAME employees progressing into managerial roles ■ Maintain our position at the heart of ■ We conduct regular surveys to help us our communities ■ To understand the needs of our communities to enhance our engagement activities and improve our services ■ Support social inclusion and respond to the needs of our communities understand a diversity of views and enhance our engagement activities ■ We also commit our time, skills and resources to help those charitable causes important to our communities, both locally and nationally ■ Despite our normal fundraising efforts being hampered by coronavirus restrictions, in total, FirstGroup and our employees donated £1.6m during FY21, as measured by the London Benchmarking Group model for community impact. See page 54 for a more detailed breakdown of our contribution ■ Strengthen understanding and optimise value ■ Build long-term relationships ■ Monitor, manage and mitigate risks in our supply chain ■ Increase sustainability and ethical standards in our supply chain ■ We use a collaborative relationship ■ Our business continues to be certified to ISO management system to provide us with clear, consistently applied processes to track performance 44001:2017 standards and we have expanded the number of programmes we operate of this nature ■ Regular supplier relationship meetings to strengthen collaboration and identify and manage risks ■ Implement more than 30 separate value improvement projects which focus on delivering value across areas such as availability, capacity, customer satisfaction, technology and innovation ■ Developed an internal environmental management system for suppliers where ISO 44001 may not be appropriate 49 FirstGroup Annual Report and Accounts 2021Strategic report Stakeholder engagement continued Enduring relationships with local communities We are proud to support the communities in which we operate and provide services. We use our skills, reach and influence to make a positive impact, helping those causes that can make a difference, both locally and nationally. Strong community engagement is at the heart of what we do. This year we supported hundreds of community causes and charitable organisations through volunteering, corporate donations and gifts in kind. These included donating advertising space and vehicle hires, event sponsorships and travel tickets. These initiatives have been more important than ever, as the impact of the coronavirus pandemic means communities face ever greater challenges with a disproportionate impact on the most vulnerable. Our emphasis throughout the year has been on providing direct support to our communities with our employees devoting their time to a wide range of projects. US and Canada, as well as transporting instructional materials, including books and laptops, to homes while schools were closed. In First Rail, our swift identification of how we could help those fleeing domestic abuse during the pandemic led to an industry-wide initiative to provide free train travel for women or men and their families who need to get to a place of safety. GWR joined forces with the domestic abuse charity Women’s Aid to launch the ‘Rail to Refuge’ scheme, offering free train travel across the GWR network for those in need. The scheme was adopted nationally through the RDG in April 2020 and has since helped more than 1,300 adults and children across the UK. In particular, we used our vehicles to help provide transport for those people and goods most needed during the pandemic. Very early in the pandemic Greyhound launched ‘Rides for Responders’, a programme that provides free travel for medical personnel and first responders volunteering to travel across the country to help communities. As of mid-March 2021, more than 660 tickets were issued to first responders, the majority being nurses and medical technicians, firefighters and pharmacists. Elsewhere, First Bus responded to the need for service modifications to cater for shifts of key NHS staff – including the provision of shuttle buses in some areas. First Student teams also provided buses for healthcare workers and others who are on the front line of the pandemic. In addition, First Student provided further support for our customers, with more than 150 locations actively supporting school districts with a variety of services at the start of the global pandemic. Drivers have delivered more than one million meals to students in the Changing travel patterns and lockdowns due to the pandemic left Avanti with excess food and drink from onboard catering this year. Through our strong community links along the Avanti route, we were able to give away the food responsibly and make a difference in the communities we serve. We distributed nearly £93,000 of surplus food to help local people in need. Over the past year we have donated nearly 40 tonnes of food from onboard our trains and first-class lounges that would have otherwise gone to waste. The exceptional community support provided by three of our colleagues in First Bus was recognised in the Queen’s Birthday Honours in 2020 for their services to the community during the early months of lockdown. All three employees, a bus driver, scheduler and supervisor, were awarded a British Empire Medal (BEM) for providing selfless services to others. Their achievements included cooking hundreds of meals for key worker colleagues, doing more than 80 shopping trips for vulnerable people and ensuring reliable lockdown transport services continued for local NHS workers. As the pandemic evolved through the year we adapted our support to our communities accordingly. Our First Transit and First Student teams have been busy providing free transport for communities across the US, including senior citizens, to get the coronavirus vaccine. In the UK we set up the ‘York Restart Fund’, with the backing of the Federation of Small Businesses in North Yorkshire. The £20,000 fund has supported plans by independent business owners and small firms in consumer sectors to grow their customer base as non-essential retail and hospitality reopens. Our support has also recognised community needs outside those created by the pandemic. In September 2020, when the US state of Oregon was hit by wildfires, our teams spent three days evacuating more than 1,500 local residents, driving more than 3,000 miles to take them to safety. Our teams in Greyhound also worked with the American Red Cross to create a free ticket system for people in Oregan needing to relocate due to the destruction caused by the wildfires. On top of our pandemic support and despite our normal fundraising activities being hampered by coronavirus restrictions, our teams continued to raise donations for charities. In total, FirstGroup and our employees donated £1.65m during FY21, as measured by the London Benchmarking Group model for community impact. See page 54 for a more detailed breakdown of our contribution. For information on how we engage with our communities to improve our services and incorporate their feedback into our decision-making processes, see pages 48-49, and our Section 172 statement on page 96. 50 FirstGroup Annual Report and Accounts 2021Strategic reportOur partnership with Action for Children – our UK employee charity of choice 2018-22 We are incredibly proud to continue working with UK children’s charity Action for Children. Our award-winning partnership is helping to transform the mental health and wellbeing of children and young people across the UK and raising awareness among our employees and customers. Since the launch of our partnership in 2018, FirstGroup and our employees across the UK have supported Action for Children through fundraising, donations, volunteering, and pro bono support. Our partnership is valued at £2.8m and in FY21 we were able to continue to raise funds and provide support to Action for Children worth more than £700,000. We use our unique resources as a transport provider, volunteering drivers and vehicles to support our partnership, including donating advertising space across our bus and rail network to help Action for Children share their message with millions of people. Our employees provide further support, giving their time and effort to fundraise and support Action for Children. During an unprecedented year, FirstGroup colleagues have continued to find innovative ways to raise funds and awareness for the charity despite coronavirus restriction. Examples include spending a night sleeping somewhere unusual in their homes for Action for Children’s ‘Boycott Your Bed’ event in September 2020; putting on charity Santa buses for customers over Christmas; and running, walking and cycling thousands of socially-distanced kilometres as part of team challenges. This year our support has enabled Action for Children to put in place comprehensive, specialist mental health training provision across the UK. Frontline employees and Parenting Coaches have been able to support some of the most vulnerable children across the country with their emotional wellbeing. More than 450 training opportunities have already been taken up by Action for Chidren employees on topics such as self-harm mitigation, suicide prevention and building emotional resilience. Thanks to FirstGroup donations, Action for Children was also able to train 23 staff across seven Exeter primary schools in FY21 to deliver the ‘Friends Resilience Programme’, an early intervention programme building positive mental health resilience in children. We also supported Action for Children’s Emergency Coronavirus Children’s Appeal which has now provided over 20,000 vulnerable children and young people across the UK with essentials such as food, nappies and cleaning products since the outbreak of the pandemic. 51 FirstGroup Annual Report and Accounts 2021Strategic reportKey performance indicators Over the past year the Group has focused on a selection of financial and non-financial KPIs, aligned to our strategic drivers (see pages 18-19). These KPIs are used to measure progress and evaluate our performance over time. Our financial KPIs are like-for-like revenue growth, total revenue, adjusted operating profit, adjusted Earnings Per Share (EPS), and Return on Capital Employed (ROCE), which together drive our cash flow and value creation. Non-financial KPIs include punctuality, average fleet age, safety, community investment and greenhouse gas (GHG) emissions. During FY21, a number of our KPIs were affected by the consequences of the coronavirus pandemic and these are clearly highlighted below. Some were unable to be assessed at all, including the in-person surveys usually conducted by the independent body Transport Focus measuring customer satisfaction in the UK bus and rail sectors. As there has been no updated measurement of these KPIs in the year they are not shown here. Customer satisfaction continues to be measured by our businesses using a variety of techniques and the results acted on as appropriate. Following the sale of First Student and First Transit, see their business reviews for a summary of their performance in the year. Financial KPIs Greyhound, First Bus and First Rail change in like-for-like (LFL) revenue (% change year-on-year) 10 0 -20 -40 -60 -80 -100 2017 2018 2019 2020 2021 First Bus First Rail Greyhound Our LFL revenue measures normally adjust for changes in the composition of the divisional portfolios, holiday timing, severe weather and other factors that distort the year-on-year trends in our passenger revenue businesses. As a result of the pandemic, all of our passenger revenue businesses saw a substantial reduction in passenger revenue, with the profit impact partially offset by government grants and contractual arrangements to procure services to enable socially-distanced travel in First Bus, First Rail and Greyhound. The First Rail revenue reduction was also mitigated by the first full year of the Avanti contract. Total revenue (£m) 2021 2020 2019 2018 2017 6,845.0 7,754.6 7,126.9 6,398.4 5,653.3 Total revenue including discontinued operations decreased by 11.7% as a result of the pandemic. Revenue from continuing operations was in line with prior year at £4,641.8m (2020: £4,642.8m), and decreased by £567.4m compared to the prior year excluding the full year contribution of the new Avanti contract. Revenue from discontinued operations was £2,203.2m (2020: £3,111.8m), reflecting the reduced activity levels due to the pandemic, partially offset by revenue recoveries from some customers. 5252 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Financial performance Adjusted operating profit (£m) Adjusted EPS (pence) 2021 2020 2019 2018 2017 ROCE (%) 2021 2020 2019 2018 2017 209.4 256.8 314.8 317.0 339.0 2021 2020 2019 2018 2017 2.4 6.8 13.3 12.3 12.4 6.4 8.2 10.5 9.5 7.3 Non-financial KPIs Punctuality First Bus punctuality (%) 2021 2020 2019 2018 2017 Greyhound on-time performance1 (%) 94.4 91.7 91.0 90.9 91.1 2021 2020 2019 2018 90.1 78.4 72.8 76.2 1 Implemented GPS tracking in 2017; earlier data is not comparable due to this change in methodology. First Rail Public Performance Measure (PPM) 95 90 85 80 75 70 65 60 2017 2018 2019 2020 2021 Avanti West Coast Great Western Railway South Western Railway TransPennine Express Hull Trains UK-wide Total adjusted operating profit including discontinued operations decreased due to the pandemic. The contribution from continuing operations was £101.9m (2020: £69.7m). For the UK divisions this largely reflects the UK Government- procured emergency arrangements to enable socially-distanced travel, while in Greyhound it comprised the drop through of lower revenues offset by reduced variable costs, fixed cost actions and CARES Act grants for vital bus connections. Adjusted operating profit from discontinued operations decreased, with the impact of reduced activity levels mitigated by cost savings, recoveries from customers and higher service levels in Q4. Adjusted EPS decreased by 4.4p to 2.4p (2020: 6.8p), reflecting the lower adjusted operating profit and higher rolling stock lease costs. ROCE is a measure of capital efficiency and is calculated by dividing adjusted operating profit after tax by all year-end assets and liabilities excluding debt items. Total ROCE pre-IFRS 16 was 6.4%. In the prior year on a comparable basis it was 9.1% at constant exchange rates and 8.2% as reported. First Bus punctuality measures percentage of services no more than one minute early or five minutes late and has seen a further year-on-year improvement, largely as a result of reduced on-road congestion during the pandemic. Further work will take place with local authorities and through insights gained from GPS data systems on board our buses to build on this improvement going forward. Greyhound’s on-time performance improved to 90% for the FY21 year, which continued the positive trend seen last year. Focused efforts to improve operational efficiency and reduced amounts of congestion due to the pandemic all contributed to the further improvement. Nationally, the average score of rail punctuality and reliability (PPM) saw an increase during the year with more trains arriving on time across the country than any time since the 1990s. Changing travel patterns during the pandemic was a major contributory factor, with fewer services running across the network enabling more flexible recovery from disruption. We are committed to building on these gains and maintaining a high level of performance in the long term. 5353 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportKey performance indicators continued Non-financial KPIs continued Average fleet age First Bus1 (years) 2021 2020 2019 2018 2017 Greyhound (years) 9.9 9.5 9.5 9.3 8.6 2021 2020 2019 2018 2017 5.3 7.7 8.9 9.3 9.9 1 First Bus 2018 data onwards calculated on basis of vehicles in service. 2017 data also restated on that basis. Safety Employee lost time injury (LTI) rate (per 1,000 employees per year) Passenger injury rate (per million miles) 2021 2020 2019 2018 7.30 12.92 14.25 14.08 2021 2020 2019 2018 2.92 4.97 5.02 5.47 Note: Historical data is restated annually to incorporate the most accurate information for the previous 36 months. Community investment (£m measured using LBG model) 1.65 1.83 1.42 3.67 3.60 3.18 Cash Time In-kind Leverage 2021 2020 2019 2018 2017 2016 5454 In First Bus, the pandemic led to temporary deferrals in our fleet investment for FY21; our future plans are focused on our environmental and partnership commitments, including the introduction of low emission buses as we work towards a zero emission fleet by 2035. We also increased our programme of retrofits of mid-life diesel vehicles to the Euro VI emissions with just under half of the fleet now meeting this benchmark. As such, the average age of our fleet increased slightly to 9.9 years (2020: 9.5 years). As a consequence of the pandemic, around 600 Greyhound buses were withdrawn from the active fleet, with the newest buses remaining in operation. This has resulted in a further drop in Greyhound’s average fleet age to 5.6 years (2020: 8.3 years) and effective fleet age to 5.3 years (2020: 7.7 years). We achieved a 44% reduction in our employee LTI rate with reductions across all divisions. Total employee injuries were also reduced by 43%. Whilst our rates were already trending favourably, the pandemic and changed operating environment have accelerated these reductions. We have been agile throughout the pandemic implementing safety strategies to mitigate this new risk within our business as normal.  Passenger Injuries per million miles are down by 41%, with these significant reductions primarily influenced by changes in operating environments and reduced footfall across our operations. We have implemented numerous strategies to help our customers travel safely, such as enhanced cleaning regimes and social distancing, managed through both our employee training and technology. This safety focus remains at the forefront of all our businesses’ operational strategies as we return to normal operations. More information on our approach to safety can be found on pages 43-45. This year we contributed £1.6m to the communities we serve across the UK and North America. This was measured by using the method of the London Benchmarking Group (LBG) model which tracks cash contributions made directly by the Group, time (employee volunteering), in-kind support (such as travel tickets, advertising space) and leverage (including contributions from other sources such as employees, customers and suppliers). FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Greenhouse gas (GHG) emissions (Tonnes of carbon dioxide equivalent – tCO2e) Tonnes of carbon dioxide equivalent (tCO2e): Total by emission scope Scope 1: Direct emissions: From road and rail vehicle fuel, heating fuel, fleet fuel and fugitive refrigerant gas emissions Scope 2: Indirect emissions: From the generation of electricity purchased for buildings and to power electric road or rail vehicles (location-based) Scope 3: Other indirect emissions: Inclusive of business travel, water use and waste treatment and disposal Out of Scope: Indirect emissions: From biogenic content of our liquid and gas fuels 2021 2020 2019 1,214,769 2,111,199 2,344,768 275,097 262,070 265,924 16,905 19,670 18,179 25,551 27,532 14,654 The significant majority (91%) of our carbon emissions is from the fuel and electricity used to power our road and rail fleet. The pandemic has significantly reduced our passenger and service volumes resulting in a 40% reduction in our carbon emissions from FY20. Prior to this year, FirstGroup had reduced its gross carbon emissions an average of 3% per year since our 2015/16 base-year (-12% change from base-year in FY20), a trajectory we expect would have continued had we not had extreme operating circumstances. The primary drivers for our continued performance, aside from the pandemic, are: ■ increased use of electric traction in First Rail from the incorporation of Avanti and new hybrid trains in TPE and Hull Trains 1,532,323 2,420,471 2,643,525 ■ a 9% annual reduction in the UK average grid Total All scopes % change year-on-year % change (2016 baseline) Adjusted1 Total All scopes % change year-on-year % change (2016 baseline) Per £m revenue (gCO2e/£m) Sub-total UK (tCO2e) -37% -38% -8% -2% 0% 7% 1,532,323 2,552,004 2,845,284 -40% -47% 224 -10% -12% 312 -3% -2% 371 808,624 958,779 1,044,855 electricity emissions ■ fleet rationalisation programme in First Bus which has seen the disposal of over 500 of its older vehicles from service For a more detailed analysis and an understanding of our Group carbon performance please see FirstGroup’s Environmental Performance Report 2021. First Bus entered 15 hydrogen and 29 electric buses into service, increasing their zero-emission vehicles proportion to 1.1% (0.3% in FY20). A further 148 electric buses have been purchased this financial year for delivery in 2021-2023. Per £m revenue (gCO2e/£m) UK only 187 237 293 1 Adjusted total provides like-for-like comparison of our carbon emissions by adjusting for major changes in rail (inclusion of Avanti and SWR). Please see more detail in our methodologies section below. Total energy use (kWh) First Bus Kilowatt hours of energy (kWh HHV): Total by energy source and renewable content 2021 2020 2019 Non-renewable sources 4,870,969,433 7,914,133,419 8,811,120,650 Renewable energy sources 1,359,365,847 1,693,850,784 1,095,128,835 Total All 6,230,335,280 9,607,984,203 9,906,249,485 % change (year-on-year) % change (2016 baseline) Per £m revenue (MWh/£m) -35% -31% 910 -3% 6% 0% 9% 1,240 1,390 Sub-total UK (kWh) 3,407,627,844 4,126,363,602 3,843,883,667 Percentage of low and zero emission passenger fleet Low emission bus Diesel or biomethane powered bus with a 30% or greater carbon saving from a standard alternative Zero emission bus electric or hydrogen powered Per £m revenue (MWh/£m) UK only 789 1,022 1,080 Total passenger fleet 2021 2020 21.6% 20.2% 1.1% 5,189 0.3% 5,619 5555 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportOur UK carbon and energy emissions are calculated using Government-issued emission factors: ■ UK Government GHG conversion factors for company reporting: BEIS,2020 and ■ emission factors for GHG Inventories: US EPA Centre for Corporate Leadership, 2020 There are limited examples where emission factors have been developed as ‘bespoke’. To calculate underlying energy use, liquid and gaseous fuels have been converted from a volume, e.g. litres, US gallons or weight, e.g. kilos or pounds to kWh (Gross Calorific Value). The following sources have been used to derive fuel energy properties for these calculations: ■ UK Government GHG conversion factors for company reporting: BEIS,2020 ■ Fuel Properties Comparison: US Department of Energy 2021 A detailed understanding of our calculation methodologies is available within FirstGroup’s Environmental Performance Report 2021 which can be found on our website at www.firstgroupplc.com. Key performance indicators continued Monitoring our underlying energy use ensures we are focusing on energy efficiency as well as switching to low and zero carbon energy choices. The underlying energy use which comprises our carbon footprint has reduced 35% since last year, resulting from a significant reduction in service volumes from the pandemic. This year we increased the proportion of renewable energy we used by 5%. Overall, our total electricity use decreased due to coronavirus so the proportion of energy from renewables increased significantly from 17% in FY20 to 22% in FY21. For a more detailed analysis and understanding of our Group energy performance please see FirstGroup’s Environmental Performance Report 2021. Group revenues, despite difficult operating circumstances, have remained strong. This, coupled with our overall reduction in gross emissions and energy use, has resulted in a 28% and 27% reduction in carbon and energy, respectively, per £m of revenue. Prior to this year, FirstGroup had reduced its carbon emissions and energy use per £m revenue, by an average of 8% per year since our 2016 base-year. Energy efficiency initiatives FirstGroup tracks and monitors energy-saving initiatives to ensure we continue to focus on energy efficiency alongside switching to low- and zero-carbon energy choices. The following examples are significant, approved initiatives in the short to medium term which will be driving our continued energy and carbon performance: ■ 148 EV buses entering service in Glasgow are expected to reduce overall energy intensity per vehicle kilometres and significantly reduce carbon emissions in First Glasgow between 2021-2023; ■ new ‘Voyager’ trains for Avanti will replace 80% of their gas oil consumption for renewable electric traction; and ■ TPEs network is undergoing a significant programme of electrification on the line between Manchester and York which will enable increased running of our trains under electric traction. Methodologies and calculations Our carbon and energy reporting approach is prepared in accordance with the following standards and guidelines: ■ Greenhouse Gas Protocol (GHG Protocol) for Corporate Accounting and Reporting Standard; and ■ UK Government Streamlined Energy and Reporting (SECR) Guidelines. FirstGroup has an operational control boundary covering 100% of its business activities with a materiality reporting threshold of 5%. The term ‘carbon emissions’ in this report refers to GHG emissions as required for a GHG inventory. This includes carbon dioxide alongside six other GHGs calculated in mass of carbon equivalent (CO2e). Our GHG inventory is reported in four categories or ‘scopes’, listing our direct and indirect emissions in accordance with the GHG Protocol: Scope 1: Direct emissions from road and rail vehicle fuel, heating fuel and fugitive refrigerant gas emissions Scope 2: Indirect emissions from the generation of electricity purchased for buildings and to power electric road or rail vehicles (location-based) Scope 3: Other indirect emissions inclusive of business travel, waste disposal, water supply and water treatment Out of Scope: relating to the combustion of biofuels Our reported total carbon figure is inclusive of our reported ‘Scope 3’ and ‘Out-of-scope’ emissions. Our gross carbon emissions are also provided with an ‘adjusted total’ to account for the incorporation of SWR and Avanti after our base-year of 2016. It applies the ‘equivalent emissions’ of these businesses to prior reported years to better compare our performance free from the impacts of major business change. This is calculated in accordance with Appendix E of the GHG Protocol. 5656 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Climate-related financial disclosures The Task Force on Climate-related Financial Disclosures (TCFD) Our ambition is to be the partner of choice for innovative and sustainable transport, accelerating the transition to a zero carbon world. We recognise the vital importance of eliminating the carbon emissions associated with our operations, encouraging modal shift to public transport, and to mitigating the impacts of climate change on our business and wider society. In recognition of this, we have already made the commitment to operate a zero emission fleet in First Bus by 2035, and earlier this year signed up to the Science Based Targets initiative (see ‘Metrics and targets’ section on page 60). Climate change poses both challenges and opportunities for our business and climate- related risk has been an integral part of our risk management framework for many years. Earlier this year we were the first public transport operator to sign up to become an official supporter of the TCFD, the first step towards meeting the public commitment we made last year to implement the TCFD’s recommendations and to being transparent with our progress towards that goal. This report marks our first response to the TCFD’s guidelines and is made on a voluntary basis, with alignment becoming mandatory for the Group from FY22 onwards. In the following pages we provide details of the progress we have made in strengthening our climate change governance, risk management and strategy processes, as well as our plans to add to our TCFD-relevant metrics in the next financial year. For this preliminary year we have focused on formalising and strengthening the foundations of our climate governance procedures, including the establishment of a TCFD Working Group, as well as a deeper dive into our risk analysis and strategy on climate change. In next year’s report we will outline a more quantitative approach to climate strategy and risk with the overall aim of improving our metrics and targets related to climate risks. Our focus for the coming year will be to further analyse and prioritise the strategic and financial impacts of our most material climate-related issues to inform our strategy and manage these risks and opportunities across our businesses. Governance TCFD recommendation: Disclose the organisation’s governance around climate-related issues and opportunities Management and oversight of climate-related risk is aligned with the robust corporate governance frameworks and processes in place throughout the Group. The plc Board, Executive Committee (ExCo) and individual divisions assess climate-related risk in accordance with the Group’s risk management framework as described on pages 62-63 and consider broader ESG matters in line with duties included in the Corporate Governance Code and Section 172, as shown on page 96. This year we identified climate risk as a standalone principal risk for the Group. More detail on the management of our principal risks can be found on page 62 onwards and more detail on our governance framework can be found on page 82. Board consideration of climate risk The Board is accountable to shareholders for managing the Company in a way that promotes its long-term sustainable success, generating value for shareholders and contributing to wider society. This aim also extends to the setting of our strategy and approach to climate-related risks and opportunities. The Board is updated on our sustainability and climate-related performance at least twice a year. In addition, the Audit Committee supports the Board in the management of risk and is responsible for reviewing the effectiveness of risk management and internal control processes during the year – including for climate-related risk. The Board has overall responsibility for the Group’s systems of internal control and their effectiveness. The Board reviews and confirms Group and divisional risks and the Audit Committee reviews the Group’s risk management process. See pages 82 and 62-63 for more on how our Board operates and how risks are reviewed and taken into account for strategic business decisions. The Board’s support for the Group’s sustainability framework, Mobility Beyond Today, and the climate-related aims and commitments within it, provides a strong foundation for the management of climate transition risk across the Group. The Remuneration Committee this year reviewed the role of ESG and climate-related measures within the Group’s remuneration approach. Such measures are likely to be included in the 2021 Long-Term Incentive Plan (LTIP), reflecting the importance we give to the role we have as a public transport operator in supporting the transition to a zero carbon world. ExCo and divisional oversight of climate-related risks and opportunities ExCo provides leadership and direction for the Group on our ESG impacts, including climate change. Updates on material issues relating to ESG and corporate responsibility matters are reported to ExCo monthly, with ad hoc matters raised in between formal reports. Executive responsibility for climate-related financial risks and opportunities is held by the Chief Financial Officer, who represents these matters at Board level. It is held by the Group Director of Corporate Services for ESG matters, and the Group General Counsel and Company Secretary for compliance with climate-related disclosure and governance requirements. Each division has a named executive management individual responsible for climate-related risks who embeds accountability within business strategy, plans and reporting. Related risks and opportunities at Group and divisional level are incorporated into our risk management framework. See pages 62 to 71 for more details on how we manage risk. TCFD Working Group Convened in 2020, the TCFD Working Group is co-chaired by the Group Director of Corporate Responsibility and the Group Financial Planning Director. It includes representatives from key management and functional roles with expertise in risk, finance, strategic planning and sustainability. This group is responsible for driving forward the technical work required of TCFD (including climate-related scenario analysis) and provides the relevant updates to ensure that the Board, ExCo and management are informed about climate-related issues, reporting to the Board and Audit Committee at least twice per year. 57 FirstGroup Annual Report and Accounts 2021Strategic reportClimate-related financial disclosures continued Strategy 1.5°C scenario 4°C scenario TCFD recommendation: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material. Climate change has been identified as a principal risk to the business. Our management of climate-related risks is met, in large part, through our Group-wide strategic framework for sustainability, Mobility Beyond Today, which outlines our ambition to be the partner of choice for innovative and sustainable transport, accelerating the transition to a zero carbon world. For more information on how, as an organisation, we identify and manage our risks please see pages 62-63. For more on our progress in delivering our Mobility Beyond Today strategy see page 35 onwards. Understanding financial impact: scenario analysis This year we undertook qualitative analysis of our climate risks using two scenarios – one where globally we transition quickly to a low carbon economy and temperatures are limited to 1.5°C and one where runaway climate change occurs and we see global temperature rises of 4°C. Further explanations of these scenarios and some of the assumptions used to build them are outlined in the boxes on  this page. Given the sale of First Student and First Transit, we selected the Group’s UK divisions for this initial phase of scenario analysis, with a commitment to expand the process as required next year. We looked at the two scenarios over the time frames to 2024, 2035 and 2050. These time frames are relevant to our three-year business planning cycle, First Bus’s zero emission by 2035 target and the UK’s net-zero by 2050 target respectively. Strategy and financial planning Our strategy to address climate-related risks and opportunities spans all areas of our business including vehicle and infrastructure investment, operations, and business development. Through extensive discussions of these qualitative scenarios and time frames we have been able to stress test and inform our business strategy to build long-term resilience in our business. 58 A scenario of 1.5°C would necessitate countries across the world coming together to ensure that a global temperature rise is minimised as much as possible through immediate transition to net-zero carbon emissions. This is in line with the UN’s Paris Agreement and in line with what the majority of the major global economies have agreed they want to achieve. As the majority of transport around the world currently runs on fossil fuels the 1.5°C scenario will have a profound impact on the transport sector. This scenario allowed us to focus on the transitional risks posed by climate change. A scenario of 4°C would result when countries around the world choose not to transition to low or zero carbon and so runaway climate change becomes a reality, with global temperatures rising significantly. Significant physical climate impacts will result from this temperature increase – from changes in weather patterns and extreme weather events to mass migration as certain geographies become uninhabitable. This scenario allowed us to focus on the physical impacts of climate change on our business. Key assumptions 1.5°C scenario Key assumptions 4°C scenario ■ By 2035 all UK bus operators are running a fully zero-emission fleet. ■ In the UK, sea level rise of up to 76cm by 2100, with between 11-16cm by 2030 ■ Hydrogen vehicles are focused by geography around industrial clusters ■ By 2040 all diesel trains are out of service ■ By 2050, 55% of the UK’s rail network is electrified – up from 38% in 2020 ■ By 2035 all urban centres are zero- emission zones ■ By 2035 a carbon price of minimum £85 per tonne ($120/ per tonne) is in place ■ 100% of UK local authorities declare a climate emergency by 2023 ■ Road pricing is being used to reduce overall travel demand from private vehicles, and Government policy favours public transport and active travel. Our analysis thus far gives us confidence in the resilience of our strategy, as we are supporting the transition to a zero carbon world while managing the physical impact of climate- related risks to our business. For First Bus, key to managing our climate transition risks is the zero emission fleet target that we have set – to have a 100% zero emission fleet by 2035, and not to purchase new diesel buses after 2022. For First Rail, our individual train operating companies each have targets relating to climate change. At Avanti we have committed to be net-zero carbon by 2031. SWR, TPE and GWR are in the process of mapping out net-zero strategies and will incorporate these ■ Total annual rainfall remains stable but comprises fewer, but more intense, events with overall drier summers ■ Increased rainfall events plus a sea level rise means the number of assets located within a high risk flooding zone (known as ‘level 3’) will increase by 1% a year ■ Temperature increases continue – more so in summer than winter, with hot summer extremes becoming more likely ■ By 2050, a summer as hot as 2018 (37.8 degrees in Cambridge) is 50% more likely. roadmaps into their sustainable development plans. Regarding the physical impacts of climate change, we have already begun to address this within our property strategy, with severe weather action plans and procedures in place across the Group. As part of our more in-depth climate risk modelling and quantitative analysis this year we will carry out more detailed analysis of the longer-term physical climate-related risks to more effectively assess the magnitude of risk and mitigations to reduce this. FirstGroup Annual Report and Accounts 2021Strategic reportWe will continue to be open and transparent with our progress on climate change issues and to publicly disclose decision-useful climate-related financial information. Risks Through this communication, we aim to keep stakeholders informed on the likely speed, scale and cost of our net-zero transition. However, we also view changing customer behaviour, including a shift in consumer preferences towards lower carbon alternatives, and strong governmental and regulatory support for transport decarbonisation, as key opportunities for our business. The quantitative analysis we will carry out this year will look at this aspect as well as applying a carbon price to our modelling approaches. Partnership and advocacy In order to accelerate the decarbonisation of public transport, we work in partnership with government, industry and stakeholder bodies to enable the right conditions to drive the net-zero transition. We actively engaged with the DfT in 2020 to help inform its Transport Decarbonisation Plan, advocating for measures to enable more people to make the shift from private car journeys to active travel and public transport. We also highlighted key financial and policy constraints to the rapid decarbonisation of our fleets and infrastructure. We work closely with industry groups such as CPT, RDG and the Zemo Partnership to promote the transition to zero-carbon public transport. In addition, we are working with business groups to ensure transport decarbonisation is part of the wider conversation, including the SBCC and the CBI. In particular, FirstGroup was represented at the CBI’s headline ‘Road to Net-Zero 2021’ conference and has contributed to much of its policy output, including CBI’s ‘Greener Miles’ report, which suggests ways Government and businesses can encourage people to decarbonise their commute. We have also engaged directly with Government and its COP26 team ahead of the UN climate change conference in November 2021. We also recognise the need to work closely with other transport operators and partners to achieve shared aims, for example working with Network Rail and others in the rail sector on the climate change adaptation and resilience measures that need to be taken by the industry as a whole. TCFD recommendation: Disclose how the organisation identifies, assesses and manages climate-related risks. We take a holistic approach to risk management, first building a picture of the principal risks at divisional level, then consolidating these alongside Group-level risks into a Group-wide view. The Board assesses the effectiveness of the Group’s risk management system and receives reports on principal risks and uncertainties. It also reviews the external risk environment, scrutinises assessment of key risks and determines strategic action points. The Group’s sustainability and public affairs teams provide regular ESG updates and insights on market developments to relevant colleagues across the Group, including our TCFD Working Group, senior management, ExCo and the plc Board. We identified the following material risks that could potentially impact on FirstGroup arising from the transitional and physical risks of climate change: Transitional risks and opportunities Policy and legal The climate transition risk of mass transformation of vehicle technology could lead to potential write-offs, asset impairments and/or early retirement of existing fossil fuel-related infrastructure and vehicle assets. This would be exacerbated by increasing mandates on the carbon intensity of our fleet and a diminishing secondary market for legacy diesel vehicles. Further climate policy developments could also result in increased costs, e.g. carbon taxes, road pricing in low-emission zones, policy-driven compliance costs and enhanced emissions reporting requirements such as increased focus on companies to reduce Scope 3 emissions. As a leader in our sector we have foreseen these changes and are well placed, particularly in relation to our competitors, to excel under these conditions. Both our First Bus and First Rail divisions have strong and well developed engagement with local and central Government departments regarding transport decarbonisation and encouraging a modal shift away from more carbon-intensive travel modes. For example, in First Rail we are represented on the Sustainable Rail Executive, convened by RSSB, alongside DfT and other key stakeholders, and also chair RSSB’s Sustainable Rail Leadership Group. We have engaged with a wide variety of stakeholders on UN COP26 Climate Change Conference, playing our part in making it as successful as possible and demonstrating the important role that public transport can make, including how collaboration among a wide range of stakeholders can aid this. Technology Careful planning is taking place to ensure that the conversion of our existing infrastructure to one powered by electricity and hydrogen is carried out to minimise capital investments and operating costs. We anticipate that green hydrogen and battery pack prices will fall significantly as economies of scale are reached and with increasing innovation in technology. New battery technology will give greater range and longer life spans with repair and reconditioning suppliers also emerging. We recognise that there is competition for Government funding, and emerging competition from disruptors around decarbonisation in the sector. However, our experience as a transport operator is unparalleled in the UK, across both the bus and rail sector and we are confident that we can deliver a cost competitive transition to net zero-carbon. Our property strategy incorporates plans for access to energy supplies for electric vehicles. Examples include securing the connection to and building of substations and future proofing of the connection to support maximum fleet size. Similarly, it incorporates support for hydrogen vehicles, in particular looking at the potential for expansion for fuel cell vehicles around industrial clusters where hydrogen is prominent, as outlined in the UK Government’s 2021 ‘Build Back Better’ strategy. New skills and knowledge will be necessary for our workforce. In recognition of this, we are incorporating these requirements into our people strategy. Examples include, not only recognising the need for electrical engineering skills for depots and vehicles, but also specific knowledge and skills for a zero carbon world for finance, procurement and business development teams. Market risks Market risks include potential for shifts in supply and demand for certain commodities, products and services as climate-related risks and opportunities are increasingly taken into account. 59 FirstGroup Annual Report and Accounts 2021Strategic reportClimate-related financial disclosures continued In March 2021, HM Treasury confirmed that the UK Government intends to fully implement a ‘Green Taxonomy’ to provide a common standard for measuring the environmental impact of organisations – sending a strong signal that capital could become cheaper for those companies able to demonstrate clear pathways to net-zero carbon. We anticipate that our First Rail operations running under electric traction (73% in FY21) will be considered ‘green’ under any future taxonomy, and have given our public support to the UK Government’s commitment to remove diesel-only trains from the network by 2040. In First Bus, our fleet target of zero-emissions by 2035, along with our Group-wide science-based decarbonisation target, will ensure that we are well aligned with taxonomy and other market-based regulations in the future. Reputation Pivotal to our transition is maintaining our excellent relationships with key stakeholders – including local and central Governments and our customers. Climate change is already recognised as a critical issue by the majority of people in the UK. As we transition to a zero carbon world, public opinion of carbon- intensive products will become less favourable and is likely to influence the decisions of a wide range of stakeholders from consumers to regulators and the wider capital markets. As described in the following section, effective decarbonisation is key to ensure our reputation as a climate leader and help our divisions plan accordingly. Physical risks and opportunities Both acute and chronic changes in weather will impact on our infrastructure and operations. We have business continuity plans already in place, but with the results of our more in-depth work on physical impacts this year we will be able to refine them further. (1) Acute weather events More frequent extreme weather events could increase disruption to our services thus impacting on customer satisfaction and potentially customer inclination to use bus or rail services. There is a potential loss of revenue and compensation for disrupted services as well as potentially increased insurance premiums for infrastructure and vehicle assets. There would also be the potential for associated health, safety and wellbeing issues for employees and customers due to extreme temperatures, requiring mitigation. 60 (2) Chronic changes in weather patterns Impact on infrastructure Chronic changes in weather patterns that will affect the UK include higher annual temperatures, more intense precipitation events and rising sea levels. All these impacts could lead to an increased risk of connective infrastructure damage, e.g. to electricity supply and digital connectivity. Flooding The increased likelihood and severity of flooding could lead to loss and damage to our assets, depreciation and stranded assets, health and safety risk to employees, passenger safety and driving safety risk for heavy rainfall events. It could also lead to vehicle accident increases and operational route closures, increased insurance costs and uninsurable assets. Heatwaves Chronic changes in weather patterns such as heatwaves could impact on passengers, employees and driver wellbeing and an increased need for cooling. Other impacts could include vehicle overheating, service disruption or increased vehicle damage from heat damaged roads and railway networks. We will continue to review the above acute and chronic physical risks of climate change as part of our more in-depth climate risk modelling and quantitative analysis this year. This work will also consider opportunities, such as the potential for more people to take public transport in fairer weather and for a higher inclination for leisure travel in the UK. Metrics and targets TCFD recommendation: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. We have been measuring and reporting our energy and carbon performance over many years as we recognise it is our most significant ESG impact. We have included relevant carbon metrics in the KPI section of this report on page 55 including: ■ Our carbon footprint and carbon intensity (per £m revenue) ■ Our energy consumption (in kWh) and the proportion of renewables in our energy mix ■ Progress against our target of operating a zero emission fleet in First Bus by 2035 In addition, we disclose our progress in more detail in our Environmental Performance Report which is available on our website. Our absolute carbon footprint has reduced by 12% between 2016 and 2020, and our emissions per £m revenue have reduced by 34% over the same period. We report on our Scope 1, Scope 2 and Scope 3 greenhouse gas emissions in line with the GHG Protocol methodology. Our Scope 3 emissions currently include business travel, waste disposal, water supply and water treatment. Through further analysis this year we will review other potentially significant areas of Scope 3 emissions. We report in line with Sustainability Accounting Standards Board (SASB) GHG reporting recommendations for road and rail transport – noting that we report ‘total fuel consumed’ as MWh rather that Gigajoules, as UK SECR reporting guidelines require us to report our total underlying energy use in kWh in our Directors report. With carbon under increasing focus from investors, policymakers and consumers, and in line with best practice, we will also consider how a carbon price could be incorporated to future financial modelling processes this year. Science-based targets (SBTs) This year, FirstGroup became the first public transport operator in the UK to formally commit to setting an ambitious, science- based target aligned with limiting global warming to 1.5°C and to reaching net-zero emissions by 2050 or earlier. Our final and interim targets will be independently verified by the Science Based Targets initiative (SBTi) and will be published alongside our first-year progress report in early 2022. SBTs are increasingly being requested of companies by investors as well as public and private sector procurers and we aim to publish our SBT for our UK operations in 2022. Our ability to meet our net-zero commitment is partly dependent on changes in Government policies and regulations which support decarbonisation of the bus and rail sectors. We will continue working with Government, elected officials and policymakers, and our professional associations to advocate for innovation and further investment in sustainable mobility. In the next 12 months we will further develop our climate change targets in line with TCFD recommendations and our SBT commitment. FirstGroup Annual Report and Accounts 2021Strategic reportNon-Financial reporting statement Introduction The EU Non-Financial Reporting Directive applies to the Group, and the tables below summarise where further information on each of the key areas of disclosure required by the Directive can be found. Further disclosures, including our Group policies and non-financial targets and performance data, can be found on our website, and in our Environmental Performance Report 2021, at www.firstgroupplc.com. Reporting requirement Relevant section of this report 1. Description of our business model ■ Our strategy and business model – pages 18-19 2. The main trends and factors likely to affect the future development, performance and position of the Group’s business ■ Our markets – pages 6-7 ■ Business review – pages 20-27 3. Description of the principal risks and any adverse impacts of ■ Principal risks and uncertainties – pages 62-71 business activity 4. Non-financial key performance indicators ■ Gender diversity – page 41 ■ Punctuality – page 53 ■ Safety – page 54 ■ Community investment – page 54 ■ Greenhouse gas emissions and energy – pages 55-56 Reporting requirement Policies, processes and standards which govern our approach* Risk management 5. Environmental ■ Group-wide strategic framework for ■ Climate-related risk – matters sustainability – pages 35-45 ■ Environmental Policy ■ Environmental management systems around the Group, certified to ISO 14001 standard in much of our UK business ■ Certified ISO 50001 systems in certain of our franchised TOCs pages 64-65 and 57-60 ■ Task Force on Climate-related Financial Disclosures (TCFD) – pages 57-60 ■ Competition and emerging technologies – pages 66-67 ■ Regulatory compliance – pages 70-71 6. Employees ■ HR Policy framework across ■ Human resources risk – the Group ■ Code of Ethics ■ Gifts and Hospitality Policy ■ Whistleblowing Policy and Procedure ■ Health and Safety Policy ■ Group-wide strategic framework for sustainability – pages 35-45 pages 70-71 ■ Safety risk – pages 68-69 ■ Task Force on Climate-related Financial Disclosures (TCFD) – pages 57-60 7. Social and ■ Community engagement and ■ Safety risk – pages 68-69 community matters 8. Human rights community investment frameworks ■ Code of Ethics ■ Payroll Giving ■ Matched Giving Guidelines and Exclusion Policy ■ LBG impact measurement ■ Health and Safety Policy ■ Group-wide strategic framework for sustainability – pages 35-45 ■ Code of Ethics ■ Supplier Code of Conduct ■ Code of Conduct on Anti-Slavery and Human Trafficking Prevention ■ Modern Slavery Statement 2020 ■ Health and Safety Policy Embedding, due diligence, and outcomes of our approach, and additional information ■ Our markets – pages 6-7 ■ Business review – pages 20-27 ■ Group-wide strategic framework for sustainability – pages 35-45 ■ Performing sustainably – page 48 ■ Suppliers – page 48-49 ■ Greenhouse gas emissions and energy data, trend analysis and assurance – pages 55-56 ■ Safety – pages 43-45 ■ Diversity and inclusion – pages 40-42 ■ Employee engagement and representation – pages 42 and 90 ■ Board-level and divisional Employee Directors – page 82, 84 and 90 ■ Skills for the future – page 42 ■ Health and wellbeing – page 42 ■ Business review – pages 20-27 ■ Supporting communities – pages 48-49 ■ Safety – pages 43-45 ■ Accessible journeys – pages 36-37 ■ Government engagement – pages 46-47 ■ Working with charities – pages 50-51 ■ Community investment – page 54 ■ Safety risk – pages 68-69 ■ Safety – pages 43-45 ■ Ethics – page 93 9. Anti-corruption and anti-bribery ■ Anti-Bribery Policy and steering committee ■ Conflicts of Interest Policy ■ Safety risk – pages 68-69 ■ Ethics – page 93 * Some policies, processes and standards shown here are not published externally 6161 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportPrincipal risks and uncertainties With renewed focus on our UK operations, FirstGroup is dedicated to building on our strong position at a key inflection point for UK public transport. Our risk management framework Top down Strategic risk management Review external environment Robust assessment of principal and emerging risks Set risk appetite and parameters Determine strategic action points Bottom up Operational risk management Board/Audit Committee Assess effectiveness of risk management system Report on principal and emerging risks and uncertainties Identify principal and emerging risks Direct delivery of strategic actions in line with risk appetite Monitor key risk indicators Executive Committee Consider completeness of identified risks and adequacy of mitigating actions Consider aggregation of risk exposure across the business Execute strategic actions Report on key risk indicators Divisions Report current and emerging risks Identify, evaluate and mitigate operational risks recorded in risk register Principal risks and uncertainties and risk reporting changes During the year we rolled out a series of changes to our risk assessment process. These changes refocused and further detailed a number of the previously reported principal risks and added speed of onset as an additional measure of a risk’s severity. As a result of these changes, the table on page 63 is not directly comparable with 2020 reporting. Discussion of our principal risks on page 64 onwards provides the current description of the principal risks, the existing mitigation activities, and corresponding movement of the risk. Our risk management methodology continues to aim at identifying the principal and emerging risks that could: ■ adversely impact the safety or security of the Group’s employees, customers and assets ■ have a material impact on the financial or operational performance of the Group ■ impede achievement of the Group’s strategic objectives and financial targets ■ adversely impact the Group’s reputation or stakeholder expectations. Further information on our risk management processes is contained in the Governance section on pages 99 to 105. To support the strategic goals and obligations of the Group, we adapted our risk management framework to holistically consider the impacts of both the changing transportation market and our re-focused operations. As a result, our principal risks and uncertainties, detailed on the pages 64 to 71, include how the sale of First Transit and First Student changed our risk profile. From 2021 onwards, our risk management framework will continue to adapt to underpin our vision and values and to support our strengthened operations and strategic focus. Our risk management approach We take a holistic approach to risk management, first building a picture of the principal risks at the divisional level, then consolidating those principal risks alongside Group risks into a Group view. In addition, we continue to identify and analyse emerging risks, which are considered and approved in Business Review and Executive Committee meetings before being presented to the Audit Committee and Board for consideration and approval, The objective of this process is to ensure all key risks to the Group are known and are being actively monitored and mitigating controls are put in place to ensure risk falls within the risk appetite set by the Board. Our risk management structure Whilst some risks such as financial resource risk are managed at a Group level, all our businesses are responsible for identifying, assessing and managing the risks they face with appropriate assistance, review and challenge from the Group functions. We seek to continue to improve the quality of risk management information generated by our divisions. The Group has developed a risk appetite framework which informs the business on the Board’s appetite for certain risks and informs risk assessment. Our risk management framework is shown in the diagram above. 6262 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Board and Audit Committee Responsibility Process The Board has overall responsibility for the Group’s systems of internal control and their effectiveness. The Audit Committee has a specific responsibility to review and validate the systems of risk management and internal control. The Board reviews and confirms Group and divisional risks and the Audit Committee reviews the Group’s risk management process. The Executive Committee acts as Executive Risk Committee and reviews the Group’s risk management processes. Internal Audit provides assurance on the key risk mitigating controls and ensures that the audit plan is appropriately risk-based. The divisions and Group functions management have responsibility for the identification and management of risks, developing appropriate mitigating actions and the maintenance of risk registers. The Executive Committee and other Group management review and challenge Group and divisional risk submissions. Divisional and Group risk champions maintain and update risk registers for their function or division. Risks and mitigating actions are monitored through normal business management processes. Executive Committee Internal Audit Divisions Principal risks To deliver our strategy, it is important that we understand and manage the risks that face the Group. The table below outlines our principal risks: High Severity (Impact x Likelihood x Velocity) Low External Risks Economic conditions, pages 64-65 Climate change, pages 64-65 Geopolitical, pages 64-65 Strategic Risks Contracted business, pages 66-67 Competition and emerging technologies, pages 66-67 Operational Risks Financial resources, pages 66-67 Pandemic, pages 68-69 Safety, pages 68-69 Pension scheme funding, pages 68-69 Data security and consumer privacy, pages 70-71 Regulatory compliance, pages 70-71 Human resources, pages 70-71 Group risk after the sale of First Student and First Transit 6363 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportPrincipal risks and uncertainties continued Risk description, full Group External Risks Economic conditions The Group’s success depends on adapting to economic fluctuations which may negatively impact performance through increased costs, changing customer needs, reduced demand and/or reduced opportunities for growth. Globally, the economic outlook is less certain, and the Group specifically has experienced a change in travel behaviour and new policies and procedures related to the pandemic. All these market changes have the potential to decrease the Group’s available financial resources to invest capital in innovative solutions that drive demand. Additionally, when these economic uncertainties are combined with lower fuel prices, they may further reduce demand for public transportation particularly in our Greyhound and First Bus divisions. Climate change Businesses globally continue to come under increasing pressure from all stakeholders, particularly investors, to demonstrate strong progress on their climate-related performance. Inadequate attention to our climate-related programmes and emerging technologies could negatively impact the Group’s performance, reputation and/or result in decreased demand. Within the UK, the government has set a legally binding target for net-zero greenhouse gas emissions by 2050. All companies that operate in the UK or are owned by UK-based companies will be substantially impacted by decarbonisation policies introduced to meet this target. As a result, the Group is under increased pressure and scrutiny from both investors and government bodies to provide evidence of our strategic plans in place to mitigate climate change risks. There are also physical risks resulting from climate change (e.g. extreme weather events) which could impact our customers, service reliability, and disrupt our energy supply and/or supply chain. Delays in implementing our strategic plans to mitigate climate-related risks, including transitioning our fleets to zero emissions, could result in lost business, reduced revenue and reduced profitability. Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year With the sale of First Student and First Transit, the ongoing Group is less susceptible to changes in economic conditions. The new concession-based National Rail Contracts have low revenue and contingent capital risk. Additionally, the Group has capacity and demand planning processes in place to efficiently adapt to changing economic and demand conditions. As a result, the Group’s performance is less impacted by economic volatility. The Group is committed to accelerating the transition to a zero-carbon world, which includes responding to the clear mandate and binding net-zero targets currently set within the UK for greenhouse gas emissions. Although the US government has not yet announced the same binding targets, the current administration’s position is clear and we expect these to result in coming years. However, we do not anticipate adverse impacts and/or changes to these risks and/or operations with the sale of First Student and First Transit. Geopolitical The political landscape within which the Group operates is constantly changing. The Group’s operations depend on government policy, funding regimes and infrastructure initiatives continuing to support private company operators in public transportation. Inability to maintain rail contracts and/or leverage national funding and develop government partnerships may result in the reduction and/or an elimination of rail contracts and/or an inability to sustain and develop new bus routes resulting in adverse financial impacts. Group operations are also dependent on obtaining the necessary mechanical pieces to maintain our fleets. Changes in the political landscape may have supply chain implications and decrease the number of vehicles available to support demand. The sale of First Student and First Transit constitutes the majority of the Group’s North American business, as a result of which there is a reduction in the operational and geographical diversity of the ongoing Group. The ongoing Group is therefore more dependent on the performance of, and revenue from, its UK divisions (i.e. First Bus and First Rail). As a result, changes in government policies, funding regimes and infrastructure initiatives in the UK have a greater overall impact on the ongoing Group. 6464 In order to adapt to market uncertainties and continue to drive demand, the Group Although it is not yet clear the lasting The Group’s First Rail division has continues to be customer-focused and strives to provide innovative transport solutions. Whilst the Group has temporarily reduced certain capital investments, we continue to focus on strategic ventures to develop new innovative service offerings (e.g. electric fleet and autonomous vehicles, ticket initiatives) in order to provide our customers with transport solutions that reduce complexity and retain impacts the pandemic will have on commuting behaviours, lock down orders have begun to lift, resulting in increased travel demands within the UK; First Bus saw volumes increase entered into no risk and low cost risk contracts to protect the remaining business from economic fluctuations. Further, if lockdown procedures or shelter in place orders are extended customer demand through unstable economic conditions. to c.60% of pre-pandemic levels during the ongoing Group will be able to In 2020 the Group accelerated implementation of real-time seating capacity on our First Bus app to support social distancing requirements as well as a number of further customer engagement actions through technology to provide greater insight to manage operations. Through this tracking the Group is able to adapt bus schedules to real-time demand to better manage operational costs. the most recent lockdown easement. We expect increased demand over the summer holidays as we anticipate travellers largely taking domestic trips instead of travelling internationally. right-size bus schedules based on real-time demand monitoring and government support arrangements in First Bus are expected to be extended to allow for social distanced public transport to continue. The Group’s strategic framework for sustainability, Mobility Beyond Today, sets out the company’s ambition to be the partner of choice for innovative and sustainable The Group recognises the continued pressure and opportunity to create a With the sale of the US businesses, the regulatory environment on climate more sustainable world and maintains change simplifies for us as we will deal our commitment to invest in new technologies and collaborate with partners to create a cleaner future. The commitments we have made this year – particularly our science-based predominantly with UK policy which is well defined and which we are on track to meet with our current commitments. The physical risks of climate change are also less variable and with less target and zero emission fleet target for extreme weather events in the UK First Bus – and the strategies we are than North America. developing to meet them will ensure we are managing our climate transition risks effectively. transport. In 2021, FirstGroup became the first bus and rail operator in the UK to formally commit to setting an ambitious science-based target aligned with limiting global warming to 1.5°C and reaching net-zero emissions by 2050 or earlier. Within First Bus we have committed to investing in only zero-emission vehicles from December 2022, and to have a 100% zero-emission fleet by 2035. The National Bus Strategy, announced on 15 March 2021, pledged £3bn for buses in England outside London, including a commitment to support the purchase of at least 4,000 new zero emission buses for the UK, from which the Group is well positioned to benefit. We also publicly support the UK Government’s ambition to remove diesel-only trains from the network by 2040. As outlined in the Government’s rail White Paper, published in May 2021, electrification of Britain’s rail network will be expanded, and alternative technologies such as hydrogen and battery power will help to achieve zero emissions from trains. We look forward to working with the government and industry partners in support of the government’s investment plans to decarbonise Britain’s rail network. Our externally assured carbon and energy performance can be found in the KPI section on pages 55-56 and in our TCFD reporting on pages 57-60, with a more detailed breakdown in our 2021 Environmental Performance Report, available on our website. Business continuity plans are in place for all areas of our businesses in case of extreme weather or other physical events. While the Group collaborates with industry bodies to help anticipate government The UK government announced its Although the new contracts are expected policy or funding regime changes in order to adjust operations, the Group is an intention to bring the UK’s current rail to be based on a more appropriate apolitical organization and does not have the ability to control or substantially influence government policy. The Group has been able to mitigate supply chain disruptions by utilising mechanical parts from vehicles not in use due to decreased demand levels as a result of the pandemic. franchising system to an end and replace it with a new rail contract model for delivery of rail passenger service by private operators. See balance of risk and reward, First Rail is a proportionately larger part of the Retained Group and therefore the future performance of the ongoing Group will pages 22-24 for additional information on be intrinsically aligned with successful the termination sum agreements of the negotiations of new rail contracts and pre-existing franchising contracts and continued government support. details of the newly negotiated National Rail Contracts (NRC). Additionally, the UK government also announced new infrastructure investments, including c. £3bn to transform bus services across the country providing the Group with new opportunities to grow the First Bus division. FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Risk description, full Group External Risks Economic conditions The Group’s success depends on adapting to economic fluctuations which may With the sale of First Student and First Transit, the ongoing Group is less susceptible negatively impact performance through increased costs, changing customer needs, to changes in economic conditions. The new concession-based National Rail reduced demand and/or reduced opportunities for growth. Globally, the economic Contracts have low revenue and contingent capital risk. Additionally, the Group has outlook is less certain, and the Group specifically has experienced a change in travel capacity and demand planning processes in place to efficiently adapt to changing behaviour and new policies and procedures related to the pandemic. All these market economic and demand conditions. As a result, the Group’s performance is less changes have the potential to decrease the Group’s available financial resources to impacted by economic volatility. invest capital in innovative solutions that drive demand. Additionally, when these economic uncertainties are combined with lower fuel prices, they may further reduce demand for public transportation particularly in our Greyhound and First Bus divisions. Climate change Businesses globally continue to come under increasing pressure from all The Group is committed to accelerating the transition to a zero-carbon world, which stakeholders, particularly investors, to demonstrate strong progress on their includes responding to the clear mandate and binding net-zero targets currently set climate-related performance. Inadequate attention to our climate-related programmes within the UK for greenhouse gas emissions. Although the US government has not yet and emerging technologies could negatively impact the Group’s performance, announced the same binding targets, the current administration’s position is clear and we expect these to result in coming years. However, we do not anticipate adverse impacts and/or changes to these risks and/or operations with the sale of First Student and First Transit. reputation and/or result in decreased demand. Within the UK, the government has set a legally binding target for net-zero greenhouse gas emissions by 2050. All companies that operate in the UK or are owned by UK-based companies will be substantially impacted by decarbonisation policies introduced to meet this target. As a result, the Group is under increased pressure and scrutiny from both investors and government bodies to provide evidence of our strategic plans in place to mitigate climate change risks. There are also physical risks resulting from climate change (e.g. extreme weather events) which could impact our customers, service reliability, and disrupt our energy supply and/or supply chain. Delays in implementing our strategic plans to mitigate climate-related risks, including transitioning our fleets to zero emissions, could result in lost business, reduced revenue and reduced profitability. Geopolitical The political landscape within which the Group operates is constantly changing. The sale of First Student and First Transit constitutes the majority of the Group’s North The Group’s operations depend on government policy, funding regimes and American business, as a result of which there is a reduction in the operational and infrastructure initiatives continuing to support private company operators in public geographical diversity of the ongoing Group. The ongoing Group is therefore more transportation. Inability to maintain rail contracts and/or leverage national funding and dependent on the performance of, and revenue from, its UK divisions (i.e. First Bus develop government partnerships may result in the reduction and/or an elimination of and First Rail). As a result, changes in government policies, funding regimes and rail contracts and/or an inability to sustain and develop new bus routes resulting in infrastructure initiatives in the UK have a greater overall impact on the ongoing Group. adverse financial impacts. Group operations are also dependent on obtaining the necessary mechanical pieces to maintain our fleets. Changes in the political landscape may have supply chain implications and decrease the number of vehicles available to support demand. Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year In order to adapt to market uncertainties and continue to drive demand, the Group continues to be customer-focused and strives to provide innovative transport solutions. Whilst the Group has temporarily reduced certain capital investments, we continue to focus on strategic ventures to develop new innovative service offerings (e.g. electric fleet and autonomous vehicles, ticket initiatives) in order to provide our customers with transport solutions that reduce complexity and retain customer demand through unstable economic conditions. In 2020 the Group accelerated implementation of real-time seating capacity on our First Bus app to support social distancing requirements as well as a number of further customer engagement actions through technology to provide greater insight to manage operations. Through this tracking the Group is able to adapt bus schedules to real-time demand to better manage operational costs. Although it is not yet clear the lasting impacts the pandemic will have on commuting behaviours, lock down orders have begun to lift, resulting in increased travel demands within the UK; First Bus saw volumes increase to c.60% of pre-pandemic levels during the most recent lockdown easement. We expect increased demand over the summer holidays as we anticipate travellers largely taking domestic trips instead of travelling internationally. The Group’s First Rail division has entered into no risk and low cost risk contracts to protect the remaining business from economic fluctuations. Further, if lockdown procedures or shelter in place orders are extended the ongoing Group will be able to right-size bus schedules based on real-time demand monitoring and government support arrangements in First Bus are expected to be extended to allow for social distanced public transport to continue. The Group’s strategic framework for sustainability, Mobility Beyond Today, sets out the company’s ambition to be the partner of choice for innovative and sustainable transport. In 2021, FirstGroup became the first bus and rail operator in the UK to formally commit to setting an ambitious science-based target aligned with limiting global warming to 1.5°C and reaching net-zero emissions by 2050 or earlier. Within First Bus we have committed to investing in only zero-emission vehicles from December 2022, and to have a 100% zero-emission fleet by 2035. The National Bus Strategy, announced on 15 March 2021, pledged £3bn for buses in England outside London, including a commitment to support the purchase of at least 4,000 new zero emission buses for the UK, from which the Group is well positioned to benefit. We also publicly support the UK Government’s ambition to remove diesel-only trains from the network by 2040. As outlined in the Government’s rail White Paper, published in May 2021, electrification of Britain’s rail network will be expanded, and alternative technologies such as hydrogen and battery power will help to achieve zero emissions from trains. We look forward to working with the government and industry partners in support of the government’s investment plans to decarbonise Britain’s rail network. Our externally assured carbon and energy performance can be found in the KPI section on pages 55-56 and in our TCFD reporting on pages 57-60, with a more detailed breakdown in our 2021 Environmental Performance Report, available on our website. Business continuity plans are in place for all areas of our businesses in case of extreme weather or other physical events. While the Group collaborates with industry bodies to help anticipate government policy or funding regime changes in order to adjust operations, the Group is an apolitical organization and does not have the ability to control or substantially influence government policy. The Group has been able to mitigate supply chain disruptions by utilising mechanical parts from vehicles not in use due to decreased demand levels as a result of the pandemic. The Group recognises the continued pressure and opportunity to create a more sustainable world and maintains our commitment to invest in new technologies and collaborate with partners to create a cleaner future. The commitments we have made this year – particularly our science-based target and zero emission fleet target for First Bus – and the strategies we are developing to meet them will ensure we are managing our climate transition risks effectively. With the sale of the US businesses, the regulatory environment on climate change simplifies for us as we will deal predominantly with UK policy which is well defined and which we are on track to meet with our current commitments. The physical risks of climate change are also less variable and with less extreme weather events in the UK than North America. Although the new contracts are expected to be based on a more appropriate balance of risk and reward, First Rail is a proportionately larger part of the Retained Group and therefore the future performance of the ongoing Group will be intrinsically aligned with successful negotiations of new rail contracts and continued government support. The UK government announced its intention to bring the UK’s current rail franchising system to an end and replace it with a new rail contract model for delivery of rail passenger service by private operators. See pages 22-24 for additional information on the termination sum agreements of the pre-existing franchising contracts and details of the newly negotiated National Rail Contracts (NRC). Additionally, the UK government also announced new infrastructure investments, including c. £3bn to transform bus services across the country providing the Group with new opportunities to grow the First Bus division. 6565 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportPrincipal risks and uncertainties continued Risk description, full Group Strategic Risks Contracted business Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year The Group’s contracted businesses are dependent on the ability to secure and renew contracts on profitable terms, comply with contract terms and avoid termination. Additionally, the ability of the Group to achieve performance targets is dependent on our ability to exceed passenger performance metrics laid out in rail contracts. Failure to do so would result in reduced revenue and profitability and / or negative impact on delivering the Group’s strategic objectives. With the sale of First Student and First Transit, the ongoing Group has less geographic diversity and therefore is more dependent on the performance of the UK divisions; however, the new National Rail Contracts will provide the ongoing Group with a consistent single-digit margin, more cash generation, and overall greater resilience. These contracts have low cost, contingent capital and revenue risk. The sale of First Student and First Transit allows the ongoing Group to further focus on our digital innovation, enhance business efficiency and flexibility, and target opportunities in adjacent markets and geographies. Competition and emerging technologies The Group’s market share and competitiveness is dependent on effectively competing in areas of pricing and service options. Our success is also dependent on identifying and developing innovative offerings in line with the Group’s goal to be the partner of choice for our customers’ transport solutions, accelerating the transition to a zero carbon world. Our main competitors include the private car and other transportation service providers (e.g. ride share, price comparison websites, etc.). Airline competition also impacts demand for bus and rail travel, especially in Greyhound’s long-haul business. Zero emission and emerging technologies such as autonomous vehicles and on-demand schemes provide opportunities to grow and develop our market segments. The Group may also begin to experience more competitors for rail contracts as a result of the decreased contingent capital requirements of the National Rail Contract structure. Failure to effectively compete in the market and/or develop new and innovative options could result in decreased customer retention, decreased demand and/or adverse financial and reputational impacts. Operational Risks Financial resources As set out in further detail in note 25 to the financial statements on pages 192-197, treasury risks include liquidity risks, risks arising from changes to foreign exchange and interest rates and fuel price risk. The sale of First Student and First Transit allows us to significantly reduce the level of debt for the ongoing Group and also includes a cash reserve to provide adequate financial resources until end markets begin to emerge from the pandemic. The Group monitors our leverage ratios and overall liquidity consistently to ensure we As a result of varying passenger demand The Group will apply the net proceeds remain within our target range and have adequate financial resources on a two to throughout the fiscal year, the Group from the sale to discharge certain Liquidity risk includes the risk that the Company is unable to refinance debt as it becomes due. Foreign currency and interest rate movements may impact the profits, balance sheet and cash flows of the Group. Ineffective hedging arrangements may not fully mitigate losses or may increase them. The Group is credit rated by S&P Global Ratings and Fitch. A downgrade in the Group’s credit ratings to below current investment grade may lead to increased financing costs and other consequences and affect the Group’s ability to invest in its operations. While the sale provides significant debt decreases and working capital reserves, it also decreases the Group’s revenue streams and may impact the ongoing Group’s ability to obtain credit when the ongoing Group targets new debt facilities. 6666 The new contract structure will be concession-based with performance incentives The transition from franchising to With the sale of First Student and First resulting in a far better balance of risk and reward. As the largest incumbent with contracts will lead to a better balance of Transit, First Rail is a proportionally four UK rail operations expected to be in place until at least 2023, we have the risk and reward via reduced revenue risk, greater part of the ongoing Group. extensive operational expertise needed to meet new contract performance incentives. minimal cost and contingent capital risk, Although this results in a less diverse We have dedicated departments that focus on DfT negotiations and ensure that and will provide more consistent cash portfolio, the new National Rail Contract future commitments to UK rail will have an appropriate balance of potential risks and generation each year. As the largest structure provides a strong base rewards for shareholders. incumbent the Group has the operational business for the ongoing Group and structure and expertise to exceed provides opportunities to build on that passenger performance targets and to foundation with no revenue risk and build on our base business with no limited cost risk. revenue risk. To meet our goal to be the partner of choice for our customers’ transport solutions, Low fuel prices and changes in we continue to focus on service quality and delivery in order to attract passengers demand for public transportation Due to the sale of First Student and First Transit the ongoing Group has increased and other customers to our portfolio of businesses. We are leaders in the operation due to the pandemic have led to reduced capacity to strategically focus innovation and maintenance of electric and autonomous vehicles, and we continue to invest in passenger volumes. Although the lasting efforts on markets within the UK, the technology and services to support connected and on-demand travel, including impact to commuting behaviours and particularly in left behind towns and cities consumer travel demand continues to where public transportation, specifically be unknown, the Group saw passenger buses, are integral to meeting the UK volumes reach c60% of pre-pandemic Government’s economic growth agenda. Mobility as a Service (MaaS). The Group also continues to have a dedicated cross-divisional consumer experience team who help implement innovative customer convenience solutions (e.g. real-time seat capacity, contactless and capped ticketing, smart tickets, 5G/Wi-Fi, data driven pricing) which focus on improving access to our services and our overall service to customers. that we offer. The Group has also identified expansion opportunities in adjacent markets and new geographies to support the expansion of public transport throughout the UK. Wherever possible the Group works with local and national bodies to promote measures aimed at increasing demand for public transport and the other services levels in some areas during the most recent lockdown easement. The Group has continued to invest in emerging technologies this year, including autonomous and electric vehicles, and services to support connected and on-demand travel, including mobility as a service (MaaS). We continue to increase the number of low and zero emission vehicles operating in our road and rail fleets, and to focus on providing easy and convenient mobility, encouraging the switch from private car journeys to our services. three year look forward. Although the completion of the sale of First Student and First Transit decreases the ongoing Group’s revenue stream, S&P Global Ratings and Fitch currently rate us as investment grade and we do not anticipate a reduction in our ability to secure credit, including the targeted debt facilities. In the event the ongoing Group did not obtain the targeted debt facilities we have additional capacity within our current financial structures to continue our strong financial positions, such as extending our 2022 bonds. secured additional funding to support long-term liabilities, including the £300m liquidity during the pandemic. Additionally, we secured covenant amendments for both our March and September 2021 testing dates. The CCFF loan. Additionally, c£100m pro forma net debt position to be retained to ensure the ongoing Group has adequate financial resources available while UK Group has continued with our strategy end markets begin to emerge from the to sell First Student and First Transit in order to invest and focus on our UK divisions which are less susceptible to impacts from passenger demand and will provide us strong cash generation and liquidity in future. pandemic over and above the estimated short-term capital needs. As a result, the ongoing Group has a significantly de-risked balance sheet and strong financial position to unlock growth in our target markets. FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Risk description, full Group Strategic Risks Contracted business Impact of sale of First Student and First Transit to risk description Mitigation The Group’s contracted businesses are dependent on the ability to secure and renew With the sale of First Student and First Transit, the ongoing Group has less geographic contracts on profitable terms, comply with contract terms and avoid termination. diversity and therefore is more dependent on the performance of the UK divisions; Additionally, the ability of the Group to achieve performance targets is dependent however, the new National Rail Contracts will provide the ongoing Group with a on our ability to exceed passenger performance metrics laid out in rail contracts. consistent single-digit margin, more cash generation, and overall greater resilience. These contracts have low cost, contingent capital and revenue risk. Failure to do so would result in reduced revenue and profitability and / or negative impact on delivering the Group’s strategic objectives. The new contract structure will be concession-based with performance incentives resulting in a far better balance of risk and reward. As the largest incumbent with four UK rail operations expected to be in place until at least 2023, we have the extensive operational expertise needed to meet new contract performance incentives. We have dedicated departments that focus on DfT negotiations and ensure that future commitments to UK rail will have an appropriate balance of potential risks and rewards for shareholders. Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year The transition from franchising to contracts will lead to a better balance of risk and reward via reduced revenue risk, minimal cost and contingent capital risk, and will provide more consistent cash generation each year. As the largest incumbent the Group has the operational structure and expertise to exceed passenger performance targets and to build on our base business with no revenue risk. With the sale of First Student and First Transit, First Rail is a proportionally greater part of the ongoing Group. Although this results in a less diverse portfolio, the new National Rail Contract structure provides a strong base business for the ongoing Group and provides opportunities to build on that foundation with no revenue risk and limited cost risk. Competition and emerging technologies The Group’s market share and competitiveness is dependent on effectively The sale of First Student and First Transit allows the ongoing Group to further focus competing in areas of pricing and service options. Our success is also dependent on on our digital innovation, enhance business efficiency and flexibility, and target identifying and developing innovative offerings in line with the Group’s goal to be the opportunities in adjacent markets and geographies. partner of choice for our customers’ transport solutions, accelerating the transition to a zero carbon world. Our main competitors include the private car and other transportation service providers (e.g. ride share, price comparison websites, etc.). Airline competition also impacts demand for bus and rail travel, especially in Greyhound’s long-haul business. Zero emission and emerging technologies such as autonomous vehicles and on-demand schemes provide opportunities to grow and develop our market segments. The Group may also begin to experience more competitors for rail contracts as a result of the decreased contingent capital requirements of the National Rail Contract structure. Failure to effectively compete in the market and/or develop new and innovative options could result in decreased customer retention, decreased demand and/or adverse financial and reputational impacts. Operational Risks Financial resources As set out in further detail in note 25 to the financial statements on pages 192-197, The sale of First Student and First Transit allows us to significantly reduce the level of treasury risks include liquidity risks, risks arising from changes to foreign exchange debt for the ongoing Group and also includes a cash reserve to provide adequate and interest rates and fuel price risk. financial resources until end markets begin to emerge from the pandemic. Liquidity risk includes the risk that the Company is unable to refinance debt as it While the sale provides significant debt decreases and working capital reserves, it becomes due. Foreign currency and interest rate movements may impact the profits, also decreases the Group’s revenue streams and may impact the ongoing Group’s balance sheet and cash flows of the Group. Ineffective hedging arrangements may ability to obtain credit when the ongoing Group targets new debt facilities. not fully mitigate losses or may increase them. The Group is credit rated by S&P Global Ratings and Fitch. A downgrade in the Group’s credit ratings to below current investment grade may lead to increased financing costs and other consequences and affect the Group’s ability to invest in its operations. To meet our goal to be the partner of choice for our customers’ transport solutions, we continue to focus on service quality and delivery in order to attract passengers and other customers to our portfolio of businesses. We are leaders in the operation and maintenance of electric and autonomous vehicles, and we continue to invest in the technology and services to support connected and on-demand travel, including Mobility as a Service (MaaS). The Group also continues to have a dedicated cross-divisional consumer experience team who help implement innovative customer convenience solutions (e.g. real-time seat capacity, contactless and capped ticketing, smart tickets, 5G/Wi-Fi, data driven pricing) which focus on improving access to our services and our overall service to customers. The Group has also identified expansion opportunities in adjacent markets and new geographies to support the expansion of public transport throughout the UK. Wherever possible the Group works with local and national bodies to promote measures aimed at increasing demand for public transport and the other services that we offer. Low fuel prices and changes in demand for public transportation due to the pandemic have led to reduced passenger volumes. Although the lasting impact to commuting behaviours and consumer travel demand continues to be unknown, the Group saw passenger volumes reach c60% of pre-pandemic levels in some areas during the most recent lockdown easement. The Group has continued to invest in emerging technologies this year, including autonomous and electric vehicles, and services to support connected and on-demand travel, including mobility as a service (MaaS). We continue to increase the number of low and zero emission vehicles operating in our road and rail fleets, and to focus on providing easy and convenient mobility, encouraging the switch from private car journeys to our services. Due to the sale of First Student and First Transit the ongoing Group has increased capacity to strategically focus innovation efforts on markets within the UK, particularly in left behind towns and cities where public transportation, specifically buses, are integral to meeting the UK Government’s economic growth agenda. The Group monitors our leverage ratios and overall liquidity consistently to ensure we remain within our target range and have adequate financial resources on a two to three year look forward. Although the completion of the sale of First Student and First Transit decreases the ongoing Group’s revenue stream, S&P Global Ratings and Fitch currently rate us as investment grade and we do not anticipate a reduction in our ability to secure credit, including the targeted debt facilities. In the event the ongoing Group did not obtain the targeted debt facilities we have additional capacity within our current financial structures to continue our strong financial positions, such as extending our 2022 bonds. As a result of varying passenger demand throughout the fiscal year, the Group secured additional funding to support liquidity during the pandemic. Additionally, we secured covenant amendments for both our March and September 2021 testing dates. The Group has continued with our strategy to sell First Student and First Transit in order to invest and focus on our UK divisions which are less susceptible to impacts from passenger demand and will provide us strong cash generation and liquidity in future. The Group will apply the net proceeds from the sale to discharge certain long-term liabilities, including the £300m CCFF loan. Additionally, c£100m pro forma net debt position to be retained to ensure the ongoing Group has adequate financial resources available while UK end markets begin to emerge from the pandemic over and above the estimated short-term capital needs. As a result, the ongoing Group has a significantly de-risked balance sheet and strong financial position to unlock growth in our target markets. 6767 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportPrincipal risks and uncertainties continued Risk description, full Group Operational Risks continued Pandemic Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year The pandemic has altered the way in which the Group operates and how we serve our communities. Our success depends on continuing to anticipate and adapt to changes in consumer commuting and travel behaviours, implementing safeguards to prevent spread and complying with new laws and regulations relating to the pandemic. Failure to balance operational changes whilst also implementing appropriate safeguards and procedures to prevent additional spread of the pandemic and promote containment may result in adverse reputational or financial impacts. The Group is committed to the health and safety of our employees, customers and others with which we do business. With the sale of First Student and First Transit, the ongoing Group is less susceptible to changes in consumer community behaviour and demand. The new National Rail Contracts include a management fee that is not dependent on demand and within First Bus we have the ability to adjust and change schedules in order to adapt to changing demand patterns To adapt our operations to impacts resulting from the pandemic the Group has While the Group has implemented With the sale of First Student and First implemented new policies and procedures across all vehicle fleets. These policies safeguards across our fleet to prevent Transit, the ongoing Group is less and procedures include providing personal protective equipment to drivers and further spread of the pandemic, technicians, increased sanitation and appropriate social distancing requirements. The guidance regarding the methods of Group complies with all applicable public health authority guidance, include the use of spread and effective containment face coverings where mandated. procedures continue to develop. Additionally, during 2020 the Group fast-tracked implementation of real-time seating These methods and procedures are susceptible to changes in consumer commuting behaviour and demand. Safety The Group is committed to fostering and maintaining a culture of safety. However, public transport inherently includes safety related risks, many of which are out of our control. These risks include terrorism, adverse weather, human error and increased traffic / congestion on public roadways. A safety incident, or a threat of an incident, could lead to reduced public confidence in public transportation overall and potentially reduce demand for our services. Pension scheme funding The Group sponsors or participates in several significant defined benefit pension schemes, primarily in the UK. Within our North American subsidiaries, we participate in several multi-employer pension schemes in which our contributions are pooled with the contributions of other contributing employers. In both schemes the Group’s future cash contributions and funding requirements are dependent on investment performance, movements in discounts rates, expectations of future inflation and life expectancy. Within North America, funding of the schemes is also reliant on the ongoing participation by the other contributing employers. In order to maintain adequate cash funding and prevent adverse financial impacts or reputational damage, the Group must monitor the performance of our fund investments and movements in other contributing factors (e.g. discount rates, life expectancy, etc.). Safety is one of the Group’s core values and the sale of First Student and First Transit has no impact on our unwavering commitment to safety. Despite our commitment to safety, we recognise that, regretably, incidents and legal claims do occur. As North America has a higher degree of litigious activity, the sale of First Student and First Transit reduces the Group’s liability insurance risk and associated costs. Although the ongoing Group will continue to operate in North America via the Greyhound division, a portion of the sale proceeds has been retained to de-risk any remaining self-insurance requirements. Whilst the sale of First Student and First Transit reduces the ongoing Group’s insurance risk, it also reduces our geographical diversity. In the event of a terrorist attack and / or safety incident within the UK, the Group may experience a decrease in demand which will not be offset by stable demand within the US. Following the sale of First Student and First Transit, the ongoing Group continues to be responsible for all pension plans other than those relating to the sold divisions for which the liability has transferred as part of the sale. Although the Group used some of the net disposal proceeds to improve pension scheme funding, the ongoing Group’s ability to contribute to the Pension Schemes on an ongoing basis will be dependent on the profits of a less diversified business with a reduced operating cash flow, in particular, in relation to the First UK Bus Pension Scheme. 6868 capacity on our Bus app to support social distancing requirements. Under the new National Rail Contracts First Rail will not experience revenue risk as a result of decreased demand, except for in our Hull Trains open access service. Our other divisions, have a greater risk of loss caused by decreased demand. While First Bus saw passenger volumes increase to c.60% of pre-pandemic levels during the most recent lockdown easement, to adapt our operations to potential changes in commuting and travel behaviour, the division has dedicated teams to assess and monitor workforce and route planning. The dedicated teams use advanced data analytics that provide an efficient way to adjust schedules. Once end markets have emerged from the pandemic, the Group also has plans ready to reshape routes and timelines to align with observed demand. The actions taken via these plans will be based on real-time passenger flow data now available following digital transformation initiatives. further impacted by the new variants of the coronavirus developing throughout the world, including in the UK. This changing knowledge could continue to affect the ways in which we must adjust our operations to protect the safety of our customers, employees and third parties who interact with our business. In order to promote and maintain our culture of safety, all divisions have extensive Although the Group continues to assess, In relation to the sale of First Student and safety plans and safety training for our drivers and employees. Points of access to update and implement safety procedures First Transit, as previously stated the legal vehicles are secured to prevent against malicious access. Mechanical safety controls across our businesses, risk mitigation in climate in North America continues to (speed monitoring, cameras, etc.) are implemented across our fleet of vehicles. this area continues to be a focus. Even deliver judgements disproportionately in While the Group has implemented preventative safety measures and procedures, we recognise that incidents may be caused by factors that are ultimately out of our control and do at times result in legal claims. As a result, the Group has dedicated departments, utilising third party experts when needed, to analyse and maintain effective insurance structures and levels. with this attention, the legal climate in North America, particularly in the US, continues to deliver judgements which are disproportionately in favour of favour of plaintiffs. While the Group has legal claim risk in the UK, the ongoing Group’s overall insurance risk has decreased. Although the ongoing plaintiffs, and at times unpredictable. Group’s insurance risk has decreased, Additionally, the extent to which the claims environment may be impacted by the effects of the pandemic is not yet clear. the ongoing Group also has less geographical diversity to offset any decrease in demand following a terrorist attack and / or safety incident within the UK. In order to effectively monitor our funding requirements, all our cash models/forecasts The Group has closed most of its defined Following the sale of First Student and include significant pension deficit funding. The Group also utilises third party experts benefit schemes in its road divisions to First Transit, a portion of the net disposal to monitor movements in discount rates and inflation expectations. We continue to replace our defined benefit schemes with defined contribution arrangements where possible. We are also focusing on diversifying asset classes and future accrual. This will lead to the natural proceeds was used to materially improve reduction of the size and volatility of the pension scheme funding and thereby pension funding risk over time. decrease our overall funding risk. reallocating riskier investments to investments that better match the characteristics of Through our membership of the Rail the liabilities as funding levels improve. Under the First Rail franchise arrangements, the Group’s train operating companies are not responsible for any residual deficit at the end of a franchise so there is only short-term cash flow risk within any particular franchise. The Group intends to use £337m of the net disposal proceeds to contribute to the Bus and Group pension schemes. Additionally, the increase in funding levels allows for greater flexibility for the management of the pension liabilities including buy-ins and further liability hedging. Delivery Group we are engaged in an industry-wide project to consider the long-term funding model for the Railways Pension Scheme. FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Risk description, full Group Operational Risks continued Pandemic The pandemic has altered the way in which the Group operates and how we serve The Group is committed to the health and safety of our employees, customers and our communities. Our success depends on continuing to anticipate and adapt to others with which we do business. With the sale of First Student and First Transit, the changes in consumer commuting and travel behaviours, implementing safeguards ongoing Group is less susceptible to changes in consumer community behaviour and to prevent spread and complying with new laws and regulations relating to the demand. The new National Rail Contracts include a management fee that is not dependent on demand and within First Bus we have the ability to adjust and change schedules in order to adapt to changing demand patterns pandemic. Failure to balance operational changes whilst also implementing appropriate safeguards and procedures to prevent additional spread of the pandemic and promote containment may result in adverse reputational or financial impacts. Safety The Group is committed to fostering and maintaining a culture of safety. However, Safety is one of the Group’s core values and the sale of First Student and First Transit public transport inherently includes safety related risks, many of which are out of our has no impact on our unwavering commitment to safety. Despite our commitment to control. These risks include terrorism, adverse weather, human error and increased safety, we recognise that, regretably, incidents and legal claims do occur. As North traffic / congestion on public roadways. A safety incident, or a threat of an incident, America has a higher degree of litigious activity, the sale of First Student and First could lead to reduced public confidence in public transportation overall and potentially Transit reduces the Group’s liability insurance risk and associated costs. Although the reduce demand for our services. ongoing Group will continue to operate in North America via the Greyhound division, a portion of the sale proceeds has been retained to de-risk any remaining self-insurance requirements. Whilst the sale of First Student and First Transit reduces the ongoing Group’s insurance risk, it also reduces our geographical diversity. In the event of a terrorist attack and / or safety incident within the UK, the Group may experience a decrease in demand which will not be offset by stable demand within the US. Pension scheme funding The Group sponsors or participates in several significant defined benefit pension Following the sale of First Student and First Transit, the ongoing Group continues to schemes, primarily in the UK. Within our North American subsidiaries, we participate be responsible for all pension plans other than those relating to the sold divisions for in several multi-employer pension schemes in which our contributions are pooled which the liability has transferred as part of the sale. with the contributions of other contributing employers. In both schemes the Group’s future cash contributions and funding requirements are dependent on investment performance, movements in discounts rates, expectations of future inflation and life expectancy. Within North America, funding of the schemes is also reliant on the ongoing participation by the other contributing employers. In order to maintain adequate cash funding and prevent adverse financial impacts or reputational damage, the Group must monitor the performance of our fund investments and movements in other contributing factors (e.g. discount rates, life expectancy, etc.). Although the Group used some of the net disposal proceeds to improve pension scheme funding, the ongoing Group’s ability to contribute to the Pension Schemes on an ongoing basis will be dependent on the profits of a less diversified business with a reduced operating cash flow, in particular, in relation to the First UK Bus Pension Scheme. Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year To adapt our operations to impacts resulting from the pandemic the Group has implemented new policies and procedures across all vehicle fleets. These policies and procedures include providing personal protective equipment to drivers and technicians, increased sanitation and appropriate social distancing requirements. The Group complies with all applicable public health authority guidance, include the use of face coverings where mandated. While the Group has implemented safeguards across our fleet to prevent further spread of the pandemic, guidance regarding the methods of spread and effective containment procedures continue to develop. With the sale of First Student and First Transit, the ongoing Group is less susceptible to changes in consumer commuting behaviour and demand. Additionally, during 2020 the Group fast-tracked implementation of real-time seating capacity on our Bus app to support social distancing requirements. Under the new National Rail Contracts First Rail will not experience revenue risk as a result of decreased demand, except for in our Hull Trains open access service. Our other divisions, have a greater risk of loss caused by decreased demand. While First Bus saw passenger volumes increase to c.60% of pre-pandemic levels during the most recent lockdown easement, to adapt our operations to potential changes in commuting and travel behaviour, the division has dedicated teams to assess and monitor workforce and route planning. The dedicated teams use advanced data analytics that provide an efficient way to adjust schedules. Once end markets have emerged from the pandemic, the Group also has plans ready to reshape routes and timelines to align with observed demand. The actions taken via these plans will be based on real-time passenger flow data now available following digital transformation initiatives. In order to promote and maintain our culture of safety, all divisions have extensive safety plans and safety training for our drivers and employees. Points of access to vehicles are secured to prevent against malicious access. Mechanical safety controls (speed monitoring, cameras, etc.) are implemented across our fleet of vehicles. While the Group has implemented preventative safety measures and procedures, we recognise that incidents may be caused by factors that are ultimately out of our control and do at times result in legal claims. As a result, the Group has dedicated departments, utilising third party experts when needed, to analyse and maintain effective insurance structures and levels. In order to effectively monitor our funding requirements, all our cash models/forecasts include significant pension deficit funding. The Group also utilises third party experts to monitor movements in discount rates and inflation expectations. We continue to replace our defined benefit schemes with defined contribution arrangements where possible. We are also focusing on diversifying asset classes and reallocating riskier investments to investments that better match the characteristics of the liabilities as funding levels improve. Under the First Rail franchise arrangements, the Group’s train operating companies are not responsible for any residual deficit at the end of a franchise so there is only short-term cash flow risk within any particular franchise. The Group intends to use £337m of the net disposal proceeds to contribute to the Bus and Group pension schemes. Additionally, the increase in funding levels allows for greater flexibility for the management of the pension liabilities including buy-ins and further liability hedging. These methods and procedures are further impacted by the new variants of the coronavirus developing throughout the world, including in the UK. This changing knowledge could continue to affect the ways in which we must adjust our operations to protect the safety of our customers, employees and third parties who interact with our business. Although the Group continues to assess, update and implement safety procedures across our businesses, risk mitigation in this area continues to be a focus. Even with this attention, the legal climate in North America, particularly in the US, continues to deliver judgements which are disproportionately in favour of plaintiffs, and at times unpredictable. Additionally, the extent to which the claims environment may be impacted by the effects of the pandemic is not yet clear. In relation to the sale of First Student and First Transit, as previously stated the legal climate in North America continues to deliver judgements disproportionately in favour of plaintiffs. While the Group has legal claim risk in the UK, the ongoing Group’s overall insurance risk has decreased. Although the ongoing Group’s insurance risk has decreased, the ongoing Group also has less geographical diversity to offset any decrease in demand following a terrorist attack and / or safety incident within the UK. The Group has closed most of its defined benefit schemes in its road divisions to future accrual. This will lead to the natural reduction of the size and volatility of the pension funding risk over time. Following the sale of First Student and First Transit, a portion of the net disposal proceeds was used to materially improve pension scheme funding and thereby decrease our overall funding risk. Through our membership of the Rail Delivery Group we are engaged in an industry-wide project to consider the long-term funding model for the Railways Pension Scheme. 6969 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportImpact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year The Group is committed to protecting the privacy and personal data of our customers, employees and others with which we do business. The sale of First Student and First Transit has no impact on our commitment to protect our consumers’ data and our business systems against security breaches and / or comply with all GDPR and CCPA regulations. To protect our customers’ data and comply with all data privacy regulations, IT Despite the Group’s continued mitigation The sale of First Student and First Transit infrastructure controls have been implemented Group-wide. We also have dedicated efforts, the risk of a cyber security attack has no impact to the risk change during compliance officers in each division. The Group also administers a training for all companies continues to increase. the year. programme to all employees, communicating their role in protecting and preventing This risk has been additionally impacted the unauthorised access to sensitive data. Additionally, in order to comply with user by the increase of a remote workforce preferences, the Group is implementing a software solution that makes it easier to during the pandemic. record and update customer preferences. The Group is dedicated to maintaining compliance with the regulatory environment within which it works and the sale of First Student and First Transit has no impact on our commitment to comply with our regulatory requirements. To help the Group comply with all legislation and regulations, we have dedicated Although our legislative and regulatory The sale of First Student and First Transit compliance professionals who ensure applicable laws by locality and state are environment continues to change, the has no impact to the risk change during followed. We also engage with third party legal experts when necessary to advise Group maintains our commitment to the year. on policies and procedures and other related compliance matters. We also provide assess and adapt not only our insurance a hotline for employees and third parties to report concerns. Whilst we strive to maintain compliance within the regulatory environment, we also maintain insurance for third party injury claims arising from vehicle and general operations, employee injuries and property damage. To help mitigate non-compliance risk with anti-bribery and anti-trust regulations we maintain robust policies and procedures and our employees receive regular training on the policies. We also complete periodic audits of our training programmes to ensure consistent training and participation. structure but also our policies and procedures to prevent non-compliance. The attraction, development, retention, reputation and succession of senior management and individuals with key skills are critical factors in the successful execution of the Group’s strategy, and operation of the Group’s divisions. The reduction in size and diversification of the ongoing Group following the sale of First Student and First Transit may make it more difficult for the Group to attract and retain employees. In order to increase retention and decrease employee costs, the Group has enhanced The lasting impact the pandemic will With the sale of First Student and First recruitment practices, including leveraging online channels for all roles. The Group have on the labour market and employee Transit, the ongoing Group has reduced also has implemented all necessary coronavirus-related safety protocols to support work conditions continues to develop in size and includes a less diverse the health and safety of our drivers and technicians. In response to Brexit employment regulations, we have secured Sponsorship Status and are in the process of implementing new employment record requirements to comply with regulations. and will require the Group to assess portfolio which, if combined with any and adapt our operations in the future. negative publicity associated with the Additionally, employee and community sale, may impact the ongoing Group’s ability to attract and retain employees. expectations continue to impact our recruitment, retention, diversity and To help prevent overall employee turnover, we continue to focus on improving development strategies. communication with employees, investing in employee development and diversity and inclusion, and providing market competitive wages and benefits. Principal risks and uncertainties continued Risk description, full Group Operational Risks continued Data security and consumer privacy, including cyber-security The Group continues to see an increase of mobile and internet sales across all divisions. These mobile and internet channels gather large amounts of data which require safeguards in order to protect our customers’ data and to comply with the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA). Whilst this data requires compliance with consumer privacy regulations, it also makes us a target of data security attacks by third parties. In addition to maintaining infrastructures that protect our consumers’ data, our operations rely on information technology systems. Cyber-attacks, computer malware, viruses, spamming and phishing attacks have become more prevalent and may result in a breach of our systems. A breach of our facilities and / or network could disrupt our operations and impair our ability to protect consumer data, and / or compromise our confidential business information. A failure to prevent, mitigate or detect security breaches and / or improper access to our business and / or customer’s information and / or comply with consumer privacy regulations could result in disruption to our operations, significant penalties and have an adverse impact on consumer confidence in the Group. Regulatory compliance The Group’s operations are subject to a wide range of legislation and regulation. Complying with such legislation and regulations may increase the Group’s operating costs, and non-compliance could lead to financial penalties, investigation expenses, legal costs or reputational damage. The Group’s corporate governance, which is recognised by external ESG ratings as strong and well aligned with stakeholder interests, supports our ability to respond to, and prepare for, financial and ESG laws and regulations. The main regulatory compliance risks specific to the Group that are not covered in other principal risks include workplace compliance (employee wage and hour, meal and break matters, etc.), workplace health and safety and anti-trust/anti-bribery regulations. Human resources Employee costs represent the largest component of the Group’s operating costs. These costs include expenses related to recruitment, retention and talent development. The costs are impacted by changes in employment markets, new regulatory requirements from Brexit and diversity and inclusion programmes. A failure to effectively recruit and retain a diverse and talented workforce could have adverse financial, reputational and operational impacts. Our driver and technician employment market has been affected by the pandemic which has increased our recruitment and retention costs and may impact operations as consumer travel demand increases. Our employee turnover rate may also be impacted by Brexit employment regulations and the announcement of the intent to sell the North American businesses. 7070 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021it also makes us a target of data security attacks by third parties. In addition to maintaining infrastructures that protect our consumers’ data, our operations rely on information technology systems. Cyber-attacks, computer malware, viruses, spamming and phishing attacks have become more prevalent and may result in a breach of our systems. A breach of our facilities and / or network could disrupt our operations and impair our ability to protect consumer data, and / or compromise our confidential business information. A failure to prevent, mitigate or detect security breaches and / or improper access to our business and / or customer’s information and / or comply with consumer privacy regulations could result in disruption to our operations, significant penalties and have an adverse impact on consumer confidence in the Group. Regulatory compliance legal costs or reputational damage. The Group’s corporate governance, which is recognised by external ESG ratings as strong and well aligned with stakeholder interests, supports our ability to respond to, and prepare for, financial and ESG laws The main regulatory compliance risks specific to the Group that are not covered in other principal risks include workplace compliance (employee wage and hour, meal and break matters, etc.), workplace health and safety and anti-trust/anti-bribery and regulations. regulations. Human resources requirements from Brexit and diversity and inclusion programmes. A failure to effectively recruit and retain a diverse and talented workforce could have adverse financial, reputational and operational impacts. Our driver and technician employment market has been affected by the pandemic which has increased our recruitment and retention costs and may impact operations as consumer travel demand increases. Our employee turnover rate may also be impacted by Brexit employment regulations and the announcement of the intent to sell the North American businesses. The Group’s operations are subject to a wide range of legislation and regulation. The Group is dedicated to maintaining compliance with the regulatory environment Complying with such legislation and regulations may increase the Group’s operating within which it works and the sale of First Student and First Transit has no impact on costs, and non-compliance could lead to financial penalties, investigation expenses, our commitment to comply with our regulatory requirements. Employee costs represent the largest component of the Group’s operating costs. The attraction, development, retention, reputation and succession of senior These costs include expenses related to recruitment, retention and talent development. management and individuals with key skills are critical factors in the successful The costs are impacted by changes in employment markets, new regulatory execution of the Group’s strategy, and operation of the Group’s divisions. The reduction in size and diversification of the ongoing Group following the sale of First Student and First Transit may make it more difficult for the Group to attract and retain employees. Risk description, full Group Operational Risks continued Impact of sale of First Student and First Transit to risk description Mitigation Comment on risk change during the year Impact of sale of First Student and First Transit, if any, to the risk change during the year Data security and consumer privacy, including cyber-security The Group continues to see an increase of mobile and internet sales across all The Group is committed to protecting the privacy and personal data of our divisions. These mobile and internet channels gather large amounts of data which customers, employees and others with which we do business. The sale of First require safeguards in order to protect our customers’ data and to comply with the Student and First Transit has no impact on our commitment to protect our General Data Protection Regulation (GDPR) and California Consumer Privacy Act consumers’ data and our business systems against security breaches and / or (CCPA). Whilst this data requires compliance with consumer privacy regulations, comply with all GDPR and CCPA regulations. To protect our customers’ data and comply with all data privacy regulations, IT infrastructure controls have been implemented Group-wide. We also have dedicated compliance officers in each division. The Group also administers a training programme to all employees, communicating their role in protecting and preventing the unauthorised access to sensitive data. Additionally, in order to comply with user preferences, the Group is implementing a software solution that makes it easier to record and update customer preferences. Despite the Group’s continued mitigation efforts, the risk of a cyber security attack for all companies continues to increase. This risk has been additionally impacted by the increase of a remote workforce during the pandemic. The sale of First Student and First Transit has no impact to the risk change during the year. To help the Group comply with all legislation and regulations, we have dedicated compliance professionals who ensure applicable laws by locality and state are followed. We also engage with third party legal experts when necessary to advise on policies and procedures and other related compliance matters. We also provide a hotline for employees and third parties to report concerns. Whilst we strive to maintain compliance within the regulatory environment, we also maintain insurance for third party injury claims arising from vehicle and general operations, employee injuries and property damage. To help mitigate non-compliance risk with anti-bribery and anti-trust regulations we maintain robust policies and procedures and our employees receive regular training on the policies. We also complete periodic audits of our training programmes to ensure consistent training and participation. Although our legislative and regulatory environment continues to change, the Group maintains our commitment to assess and adapt not only our insurance structure but also our policies and procedures to prevent non-compliance. The sale of First Student and First Transit has no impact to the risk change during the year. In order to increase retention and decrease employee costs, the Group has enhanced recruitment practices, including leveraging online channels for all roles. The Group also has implemented all necessary coronavirus-related safety protocols to support the health and safety of our drivers and technicians. In response to Brexit employment regulations, we have secured Sponsorship Status and are in the process of implementing new employment record requirements to comply with regulations. To help prevent overall employee turnover, we continue to focus on improving communication with employees, investing in employee development and diversity and inclusion, and providing market competitive wages and benefits. The lasting impact the pandemic will have on the labour market and employee work conditions continues to develop and will require the Group to assess and adapt our operations in the future. Additionally, employee and community expectations continue to impact our recruitment, retention, diversity and development strategies. With the sale of First Student and First Transit, the ongoing Group has reduced in size and includes a less diverse portfolio which, if combined with any negative publicity associated with the sale, may impact the ongoing Group’s ability to attract and retain employees. 7171 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportViability and going concern The results of this scenario testing showed that the Group would be able to remain viable and maintain liquidity over the assessment period. Corporate planning processes The Group’s corporate planning processes include completion of a strategic review for the Rail and Bus divisions, preparation of a medium-term business plan and a quarterly re-forecast of current year business performance. The plans and projections prepared as part of these corporate planning processes consider the Group’s cash flows, committed funding and liquidity positions, forecast future funding requirements, banking covenants and other key financial ratios, including those relevant to maintaining the Group’s existing investment grade status. It also considers the ability of the Group to deploy capital. A key assumption underpinning these corporate planning processes is that credit and asset-backed financing markets will be sufficiently available to the Group to put additional new facilities in place, if required. Viability statement Based on the results of the analysis explained above, including scenario testing, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 March 2024. The Board confirms that in making this statement it carried out a robust assessment of the principal and emerging risks facing the Group, including those that would threaten its business model, future performance, solvency and/or liquidity. Viability Time horizon The Directors have assessed the viability of the Group over a three-year period. This period reflects the Group’s corporate planning processes and is considered appropriate for a fast-moving competitive environment such as passenger transport. Scenario testing In making their assessment, the Directors have taken into account the potential financial and operational impacts, in severe but plausible scenarios, of the principal and emerging risks which might threaten the Group’s viability during the three-year period to 31 March 2024 and the likely degree of effectiveness of current and available mitigating actions that could be taken to avoid or reduce the impact or occurrence of such risks (details of the risks and mitigating actions are set out on pages 62-71). The assessment of the available mitigating actions included the Group’s ability to manage its cost base and capital expenditure. In making their assessment, the Directors have made the assumption that the Group will retain £200m Bond expiring in September 2024 and all currently committed First Bus finance leases post-completion, and will have access to debt markets to negotiate additional new credit facilities, if required. All other currently committed debt facilities are assumed to be redeemed on, or shortly after, completion of the sale of First Student and First Transit. The broad details of the scenarios that were considered in the assessment are: 1) a protracted period of coronavirus disruption and continuation of social distancing measures during the second half of FY22 with a gradual recovery in passenger volumes through FY23; 2) heightened operational and environmental pressures including increased labour market competition, accelerated First Bus fleet investment and the loss of a key First Rail contract; 3) disposal of Greyhound; and 4) inability of the Group to negotiate additional new credit facilities on acceptable terms. Going concern The Board reviewed an updated base case and a severe but plausible downside scenario, considering the progress made since the Group’s announcement of its full year results for the 52 weeks ended 28 March 2020 (FY20) and the potential mitigating actions. Based on their review of the financial forecasts for the period to September 2022 and having regard to the risks and uncertainties to which the Group is exposed, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the 12 month period from the date on which the financial statements were approved. Accordingly, they continue to adopt a going concern basis of accounting in preparing the consolidated financial statements in this full year report. In the FY20 results the Group disclosed that the risks and uncertainties facing the Group at that stage of the pandemic indicated that material uncertainty existed that could cast doubt on the Group’s and the Company’s ability to continue as a going concern. The material uncertainty related to: ■ the uncertainty regarding the levels of fiscal financial and contractual support which may be provided beyond the period for which that funding and contractual support is currently being provided ■ whether passenger volumes recover to the levels necessary to sustain the business without the current fiscal financial and contractual support ■ the ability of the Group to obtain covenant waivers from debt providers if required ■ the ability of the Group to draw down on c.£550m of the currently available but uncommitted facilities throughout the going concern period ■ the timing of cash flows, including movements in working capital and the timing of receipts of contractual and fiscal support that may impact debt levels at covenant test dates. 7272 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Severe, plausible downside scenario In addition, a severe but plausible downside case was also modelled which assumes a more protracted post-pandemic recovery profile. In Greyhound and First Bus the severe but plausible downside case assumes slower recovery with passenger revenues in the second half of FY22 at an average rate of 57% and 75% pf pre-pandemic levels respectively. In First Rail, the downside case assumes reduced TOC performance fee awards and operating losses in Hull Trains and East Coast Open Access. Mitigating actions If the impact on the Group of the pandemic were to be more protracted than assumed in the base case scenario, the Group would reduce and defer planned growth capex spend and further reduce costs in line with a lower volume operating environment to the extent that the essential services we operate are not required to be run for the governments and communities we support. Going concern statement Based on the scenario modelling undertaken, and the potential mitigating actions referred to above, the Board is satisfied that the Group’s liquidity over the going concern period is sufficient for the business needs. Update since the FY20 results As noted in the Chief Executive’s review and business reviews, compared with the position in July 2020 we now have substantially greater clarity about the resilience of our businesses, the contractual arrangements in First Rail through the ERMA in Avanti, NRC’s in SWR and TPE and the EMA in GWR, the fiscal arrangements in place in the UK and North America: ■ Continued support from governments, school boards and other contract customers throughout the FY21 pandemic period have demonstrated a commitment to maintaining the essential public transport services the Group operates. In the US, further fiscal support bills are being legislated through Congress in FY22 including significant provision for further support to the public transport sector ■ Passenger volume levels have outperformed our prior forecast assumptions in year-to- date trading. It is anticipated that governments will continue to support minimum operating service levels through the emergence from the pandemic until social distancing is removed and these services can be run commercially ■ Management has demonstrated the flexibility of our businesses to generate cash flows well within required debt facility and covenant levels since the pandemic struck ■ On 21 July 2021 the Group completed the sale of First Student and First Transit to EQT Infrastructure for net proceeds of c.£2.3bn. The transaction has resulted in a material deleveraging and de-risking of the business. Evaluation of going concern The Board evaluated whether it was appropriate to prepare the company and consolidated financial statements in this report on a going concern basis and in doing so considered whether any material uncertainties exist that cast doubt on the Group’s and the Company’s ability to continue as a going concern over the going concern period, and in particular whether any of the circumstances giving rise to the material uncertainties at the 2020 year-end still existed. Consistent with prior years, the Board’s going concern assessment is based on a review of future trading projections, including whether the amended banking covenants are likely to be met and whether there is sufficient committed facility headroom to accommodate future cash flows for the going concern period. Divisional management teams prepared detailed, bottom-up projections for their businesses reflecting the impact of the coronavirus pandemic operating environment, including customer revenue recovery where services had been disrupted and what government or contractual support arrangements were in place. Base case scenario These projections were the subject of a series of executive management reviews and were used to update the base case scenario that was used for the purposes of the going concern assessment at the 2021 year end. The base case assumes a gradual recovery in passenger volumes as a result of an anticipated lifting of social distancing and travel restrictions in FY22, but that passenger volumes remain below pre-pandemic levels in the going concern assessment period. The macro projections in the updated base case assume that the UK operates in a post-Brexit coronavirus economy. We have not assumed any further North American fiscal support beyond what has already been committed by the federal governments. 7373 FirstGroup Annual Report and Accounts 2021Strategic reportFirstGroup Annual Report and Accounts 2021Strategic reportGovernance report In this section, we introduce our Board, explain our approach to corporate governance and activities in the year, and give details of the Company’s remuneration principles and policies to support our objectives. 74 FirstGroup Annual Report and Accounts 2021Governance reportGovernance report Board of Directors Chairman’s report Corporate governance report Nomination Committee report Audit Committee report Board Safety Committee report Remuneration Committee report 76 80 82 97 99 106 108 Remuneration at a glance Remuneration in context Annual report on remuneration Directors’ remuneration policy Directors’ report and additional disclosures Directors’ responsibility statement 112 113 117 132 142 145 75 FirstGroup Annual Report and Accounts 2021Governance reportBoard of Directors David Martin N M Non-Executive Chairman Matthew Gregory X S M Chief Executive Ryan Mangold X S M Chief Financial Officer Appointed: 15 August 2019 Key areas of expertise: Transportation, Business Turnaround, Performance Improvement, Contracting, M&A Skills and experience: David is the former Chief Executive of Arriva, which he joined in 1998 as board member responsible for international development before taking over the leadership of the company in 2006. During his tenure, Arriva was transformed into a multinational transport services group through a number of key strategic mergers and acquisitions. In September 2010 the company was purchased by Deutsche Bahn, one of the world’s leading passenger transport and logistics companies. David remained as Chief Executive throughout this period, before stepping down in January 2016. He remained on the Arriva Board advising on a range of issues until May 2017. He was formerly a Non-Executive Director at Ladbrokes plc and previously held roles at British Bus plc, where he was responsible for development of strategy and M&A, at shipping company Holyhead Group and at business services group Initial Services PLC. David is a chartered management accountant. External appointments: Senior Independent Director at Biffa plc; member of the advisory board at Nottingham Business School; member of the steering committee at Nottingham Trent University. Nationality: British Appointed: 1 December 2015 Chief Financial Officer and appointed Chief Executive 13 November 2018 Key areas of expertise: Transportation, Contracting, Corporate finance/M&A, Business Turnaround, Safety, Governance Skills and experience: Matthew has a deep understanding of FirstGroup, having joined the Company as Chief Financial Officer in December 2015, before his appointment as Chief Executive in November 2018. Matthew has strong strategic and operational expertise, including delivering strategy and driving performance improvement. He has extensive international experience, including significant M&A and corporate finance activity. He was formerly Group Finance Director of Essentra plc, a component manufacturer and distributor, having previously been Director of Corporate Development, where he was responsible for multiple international acquisitions, as well as driving growth and margin improvement in the group’s largest division. His early career was spent at the manufacturing and distribution division of Rank Group plc where he was responsible for managing multinational corporations, introducing new technologies and restructuring legacy businesses. Matthew qualified as a chartered accountant at EY and has recent and relevant financial experience. Nationality: British Appointed: 31 May 2019 Key areas of expertise: Corporate finance/M&A, Business Turnaround, Pensions, Governance Skills and experience: Ryan was appointed as CFO in May 2019, having previously been Group Finance Director of Taylor Wimpey Plc for eight years. Ryan has a strong track record of building financial discipline in the organisations he has worked at. During his time at Taylor Wimpey, Ryan played a leading and integral role in strengthening the balance sheet, driving operational improvements, rebuilding the business post the financial crisis (to become a constituent of the FTSE 100), the sale of the North American business and the improvement of its pensions position. Ryan was previously at the Anglo American group of companies, where he was Group Financial Controller at Mondi and played a significant role in its demerger from Anglo American in 2007. Ryan is a chartered accountant and has recent and relevant financial experience. Nationality: South African/British Key A Audit Committee S Executive Safety Committee R Remuneration Committee X Executive Committee N Nomination Committee M M&A Subcommittee B Board Safety Committee Chair 76 FirstGroup Annual Report and Accounts 2021Governance reportSally Cabrini R B Independent Non-Executive Director Martha Poulter B A Independent Non-Executive Director Warwick Brady A N Independent Non-Executive Director Appointed: 24 January 2020 Appointed: 26 May 2017 Appointed: 24 June 2014 Key areas of expertise: HR, IT, Transformation Skills and experience: Sally brings valuable experience of a number of sectors including UK regulated utilities, services and manufacturing. She has expertise in delivering significant business transformation programmes often including internal restructuring or divestment, pension changes and both cultural and significant technological changes. As Transformation, IT and People Director at Interserve Group Limited she had a strong focus on effective operational delivery and led a major transformation programme which had significant financial and strategic challenges and prior to that she was a senior executive at FTSE 100 constituent United Utilities for nine years, including four years as Business Services Director with responsibility for information technology, cyber security and human resources in a regulated CNI environment. Sally was also a Non Executive Director of Lookers plc from January 2016 to 2020. Sally is a fellow of the Chartered Institute of Personnel and Development. External appointments: NED and Chair of the Remuneration Committee of Appreciate Group plc. Nationality: British Key areas of expertise: Transportation, Corporate finance/M&A, Business Turnaround, IT/technology, Governance Key areas of expertise: Transportation, Corporate finance/M&A, Business Turnaround, Safety, Governance Skills and experience: Martha has deep expertise in technology and cyber security, specialising in the integration of new technology systems to transform and enable business performance. Throughout her career she has led technology programmes across hospitality, finance and service industries, with a strong focus on customer service and driving operational improvements and efficiencies. Martha has led and executed technology strategies across Europe, America and Asia. Most recently Martha was the Executive Vice President and Chief Information Officer (CIO) of Starwood Hotels & Resorts Worldwide and, prior to that, she was Vice President of General Electric and CIO of GE Capital with global responsibility for IT strategy and operations. External appointments: Senior Vice President and CIO of Royal Caribbean Cruises Ltd. Nationality: American Skills and experience: Warwick has a strong track record of delivering restructuring, cost reduction and modernisation programmes, particularly in the transportation sector. His previous roles include Chief Executive of Mandala Airlines in Asia, Deputy Operations Director at Ryanair plc, and Chief Operating Officer at Air Deccan/Kingfisher in India and easyJet plc, during its transformation to become a FTSE 100 business. Warwick also held board positions at Airline Group and NATS, the UK’s airspace provider, Deputy CEO of Buzz and was CEO of Esken plc (formerly Stobart Group Ltd) until April 2021. External appointments: President and CEO of Swissport International AG. Nationality: South African/British 77 FirstGroup Annual Report and Accounts 2021Governance reportBoard of Directors continued Steve Gunning A Independent Non-Executive Director Julia Steyn A R M Independent Non-Executive Director Anthony Green B Group Employee Director Appointed: 1 January 2019 Appointed: 2 May 2019 Appointed: 15 September 2020 Key areas of expertise: Transportation, Corporate finance/M&A, Business Turnaround, Pensions, Safety, Governance Key areas of expertise: Transportation, Contracting, Corporate finance/M&A, Governance Key areas of expertise: Transportation, Employee Engagement, Safety, Learning and Development Skills and experience: Steve is the Chief Financial Officer of International Airlines Group (IAG), the parent company of British Airways, having previously served as CFO of British Airways for three years. Prior to that he was CEO of IAG’s Cargo Division for five years. During his career Steve has gained considerable experience leading operational turnarounds, overseeing major corporate integration processes, corporate governance and complex pension negotiations. Steve qualified as a chartered accountant at PwC and gained experience in both the UK and the US and worked in the rail, financial and manufacturing sectors. Steve has recent and relevant financial experience. External appointments: Director of IAG Global Business Services. Nationality: British Skills and experience: Julia brings extensive knowledge of the US transport industry to the Board. Julia served as Vice President, Urban Mobility and Maven at General Motors (GM). Maven combines all of GM’s car- and ride-sharing offerings, including its strategic alliance with Lyft, under a single personal mobility brand. Julia first joined GM in 2012 as Vice President, Corporate Development and Global M&A, to manage GM’s partnerships globally while also developing merger and acquisition opportunities. Prior to this, Julia was Vice President and Co-Managing Director for Alcoa’s corporate development group, having previously worked in London, Moscow and New York for Goldman Sachs and A.T. Kearney. External appointments: Chief Executive Officer of BOLT Mobility and independent director of Garrett Motion Inc. Nationality: American Skills and experience: Ant is a bus driver and a trainer for First Bus. He has been the Employee Director of First Essex Buses Ltd since 2014, a company he joined in 2009. In 2015, he was seconded to roll out Be Safe the Group’s safety behavioural change programme. Since then Ant has trained more than 1,900 colleagues and coached leaders on the implementation of successful safety techniques. Prior to joining First Essex, he worked at retailer Homebase for 16 years including in several managerial positions, and also volunteered at St John Ambulance. Nationality: British Key A Audit Committee S Executive Safety Committee R Remuneration Committee X Executive Committee N Nomination Committee M M&A Subcommittee B Board Safety Committee Chair Former Director who served for part of the year: Jimmy Groombridge Group Employee Director Jimmy stepped down from the Board on 29 June 2020. 78 FirstGroup Annual Report and Accounts 2021Governance reportPeter Lynas A R N Senior Independent Non-Executive Director Jane Lodge A R Independent Non-Executive Director David Robbie A R N M Former Independent Non-Executive Director Appointed: 30 June 2021 Appointed: 30 June 2021 Key areas of expertise: Defence and aerospace, Government contracting, Turnaround, Corporate finance/M&A, Pensions, Governance Skills and experience: Peter was group finance director of BAE Systems plc (and a director of BAE Systems, Inc.) from 2011 until his retirement in 2020, having previously served in increasingly senior financial and M&A roles since joining the company in 1999. Peter’s early career was spent at De La Rue Systems, which he joined as a trainee accountant, and then GEC Marconi from 1985 to 1999, where he became finance director of Marconi Electric Systems. In addition to his strong strategic and financial background Peter brings to the Board extensive experience in heavily regulated industries with significant contractual relationships with government. External appointments: Non-executive director and audit committee chair of SSE plc since 2014. Nationality: British Key areas of expertise: Transportation/ engineering and infrastructure, Corporate finance/M&A, Governance Skills and experience: Jane spent her executive career with Deloitte, where she spent more than 25 years advising multinational companies including businesses in transport, leisure, consumer and technology sectors. Since 2012 she has served as a non-executive director and audit committee chair at several UK public companies in a range of sectors. Previous roles include non-executive director of Sirius Minerals plc (2015-2020, when the company was acquired by Anglo American plc), Costain Group plc and of Devro plc (2012-2020). In addition to broad international experience in a range of sectors, Jane brings substantial audit, risk and audit committee expertise to the Board. External appointments: Non-executive director and audit committee chair of DCC plc and Bakkavor Group plc, and a non-executive director and remuneration committee chair of Glanbia plc. Nationality: British Appointed: 2 February 2018 Resigned: 30 June 2021 Key areas of expertise: Transportation, Contracting, Business Turnaround, Corporate finance/M&A, Pensions, Governance Skills and experience: David brings valuable turnaround experience to the Board, with a lead role in the integration of P&O with Royal Nedlloyd, and operational efficiency, cash optimisation and improved ROCE programmes at Rexam following its strategic refocus from 2010. He has significant international corporate finance and M&A transaction experience. He was Finance Director of Rexam PLC from 2005 until its acquisition by Ball Corporation in 2016. Prior to his role at Rexam, David served in senior finance roles at BTR plc before becoming Group Finance Director at CMG plc in 2000 and then CFO at Royal P&O Nedlloyd N.V. in 2004. He served as a NED of the BBC between 2006 and 2010 and as Chairman of its Audit Committee. David originally qualified as a chartered accountant at KPMG and has recent and relevant financial experience. External appointments: NED, Chair of the Audit Committee and member of the Nomination and Remuneration Committees of DS Smith Plc. and NED and SID of Easyjet plc. Nationality: British Executive Committee members Matthew Gregory Chief Executive Ryan Mangold Chief Financial Officer Rachael Borthwick Group Corporate Services Director Steve Montgomery Managing Director, First Rail David Isenegger General Counsel and Company Secretary Paul Osland1 President, First Student Janette Bell Managing Director, First Bus Dave Leach President, Greyhound Brad Thomas1 President, First Transit 1 Stepped down from Executive Committee on completion of sale of First Student and First Transit on 21 July 2021. 79 FirstGroup Annual Report and Accounts 2021Governance reportChairman’s report David Martin Chairman “ Strong governance is essential for the creation of value for all our stakeholders.” In this section Board of Directors Chairman’s report Corporate Governance report Nomination Committee report Audit Committee report Board Safety Committee report Remuneration Committee report Directors’ report and additional disclosures Directors’ responsibility statement 78 80 82 97 99 106 108 142 145 80 Dear Shareholder On behalf of the Board, I am pleased to introduce the corporate governance report for 2021. This continues to be the Board’s principal method of reporting to shareholders on our application of the principles of good corporate governance. Governance Strong governance is essential for the effective delivery of our strategy, the creation of value for all our stakeholders and the ongoing development and sustainability of our business. Our governance framework has served the Group well in a year of challenge and change with the ongoing impact of the pandemic on our operations, both in the UK and North America and the sale of First Student and First Transit. The Board’s priority has always been and remains the health and safety of our passengers and employees. It is in this context the Board met twelve times this year with seven ad hoc meetings in addition to the Board’s five scheduled meetings (see page 83). The M&A Subcommittee, established in January 2020 to oversee the sale of the Group’s North American divisions, met seven times in the year and the Audit Committee also held two ad hoc meetings. I would like to thank the Board for their time and dedication over the course of the year. I would also like to acknowledge the 20% reduction in salary and base fees volunteered by our Chief Executive, Chief Financial Officer and Non-Executive Directors for four months earlier this year and similarly the voluntary salary reductions and deferrals made by some of our senior employees across the Group. The Board and its Committees conducted all their meetings remotely through audio and video calls and, whilst not as satisfactory as face to face meetings, the Board and Committees continue to function effectively. The activities of the Board and its principal Committees together with how we have applied the principles of the 2018 UK Corporate Governance Code (‘Code’) are set out in the following pages. Board evaluation This year’s evaluation was undertaken internally involving a detailed and thorough review of the Board and its principal Committees which covered a wide range of topics. Further information on the process, progress against actions resulting from last year’s externally facilitated review and actions identified in this year’s internal review can be found on page 88. It is my view that the Board has discharged its duties effectively in the year under review. I am not, however, complacent and neither are my fellow Directors. The evaluation identified areas which can benefit from increased oversight and these topics will be amongst the key priorities for the Board in addition to the strategic and operational priorities already discussed in other sections of this Annual Report. Changes to the Board We have seen several changes to our Board since last year. I am pleased to note that Anthony Green was elected Group Employee Director and was appointed to the Board on 15 September 2020. Ant has been an employee of FirstGroup since 2009 and he brings an important and unique perspective to our Board discusisons. David Robbie, Senior Independent Director and Chairman of the Audit Committee, decided to not seek re-election at this year’s AGM. On behalf of the Board, I would like to thank David for his valuable and considerable contribution over the years. We also welcomed two new Non-Executive Directors to the Board, Peter Lynas and Jane Lodge, both of whom joined at the end of June 2021. Peter has been appointed Senior Independent Director and Jane has been appointed Chairman of the Audit Committee. In making appointments to the Board, our objective is to bring a range of expertise, experience and diverse perspectives. In view of their substantial and varied experience, I have no doubt Peter and Jane will make a significant contribution to the Board in the future. As I mentioned earlier in this Annual Report, Matthew Gregory has decided to step down at the conclusion of the AGM in September this year at which time I will become interim Executive Chairman. I want to acknowledge and thank Matthew for his considerable contribution to FirstGroup since he joined the Board in 2015. FirstGroup Annual Report and Accounts 2021Governance reportIn addition to the search for a new Chief Executive, one of my priorities and that of the Nomination Committee in the coming months will be to keep succession planning under constant review with the intention of keeping the Board and Committee composition strong and diverse as the Group continues to evolve following the sale of First Student and First Transit. Compliance with the Code FirstGroup complied in all respects with the provisions of the Code in FY21 with the exception of provision 36 which requires companies to implement a policy on post- employment shareholdings. The current Directors’ Remuneration Policy, approved by shareholders at the Company’s AGM in July 2018, expires this year. This non-compliance will be remedied with the new Policy being put to shareholders at the Company’s 2021 AGM. Provision 9 of the Code states the role of the chair and chief executive should not be exercised by the same individual. FirstGroup will not therefore be compliant with provision 9 from the conclusion of the 2021 AGM and for the duration of my appointment as interim Executive Chairman. This will of course be addressed in due course with the appointment of a new Chief Executive. The Board comprises a majority of independent Non-Executive Directors, including the recently appointed Senior Independent Director, Peter Lynas. There continues therefore to be a strong and independent dimension to the Board’s deliberations. It remains only for me to thank again my fellow Directors, our colleagues and our employees both in the UK and North America for their ongoing commitment and considerable efforts this past year. David Martin Chairman 27 July 2021 Snapshot of Code compliance Independence Senior Independent Director Over half of the Board (excluding the Chairman) comprises independent Non-Executive Directors and the composition of the Audit, Nomination and Remuneration Committees comply with the Code (pages 87, 97, 100 and 130). The Senior Independent Director was David Robbie until he stepped down effective 30 June 2021. Peter Lynas joined the Board 30 June 2021 and was appointed Senior Independent Director (page 83). Accountability and election Attendance There has been a clear separation of duties between the Chairman and CEO. This will change when Matthew Gregory steps down as Chief Executive at the conclusion of the 2021 AGM and David Martin is appointed interim Executive Chairman until a new Chief Executive is appointed (page 84). There has been full attendance at all Board meetings and there has been full attendance by Committee members at Committee meetings (pages 83, 97, 100, 106 and 130). External auditor tenure Non-audit policy We changed our auditor in 2020 following an extensive tender process (page 99). Details of non-audit policy and fees for non-audit services are provided in this report (page 105). Workforce engagement Stakeholder engagement The Group Employee Director is a member of the Board and the Group Safety Committee. He also attends the Remuneration and Audit Committees (pages 48 and 90). There has been strong engagement with all our stakeholders, which has been especially critical during the pandemic (pages 48 and 143). Performance-related pay Remuneration Policy A significant part of performance related pay is delivered through shares (page 134). A new Policy is being put to shareholders at the 2021 AGM that is compliant with the Code (page 132). Diversity Culture Information about the diversity of the Board is provided as well as more generally within the Group (pages 87, 98 and 40). Information about how the Board assesses and monitors culture is provided (page 92). 81 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report Corporate governance framework The corporate governance framework, comprising clearly defined responsibilities and accountabilities, is set out below: Board Responsible for the stewardship of the Group, oversees its conduct to deliver on strategy and create sustainable value for the benefit of shareholders and stakeholders Audit Committee Provides independent assessment and oversight of financial reporting, internal controls, risk management and internal and external audit (pages 99-105) Nomination Committee Reviews the size, composition and skills of the Board and its Committees, monitors Board and senior management succession planning, considers diversity and inclusion matters (pages 97-98) Remuneration Committee Determines the remuneration framework and policy for Executive Directors and senior management, considers alignment of reward and incentives with regulation, market practice and culture and monitors workforce remuneration-related policies and practices (pages 108-131) Board Safety Committee Oversees and monitors safety performance and safety standards for managing safety risks and promotes a safety first culture (pages 106-107) Disclosure Committee Oversees the implementation of procedures related to the identification, control and disclosure of inside information (page 83) M&A Sub-Committee Oversees the implementation of the sale of First Student and First Transit, other strategic portfolio actions and related financings (page 83) D E G e h t a v i Chief Executive Provides leadership to the executive team in running the business and implements strategy (page 84) Executive Committee Supports the Chief Executive in the day-to-day running of the Group and acts as Executive Risk Committee (page 83) Executive Safety Committee Monitors safety performance, reviews and updates safety standards, shares best practice and promotes a safety first culture (page 106) Employee Directors’ Forum To represent the voice of the workforce and promote employee engagement (page 90) The role of the Board The Board is responsible for promoting the Company’s long-term sustainable success for the benefit of its shareholders and stakeholders and for establishing the Company’s Vision, Values, culture and strategy. The Board discharges some of these responsibilities directly and others through Committees which it has established to provide dedicated focus on particular areas. Execution of the strategy and management of the Company’s business is delegated to the Chief Executive, with the Board retaining responsibility for overseeing, guiding and holding management to account. The Board is also responsible for: ■ establishing the Group’s long-term objectives, strategy and risk appetite 82 ■ ensuring the necessary resources are in place for the business to meets its strategic objectives ■ establishing policies and business practices that support the strategy and align with the Company’s Values and culture ■ overseeing the implementation of a robust governance and internal controls framework to allow for effective management of risk ■ overseeing Board and Committee composition, Directors’ independence and conflicts of interest and effective succession planning for senior management ■ maintaining effective engagement with the Company’s shareholders and stakeholders. Further information on the role of the Board and the roles of individual Board members is provided in the following pages. Biographies of the Directors can be found on pages 76-79. The Schedule of Matters Reserved to the Board is available on the Company’s website at www.firstgroupplc.com The Committees of the Board The four principal Committees of the Board are: ■ Audit Committee ■ Nomination Committee ■ Remuneration Committee ■ Board Safety Committee The Board has also established a Disclosure Committee and a M&A Subcommittee. FirstGroup Annual Report and Accounts 2021Governance report The Terms of Reference for the four principal Committees are available on the Company’s website at www.firstgroupplc.com M&A Subcommittee The M&A Subcommittee was established in January 2020 and was mandated to oversee the implementation of the sale of the North American contract divisions, other strategic portfolio actions and any related financings. The membership of this Subcommittee comprises the Chairman of the Board, two independent Non-Executive Directors and the Executive Directors. The Subcommittee is chaired by the Chairman of the Board. The Subcommittee met seven times in the year under review. Disclosure Committee The Board has delegated authority to the Disclosure Committee to oversee the timely and accurate disclosure of sensitive information. Meetings of the Disclosure Committee are convened as and when the need arises. Membership of the Committee comprises the Executive Directors together with the General Counsel & Company Secretary and the Corporate Services Director. Executive Commitee The Executive Committee, chaired by the Chief Executive, supports the Chief Executive in the day-to-day running of the Group. It meets quarterly and its main responsibilities include: ■ developing, implementing and monitoring operational plans ■ reviewing financial performance, forecasts and targets ■ prioritising initiatives and allocating resources ■ developing strategy for submission to the Board ■ overseeing risk management including identifying risks and developing and implementing risk mitigation plans ■ developing and monitoring the internal control environment ■ leading the Group’s culture and safety programme, supported by the Executive Safety Committee. Refer to page 79 for the members of the Executive Committee. Position Chairman Non-Executive Directors1 Member David Martin Warwick Brady Sally Cabrini Steve Gunning Martha Poulter David Robbie2 Julia Steyn Appointment date 15 August 2019 24 June 2014 24 January 2020 1 January 2019 26 May 2017 2 February 2018 2 May 2019 Group Employee Director Anthony Green 15 September 2020 Executive Directors Matthew Gregory Ryan Mangold 1 December 2015 31 May 2019 1 Peter Lynas and Jane Lodge appointed to the Board 30 June 2021. 2 David Robbie stepped down from the Board 30 June 2021. Board meetings There were five scheduled Board meetings in the year ended 27 March 2021 and an additional seven meetings were convened at short notice to consider the Board’s response to developments related to the pandemic, both within the business and globally and other commercial, financial and strategic matters, including the sale of First Student and First Transit. In ordinary circumstances, the Board would expect to hold at least two meetings in the US and would regularly undertake site visits across its operations in the UK and the US, however, this has not been possible this past year due to pandemic-related restrictions. As a consequence, all meetings during the year were held by audio and video conference. Commitment All Directors are expected to attend each Board meeting and each Committee meeting for which they are members, unless there are exceptional reasons preventing them from participating. Only members of the Committees are entitled to attend their meetings, but others may attend at the Committee Chair’s discretion. Non-Executive Directors have an open invitation to attend all Committee meetings, even if they are not a member, and they do so regularly to gain further insight. Executive Directors attend Committee meetings by invitation only. Scheduled meetings Ad hoc meetings 5/5 5/5 5/5 5/5 5/5 5/5 5/5 3/3 5/5 5/5 7/7 7/7 7/7 7/7 7/7 7/7 7/7 2/2 7/7 7/7 83 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Roles and responsibilities The Board has agreed a clear division of responsibilities between the Chairman and the Chief Executive, and these roles, as well as those of other Directors, are clearly defined so that no single individual has unrestricted powers of decision. Chairman David Martin ■ Leads and manages the business of the Board ■ Manages Board composition, performance and ■ Provides advice, support and constructive challenge to the Chief Executive ■ Provides direction and focus and ensures sufficient time is allocated to promote effective debate and sound decision making ■ Promotes the highest standards of integrity and probity and ensures effective governance succession planning ■ Maintains effective communication with shareholders and ensures their views are understood by the Board ■ Facilitates effective and constructive relationships and communications between Non-Executive Directors and Executive Directors Chief Executive Matthew Gregory ■ Provides leadership to the executive and senior ■ Implements the agreed strategy management team in the day-to-day running of the Group’s businesses ■ Develops the Group’s objectives and strategy for consideration and approval by the Board, taking in to account the interests of shareholders and stakeholders ■ Promotes a safe working environment and a safety- focused culture across the Group ■ Maintains an active dialogue with shareholders in respect of the Company’s performance ■ Responsible for implementing effective internal controls and risk management systems are in place Chief Financial Officer Ryan Mangold ■ Responsible for the financial stewardship of the ■ Supports the Chief Executive in providing executive Group’s resources leadership and developing strategy ■ Responsible for the Group’s finance, tax, treasury, ■ Supports the Chief Executive to implement the IT, insurance, risk management and internal control functions agreed strategy ■ Reports to the Board on operational and financial performance of the businesses ■ Acts as an additional point of contact for shareholders ■ Leads the annual review of the Chairman’s to discuss matters of concern ■ Provides a sounding board for the Chairman and serves as an intermediary for the other Directors ■ Brings insight into employee engagement and perspectives from the front line to Board deliberations ■ Chairs the Employee Directors’ Forum (‘EDF’) performance taking in to account the views of the Non-Executive Directors and Executive Directors ■ Promotes employee involvement and participation in the affairs of the Group through share ownership, employee surveys and other means of employee involvement ■ Promotes the Group’s policies and procedures amongst employees, in particular those related to safety, diversity and inclusion, and business ethics ■ Provide a strong independent element to the Board ■ Review management’s performance in meeting and collectively provide a broad range of experience, knowledge and individual expertise ■ Constructively support and challenge management agreed objectives and deliverables ■ Review the integrity of financial information and determine whether internal controls and systems of risk management are robust ■ Provides advice and support to the Board, its Committees, the Chairman and other Directors individually as required, primarily in relation to legal and corporate governance matters ■ Responsible, with the Chairman, for setting the agenda for Board and Committee meetings and for high quality and timely information and communication between the Board and its Committees and the Executive Directors and senior management Senior Independent Director David Robbie Group Employee Director (GED) Anthony Green Non-Executive Directors (NEDs) Warwick Brady Sally Cabrini Steve Gunning Martha Poulter Julia Steyn General Counsel and Company Secretary David Isenegger 84 FirstGroup Annual Report and Accounts 2021Governance reportBoard focus through the year The following table provides an overview of the key business and activities of the Board during the year. Strategy Stakeholders ■ Reviewed progress and provided guidance on the sale of First Student ■ Reviewed feedback from institutional shareholders and analysts and First Transit ■ Considered the future strategy for the Group and the strategy and business case for the ongoing Group ■ Received a report from the newly appointed MD of the Bus Division on performance and strategic direction ■ Received updates on the Electrification strategy and other technological innovations ■ Considered and approved entry in to EMAs and ERMAs for TPE, SWR and West Coast Partnership and an EMA for GWR ■ Considered and approved termination sums as negotiated with the DfT in respect of operating for rail companies ■ Reviewed and approved amendments to certain covenant tests as negotiated with the Group’s lending banks and USPP investors Performance ■ Provided a heightened level of oversight and scrutiny during the pandemic and supported measures taken by management to deal with the impact ■ Reviewed operational and financial performance relative to the business plan, budget and forecast at divisional and Group level ■ Reviewed the Group’s funding and liquidity position ■ Reviewed and approved the Group’s annual business plan and budget ■ Received reports from the Group Employee Director Governance and risk management ■ Received reports from the Board Committees ■ Received reports on corporate governance and legal and regulatory updates from the Company Secretary and the Group’s external legal advisers ■ Approved the FY20 Annual Report, the 2020 AGM Notice and the FY21 half year results announcement ■ Carried out a robust assessment of the Group’s principal and emerging risks, their potential impact and the effectiveness of the mitigating controls in place ■ Debated the Group’s risk appetite and agreed the revised placement of certain risks ■ Received an update on the TCFD ■ Approved the appointment of the General Counsel & Company Secretary ■ Approved a new all employee share incentive plan ■ Reviewed and approved the Modern Slavery Statement ■ Reviewed and approved the Gender Pay Gap disclosure ■ Considered feedback from the evaluation of the Board’s and ■ Reviewed and approved various capital expenditure requests Committees’ performance and agreed actions 85 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Decisions taken by the Board during the year The table below summarises some of the most significant decisions taken by the Board during the year and how stakeholder interests were taken into account. Board decision / action Stakeholders affected Strategic, operational, financial and Section 172 considerations Response to the pandemic Employees Customers Shareholders Government Creditors ■ Health, wellbeing and safety of employees and customers ■ Entry in to EMAs and ERMAs to ensure continued delivery of essential services ■ Helping vulnerable employees and customers in the communities within which we operate ■ Maintaining a sound funding and liquidity position Entry in to and drawdown of £300m CCFF Employees ■ Maintaining a sound funding and liquidity position Agreement reached with the DfT regarding termination sums for SWR, West Coast Partnership and entry in to new rail contracts for SWR and TPE Sale of First Student and First Transit for net cash proceeds of c.£2.3bn Customers Shareholders Government Creditors Shareholders Employees Customers Government Shareholders Employees Customers ■ Continued delivery of essential services ■ Financial security for employees ■ Reduction in the financial risk profile of the First Rail franchise portfolio ■ Transition to a lower risk and more predictable National Rail Contract model beneficial for passengers by providing clearer focus on performance and expected to generate more resilient and consistent returns for shareholders ■ Enables longstanding liabilities to be addressed ■ Ensures the Group has sufficient means for future development of retained businesses ■ Provides for a return of value for shareholders Sale of Greyhound properties for £102m Shareholders ■ Realisation of value for shareholders Employees Customers ■ Contribution to the Group’s funding and liquidity position ■ Rationalisation of Greyhound’s property portfolio Approved TCFD governance framework, phased implementation plan and certain TCFD related disclosures to be made on a voluntary basis in FY21 Shareholders Employees Customers Government and regulators NGOs ■ Reorganisation of Greyhound operations to intermodal transport hubs and new facilities to better suit our customers’ needs ■ Drives the Group towards its ambition to achieve net zero emissions by 2050 or earlier ■ Communicate to our investors how we manage the financial impacts of climate change ■ Regulatory and environmental compliance 86 FirstGroup Annual Report and Accounts 2021Governance reportBoard balance and independence As at 27 March 2021 the Board comprised the Chairman, two Executive Directors, the Group Employee Director and six Non-Executive Directors. The balance of Directors on the Board ensures that no individual or small group of Directors can dominate the decision- making process. The biographies on pages 76-79 demonstrate a broad range of skills, sector experience and knowledge. The Board carries out an annual review of the independence of its Non- Executive Directors. All the Non-Executive Directors are considered to have the appropriate skills, knowledge, experience and character to bring independent and objective judgement and valuable insights to the Board’s deliberations. Being an employee of the Group, the Group Employee Director is not considered by the Board to be independent. The Chairman was considered to be independent on appointment and is committed to ensuring that the Board comprises a majority of independent Non-Executive Directors. Composition of the Board (as at 27 March 2021) Board balance Sector experience Chairman Executive Directors Group Employee Director Non-Executive Directors Independence Independent Non-independent 1 2 1 6 6 4 Hospitality Transport Manufacturing Construction Gender Male Female 1 6 2 1 7 3 With the appointment of Jane Lodge, effective 30 June 2021, the gender split changes to 7 male/4 female Tenure (Years from appointment to 27 March 2021) Warwick Brady Sally Cabrini Anthony Green Matthew Gregory Steve Gunning Ryan Mangold David Martin Martha Poulter David Robbie Julia Steyn 0 1 2 3 4 5 6 87 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Board evaluation The Board undertakes a formal and rigorous review of its performance and that of its Committees and Directors each year, with an externally facilitated evaluation at least once every three years. The last such externally facilitated evaluation was undertaken in 2020 by Condign Board Consulting, a governance consultancy firm that has no other relationship with the Company. In 2021, an internal evaluation was carried out, overseen by the General Counsel & Company Secretary, which involved completion of a questionnaire for the Board and each of its Committees. The views of the Directors were consolidated into a formal report which was discussed by the Board. The review of the Chairman was facilitated by confidential one-to-one discussions between the Senior Independent Director and each Director. The Board evaluation process identified some areas of strength, including notably the Company’s response to the pandemic with the Executive Directors prioritising management’s focus to ensure the health and wellbeing of employees and customers and resuming essential services as quickly and efficiently as possible. Members of the Board reported that regular updates and additional non-scheduled Board meetings to consider key matters such as the pandemic had been particularly helpful. The Board felt that while it had adapted well to the challenges of working remotely by way of virtual meetings, the benefits of face-to-face meetings, site visits and informal meetings such as Board dinners could not be understated and so these would resume as soon as possible. The Directors were generally satisfied with the reporting of Committee activities to the Board and agreed that the areas and activities currently delegated by the Board to its Committees were appropriate. Progress against the conclusions of the 2020 Board/Committee evaluation, together with actions from the 2021 Board/Committee evaluation are set out in the table below. Actions from 2020 Board evaluation Area of focus Progress Improve information flows and quality and timely receipt of Board papers Weekly reports were provided by the Chief Executive during the height of the pandemic and additional ad hoc Board meetings were convened by the Chairman to improve information flows and aid decision making, which was particularly critical when dealing with fast moving developments in the pandemic. Agenda planning An annual workplan for the Board and each Committee assists the Chairman and Company Secretary to ensure focus is given by the Board to key ‘business as usual’ matters in the corporate cycle whilst not detracting from more immediate strategic and operational priorities, such as the pandemic and the sale of First Student and First Transit. Succession planning Progress against this action was paused due to the Board’s and management’s ongoing focus on the pandemic. Actions from 2021 Board evaluation Area of focus Action Relationships and level of engagement at Board level Relationships between Board members and between the Board and management were generally rated positively, however, engagement has been limited to virtual meetings for more than one year due to pandemic related restrictions and the impact of this was felt more keenly given there had been several newly appointed Directors in the past two years. Face to face meetings, deep dives, site visits and informal gatherings are to be resumed as soon as possible. Quality of Board papers Management to enhance Board papers to aid decision making with the consistent use of KPIs, use of agreed templates, identify issues and complexities of the Group more clearly, make content more concise and point more clearly to the expected decision/risk/input. Stakeholders Culture Risk assessment Succession planning 88 The oversight of stakeholder views was mixed, although understanding the views of shareholders, customers, employees and government were identified as relative strengths. Increasing exposure to the views of suppliers and communities was highlighted. The Board currently considers a range of information in relation to culture. It intends to enhance this by more frequently monitoring and assessing culture for alignment with our strategy, purpose and values following completion of the sale of First Student and First Transit. Assessment of the Group risk profile and risk appetite will be a key area of focus following execution of the sale of First Student and First Transit. Board succession and retention of skilled, high potential individuals across the Group remain key areas of focus, as does the development of the management pipeline. FirstGroup Annual Report and Accounts 2021Governance reportInduction and development On appointment, all new Directors receive a comprehensive and structured induction, tailored to each Director’s individual experience, background and areas of focus. The induction programme typically includes visits to the Group’s businesses both in the UK and in the US and meetings with Board Directors, senior managers, advisers and the external auditors. This is supplemented with a wide range of information, including historical Board and Committee papers, internal and external reports and presentations covering the key commercial, operational, financial and functional areas of the Group and relevant policies and governance procedures. The programme is designed to facilitate a new Director’s understanding of the Group’s businesses, the key drivers of operational and financial performance, the role of the Board and its Committees, the Company’s corporate governance practices and procedures and the duties, responsibilities and liabilities of being a director of a public limited company. During the year, Anthony Green participated in a tailored induction programme, details of which are set out below. Site visits to any of the Group’s businesses in the UK and US were curtailed due to the pandemic. Induction pack Meetings with Directors/senior management and areas of focus Meetings with advisers ■ Access to papers and minutes of the last ■ Chairman – long term strategy, overview ■ Corporate lawyers, Slaughter & May LLP 12 months’ Board meetings and meetings of the Board Safety Committee, Remuneration Committee and Nomination Committee ■ Board Evaluation Report for 2019/2020 of the Board/Committees ■ Corporate brokers, JP Morgan ■ CEO – business model, operational Cazenove Limited performance, current strategic priorities, current issues ■ Corporate brokers, Goldman Sachs ■ Briefing paper on the duties of directors ■ CFO – financial performance, funding & ■ Group policies and governance procedures such as the Share Dealing Policy, Whistleblowing Policy, Gifts and Hospitality Policy, Anti-Bribery Policy, Code of Ethics and the Safety Management Framework ■ Directors’ & Officers’ liability insurance ■ Schedule of Matters Reserved to the Board ■ Schedules of Delegated Authority for Corporate, Rail, Bus, Student, Transit and Greyhound ■ Terms of Reference for Committees ■ Last Annual Report liquidity, accounting issues, risk ■ General Counsel & Company Secretary and the Deputy Company Secretary – overview of Board/Committees, legal and regulatory briefing, Board arrangements and meeting dates ■ Chair of the Board Safety Committee – overview of role of Committee and current focus areas ■ Chair of the Remuneration Committee – overview of role of Committee, current focus areas and overview of remuneration structure ■ Group Head of Reward – overview of remuneration incentive arrangements at executive and senior levels, current issues, best practice ■ Group Legal Director – corporate history, business model, briefing on modern slavery and ethics programme Ongoing programme of meetings, deep dives, training and refresher sessions The Chairman, with support from the General Counsel & Company Secretary, has overall responsibility for ensuring that the Directors receive suitable training to enable them to discharge their duties. Training opportunities are provided through internal meetings, presentations and briefings by internal subject matter experts as well as external advisers. During the year, the Directors attended briefing sessions on TCFD, Remuneration, Listing Rules and Companies Act requirements in relation to Class 1 transactions and corporate governance, legal and regulatory developments. 89 FirstGroup Annual Report and Accounts 2021Governance report Corporate governance report continued Information and support The General Counsel & Company Secretary is responsible for advising the Board on all governance matters and for ensuring that Board procedures are followed, applicable rules and regulations are complied with and that due account is taken of relevant codes of best practice. The General Counsel & Company Secretary is also responsible for ensuring there are effective communication flows between the Board and its Committees, and between senior management and Non- Executive Directors. All Directors receive papers and other relevant information on the business to be conducted at each Board or Committee meeting well in advance, usually a week before, and all Directors have direct access to senior management should they wish to receive additional information on any of the items for discussion. The head of each division attends Board meetings on a regular basis to ensure that the Board is properly informed about divisional performance and any current issues. All Directors have access to the advice of the General Counsel & Company Secretary and, in appropriate circumstances, may obtain independent advice at the Company’s expense. Workforce engagement One of the key requirements of the Code is for boards to have in place mechanisms to ensure that they understand the views of the workforce. Many companies will have only recently established and started reporting on those mechanisms. FirstGroup has had an Employee Director on its Board since 1996 and on the majority of its UK operating companies’ boards since the founding of the Company. The GED is also a member of the Board Safety Committee and regularly attends the meetings of the Remuneration Committee and the Audit Committee. The role and responsibilities of the Group Employee Director are described on page 84. The GED chairs the EDF which currently comprises 14 Employee Directors, all of whom have been nominated through employee elections in their respective operating companies. See the adjacent case study on the Role of an Employee Director. The Board also engages with the workforce through employee perception surveys (Your Voice), wellbeing surveys, internal communications such as newsletters and the intranet and deep dives and site visits where the Board members have an opportunity to meet with a range of employees at all levels of the organisation. Regrettably site visits have been curtailed this past year, however, they will be resumed as soon as restrictions are eased. 90 Q&A The role of an employee director at Avanti West Coast by Lizzie Power any confusion. My MD and I recorded a short video entitled ‘Myth busting’ a while ago, which was particularly well-received. It was basically about dispelling unhelpful rumours, like depot closures, which had no substance to them and just caused unnecessary anxiety amongst colleagues. Q During the pandemic, how has the Employee Director role helped Avanti keep services running and customers and colleagues safe? A Throughout the pandemic, I’ve been pleased to work alongside colleagues, transporting key workers at a crucial time for our communities, and using COVID- secure measures to maintain safety for both colleagues and customers. I’ve also continued to attend virtual meetings on a range of matters. Doing both means I’ve been able to help the business enhance processes and procedures if required.  Q As an Employee Director, how do you make sure employees’ views and ideas are represented in the Boardroom? A I have a duty to my colleagues and the business to share their thoughts and views. I do this via reports to my MD, Phil Whittingham, and I attend board meetings where I can give my feedback directly, enabling me to share the experience of our people, and my own experience and advice. I also work as a Train Manager each week, alongside calls with colleagues and visits to stations and depots – all this provides me with an opportunity to talk to our people and find out what matters to them. Q What kind of issues have you raised and what difference do you feel you have made? A People raise a wide range of topics with me such as long-term plans for our future, rosters, working conditions, technology problems or ideas and sometimes personal issues. It’s my job to ensure they feel their voice is closer to the boardroom than it would be otherwise. And given I have a role like them, it is a voice that shares their experience each day. I’ve been able to get rapid answers from our senior leaders to people’s questions, so they know why decisions are made, and to help clear up FirstGroup Annual Report and Accounts 2021Governance reportShareholder engagement in FY21 The Board is committed to engaging effectively with our shareholders. The Board uses formal and informal communication channels to understand and take into account the views of shareholders, some of which are set out in the table below. Topic Participants FY21 activity Strategy, governance and remuneration Chairman Group Corporate Services Director Remuneration Chair of the Remuneration Committee Group Head of Reward Strategy, finance and operational performance Chief Executive Chief Financial Officer Group Corporate Services Director ESG Chief Executive Group Corporate Services Director Telephone/video conference meetings with institutional shareholders to discuss strategy and seek shareholder feedback. Invitations were extended to 20 institutional shareholders to discuss the proposed Remuneration Policy. The Chair engaged with several shareholders. Live webcasts of key announcements and individual calls with institutional shareholders on results and other key announcements. Telephone/video conference meetings with institutional shareholders, often as part of wider strategic/operational discussions Group Director of Corporate Responsibility Interaction with ESG rating agencies In addition to the above, the Board is provided with insight into the views of shareholders and their representative bodies on a more generalised basis. Copies of key sell-side analysts’ notes on the Company are circulated to the all Directors, as are summaries of their views collected anonymously by the Company’s advisers. An independent review of the perceptions of the Company’s major institutional shareholders is conducted every six months, which is presented to the Board. Responding to shareholder feedback The Code provides that when 20% or more of votes have been cast against a board recommendation for a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult with shareholders in order to understand the reasons behind the result. The Code also states that companies should publish an update on the views received from shareholders and the actions taken, and that the board should provide a final summary in the annual report. 2020 AGM The total votes for Resolution 7 at last year’s AGM, to re-elect Matthew Gregory as a Director, were below 80%. In March 2021, we published a statement on our website, which is also available to view on the Investment Association’s website in the public register. The Chairman engaged with the Company’s major shareholders prior to the AGM. He offered meetings to 29 institutional shareholders, representing approximately 83% of the Company’s issued share capital, and the Chairman subsequently met with 17 shareholders, representing 66% of the issued share capital. A small subset of shareholders voted against the Board’s recommendation on Resolution 7. Most discussed the background to and their reasons for doing so with the Chairman, and their reasons broadly related to the execution of strategy. Their views were subsequently relayed and explained to the Board before the AGM. The Board considered the feedback from all shareholders and remains confident that it has the necessary mix of skills, experience and knowledge to deliver the Group’s strategy, including realising shareholder value through the sale of First Student and First Transit. 2020 General Meeting The total votes for the Resolution proposed at the General Meeting on 27 May 2021 relating to the sale of First Student and First Transit were below 80%. The Company continues to openly and constructively engage with shareholders, including those who were not in favour of the sale. See page 8 for further information. 2021 AGM The AGM this year will be held on 13 September 2021 at The Brewery, 52 Chiswell Street, London, EC1Y 4SD. The meeting is intended to be a physical meeting, however, we will be closely monitoring restrictions over public gatherings and the UK Government’s safety guidance in light of the pandemic. Any changes to the arrangements will be communicated to shareholders before the meeting through our website and, where appropriate, by RIS announcement. We will also be making arrangements for shareholders to follow the meeting remotely via an audiocast. The Notice of AGM and other documentation are enclosed with this Annual Report or are available on the Company’s website at www.firstgroupplc.com for those shareholders who have chosen to communicate with the Company by electronic means. Shareholders are strongly encouraged to return their Form of Proxy completed in favour of the Chairman of the meeting or vote online in advance of the meeting. 91 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Culture Company culture is monitored and assessed by the Board through a range of inputs, which are reflected in the table below. The Board takes seriously its responsibility for shaping and monitoring the corporate culture of the Group and remains committed to applying the highest standards of corporate governance, recognising that robust governance and culture underpin business success. A key component of FirstGroup’s culture is its strong safety focus which is predicated on Zero Harm. Be Safe is a Group wide programme that embeds safety as a core Value and this Value has underpinned the Company’s response to the pandemic. Further information can be found on pages 43 to 45. Operating companies regularly undertake employee perceptions surveys, Your Voice, the results of which are reported to the Executive Committee and the Board. Further information on the Your Voice surveys can be found on pages 42 and 49. Reinforcing a healthy corporate culture Risk management Ethics and compliance Employee engagement ■ Delegated to the Audit Committee and the Executive Committee ■ Risk appetite reviewed annually by the Board ■ Continued embedding of the Code of Ethics that was rolled out in 2018 ■ Modern Slavery Statement reviewed and approved annually by the Board ■ Payment Practices Report ■ GED member of the Board ■ EDF meets in person twice yearly and monthly by other means ■ GED reports to the Board regularly and after each EDF meeting ■ Your Voice survey run regularly and results reported to the Board How the Board monitors culture Measuring our culture Remuneration and culture Company success ■ Your Voice survey runs regularly and results reported to the Board ■ Annual report by the Group Corporate Services Director ■ Delegated to the Remuneration Committee ■ Gender Pay Gap Report reviewed and approved annually by the Board ■ Continuity of transport is essential to governments, local communities and customers and that remains front of mind in our decisions ■ Regular reports from the Chief Executive on performance ■ Divisional presentations at various times during the year 92 FirstGroup Annual Report and Accounts 2021Governance reportEthics In line with our Values and the expectations of our customers and partners, we are committed to conducting our business in an open and ethical manner, including in all of our interactions with our customers, employees and other stakeholders. Our Values and ethical commitment shape not only what we do, but also how we do it. We invest time and effort to put in place the right processes, policies and governance structures to ensure we meet these high standards of integrity and professionalism. Adhering to an ethical framework is a vital part of our commitment to our customers and stakeholders and helps to ensure that our Vision and Values are at the heart of everything we do at FirstGroup. Our Code of Ethics makes sure that all of our businesses are performing to the highest ethical standards and are accountable for their performance. The Code of Ethics applies to everybody working for, or on behalf of, FirstGroup. It sets out the standards that our customers and stakeholders expect of us, and which we expect of each other. It is supported by detailed policies and procedures which apply across the Group and are implemented and managed by the senior management team in each of our divisions, including our Code of Conduct on Anti-Slavery and Human Trafficking Prevention and our Anti-Fraud and Anti-Bribery policies, as well as local policies on data privacy and other areas of legal and ethical compliance. We are committed to recognising human rights on a global basis and recognise that we have a responsibility to ensure that FirstGroup operates in a way that respects, protects and champions the human rights of all those who come into contact with our operations. This includes a commitment to the prevention of modern slavery and human trafficking in all its forms both within our own businesses and in our supply chains. This commitment extends to all business dealings and transactions in which we are involved, regardless of location or sector. We have a zero-tolerance approach to any violations within our Company or by business partners. Our Modern Slavery and Human Trafficking Statement, which is updated annually, sets out our policies and the steps we take to address risks in our business and our supply chains and can be found at www.firstgroupplc. com. In line with our commitment to improving our performance by sharing best practice across the Group, our statement applies to Our purpose and Vision We provide easy and convenient mobility, improving quality of life by connecting people and communities. Our Values ■ Committed to our customers – we keep our customers at the heart of everything we do ■ Dedicated to safety – always front of mind, safety is our way of life ■ Supportive of each other – we trust each other to deliver and work to help one another succeed ■ Accountable for performance – every decision matters, we do the right thing to achieve our goals ■ Setting the highest standards – we want to be the best, continually seeking a better way to do things. Our Values are recognised across the Group and are fundamental to the way we operate. We see these Values as key to the way we work with our customers, suppliers, employees and stakeholders in general. We have also mandated centrally a set of minimum standards for training and policy attestation across a range of ethical and compliance topics, including those referred to above. These standards are reviewed regularly at Executive Committee and Board level, and updated as appropriate to address new or evolving risks. Divisional management teams are responsible for ensuring that these core requirements are implemented and adhered to within their respective businesses. They are also responsible for assessing whether stricter or additional requirements are appropriate to the particular ethical and legal compliance risks faced by their respective businesses, and implementing such further measures as are deemed necessary to mitigate those risks. We have an externally managed whistleblowing service for colleagues available across the Group with a helpline (online and phone- based) for the anonymous reporting of suspected wrongdoing or dangers at work. All reported issues or concerns to the hotline are taken seriously and investigated as appropriate, ensuring that confidentiality is respected at all times. all of our businesses, including those which are not legally required to make a statement under the Modern Slavery Act or equivalent legislation, regardless of their location, size or turnover. We have a zero-tolerance approach to fraud in any form, including the facilitation of tax evasion and bribery. We never offer or accept any form of payment or incentive intended to improperly influence a business decision. Equally, we support free and open competition, gaining our competitive advantage by providing the highest level of service, not through unethical or illegal business practices. Similarly, we respect and protect the privacy of our customers, employees and stakeholders, and are committed to conducting our business in accordance with all applicable data protection legislation, including the General Data Protection Regulation, UK Data Protection Act and the California Consumer Privacy Act. We have internal control systems and procedures in place to counter bribery and corruption, and to ensure that we comply with data privacy, competition and trade laws. These systems and procedures are kept under regular review, to ensure that we continue to adopt appropriate defences and mitigations to ethical and legal risks that are faced by our businesses, both at a central level and within each division. 93 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Compliance with the UK Corporate Governance Code The Annual Report and Accounts for the year ended 27 March 2021 have been prepared in accordance with the Code published by the Financial Reporting Council (FRC) in 2018. The Code is available on the FRC’s website at www.frc.org.uk. The Board considers that it and the Company have, throughout the period to 27 March 2021, complied in all respects with the provisions of the Code with the exception of provision 36 in relation to post employment shareholding requirements in the Directors’ Remuneration Policy. See pages 110, 132 and 135 for further information. In addition, the Company will not be compliant with provision 9 of the Code upon the appointment of David Martin as in interim Executive Charman with effect from the conclusion of the Company’s AGM on 13 September 2021 and for the duration until a new Chief Executive is appointed. See pages 9, 80 and 81 for further information. We explain throughout this report how we applied the principles and complied with the provisions of the Code. For ease of reference, the table below summarises where the relevant information can be found. The Company’s auditors, PwC LLP, are required to review whether this statement reflects the Company’s compliance with those provisions of the Code specified for their review by the FCA’s Listing Rules. Section Code principles Board leadership and company purpose A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. Page 8-9, 13 to 17 and 82 to 84 The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. 12, 18-19, 92-93 The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. 62 to 71, 103 In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. 46 to 49, 90 and 92 The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. 82 to 90 Division of responsibilities The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information. 82 to 90 The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business. 84 and 87 Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account. The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently. 82 to 90 82 to 90 94 FirstGroup Annual Report and Accounts 2021Governance reportSection Code principles Composition, succession and evaluation Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. Page 98 The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed. 78 to 81, 87 Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively. 88 Audit, risk and internal control The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements. 103-104 The board should present a fair, balanced and understandable assessment of the company’s position and prospects. 103-104 The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives. 62 to 71 and 103 Remuneration Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values and be clearly linked to the successful delivery of the company’s long-term strategy. 110, 116 to 121, 132 to 141 A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. 130-131 Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. 108 to 111, 118 to 125 95 FirstGroup Annual Report and Accounts 2021Governance reportCorporate governance report continued Section 172 of the Companies Act 2006 The Directors are mindful of the duty they have under Section 172 to promote the success of the Company over the long term for the benefit of shareholders as a whole, having regard to the interest of a range of other key stakeholders. In performance of its duties throughout the year, the Board has had regard to the interests of the Group’s key stakeholders and taken account of the potential impact on these stakeholders during its deliberations. Details of the Board’s engagement with stakeholders during the year, in compliance with Section 172, can be found on pages 46-49 and the table on page 86 sets out the stakeholders and factors that were considered by the Board when making its most significant decisions during the year. In addition, further information on how the Board had regard to the following matters can be found as follows: Section 172 Likely consequences of any decision in the long term The interests of the Company’s employees The need to build and sustain the Company’s business relationships with suppliers, customers and others The impact of the Company’s operations on the community and the environment The desirability of the Company maintaining a reputation for high standards of business conduct The need to act fairly between shareholders of the Company Page 8-9, 12-16 40-49 46 to 51 35, 38-39 93 46-47, 93 96 FirstGroup Annual Report and Accounts 2021Governance reportNomination Committee report David Martin Chair, Nomination Committee “ The Committee’s primary role is to ensure the Board has an appropriate blend of skills, knowledge, experience and diversity to operate effectively and deliver our strategy” Role and responsibilities The primary role of the Nomination Committee is to ensure that the Board has the appropriate skills, knowledge, experience and diversity to operate effectively and deliver our strategy. The key responsibilities of the Committee are set out below and the Committee’s Terms of Reference are available on the Company’s website. ■ Evaluate the balance of skills, knowledge, experience and diversity on the Board, and, in the light of this, prepare a description of the role and capabilities required for a particular appointment and lead the process for making any such appointment ■ Give full consideration to succession planning for Directors and other senior executives and make recommendations to the Board ■ Oversee compliance with the Code and other applicable corporate governance regulations The Committee Chair provides feedback and recommendations to the Board and copies of the minutes of its meetings are made available, where appropriate, to all Directors. The Committee is empowered to appoint search consultants and other external advisors as it sees fit to assist with its work. Composition of the Nomination Committee and attendance The Chairman of the Board, David Martin, chairs the Committee and independent Non-Executive Directors, David Robbie and Warwick Brady, are members. The General Counsel and Company Secretary attends all meetings. The Chief Executive attends meetings of the Committee upon invitation. No individual participates in discussion or decision-making when the matter under consideration relates to him or her. Member1,2 David Martin (Chair) David Robbie Warwick Brady Appointment date Scheduled meetings 15 August 2019 5 November 2019 30 September 2019 2/2 2/2 2/2 1 David Robbie stepped down 30 June 2021 2 Peter Lynas appointed 30 June as member Committee focus through the year The following table provides an overview of the key business and activities of the Committee during the year: Board and Committee composition ■ Considered the election process for the appointment of Anthony Green as Group Employee Director and recommended the same to the Board ■ Recommended changes to the membership of the Board Safety Committee with the appointment of Anthony Green ■ Considered the outcome of the Board and Committee evaluation and individual assessments in respect of the Non-Executive Directors seeking re-election / election at the 2021 AGM Governance, regulatory and reporting ■ Considered feedback from the evaluation of the Committee’s performance and agreed actions ■ Reviewed and approved the Committee report in the FY20 Annual Report Diversity and Inclusion The Board believes a diverse workforce is vital to the Group’s success and values the differences each colleague brings to their role, making the Group stronger and better able to meet the needs of our customers and the communities within which we operate. Since 2017, FirstGroup has more than doubled the number of UK female employees (from 2,937 to 5,904) representing an increase from approximately 13% to nearly 20% of the total UK workforce. As a result of our continued focus at recruitment, we have seen a 29% increase in the number of women hired compared with 2020, and our women’s development programmes have been successful in identifying female talent and speeding up readiness for promotion into higher paying roles, with 33% of participants already achieving their first supervisory role, and 40% of junior managers being promoted to more senior roles after attending these programmes. This improvement is similarly reflected at more senior levels in the Group with two recent appointments, Janette Bell, MD of First Bus and Claire Mann, MD of SWR. Janette Bell and Rachael Borthwick, Corporate Services Director, are members of the Executive Committee, representing 22% of the Committee membership. At 30%, the Board at 27 March 2021 was above its target of 25% female representation and slightly below the Hampton- Alexander Review target of 33%. With the appointment of Jane Lodge on 30 June 2021, female representation on the Board has increased to 36.4% and three out of the Board’s four principal Committees are chaired by female Non-Executive Directors of the Board. 97 FirstGroup Annual Report and Accounts 2021Governance reportNomination Committee report continued Group Employee Director election process Nominee criteria to stand for election as Group Employee Director Has to be an Employee Director of a FirstGroup subsidiary Be in post for no less than twelve months Election Employee Director required to submit a written election statement (no more than 250 words) 14 days prior to the date fixed for the election Election supervised by Company Secretariat and Electoral Reform Services or such other independent agency approved by the EDF Members of the EDF cast their votes. The candidate with the highest number of votes will be put forward for consideration by the Nomination Committee Nomination Committee considers the nomination, meets with the candidate and makes a recommendation to the Board Board considers the recommendation and, if thought fit, approves the appointment Appointment is announced to the market Director is subject to election by shareholders at the next AGM Nomination/appointment Further information on our most recent gender pay report is available on the Company’s website. The Board recognises that there is still much to do to improve our overall workforce diversity. FirstGroup is a signatory to the ‘Change the Race Ratio’ reflecting the commitment of the Chairman, the Chief Executive and the Board to increase the racial and ethnic diversity of the Board, senior leadership and our workforce. Work is underway to develop detailed plans, including diversity targets that can be measured and tracked and which we expect to publish later this year (see page 40 for further information). Policy on appointments to the Board The Committee recognises the value that individuals from diverse backgrounds can bring to Board deliberations. The Committee considers diversity in its wider sense, including gender, length of tenure and nationalities. In line with the Committee’s diversity policy, when considering the recruitment of a new Director, the Committee adopts a formal, rigorous and transparent procedure and due regard is given to ensuring fairness and diversity through the consideration of skills, experience, competencies, sector knowledge, independence and individual characteristics. Prior to making an appointment, the Committee evaluates the composition of the Board and, in light of this evaluation, prepares a full description of the role and capabilities required. In identifying suitable candidates, the Committee: ■ uses open advertising or the services of external advisers to facilitate the search ■ considers candidates on merit and against objective criteria ensuring that appointees have sufficient time to fulfill their Board and, where relevant, Committee responsibilities in light of other potential significant positions. As part of this process, candidates disclose all other time commitments and, on appointment, undertake to inform the Board of any changes ■ considers candidates from a wide range of backgrounds. Where the Committee appoints external advisers to facilitate the search, it ensures that the firm that is selected has signed up to the relevant industry codes (for example, on diversity) and has no connection with the Company. Changes to the Board In the year under review, Jimmy Groombridge, Group Employee Director, stepped down with effect from 29 June 2020. Jimmy was replaced by Anthony Green effective 15 September 2020. The process to nominate the GED, as shown above, is set out in the Memorandum of Understanding between the Company and the EDF. Peter Lynas and Jane Lodge were appointed to the Board as Non-Executive Directors after the year under review (30 June 2021). Prior to their appointment, the Committee ran a comprehensive and rigorous search. A candidate profile and posiiton specification was drawn up and Sam Allen Associates Limited, an executive search firm with no other connection with the Company, was engaged to identify suitable candidates. Several qualified and experienced candidates were shortlisted and interviewed by the Chairman and the Senior Independent Director. Following a further round of interviews with other members of the Board, the Committee recommended the appointment of Peter and Jane to the Board. In addition, David Robbie stepped down from the Board with effect from 30 June 2021. Matthew Gregory has informed the Board that he intends to step down from the Board with effect from the conclusion of the Company’s AGM on 13 September, at which time I will be appointed interim Executive Chairman. Sam Allen Associates have been engaged to identify suitable candidates for the position of Chief Executive. Committee evaluation The performance of the Committee was considered through the annual Board evaluation process, in which members were requested to complete a questionnaire. The feedback from this process indicated that notwithstanding the limited progress made in certain areas of the Committee’s responsibilities due to more immediate strategic and operational priorities, the Committee members were satisfied that the Committee was effective. Core areas of focus for FY22 will continue to be succession planning at both Board and executive/senior management level, managing Board and Committee composition and skills and driving diversity and inclusion both at Board level and in the business. 98 FirstGroup Annual Report and Accounts 2021Governance reportAudit Committee report Jane Lodge Chairman, Audit Committee “ The Committee is responsible for supporting the Board to assess the integrity of the Company’s financial reporting, the adequacy and effectiveness of the Company’s management of risk and internal controls and for overseeing the operation of the Group’s internal audit function.” Coronavirus pandemic Whilst recognising the additional pressure on management and employees of the Group’s businesses as a result of the pandemic, throughout the year the Committee continued to engage with Group management and the Group internal audit function, the latter operating in an almost entirely virtual environment to ensure that robust controls and risk management systems were well maintained. Priorities for the year ahead The Committee’s key priorities for the year ahead will include, amongst other things, a continued focus on the impact of the pandemic on the financial performance of the ongoing Group and an in-depth review of processes and internal controls to assess areas for continued improvement of risk and financial management across the ongoing Group. See pages 88 and 105 for further information. Jane Lodge Chairman, Audit Committee Dear Shareholder I joined the FirstGroup Board in June 2021 as a Non-Executive Director and Chairman of the Audit Committee. Whilst I did not serve on the Board during the year under review, I have had the benefit of a comprehensive induction and handover which included meetings with the Chairman of the Board, CEO, CFO and senior members of the finance function, Head of Internal Audit & Risk, General Counsel & Company Secretary, Deputy Company Secretary and the external auditors. Having succeeded David Robbie as Chairman of the Committee, who stepped down from the Board in June 2021, I am pleased to introduce the Audit Committee’s report for the financial year ended 27 March 2021. Focus during the year This report provides an overview of the Committe’s principal activities and key areas of focus during the year as well as the Committee’s priorities for the year ahead. As part of the half year and full year reporting review process, the Committee tested management’s judgment relating to going concern, impairment, revenue recognition and the level of provisioning. In addition, the Committee challenged the classification of certain adjusted items which led to a new Adjusted Items policy. It has been a challenging year for FirstGroup in many respects, with the ongoing demands associated with the pandemic, progressing the sale of First Student and First Transit and entering into new National Rail Contracts. Against this backdrop, in line with the mandatory rotation rules, FirstGroup changed its external auditor, with the appointment of PwC at the 2020 AGM. To change auditors in any large organisation is a significant undertaking and particularly so in a multi- divisional and multi-jurisdictional organisation such as FirstGroup and, of course, the transition was made more difficult due to the pandemic. Notwithstanding this, PwC shadowed Deloitte through the 2020 full year audit and engaged with management to build their knowledge of the Group. Following a detailed planning process, PWC conducted a largely remote audit. FirstGroup is already seeing the benefits of rotating the external auditor with the new perspective that can be brought with a ‘fresh set of eyes.’ 99 FirstGroup Annual Report and Accounts 2021Governance reportAudit Committee report continued The Chairman of the Board, the Chief Executive, the Chief Financial Officer, the General Counsel & Company Secretary, the Director of Finance, the Head of Internal Audit, the Group Financial Controller and the External Audit Partner routinely attend meetings of the Committee. In addition, other senior finance and business managers are invited to attend meetings as required to provide the Committee with a deeper level of insight on relevant business matters. Other members of the Board have an open invitation to attend Committee meetings and they frequently did so during the year under review to facilitate a deeper understanding of the business and support their role as Directors of the Company. The Deputy Company Secretary acts as Secretary to the Committee. The Committee meets periodically without management present and private meetings are held with the Internal Audit and External Audit teams without management present. Appointment date Scheduled meetings Member1,2,3 David Robbie (Chairman) 2 February 2018 Warwick Brady 24 June 2014 Steve Gunning 24 January 2019 Martha Poulter 26 January 2018 Julia Steyn 5 November 2019 7/7 7/7 7/7 7/7 7/7 1 David Robbie stepped down 30 June 2021 2 Jane Lodge appointed 30 June 2021 as Chairman and member 3 Peter Lynas appointed 30 June 2021 as member Role of the Audit Committee The primary role of the Audit Committee is to review and monitor the integrity of the financial reporting by the Company, to review the Group’s internal control and risk management systems, to oversee the Group’s internal audit function, to oversee the relationship with the Group’s external auditor and to report to shareholders on its activities. The Committee’s Terms of Reference are available on the Company’s website. Composition of the Audit Committee and attendance The Committee was chaired by David Robbie until 30 June 2021 and subsequently by Jane Lodge who joined the Board effective 30 June 2021. Both David and Jane have recent and relevant financial experience and the requisite competence in accounting. Committee members include independent Non-Executive Directors, Warwick Brady, Steve Gunning, Martha Poulter and Julia Steyn all of whom have the necessary skills and financial literacy to effectively discharge their duties, as does Peter Lynas who was appointed a member of the Committee on 30 June 2021. The Committee also has sector relevant competence, as disclosed in the biographies on page 76-79 and the charts on page 87. 100 FirstGroup Annual Report and Accounts 2021Governance reportSummary of Committee activities through the year The Committee has an extensive agenda of items of business focusing on financial reporting, internal control, risk management, internal audit and external audit in addition to certain standing matters that the Committee considers at each meeting as well as any specific topical items which have arisen during the course of the year. The work of the Committee in FY21 broadly fell under four main areas and is summarised below: Accounting, tax and financial reporting Internal control, risk management and internal audit ■ Reviewed and approved the Group’s half-yearly and annual results ■ Reviewed the structure (Group Risk Management Framework and considered the significant accounting policies, principal estimates and accounting judgements used in their preparation, the transparency and clarity of disclosures within them, and compliance with financial reporting standards. Given the extreme impact of the pandemic on the business, a greater amount of time was spent on reviewing the committed level of financial resource and liquidity as the business navigated through the impact of the pandemic and this included the review of the basis for preparing the Group half-yearly and full year accounts on a going concern basis with input from the external auditors. The related disclosures in the half-yearly results and in the Annual Report and Financial Statements were also reviewed ■ Reviewed and approved management’s assessment of the Group’s prospects and longer-term viability contained in the Annual Report and Financial Statements ■ Received reports from management and the external auditors on accounting, financial reporting regulation and taxation issues ■ Reviewed and assessed whether the Annual Report and Financial Statements, taken as a whole, were fair, balanced and understandable ■ Reviewed and approved the Tax Strategy, Treasury Policy and Adjusted Items Policy ■ Reviewed the assumptions such as future growth rates, cash flows and discount rate used in the impairment models and the output from the impairment review ■ Reviewed the non-GAAP measures used in the Company’s reporting ■ Reviewed the accounting treatment for the EMA and ERMA arrangements ■ Reviewed the accounting treatment of First Student and First Transit following the sale agreement entered in to with EQT and in relation to Greyhound for which exit options were being explored. and Group Risk Assessment Approach) and effectiveness of the Group’s system of risk management and internal control and the related disclosures in the Annual Report and Financial Statements ■ Reviewed the Group’s risk management activities undertaken by the divisions and at Group level in order to identify, measure and assess the Group’s principal and emerging risks and review the risk appetite statement, developed by management, for recommendation to the Board ■ Approved the annual internal audit plan and reviewed reports from the internal audit department relating to control matters, monitored progress against the internal audit plan and any deviations to the plan were agreed ■ Monitored and assessed the Group’s insurance arrangements, insured and uninsured claims and material litigation ■ Reviewed matters reported to the external whistleblowing hotline and considered the process for the investigation of the same and the outcome of those investigations. External audit ■ Considered and approved the scope, audit plan, terms of engagement and fees for the external audit work to be undertaken in respect of FY21 ■ Received reports from the external auditor on their findings during the half-yearly review and full year audit ■ Considered a schedule of non-audit services provided by the external auditor in the year under review ■ Considered the objectivity and independence of the external auditor and the effectiveness of the external audit process, taking in to account their policies to safeguard independence, non-audit work undertaken by the external auditor and compliance with the Company’s Policy on the provision on non-audit services and applicable regulations ■ Considered and recommended to the Board the re-appointment of the external auditor ■ Considered and approved letters of representation to the external auditor. Other matters ■ Reviewed and challenged the approach and methodology for addressing the North American insurance exposure ■ Received reports from the Chief Information Officer on IT governance and cyber security. 101 FirstGroup Annual Report and Accounts 2021Governance reportAudit Committee report continued Significant issues The matters the Committee considers to be significant for the FY21 Annual Report and Financial Statements are as follows: Significant issues and judgments How the Audit Committee addressed these issues Coronavirus The pandemic had a material impact on the business from an operational level as well as how we executed our strategy. The Group acted swiftly to reduce costs, reduce uncommitted capital expenditure, restructure and reorganise the operating model including a significant number of employees working from home, ensure the business had adequate liquidity for the short and medium term, ensure that all contractual and fiscal support measures and policies put in place by the respective governments had been applied, and ensure continuation of the essential services we operated were done in a safe manner in line with government policy. Revenue recognition Estimates are made on an ongoing basis when determining the recoverability of amounts due and the carrying value of related assets and liabilities arising from franchises and long-term service contracts. In addition, revenue recorded may be subject to manual adjustment to reflect the timing and valuation of revenue recognised, e.g. due to timing of travel or where amounts are unbilled at a period end. The various fiscal measures implemented in our markets by governments in response to the pandemic in several cases have been classified as revenue. Pension assumptions and funding The Group participates in a number of defined benefit pension schemes. Management exercises significant judgement when determining the assumptions used to value the pension liabilities as these are particularly sensitive to changes in the underlying assumptions. North American Insurance Provisions are measured using management’s best estimate of the likely settlement of all known incidents based on actuarial valuations and due consideration of wider market conditions. A valuation of the expense required to settle these obligations and, where applicable, the discount rate used to calculate the expected settlement is also carried out. Following a rise in adverse settlements and developments on a number of aged insurance claims, against a backdrop of a harsher, plaintiff-friendly motor claims environment and adverse development factors, management decided to increase specific case reserves. The impact of these adverse developments was a charge of £32.2m. The Committee received regular updates on progress on the impact of the pandemic throughout the crisis and challenged and supported management to ensure all appropriate steps had been taken to ensure the business had adequate financial resources and processes to navigate through the crisis and emerge stronger. The Committee reviewed the revenue recognition policies and procedures for the coronavirus fiscal support and challenged the appropriateness of such policies and recognition criteria. Regular forecasts are compiled on the outcome of these types of franchises and contracts to assess the reasonableness of the assumptions applied. It was concluded at the Committee meeting held in June 2021 that these policies and approach and their application were appropriate. Further detail on revenue recognition is provided in note 2 in the consolidated financial statements. Management engaged with external experts and the Committee considered and challenged the assumptions used for estimating the liabilities. Sensitivity analysis was performed on the key assumptions: inflation, discount rate and mortality. The overall liabilities were assessed for reasonableness. Further detail on pensions is provided in note 37 in the consolidated financial statements. The Committee reviewed the provision and challenged the assumptions used to calculate the liability. Independent actuarial expert advice on the adequacy of the provision against such liabilities is sought on a regular basis and benchmarked against alternative actuarial views, and the discount rate has been benchmarked against external data. The Committee agreed with management’s view not to charge the items relating to the adverse developments in arriving at adjusted operating profit for the North American divisions because the adverse movement primarily related to the settlement of historic losses and in order to avoid distorting year-on-year comparisons for these businesses. The Committee considered this issue at its meetings in November 2020 and June 2021. Further detail on the assumptions used in determining the value is provided in note 4 in the consolidated financial statements. Going concern and viability The Group regularly prepares an assessment detailing available resources to support the going concern assumption and the long-term viability statements. The Group has been impacted significantly by the pandemic in the markets we operate. The consequences of the pandemic have meant more regular updates of the business forecasts and liquidity modelling and these remain under regular review as the markets we operate in respond to the crisis and how this impacts our ability to provide the essential services we operate. The medium-term impact of the pandemic on our businesses is becoming clearer. We continue to provide essential services to our customers and the communities we serve and anticipate doing so for the foreseeable future. The Committee reviewed and challenged management’s funding forecasts and sensitivity analysis and the impact of various possible downside scenarios, which took account of the potential ongoing impact of the pandemic on passenger volumes, the availability and duration of fiscal support measures that might be made available beyond the period for which that support is currently being provided as well as the Group’s underlying principal risks and uncertainties. Following the review, which the Committee carried out at its meeting in June 2021, the Committee recommended to the Board the adoption of both the going concern and viability assessment, and the related statements for inclusion in this report. 102 FirstGroup Annual Report and Accounts 2021Governance reportInternal controls and risk management The Board is responsible for establishing a framework of prudent and effective controls, which enable risk to be assessed and managed. Periodic review and ongoing monitoring of risk management and internal control frameworks are essential components of any sound system of risk management and internal control. The Committee monitors the Company’s risk management and internal control systems and, in addition to periodic reviews by the Committee, the Board undertakes an annual in-depth review of the effectiveness of internal controls, including the operation of financial, operational and compliance controls. The Committee also guides the Board on the nature and extent of the principal and emerging risks the Company may be willing to take in order to achieve its long-term strategic objectives. The output from this system is the Company’s risk appetite policy, which is subsequently reviewed by the Board. The process the Committee applied in reviewing the effectiveness of the system of risk management and internal control is set out below, together with a summary of the actions that have been or are being taken to improve the overall control environment. Internal controls The Committee receives regular updates on the Group’s system of internal control including progress made to the overall programme and conclusions on the design and effectiveness of key controls mitigating financial, operational and compliance risk. Management intends to continue to improve the standardisation and documentation of internal controls to give the Committee greater comfort around the effectiveness of the control environment. Overall, the Committee is satisfied that the Group’s internal control framework was operating effectively as at the year end. The Committee will continue to oversee the improvement programme that has been put in place to enhance the internal control framework. Risk management The Board, through the Committee, is responsible for determining the nature and extent of any significant risks the Group is willing to take in order to achieve its strategic objectives and for maintaining sound risk management and internal control systems. The Committee oversees a Group-wide system of risk management and internal control that identifies and enables management and the Board to evaluate and manage the Group’s principal and emerging risks. This system is bespoke to the Company’s particular needs and the risks to which it is exposed and is designed to manage, rather than eliminate, risk. Owing to the limitations inherent in any system of internal control, this system provides robust, but not absolute, assurance against material misstatement or loss. The Committee assessed the Group’s risk management methodology, which is used to identify and manage the principal and emerging risks, as well as the reporting and categorisation of Group risks, and made recommendations for improvement. Changes were implemented with the Committee’s oversight. See page 62 for further information on the Group’s risk management system. The Committee also reviewed the process for assessing the principal and emerging risks that could threaten the Company’s business model, future performance, solvency or liquidity in order to make the long-term viability statement on page 72 and considered the appropriate period for which the Company was viable. The Company’s policies on financial risk management, including the Company’s exposure to liquidity risk, credit risk and certain market-based risks including foreign exchange rates, interest rates and fuel prices, can be found on page 32 and in note 25 to the consolidated financial statements. Key elements of the Group’s risk management framework that operated throughout the year are: ■ divisions identifying and reviewing their principal and emerging risks and controls for monitoring and managing risks, which are reviewed by senior executive management. The updated divisional and Group risk profiles, which are reviewed by the Chief Executive and Chief Financial Officer, are presented to the Executive Committee on a regular basis ■ an agreed methodology for ranking the level of risk in each of its business operations and the principal and emerging risks ■ implementation of appropriate strategies to mitigate principal and emerging risks, including careful internal monitoring and ensuring external specialists are consulted where necessary ■ a centrally co-ordinated internal audit programme to verify that policies and internal control procedures are being correctly implemented and to identify any risks at an early stage ■ reviewing and monitoring the confidential reporting system to allow employees to raise concerns about possible legal, regulatory, financial reporting or any other improprieties ■ a remuneration policy for executives that motivates them, without delivering excessive benefits or encouraging excessive risk- taking. Twice a year the Board is presented with an update for its assessment of the principal and emerging risks facing the Group, together with a risk map, highlighting any changes made since the previous update and the reasons for any changes. Each Committee that reports regularly to the Board provides an update on the status of risks considered within its remit. Financial and business reporting The Board recognises its responsibility to present a fair, balanced and understandable assessment of the Group’s position and prospects in its reporting to shareholders. This responsibility encompasses all published information including, but not limited to the half-yearly and full year financial statements, regulatory news announcements and other publicly disclosed information. 103 FirstGroup Annual Report and Accounts 2021Governance reportAudit Committee report continued The quality of the Company’s reporting is ensured by having in place procedures for the review of information by management. There are also strict procedures to determine who has authority to release information. A statement of the Directors’ responsibilities for preparing the financial statements can be found on page 145. The Group adopts a financial reporting and information system that complies with generally accepted accounting practice. The Group Finance Manual details the Group’s accounting policies and procedures with which subsidiaries must comply. Budgets are prepared by subsidiary company management which are then consolidated into divisional budgets. These are subject to review by both senior management and the Executive Directors followed by formal approval by the Board. Regular forecast updates are completed during the year and compared against actions required. Each subsidiary unit prepares a monthly report of operating performance with a commentary on variances against budget and the prior year, which is reviewed by senior management. Similar reports are prepared at a Group level. Key performance indicators, both financial and operational, are monitored on a weekly basis. In addition, business units participate in strategic reviews, which include consideration of long-term financial projections and the evaluation of business alternatives. Reviews of internal controls within operating units by internal audit have sometimes highlighted control weaknesses, which are discussed with management and, where appropriate, the Committee, and remedial action plans are agreed. Action plans are monitored by internal audit and, in some cases, follow up visits to the operating entity are conducted until such time as the controls that have been put in place are working effectively. No material losses, contingencies or uncertainties that would require disclosure in the Annual Report and Accounts have been identified during the year by this process. The Committee, in conjunction with management, regularly reviews and develops the internal control environment to make continual improvements. No significant internal control failings were identified during the year. Where any gaps were identified, processes were put in place to address them and these are monitored. In addition, as stated above, management intends to continue to improve the standardisation and documentation of internal controls to give the Committee greater comfort around the effectiveness of the control environment. The process is designed to provide assurance by way of cumulative assessment. It is a risk-based approach. Internal audit The internal audit function advises management on the extent to which systems of internal control are adequate and effective to manage business risk, safeguard the Group’s resources, and ensure compliance with the Group’s policies and legal and regulatory requirements. It provides objective assurance on risk and controls to senior management, the Committee and the Board. Internal audit’s work is focused on the Group’s principal and emerging risks. The mandate and programme of work of the internal audit function is considered and approved by the Committee annually and includes a number of internal audits and health checks across the Group’s divisions. Findings are reported to relevant operational management and to the Committee. The internal audit function follows up on the implementation of recommendations and reports on progress to senior management and to the Committee at each meeting. The internal audit function is primarily outsourced. The Head of Internal Audit & Risk reports functionally to the Chairman of the Committee and administratively to the CFO. The effectiveness of the internal audit function’s work is continually monitored using a variety of inputs including the ongoing audit reports received, the Committee’s interaction with the function’s head, an annual review of the function’s internal quality assurance report, a quarterly summary dashboard providing a snapshot of the progress against the internal audit plan tabled at each Committee meeting as well as any other periodic quality reporting requested. Taking all these elements into account, the Committee concluded that the internal audit function was an effective provider of assurance over the Company’s risks and controls and appropriate resources were available as required. External audit External auditor independence and objectivity PwC were appointed the Company’s external auditor following a competetive tender process in 2020, details of which are included in last year’s Annual Report and Financial Statements. Matthew Mullins is the Senior Statutory Auditor. The independence of the external auditor is essential to the provision of an objective opinion on the true and fair view presented in the financial statements. PwC’s independence and objectivity are safeguarded by a number of control measures including: ■ limiting the nature of non-audit services performed by the external auditor ■ the external auditor’s own internal processes to vet and approve any requests for any non-audit work to be performed by the external auditor ■ monitoring changes in legislation related to auditor independence and objectivity to assist the Company to remain compliant ■ the rotation of the lead auditor partner after five years ■ independent reporting lines from the external auditor to the Committee and ensuring the external auditor is afforded the opportunity for in camera sessions with the Committee ■ placing restrictions on the employment by the Group of certain employees of the external auditor ■ providing a confidential helpline that employees can use to report any concerns, including those relating to the relationship between Group employees and the external auditor ■ an annual review by the Committee of the policy in place to ensure the objectivity and independence of the external auditor is maintained. 104 FirstGroup Annual Report and Accounts 2021Governance reportFinancial Reporting Council (FRC) The Company was notified by the FRC that the Company’s FY20 Annual Report and Financial Statements had been included in a sample for the thematic review of companies’ disclosures following the first full year of adoption of IFRS 16: Leases. A limited scope review had been performed in accordance with the Conduct Committee’s Operating Procedures. A full review of the FY20 Annual Report and Financial Statements was not undertaken. Findings from the review indicated that there was an opportunity for all companies to improve their disclosures, including FirstGroup. No specific questions or queries were raised with regard to FirstGroup. Committee evaluation The Committee’s performance was considered through the annual Board evaluation process, in which members were requested to complete a questionnaire. Feedback from Committee members and other Board members was generally positive and it was concluded that the Committee was effective in discharging its responsibilities. An in-depth review of the Group’s processes and internal controls to assess areas for continued improvement of risk and financial management, ESG considerations and the impact of the pandemic were highlighted as priorities for FY22. Further training on rail accounting and one-to-one sessions between individual Committee members and the external auditor were also highlighted as priorities for FY22. Assessing the effectiveness of the external audit process The Committee, other Board members, senior management in both the corporate functions and within the operations and the internal audit team evaluated PwC’s performance and the effectiveness of the external audit process during FY21. The Committee also considered the independence and objectivity of PwC. The following factors were considered: ■ the quality of the interactions between the audit team and the Committee, other Board members, management and those involved in the preparation of the accounts ■ whether the scope of the audit and the planning process were appropriate for the delivery of an effective audit ■ the external auditor’s progress achieved against the agreed audit plan and communication of any changes to the plan, including changes in perceived audit risks ■ the competence with which the external auditor handled the key accounting and audit judgements and communication of the same with management and the Committee ■ the external auditor’s compliance with relevant regulatory, ethical and professional guidance on the rotation of partners ■ the expertise and resources of the external audit team conducting the audit ■ whether the statutory audit contributed to the integrity of the Group’s financial reporting. Taking into account the above factors and feedback from management, members of the Committee and the Board, the Committee concluded that the external audit process and services provided by PwC were satisfactory, particularly in the context of a first year audit, which was largely undertaken remotely. The feedback will be shared with PwC and any opportunities for improvement will be considered and agreed. Policy on the provision of non-audit services The Committee’s policy on the use of the external auditor for non-audit services includes the identification of non-audit services that may be provided and those that are prohibited. The policy requires that the external auditor will only be used for non-audit services where regulation permits, the Group benefits in a cost-effective manner and the external auditor maintains the necessary degree of independence and objectivity. The policy provides for a cap on fees for non-audit work of 70% of the average of fees paid to the audit firm over the previous three years for audit services. The Committee receives regular reports on all non-audit assignments awarded to the external auditor and a breakdown of non-audit fees incurred. The Committee is satisfied that the Company was compliant during the year with both the Code and the FRC’s Ethical Standard in respect of the scope and maximum permitted level of fees incurred for non-audit services provided by PwC. Details of amounts paid to the external auditor for audit and non-audit services for the year ended 27 March 2021 are set out in note 6 to the consolidated financial statements. Tax strategy We believe we have a responsibility to manage our tax affairs in a way that sustainably benefits the customers and communities we serve. We also have a responsibility to shareholders to ensure we pay the right amount of tax and ensure compliance with the tax rules in each country in which we operate. Further information on our tax strategy, which was reviewed by the Committee and subsequently approved by the Board in September 2020, is available on our website. The tax strategy is reviewed annually by the Committee. Compliance with the Competition and Markets Authority Purusant to Article 7.1 of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Company confirms that it has complied with the provisions of the CMA Order during FY21, including Part 5 in relation to the role of the Committee. 105 FirstGroup Annual Report and Accounts 2021Governance reportBoard Safety Committee report Role and responsibilities FirstGroup is committed to the safety and wellbeing of our employees, customers, the communities within which we operate and all stakeholders that interact with our businesses. Our approach to safety is reflected in our core Values and our long term goal is to achieve Zero Harm. For more information, refer to page 43. The primary role of the Board Safety Committee is to assist the Board in obtaining assurance that appropriate systems are in place to deal with the management of safety risks. The key responsibilities of the Committee are set out below and the Committee’s terms of reference are available on the Company’s website: ■ review safety performance and significant safety incidents, considering the key causes and ensuring actions are taken and communications made by management to prevent similar incidents occurring in the future ■ keep under review the development and maintenance of a framework of policies and standards for managing safety risks and their impact on the Group’s activities ■ assess the impact of safety decisions and actions taken by the Group on its reputation, employees and other stakeholders ■ monitor and assess the commitment and behaviour of management towards safety-related risks and promote a positive safety culture throughout the Group ■ make recommendations to the Remuneration Committee in relation to the use of appropriate safety performance metrics and targets for incentive plans for the Executive Directors and certain senior managers, and assess the annual performance against those metrics ■ review the findings of any internal or external reports on the efficiency and effectiveness of the Group’s safety systems and culture, assess any strategies and action plans developed by management in response to issues raised and, where appropriate, make recommendations to the Board on such matters. The Committee is supported by the Executive Safety Committee (ESC), which meets every two months and is chaired by the Chief Executive. The ESC oversees the Group’s safety strategy and the performance, procedures and practices of the divisions and operating companies. The ESC undertakes in-depth analysis and reviews of specific topics to understand root causes, share best practice and inform safety interventions, which it then reports to the Committee. The Committee Chair provides feedback and recommendations to the Board and copies of the minutes of its meetings are made available to all Directors. Composition of the Board Safety Committee and attendance The Committee comprises Martha Poulter (Chair) and Sally Cabrini, both of whom are Non-Executive Directors, and Anthony Green, Group Employee Director. The members collectively bring a wide range of sector experience and insights to Committee deliberations, including the employee perspective through the involvement of Anthony Green. The General Counsel & Company Secretary attends all meetings and, at the request of the Committee Chair, the Chief Executive, the Corporate Services Director, the Group Safety Director and the Deputy Company Secretary attend all meetings of the Committee. Other senior managers attend as required for deep dives, when incidents have occurred in operations under their control or when their specialist expertise is required. Member Appointment date Scheduled meetings Martha Poulter (Chair) 30 September 2019 Sally Cabrini Anthony Green 14 February 2020 15 September 2020 3/3 3/3 1/1 Martha Poulter Chair, Board Safety Committee “ FirstGroup’s commitment to safety is unwavering. As one of our core Values, safety is always front of mind.” 106 FirstGroup Annual Report and Accounts 2021Governance reportCommittee focus through the year The following table provides an overview of the key business and activities of the Committee during the year: Operational Governance, regulatory and reporting ■ Received comprehensive updates on the impact of the coronavirus ■ Considered feedback from the evaluation of the Committee’s pandemic and the measures taken by management performance and agreed actions ■ Reviewed safety performance reports at Group and divisional level, ■ Reviewed and approved the Committee report and other safety related disclosures in the FY20 Annual Report ■ Reviewed the FY20 performance outcome under the Group’s incentive plans in relation to safety and the design for the FY21 safety metrics/targets ■ Received an update on current and emerging safety legislation and regulations, both in the UK and North America ■ Considered and approved the revised Health & Safety Policy including trend data ■ Reviewed actual and potential serious and fatal incidents, including the circumstances leading to and key learnings from the incidents ■ Reviewed the impact of safety initiatives ■ Received a deep dive presentation on the Greyhound division, encompassing safety related strategy, technological innovations to enhance safety and communication and training and development of drivers ■ Reviewed current and planned health and wellbeing programmes across the Group, including initiatives focused on mental wellbeing ■ Received an update on the Group’s emergency planning and business continuity plans Committee evaluation The Committee’s performance was considered through the annual Board evaluation process, in which members of the Committee and the Board were asked to complete a questionnaire. The feedback from this process was positive and it was concluded that the Committee was effective. 107 FirstGroup Annual Report and Accounts 2021Governance reportRemuneration Committee report Dear Shareholder I am pleased to present the Directors’ Remuneration Report for the financial year ended 27 March 2021, my second as the Remuneration Committee Chair of FirstGroup. The Remuneration Report covers the required regulatory information and provides further context and insight into our pay arrangements for Directors and other employees of the Group. We set out our key decisions since last year, including proposed changes to our Directors’ Remuneration Policy, the assessment of FY21 performance and determination of pay, and our approach to ensuring executive pay outcomes are fair in the context of wider employee pay. Impact of coronavirus Firstly, I want to address the impact of the coronavirus pandemic on all of the Group’s stakeholders during this year. As noted in the Chief Executive’s report, our first priority was the health and safety of the Group’s passengers, employees and communities. We followed public health authority guidance and have adopted and also developed best practice in areas such as enhanced cleaning and decontamination of vehicles, depots and terminals. We also take great pride in the way our colleagues and teams across the Group have provided direct assistance and support to those most in need, right at the heart of our communities. While our operations, which are part of the critical infrastructure providing essential transportation services, enabled key workers to travel to their destinations and perform their vitally important roles. In addition, our local knowledge, and position at the heart of our communities have allowed us to provide further support and assistance during this challenging time through delivering food and medical supplies and providing free transport for medical personnel and first responders. The pandemic has had a significant effect on our businesses across the FY21 financial year and the Group has had to take decisive action to protect our ability to maintain critical services while travel restrictions were at their most comprehensive and ensure that we are in a position to rapidly increase capacity once appropriate. This has included steps to reduce costs and preserve cash and the utilisation of emergency measures announced by the Government. Our people have embodied the Vision and Values of the Group, particularly during the challenging backdrop of the pandemic. The Board is very proud of their commitment and accomplishments in continuing to provide vital mobility services, while ensuring the safety of customers and employees and working in partnership with governments and the communities we serve. Our people and management teams have also provided an unprecedented level of community support over the past 12 months. Some of the highlights have been: ■ sourcing and distributing personal protective equipment (PPE) to keep our employees safe, including over 650,000 masks ■ modifying all operational vehicles to ensure social distancing and that our customers and employees were kept safe, including measures such as installing barriers and protective screens, revised seating layouts, enhanced signage and floor markings ■ delivering more than 1.75 million meals to disadvantaged school pupils, and tens of thousands of meals to vulnerable households and the elderly ■ transporting tens of thousands of educational materials, including books, laptops and curriculum packets to allow children to continue their studies ■ during the Oregon wildfires in September 2020, our teams spent three days evacuating more than 1,500 local residents, driving more than 3,000 miles to take them to safety. Our teams in Greyhound worked with the American Red Cross to create a free ticket system for people needing to relocate due to the wildfires Sally Cabrini Chair, Remuneration Committee “While we are extremely pleased with the successful sale of our North American contract businesses, for a full strategic value and the work to ensure the ongoing Group has the financial strength and flexibility to pursue its strategy going forward, the current external context and the impact on all of our stakeholders has framed the Committee’s decisions this year.” In this section Statement by the Chair of the Remuneration Committee Remuneration at a glance Remuneration in context Annual report on remuneration Directors’ remuneration policy 108 108 112 113 117 132 FirstGroup Annual Report and Accounts 2021Governance reportThe Committee recognises the strong contribution of the Executive Directors during FY21, in particular the swift and decisive actions taken to mitigate the impact of coronavirus and protect the Group for the long-term, and their leadership in ensuring we deployed our people, assets and expertise to support the communities we serve. Despite the challenges of coronavirus, they also successfully negotiated the sale of our North American contract businesses for a full strategic value. However, we are operating in unusual and unprecedented circumstances and therefore, notwithstanding these achievements, and the fact that the operating profit and cash flow targets had been exceeded, we as a Committee reached the conclusion that awarding a bonus to the Executive Directors would ultimately not be appropriate this year. As such, no bonus will be paid in respect of FY21 which is the second year in succession. 2018 LTIP – the vesting of the LTIP granted in 2018 was subject to three performance measures: 40% EPS, 20% Road ROCE and 40% relative Total Shareholder Return (TSR). The Company’s performance was just above median for the TSR measure, resulting in 36.6% vesting under this element of the award and 14.6% of the overall award. Due to the impact of the ongoing pandemic, the threshold targets for the EPS and Road ROCE measures were not met. The Committee carefully reviewed the overall vesting outcome in the context of the Group’s underlying performance and were satisfied with this level of vesting. The shares will be held for an additional two years to provide alignment with our shareholders. ■ trained and deployed nearly 700 Covid Marshalls to safely direct and reassure customers using our rail and bus services and ensure compliance with social distancing measures ■ pioneered best practice in areas such as enhanced cleaning and decontamination of vehicles, depots, and terminals ■ deployed technology to provide advice and communicate with customers on the live location of their buses and whether seats are available. These actions and initiatives (set out in greater detail in our Responsible Business Report on pages 35-45) involved the coming together of our wider stakeholders, and saw our employees working in partnership with our customers, governments and the communities we support to provide vital mobility services. Leadership Transition As announced in the Chairman’s statement, Matthew Gregory will step down from his role as Chief Executive Officer and from the Board at the AGM, at which point David Martin will become interim Executive Chairman until a new Chief Executive is appointed. Matthew will provide assistance in relation to ongoing projects and work closely with David to ensure a smooth transition, as required, to the end of his 12 month notice period. Remuneration arrangements relating to Matthew’s cessation will be in line with his service contract and the shareholder approved remuneration policy and reflect his period of employment. Full details of Matthew’s termination arrangements will be included in next year’s report and will also be fully disclosed, in the normal way, when confirmed. Overview of financial performance, operating achievements, and strategic progress. In April 2020, the devastating impact that the coronavirus pandemic would have globally was starting to become clear with the UK and much of North America placed in full lockdowns. While the level of restrictions varied throughout the year, our key priority has always been the health and safety of our passengers, employees and communities. We have been operating at all times throughout the pandemic; our services are part of the critical infrastructure that have enabled people to move safely, including key workers providing essential services. As a Committee we believe it is imperative to strike the right balance between incentivising the management team, rewarding strong performance and being equitable in the broader context. While the experience of our wider stakeholders, including our employees and shareholders, has always been a key input, the past year has brought this into even sharper focus demonstrated through a number of actions we have taken: ■ no EABP payment for FY20 – despite partial achievement of the performance targets, no bonus for FY20 was paid to our Executive Directors given the uncertain operating environment ■ salary reductions – the Chief Executive, Chief Financial Officer, Chairman and Non-Executive Directors voluntarily reduced their salary/fees by 20% from 1 April 2020 to 31 July 2020. A wider group of senior employees across the Group have also made voluntary salary reductions and deferrals. Turning to the FY21 Bonus, it was clear that it would not be possible to set full-year targets at the usual time in May 2020, given the prevailing uncertainty at the time, and a different approach would need to be taken to assess performance. The performance year was therefore split as follows: ■ Half 1 – short term crisis management and response, i.e. the actions taken to protect the business and ensure the safety of our customers and employees, our ability to operate within our committed debt facilities and also stay within financial covenants ■ Half 2 – ensuring the business is best placed to emerge from the pandemic in as robust a position as possible and pursuing our strategic goal of portfolio rationalisation. This meant prioritising cash generation and operating profit, rather than revenue, as well as delivering against operational measures, including safety initiatives, meeting the needs of our customers and supporting the communities we serve. The decisive actions and leadership of the management team during a time of unprecedented challenges resulted in strong performance with our early forecasts for H1 exceeded and H2 operating profit and cashflow targets achieved. Full details of targets and performance achieved are set out on page 118. 109 FirstGroup Annual Report and Accounts 2021Governance reportRemuneration Committee report continued Remuneration fairness As a Remuneration Committee we take our responsibility to consider the pay of the senior team in the context of wider workforce pay policies and practices seriously and a number of items are tabled at Committee meetings each year to ensure the approach throughout the organisation is fair. In particular we felt it was important to fully understand the impact of the coronavirus pandemic on pay and benefits and how employee welfare initiatives had been implemented or extended to support our people. This year we have expanded the ‘Remuneration in Context’ section of the report on pages 113-116 to include a summary of these items and give greater insight into the factors the Committee considers when making executive reward decisions. Remuneration for FY22 As we look ahead, there remain some uncertainties which create a range of potential scenarios for our businesses to consider as our local markets emerge from the coronavirus pandemic. In addition, the sale of our North American contract businesses in H2 2021, will result in FirstGroup becoming a leader in public transportation focused on the UK. As such the Committee intends to make awards under the LTIP this year, but will delay setting the performance conditions for these awards until the business implications of the above factors is clearer. These will be set no later than six months following the date of grant and the targets for these awards will be published in the FY22 Directors’ Remuneration Report. As usual, the annual bonus measures and targets will be disclosed in next year’s Report with at least half being based on the financial performance of the Group in line with our Policy. The maximum award levels will be in line with our shareholder-approved Policy and implementation over recent years. In light of the unprecedented trading disruption caused by coronavirus, there will be no increase in base salaries for the Executive Directors in 2021 (the second year in succession). Review of our Remuneration Policy The forthcoming 2021 AGM marks the third anniversary of the approval of our Remuneration Policy and as such, we are required to put a new policy to a binding shareholder vote and we look forward to the continuing high levels of shareholder support we have secured in the past. The policy will be the framework for setting the pay of the Executive Directors and Non- Executive Directors. While the shareholder-approved Policy applies to the most senior executives in the business, the Committee has also reviewed remuneration and incentives more widely, taking these into account when setting this Policy. The review focused on ensuring that the Remuneration Policy remains fit for purpose, is aligned to the business strategy and complies with the Companies Act, relevant regulatory requirements (including the UK Corporate Governance Code) and latest investor guidelines. A key component of the Committee’s review included a consultation exercise with our largest shareholders. In conducting the review, the Committee were cognisant of the plans to divest of our North American businesses and the significant impact this would have on the Group’s future size, shape, and strategy. Therefore, the proposed changes are deliberately minimal and focused on further alignment of FirstGroup with current market and governance best practice. Once these strategic objectives are achieved the Group will be a UK-based transportation provider with bus and rail operations at its core. With that greater clarity on the future shape of the Group, the Committee may take the opportunity to put a new Policy to a shareholder vote ahead of the typical three-year anniversary. No changes are proposed to the structure or quantum of the annual bonus or LTIP. The review, has also provided an opportunity to formalise some of the best practice that we have already adopted, for example Executive Directors’ pension contribution levels (15% of salary) are already aligned with the average pensions benefit for the wider workforce, and the Policy will be formally updated to reflect this. This level would also apply to any new appointments. The main changes proposed are as follows: 1. Increase to shareholding guidelines – an increase in the shareholding guideline to 200% of base salary for all Executive Directors to be built up within five years (the Chief Executive’s current shareholding requirement is 200% of base salary and it is 150% for other Executive Directors). 2. Introduction of post-employment shareholding guideline – a post-employment shareholding of 100% of the in-employment guideline for the first year post-cessation, dropping to 50% of the in-employment guideline for the second year (or the full actual holding if lower). 3. Increase flexibility to allow LTIP awards to be based on one performance measure – the current Policy is unusually prescriptive therefore we are making a minor amendment to ensure the LTIP can be based on one performance measure if appropriate. The approach to performance measurement, including the rationale for any change, will be fully disclosed in the relevant Directors’ Remuneration Report. in-flght LTIP awards will continue to pay-out. Changes, where made, will not be applied to in-flight LTIP awards. 4. ESG measures are likely to be included in the 2021 LTIP, reflecting the important role that we as a public transportation company have in supporting the UK Government’s commitment to a ‘green transport revolution’. 110 FirstGroup Annual Report and Accounts 2021Governance reportKey activities during the year May 2020 ■ Reviewed remuneration arrangements in light of coronavirus July 2020 ■ Confirmed decision not to award any bonus to Executive Directors for FY20, in light of the pandemic ■ Approved 2019/20 EABP pay-out below Executive Committee level ■ Determined the vesting of the 2017 LTIP ■ Reviewed and approved the 2020 Directors’ Remuneration Report September 2021 ■ Approved the 2020 LTIP awards ■ Agreed Remuneration Policy Review approach October 2021 ■ Agreed FY21 EABP approach March 2021 ■ Reviewed the 2019 Gender Pay Gap (GPG) reporting ahead of publication ■ Review wider workforce remuneration and related policies ■ Reviewed and amended Terms of Reference The Committee considers that the new Directors’ Remuneration Policy is clear and as simple as possible, while incorporating the necessary safeguards to ensure a strong link between performance and reward and, further, ensuring that failure cannot be rewarded. The incentive plans align to the business strategy and culture and provide for a rounded assessment of performance. The overall structure of the package provides a market-competitive remuneration opportunity with proportionate levels of pay that vary with performance. Furthermore, the Committee has demonstrated in recent years that it is prepared to use discretion to reduce a formula driven outcome when this does not reflect broader Company performance or the shareholder experience. A full summary of the proposed Remuneration Policy is set out on pages 132–141. Governance The Committee actively monitors developments in corporate governance and the guidelines produced by shareholders and their representative bodies. Our Group Employee Director is encouraged to attend all Committee meetings, and regularly does so, and I also periodically attend meetings of the Employee Directors’ Forum to hear from our network of Employee Directors directly. We have provided further details on our approach to pay throughout the Group on pages 113-116. In conclusion We will continue to monitor governance developments and are committed to maintaining an open and transparent dialogue with our shareholders on executive remuneration. We consider ongoing engagement to be vital in ensuring that our approach to remuneration continues to be aligned with the long-term interests of the Group’s shareholders and wider stakeholders. We welcome the feedback received during the year and hope to receive your support at our upcoming AGM. Sally Cabrini Chair, Remuneration Committee 111 FirstGroup Annual Report and Accounts 2021Governance reportRemuneration at a glance Adjusted Operating Profit (pre-IFRS16) Adjusted Cash generation Adjusted EPS (pre-IFRS16) Relative TSR Road ROCE (pre-IFRS 16) £156.3m £176.5m 3.3p 55th percentile 2.4% FY20: £250.4m FY20: £0.1m FY20: 9.0p FY20: 53rd percentile FY20: 4.3% This section summarises the pay that our Directors received in respect of their FY21 performance, and the proposed rates for FY22. Further details are set out on pages 117-125. FY21 Fixed pay and shareholding Executive Annual Bonus Plan Long Term Incentive Plan FY21 EABP £0 CEO 2018-2020 LTIP Vesting Outcome £0 CFO £137,883 CEO n/a CFO (participated in the LTIP from appointment in 2019 and therefore had no 2018 award) FY21 bonus targets outcome Vesting outcome As a result of Committee downwards discretion the outcome was reduced to: 0% Measures EPS TSR Road ROCE Outcome (34.8%) 55th percentile 2.4% Vesting 0.0% 36.6% 0.0% 14.6% (out of a 200% maximum) Shares are subject to a two-year holding period that extends beyond the Executive Director’s tenure. Base Salary £592,667 Matthew Gregory (CEO) (includes voluntary reduction of 20% from 1 April to 31 July) £420,000 Ryan Mangold (CFO) (includes voluntary reduction of 20% from 1 April to 31 July) Pension Executive Directors receive a pension allowance of 15% of base salary Benefits Include car allowance, medical and life insurance Shareholding Guideline levels, % of base salary as at 27 March 2021 200% CEO 150% CFO Actual levels, % of base salary as at 27 March 2021 99% CEO 49% CFO Malus and clawback apply to all incentive awards. More detail can be found on page 136. FY22 Fixed pay and shareholding Executive Annual Bonus Plan Long Term Incentive Plan Maximum opportunity % of salary 150% CEO 150% CFO Awards will be made in line with the Remuneration Policy. £450,000 Ryan Mangold (CFO) No change Base Salary £635,000 Matthew Gregory (CEO) No change Pension No change from FY21 Benefits No change from FY21 Shareholding Target levels, % of base salary 2022 200% CEO 200% CFO 112 FirstGroup Annual Report and Accounts 2021Governance reportThere has been little change in the CEO pay ratio between FY20 and FY21 reflecting the lack of bonus in both FY20 and FY21 in response to the impact of coronavirus on the Group’s wider stakeholders. The Committee is satisfied that the data included in the CEO Pay Ratio table reflect the goals of the Group’s remuneration policy to support colleagues in the performance of their roles in collectively delivering the Group’s strategy. In particular the Committee notes that factors such as the Company’s philosophy to pay the going market rates of pay, to operate a performance-based framework that rewards employees for their individual efforts and the performance of the Company, and to structure pay in a simple and transparent manner have been applied consistently. Remuneration in context In setting the Remuneration Policy for Executive Directors, the Committee takes into account the overall approach to rewarding other employees in the Group. FirstGroup operates in a number of markets and its employees carry out a diverse range of roles across the UK and North America. Due to the varied nature of the operations of our divisions and the respective employment markets, we have a range of remuneration practices across the organisation. These are designed to be relevant to each individual market. Approximately 90% of our UK employees and 70% of our US employees are covered by collective bargaining arrangements. As a Remuneration Committee we take our responsibility to consider the pay of the senior team in the context of wider workforce policies and practices seriously and a number of items are tabled at Committee meetings each year to ensure the approach throughout the organisation is fair: ■ report summarising wider workforce pay policies and practices with updates provided on a regular basis ■ GPG Report including statistics from each UK reporting entity ■ actions management are taking to improve diversity in the workforce and close gender gaps where they exist ■ CEO pay ratio and underlying statistics. The diagram on page 116 (Wider workforce remuneration) summarises the approach to pay across FirstGroup. The main difference between the remuneration of the most senior employees (including Executive Directors) and that of the wider workforce is that remuneration for senior employees is more heavily weighted towards variable pay, which is linked to business performance. CEO pay ratio In line with the reporting requirements the table below sets out the ratio at the median, 25th and 75th percentiles of the total remuneration received by the Chief Executive compared to the total remuneration received by our UK employees. The Company has calculated the ratios in accordance with the Option B methodology laid out in the pay gap regulations which were deemed the most reasonable and practical approach given the collation of data exercise required for GPG reporting. There has been no departure from this methodology and no pay has been omitted. It should be noted that the pay ratio may vary year-on-year and the incentive outcomes for the Chief Executive can impact the results significantly. We will provide an explanation in each year’s Report around the change in the ratio as well as any additional context where helpful to understand variance. The UK employees at the lower quartile, median and upper quartiles were identified as at 5 April 2020 and their salary and total remuneration were calculated in respect of the 12 months ended 31 March 2020. The Committee is satisfied that these pay ratios are consistent with our pay, reward and progression policies and that these colleagues are representative of the relevant percentiles across the organisation, as they represent frontline workers in our UK Bus and Rail divisions, i.e. the large majority of our UK workforce receiving basic pay, overtime, holiday pay and employers pension contributions. The figures also include sick pay (where relevant). Year FY21 FY20 Method Option B Option B CEO Total Remuneration £839,822 £788,400 Population Employee total remuneration CEO to employee ratio Employee total remuneration CEO to employee ratio 25th percentile £27,560 30:1 £24,600 32:1 Median £34,002 25:1 £32,000 25:1 75th percentile £53,437 16:1 £45,400 17:1 113 FirstGroup Annual Report and Accounts 2021Governance reportRemuneration in context continued Impact of coronavirus – treating our people fairly As a result of the coronavirus pandemic, governments on both sides of the Atlantic introduced a number of employment support schemes that FirstGroup was either mandated to use or chose to use in order to protect jobs. The use of these schemes has fluctuated throughout the year in response to changing operational circumstances. Management applied the various government support schemes flexibly to minimise the financial impact on individual employees, ensure equity of approach and deliver vital mobility services for key workers (and others) who needed to travel during the height of the pandemic. The impacts differed for each of our operating businesses. In the UK, First Rail was largely able to avoid furloughing employees with less than 2% of employees being furloughed during the year. First Bus operated service levels in accordance with requests from the DfT and this meant the mileage operated has also fluctuated over the year as UK Government guidance on social distancing restrictions varied. Under the terms of the CBSSG, i.e. the mechanism through which the Government contracted with First Bus to provide services, it was a requirement that employees not required to run the requested levels of service, be placed on furlough. Where this was necessary, this was done on a rotational basis in order to minimise the financial impact on any individual employee. This approach was discussed and agreed with our trade union partners prior to being implemented. In North America, First Transit routes largely remained in operation through the pandemic, albeit with reduced demand, but the approach to school openings varied greatly in the US resulting in an uneven impact on First Student’s operations. It was necessary to furlough employees at certain points, particularly in the early stages of the pandemic when the majority of schools were closed. Throughout the year First Student management have worked closely with customers to ensure that many of them provided support to the Company, allowing us to retain our employees and be well placed for the resumption of services. This also enabled employees to be deployed in other ways to support our communities. Greyhound’s approach has been heavily influenced by the commercial pressures already being faced by the business. As part of the continuing focus on implementing tighter cost control it was unfortunately necessary to make a number of redundancies, the majority of which were Greyhound corporate employees (67% of the total). Senior management were not insulated from the financial impact of the pandemic when it came to their own pay, in particular: ■ the Chief Executive, Chief Financial Officer and the Board voluntarily reduced their salaries/fees by 20% from 1 April 2020 to 31 July 2020 (with a wider group of senior employees across the Group making voluntary salary reductions and deferrals) ■ for all management grade employees (including the Executive Directors) there has been no annual base salary review for two years ■ at the outset of the pandemic, the Executive Directors had agreed with the Committee that no FY20 EABP payment should be made to the Executive Directors, despite partial achievement of the targets ■ the Committee has again decided that, despite strong performance against the targets, no payment should be made to the Executive Directors, in respect of the FY21 EABP. In summary, the Company has managed to avoid making large-scale redundancies, with the exception of Greyhound, where restructuring was already underway prior to the onset of the pandemic in response to the already challenging operating environment. Where furlough has been utilised, the management teams have managed to minimise the impact on individual earnings as far as possible. Supporting Health & Wellbeing The Company adopts an integrated approach to Wellbeing programmes, coordinated with dedicated Health & Safety specialists. Each Division considers the key health and wellbeing programmes for their teams, depending on their specific needs and priorities. The impact of coronavirus served to reinforce the importance of such activities and, across the entire Group, management continued to make the health and wellbeing of colleagues a priority, increasing the Company’s wellbeing focus accordingly. In light of the restrictions caused by the pandemic, an agile approach has been adopted wherever possible (for example by switching to virtual/on-line support and delivery) and we maintain an ongoing review of programmes to target appropriate measures, coupled with actions to address identified issues. Some examples of initiatives are shown below, although this is far from an exhaustive list of the myriad activities being conducted across the Group: ■ Employee Assistance Programmes (EAPs) are offered across the Group providing advice and support on a wide range of issues for example bereavement, divorce, legal and financial advice, and guidance on nutrition and physical fitness ■ wellbeing programmes were adapted to address the mental and physical wellbeing of all colleagues during the pandemic. Our existing EAPs were repromoted, tips for remote working circulated, and home office ergonomic advice communicated 114 FirstGroup Annual Report and Accounts 2021Governance reportEmployee engagement While the Committee does not formally consult with employees on Executive Director remuneration, a number of different mechanisms are in place to gather feedback and insights from employees across a range of issues. More information on our ‘Your Voice’ survey is set out on page 42. The Group engages with its UK workforce through our Employee Directors and the Group Employee Director is invited to attend all of the Committee’s meetings. Our Committee Chair, Sally Cabrini, will also periodically attend the meetings of the EDF. More information on the role of our Group Employee Director is set out on page 84. The Committee believes that it is important for our employees to understand how the remuneration of our Executive Directors is determined and will utilise the different communication channels operating across the Group to ensure our employees are aware of the information available in the Directors’ Remuneration Report. ■ First Student and First Transit have developed an online portal ‘You First’ that assists teams with mental wellness, finance, and stress management and introduced ‘Wellness Wednesdays’ a weekly occurrence during which articles and resources are promoted and hosted on the employee portal and Company apps to ensure a constant drumbeat of information and resources is available. Wellness checks and guidance take place through the use of on-line confidential health assessment tools, screening programmes or health kiosks giving ‘health MOTs’ across the businesses ■ our larger UK businesses have dedicated in-house Occupational Health Teams and others use external specialist advisers to support employees with health problems that may affect performance ■ Greyhound have developed a ‘BackSafe’ programme to address manual handling injuries, either from handling luggage on/off coaches (especially after a period of driving), or in freight delivery activities ■ Within First Rail, each operating company has implemented and managed health and wellbeing campaigns/initiatives in their franchise period. Areas included: embedding the provision of Mental Health First Aiders and providing resources for use on employee comms channels; musculoskeletal support (working with in-house physiotherapists to provide roadshows in workplaces and providing personal advice to those who request it); and the provision of ‘Health Kiosks’ to give a ‘health MOT’ to colleagues ■ across all Divisions, there are mental health awareness tools and support available and these have been enhanced during the pandemic. For example, in First Bus there was already a network of trained Mental Health First Aid Champions and existing Mental Health awareness courses have been further supplemented with a version on the ‘First Bus University’ online learning platform. First Rail also have a network of Mental Health First Aid Champions with a host of resources and links available to support them on the employee portal. In North America, Greyhound have arranged for every employee to have a ‘check-in’ meeting with their manager regarding any mental health or personal concerns they may have. 115 FirstGroup Annual Report and Accounts 2021Governance reportRemuneration in context continued Wider workforce remuneration Element Fixed pay including salary and benefits Annual Bonus Long-Term Incentive Plan (LTIP) Shareholding Guidelines Eligibility ■ all employees regardless of role ■ base salaries are reviewed annually. When considering salary for Executive Directors and Executive Committee members, the Committee pays close attention to increases available to the wider workforce ■ we are committed to helping our colleagues save for retirement through a variety of company pension arrangements, which are designed in line with local market practice. We operate a number of different pension plans in the UK which reflect the history and requirements of these businesses. In the US the company contributes towards a number of defined contribution plans including 401(k) arrangements and various union multi-employer plans ■ our Employee Assistance Programme offers all employees access to free, 24/7 confidential telephone, online and face-to-face advice for problems they may be experiencing at home or work ■ other benefits in the UK include discounted travel on our rail and bus services, discounts on shopping, entertainment and eating out ■ our larger UK businesses have dedicated in-house Occupational Health teams; our other businesses use external specialist advisers to support employees with health problems which may affect performance ■ in the US we offer a broad spectrum of health and welfare benefits to our employees and their families, including life insurance, health, dental and vision benefits for employees and their dependants. We also provide disability plans for short and long-term illness. Employees and family wellbeing is a focus through our ‘Route to Rewards’ wellness programme, and throughout the year we encourage participation in wellness activities. In Canada, our employee benefits include life insurance, health and dental benefits, and disability coverage for employees and their dependants ■ all divisions run workplace health and wellbeing programmes to support employees to stay fit and healthy. Senior executives and management population – incentivises successful execution of our business strategy and operational goals with participants including both corporate centre and divisional roles. Senior executives with sufficient line of sight to drive long-term sustained value creation for our shareholders Senior executives – ensures alignment with the shareholder experience Strategic alignment of remuneration The table below sets out how each of the performance measures used in our incentive plans are aligned to the Company’s strategy and business objectives, as outlined in the Strategic report: FirstGroup’s Strategic Drivers Focused and disciplined bidding in our contract businesses Driving growth through attractive commercial propositions in passenger revenue businesses Continuous improvement in operating and financial performance Prudent investment in our fleets, systems, and people Maintain responsible partnerships with our customers and communities Measure EBIT Cash EABP Operational Measures Safety Customer Satisfaction Individual Performance LTIP Relative TSR 116 FirstGroup Annual Report and Accounts 2021Governance reportAnnual report on remuneration The Annual Report on Remuneration sets out: ■ Directors’ Remuneration for FY21, pages 117-124 ■ the statement of the planned implementation of policy in FY22, page 125 ■ the Committee’s responsibilities and activities, page 130 This part of the Directors’ Remuneration Report has been prepared in accordance with Part 3 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2008 (as amended) 13 and Rule 9.8.6 of the Listing Rules. The Annual Report on remuneration and the Statement by the Chair will be put to an advisory shareholder vote at the 2021 AGM. Single total figure of remuneration for Executive Directors (audited) £’000s Salaries1 Taxable Benefits Pension Total fixed remuneration Annual Bonus cash Annual Bonus value of deferred shares LTIP3 Total variable remuneration Total remuneration Matthew Gregory Ryan Mangold CEO FY21 593 14 95 702 0 0 138 138 840 CEO FY20 635 14 94 743 0 0 45 45 788 CFO FY21 420 14 68 502 0 0 – 0 CFO FY202 377 12 56 445 0 0 – 0 502 445 1 Matthew Gregory and Ryan Mangold agreed a 20% base salary cut from April to July as part of coronavirus cost reduction measures across the Group, amounting to reductions of £42,333 and £30,000 respectively. Their car allowance and pension allowance remained at the 100% level. 2 Ryan Mangold was appointed to the Board as Chief Financial Officer on 31 May 2019. 3 The value of the 2018 LTIP at vesting was calculated using the average share price for the period 1 January to 31 March 2020 (82.66p). In line with the requirements under the UK Companies (Miscellaneous Reporting) Regulations 2018, none of the total value of £137,883 at vesting can be attributed to share price growth as the share price at award was 84.08p in 2018. More detail can be found on pages 117 to 123. Benefits (audited) Benefits for Executive Directors include the provision of a company car allowance, family private medical cover, life assurance and advisory fees. Benefits for the year comprised a £12,000 car allowance and £2,000 for UK private medical insurance. for both Executive Directors. Pension (audited) Matthew Gregory received a pension allowance of £95,250 including a defined contribution pension input amount of £4,000. Ryan Mangold received a pension allowance of £67,500. For both this comprised of 15% of their contractual base salary which is in line with the average pension benefit for the wider workforce.1 FY21 performance and reward decisions As a Committee we believe it is imperative to strike the right balance between incentivising the management team, rewarding strong performance, and being equitable in the broader context. When assessing the performance of the Executive Directors, the Remuneration Committee takes a broad view of financial performance delivered, the shareholder experience and the outcome for the Company’s stakeholders – including customers, employees and the communities in which we operate. When considering remuneration outcomes, the Committee takes into account performance against specific metrics on safety, including workplace fatalities and injuries, and customer satisfaction, as well as environmental, social, and governance (ESG) matters such as significant environmental incidents, large or serial fines or sanctions from regulatory bodies, and significant adverse legal judgments or settlements. The Committee has broad discretion to ensure incentive outcomes are appropriate. The impact of the coronavirus pandemic on all the Group’s stakeholders has brought this into even sharper focus, and the Committee carefully considered the implications for executive pay outturns in respect of FY21. 1 We operate a number of different pension arrangements across the Group including defined benefit pensions in our rail operating companies. The value of the average pension benefit across the UK workforce exceeds 15%. 117 FirstGroup Annual Report and Accounts 2021Governance reportAnnual report on remuneration continued FY21 Executive Directors’ annual bonus (audited) For FY21, the annual bonus maximum opportunity was 150% of salary for both Executive Directors. Given the prevailing uncertainty at the time targets are usually set in May, it became clear that a different approach needed to be taken for FY21. The Committee agreed that the EABP assessment should be divided into two periods. At a high level these can be characterised as follows: ■ Half 1 – short-term crisis management and response, i.e. the actions taken to protect the business and ensure the safety of our customers and employees, our ability to operate within our committed debt facilities and also stay within financial covenants ■ Half 2 – ensuring the business is best placed to emerge from the pandemic in as robust a position as possible and pursuing portfolio rationalisation. This meant prioritising cash generation and operating profit, rather than revenue, as well as delivering against operational measures, including safety initiatives, meeting the needs of our customers and supporting the communities we serve. The focus on safety and customer service continued with each measured in the annual bonus. The Committee retains overriding discretion to adjust the overall bonus outturn (including to £nil) if a serious safety failing or deterioration is identified. For completeness, the chart below sets out the targets, performance achieved and corresponding bonus outturns on a formulaic basis against the financial and qualitative targets. Measure Half 1 The effectiveness of the actions taken to protect the business and ensure the safety of our customers and employees; and Our ability to operate within our committed debt facilities and financial covenants. Measure Half 2 Adjusted Group Operating Profit in H2 Adjusted Group Cash flow (Full Year) Weighting Actual Result Bonus achievement 100% The Committee concluded that the Half 1 EBIT and cash generation performance was 50% significantly better than the April 2020 Board forecast, i.e. at the outset of the pandemic, and the June 2020 Board update, and determined that a number of swift and decisive management actions and initiatives had been critical in delivering this. Weighting Threshold Maximum Actual Result Bonus achievement 50% £85.0m £140.0m £164.6m 100% 20% (£145.0m) (£65.0m) £176.5m 100% Bonus achievement 7.5% Measure Weighting Actual Result 1. Customer service – Supporting Customers and Other Stakeholders The safe and effective scaling up and down of services in accordance with the needs of our customers and other stakeholders and supporting the communities we serve through the pandemic. 7.5% Qualitative Assessment – the Committee considered a comprehensive report of management actions and initiatives and concluded that this objective had been fully met, noting achievements which included the following: Supporting the communities that we serve ■ our First Student drivers delivered more than 1.75 million meals to disadvantaged school pupils, and tens of thousands of meals to vulnerable households and the elderly ■ when Avanti was left with excess food and drink from our onboard catering this year through strong community links they were able to give away the food responsibly and make a difference in the communities served, distributing nearly £93,000 of surplus food to help local people in need ■ SWR donated spare PPE to the emergency services, NHS, and care providers on the frontline in the fight against coronavirus ■ First Student drivers in more than 175 locations transported tens of thousands of educational materials, including books, laptops and curriculum packets to enable children to continue their studies during the pandemic ■ Greyhound launched ‘Rides for Responders’, to provide free travel for medical personnel and first responders volunteering across the country ■ when winter storms left 1.5 million people without power and water on some of the coldest days on record in Houston, Texas, our drivers stepped in to shuttle people to and from warming shelters and to transport patients to their hospital appointments. 118 FirstGroup Annual Report and Accounts 2021Governance reportMeasure Weighting Actual Result Bonus achievement 1. Customer service – Supporting Customers and Other Stakeholders continued 2. Operational and safety measures ■ operating services safely in accordance with social distancing and public health guidelines, taking all reasonable precautions to ensure the safety and wellbeing of passengers and employees ■ continue to promote safety culture, strategy and governance, encouraging consistently high standards of safety behaviour and foresight of potential hazards, including cyber security Responding to the needs of our customers By the start of this financial year, following the lockdowns and other restrictions, the Group had experienced an average passenger volume reduction of c.90%, we worked with our customers and government partners to adjust services to fit demand while preserving our ability to restore service quickly as required. Some of these actions included: ■ First Bus developed and deployed new technological solutions, including enabling customers to view the live location of buses and see real time seat capacity information. Timetables were adjusted dynamically throughout the year adding more journeys/ capacity to allow customers to get to hospitals and essential services more easily ■ our First Rail train operating companies were all awarded the highest score by the DfT in the EMA ‘customer experience’ category. The DfT scorecard noted the impressive performance in dynamically redeploying employees across the Rail network to maintain the highest levels of customer service and cover any pandemic-related staff shortages and the ‘excellent’ provision of information to customers through multiple channels ■ in North America, our contract-based businesses worked closely with their customers and operated service dynamically throughout the entire year to match the cost base to service level as efficiently as possible. 7.5%  Qualitative Assessment – The Committee considered a comprehensive report of 7.5% management actions and initiatives and concluded that this objective had been fully achieved, noting the following achievements: Group aggregate performance against lagging safety Indicators FY21 safety results improved significantly versus prior year ■ collision Accident Frequency Rate has improved (an 11% decrease) ■ passenger Injury Accident Frequency Rate has improved (41% decrease) ■ all employee Injury Accident Frequency Rates have improved (43% decrease) ■ lost time Injury Accident Frequency Rate has improved (44% decrease). Keeping customers and employees safe during the pandemic ■ sourced and distributed employee PPE including over 650,000 masks ■ implemented new Standard Operating Procedures covering employee health screening (including temperature screening protocols), physical/social distancing (including reconfiguring work areas and staggering start-times) and bus-installed hand sanitiser stations ■ successfully transitioned all office-based employees to home working and deployed operational employees in an agile way to cover potential employee shortages ■ modified all buses to ensure social distancing was adhered to and customers and employees were kept safe, including installing barriers and Perspex screens, revised seating layouts, enhanced signage and floor markings ■ improved cab conditions for First Bus colleagues through enhanced cleaning regimes, modification of personal assault screen provisions and documenting Safe Systems of Work in respect of personal hygiene and ventilation ■ we trained and deployed nearly 700 Covid Marshalls to safely direct and reassure customers using our Rail services ■ developed best practice in enhanced cleaning and decontamination of vehicles, depots and terminals including ozonation and pioneered the use of Zoono Z71 via a fogging process ■ the entire First Bus fleet was fitted with innovative Low Bridge Warning Technology and all 12,000 operation colleagues were trained on the system. Supporting our employees’ wellbeing ■ we continued to provide support to frontline employees on wellbeing issues, particularly mental health. Divisions have built on the range of existing wellbeing programmes that are tailored to their business attributes and needs. 119 FirstGroup Annual Report and Accounts 2021Governance reportAnnual report on remuneration continued Measure Weighting Actual Result 3. Personal objectives 15% See detail below Objectives Matthew Gregory Ryan Mangold Demonstrate personal leadership of action to protect customers and employees from health and safety risks including coronavirus, and further improve our health and safety culture. The Chief Executive has led the pandemic strategic response, providing visible leadership, personally delivering key communications and established the priority of safeguarding the health and wellbeing of customers and colleagues to ensure the continued running of vital services. The CFO has played a critical role in ensuring the resilience of FirstGroup during the pandemic, conducting a detailed Group-wide coronavirus risk review at the onset of the pandemic and developing a rigorous Group-wide coronavirus reporting process. Protect the business whilst seeking opportunities for growth and innovation. Lead implementation of portfolio rationalisation strategy to unlock the inherent value in the Group. Lead all necessary activity to establish an appropriately capitalised Retained Group with a clear and agreed ESG strategy The CFO maintained strong liquidity, in excess of £800m, throughout the pandemic, and worked closely with banks, lenders and ratings agencies to increase our facilities and attained covenant amendments at a very effective cost while maintaining investment grade. The CFO worked closely with all divisions to ensure that cost reductions and liquidity improvements were achieved, successfully negotiated a bridge loan to refinance the £350m bond and put in place £300m CCFF Commercial Paper to ensure enhanced near-term liquidity. Throughout the year the CFO ensured that the North American transaction was progressed, and all necessary separation work delivered. Ensured the financial aspects of the North American transaction were successfully delivered including the prospect of future value through fiscal stimulus and the negotiation of an appropriate pension contribution from the sale proceeds. The CFO developed a fit for purpose, financial policy and Group Finance design for the Retained Group with scope for a progressive dividend policy in the future. This will provide investors with a simpler and clearer methodology to value going forwards. Significant progress was made in streamlining and simplifying Corporate functions with detailed planning undertaken for further post-North American transaction structural savings. The Chief Executive has ensured a Group-wide continuing focus on cash control and cost reduction, achieving Funding in First Bus and First Rail to provide continuation of services and achieving high levels of revenue recovery in First Student and First Transit and securing Greyhound 5311(f) funding. Delivered a successful outcome to the North American contract business bid season, with retention rates in line with our expectations and several important new business wins. The Chief Executive led delivery of the North American contract businesses transaction to a credible cash buyer for a full strategic value, that looked beyond the effects of the pandemic. While the Greyhound sale has not yet been completed the Chief Executive ensured that the business was successfully separated into a stand-alone entity, that is, as far as possible, de-risked. The Chief Executive led delivery of the Retained Group investment case, ensuring that the Retained Group was appropriately capitalised to handle current market uncertainties and positioned for potential growth. FirstGroup became the first UK public transport operator to formally commit to setting an ambitious science-based target aligned with limiting global warming to 1.5°C and to reaching net-zero emissions by 2050 or earlier. Successes this year included: ■ the Group being awarded a place in the Clean200 report (top 200 publicly-listed companies worldwide by green revenues) as well as included in Standard & Poor’s 2021 sustainability report the S&P Global Sustainability Yearbook 2021. ■ winning significant funding from Scottish Government for 126 electric buses as well as running the world’s first double-decker hydrogen buses, in Aberdeen. Successful management of the transition to a new operating model and contractual framework for Rail. The Chief Executive ensured First Rail maintained focus on delivering a commercially led transition to the new operating model, ensuring that Rail termination sums exceeded market expectations and that the design of the new National Rail Contract reflected an appropriate balance of risk and reward for operators and the Government. N/A 120 FirstGroup Annual Report and Accounts 2021Governance reportMeasure Weighting Actual Result 3. Personal objectives 15% See detail below Objectives Matthew Gregory Ryan Mangold Lead initiatives to mitigate Insurance risk and cost with particular focus on North America. N/A The CFO successfully led a number of initiatives that delivered material improvements to our insurance risk position, including: ■ increasing visibility of insurance costs and dynamics through an additional actuarial review by Marsh ■ improving data and incident management ■ improved claims handling and targeted settlements. As noted in the Chief Executive’s report, performance on the financial measures was ahead of our expectations with the impact of lower revenues mitigated by cost savings, better than expected revenue recoveries from customers and higher service levels in the final quarter and there was strong performance in respect of the non-financial measures (as detailed above). In conclusion while the Committee recognises the strong delivery against the EABP targets set for FY21 as well as the significant personal contribution of the Executive Directors during FY21, in particular the swift and decisive actions taken to mitigate the impact of the global pandemic and protect the Group for the long-term, their leadership in ensuring we deployed our people, assets and expertise to support the communities we serve and the success in delivering the Board’s strategic objective of portfolio rationalisation through the sale of our North American contract businesses, we continue to operate in an unusual and unprecedented environment. As such the Committee concluded that awarding a bonus to the Executive Directors would ultimately not be appropriate. As such, no bonus will be paid in respect of FY21 for the second year in succession. 121 FirstGroup Annual Report and Accounts 2021Governance reportAnnual report on remuneration continued Long Term Incentive Plan Vesting of 2018 Long Term Incentive Awards (audited) The vesting of the 2018 LTIP awards was subject to the achievement of EPS Growth (40%), Road ROCE (20%) and TSR (40%) performance conditions over a three-year performance period from 1 April 2018 to 27 March 2021. TSR performance was measured against a comparator group of 29 companies in the travel, business services and industrial sectors, which are of comparable scale, complexity and activity to FirstGroup. Metrics EPS growth1 Relative TSR Road ROCE2 Total Weighting Outturn 40% 40% 20% (34.8%) 55th percentile 2.4% 0% <4% CAGR 5 years Average hedged rate Maturity Carrying amount of hedging instruments Assets – Derivatives (£m) Liabilities – Derivatives (£m) (Liabilities – Borrowings (£m) Carrying amount of hedged item Liabilities – Borrowings (£m) Accumulated amount of fair value hedging adjustments included in carrying amount of hedged item Liabilities – Borrowings (£m) Changes in fair value of hedged item used for calculating hedge effectiveness Changes in fair value of hedging instrument used in calculating hedge effectiveness Changes in fair value of hedging instrument accumulated in cash flow hedge reserve Cash flow hedges Commodity price risk Foreign exchange price risk Net investment hedges Foreign exchange risk 1.42m bbls 1.03m bbls 0.38m bbls 0.01m bbls – $72.17/bbl $69.7m $2,105.6m $527.3m $42.0m $506.7m $24.1m $0.6m $896.6m $175.0m 1.3377 Apr21-Jun23 Apr21-Jun23 1.3627 n/a 2.9 5.6 n/a n/a (22.5) 22.5 34.6 0.0 1.7 n/a n/a 6.1 (6.1) (6.6) 13.8 (6.4) (635.8) n/a n/a (116.1) 116.1 n/a The following gains and losses on derivatives designated for hedge accounting have been charged through the consolidated income statement in the year: Losses on hedging instruments in fair value hedges Gains on hedged item attributable to hedged risk fair value hedges Hedge ineffectiveness in cash flow hedges 2021 £m (6.4) 6.4 (0.3) (0.3) 2020 £m (3.0) 3.0 (7.4) (7.4) Financial risk management The Group is exposed to financial risks including liquidity risk, credit risk and certain market-based risks principally being the effects of changes in foreign exchange rates, interest rates and fuel prices. The Group manages these risks within the context of a set of formal policies established by the Board. Certain risk management responsibilities are formally delegated by the Board, principally to a sub-committee of the Board and to the Chief Financial Officer and to the Treasury Committee. The Treasury Committee comprises the Chief Financial Officer and certain senior finance employees and is responsible for approving hedging transactions permitted under Board approved policies, monitoring compliance against policy and recommending changes to existing policies. Liquidity risk Liquidity risk is the risk that the Group may encounter difficulty in meeting obligations associated with financial liabilities. The objective of the Group’s liquidity risk management is to ensure sufficient committed liquidity resources exist. The Group has a diversified debt structure largely represented by medium term unsecured syndicated committed bank facilities, medium to long-term unsecured bond debt and finance leases. It is a policy requirement that debt obligations must be addressed well in advance of their due dates. Group treasury policy requires a minimum of £150m of committed liquidity headroom at all times within medium-term bank facilities and such facilities must be renewed or replaced well before their expiry dates. At year end, the total amount of these facilities stood at £920.0m (2020: £920.0m), and committed headroom was £346.1m (2020: £348.6m), in addition to free cash balances of £784.5m (2020: £237.1m). The next material contractual expiry of revolver bank facilities is in November 2023. Largely due to the seasonality of the First Student school bus business, headroom tends to reduce from March to October and increases again by the following March. The average duration of net debt (excluding ring-fenced cash) at 27 March 2021 was 2.7 years (2020: 3.3 years). 195 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 25 Financial instruments continued The following tables detail, on a continuing basis, the Group’s expected maturity of payables for its borrowings, derivative financial instruments and trade and other payables. The amounts shown in these tables are prepared on an undiscounted cash flow basis and include future interest payments in the years in which they fall due for payment. Borrowings1 Fuel derivatives Currency forwards Trade and other payables 1 Includes lease liabilities as set out in note 23. Borrowings Fuel derivatives Currency forwards Trade and other payables < 1 year £m 1-2 years £m 2-5 years £m > 5 years £m 1,977.0 4.4 7.5 1,437.0 3,425.9 632.9 0.6 0.6 – 634.1 1,262.5 – – – 1,262.5 209.5 – – – 209.5 < 1 year £m 1,229.5 39.8 4.4 1,700.7 2,974.4 1-2 years £m 2-5 years £m > 5 years £m 1,054.6 17.3 – – 1,071.9 1,700.7 1.9 – – 1,702.6 479.4 – – – 479.4 2021 Total £m 4,081.9 5.0 8.1 1,437.0 5,532.0 2020 Total £m 4,464.2 59.0 4.4 1,700.7 6,228.3 No derivative financial instruments had collateral requirements or were due on demand in any of the years. Derivative financial instruments are net settled. Adoption of new standards Inter-Bank Offered Rate (‘IBOR’) Reform – Phase 1 and Phase 2 (amendments to IFRS 9, IAS 39, IFRS7, IFRS 4 and IFRS 16) These reforms were issued in September 2019 and was applied for the first time with effect from 1 January 2020 and 1 January 2021 respectively. The Company does not hold any derivative financial instruments linked to IBOR rates such as LIBOR that expire beyond 31 December 2021, therefore no existing hedge relationships have been affected as a result of adopting these amendments. Currency risk Currency risk is the risk of financial loss to foreign currency net assets, earnings and cash flows reported in pounds Sterling due to movements in exchange rates. The Group’s principal operations outside the UK are in the US and Canada, with the US being the most significant. Consequently, the principal currency risk relates to movements in the US Dollar to pounds Sterling. ‘Certain’ and ‘highly probable’ foreign currency transaction exposures may be hedged at the time the exposure arises for up to two years at specified levels, or longer if there is a very high degree of certainty. The Group is also exposed to currency risk relating to its UK fuel costs which are denominated in USD. This is hedged through entering a series of average rate forward contracts on a similar profile to our fuel hedging programme. Forward currency risk is designated in the cash flow hedges, however valuation movements arising from changes in currency-basis spreads are excluded from the relationships as costs of hedging. These costs of hedging are recorded in a separate component of equity until the hedged fuel inventory is recognised, at which time they are removed from that separate component of equity and included as part of the basis adjustment to the initial cost of the inventory. At both transition date and the balance sheet date the value to be recorded in a separate component of equity was immaterial, and as such no separate reserve has been shown within the primary financial statements. The Group does not hedge the translation of earnings into the Group reporting currency (pounds Sterling), but accepts that reported Group earnings will fluctuate as exchange rates against pounds Sterling fluctuate for the currencies in which the Company does business. During the year, the net cash generated in each currency may be converted by Group Treasury into pounds Sterling by way of spot transactions in order to keep the currency composition of net debt broadly constant. US dollar debt balances are designated as a net investment hedge of US investments. IFRS 7 requires the Group to show the impact on profit after tax and hedging reserve on financial instruments from a movement in exchange rates. The following analysis details the Group’s sensitivity to a 10% strengthening in pounds Sterling against the US Dollar. The analysis has been prepared based on the change taking place at the beginning of the financial year and being held constant throughout the reporting period. A positive number indicates an increase in earnings or equity where pounds Sterling strengthens against the US Dollar. Impact on profit after tax Impact on hedging reserve 196 2021 £m 2.1 0.3 2020 £m 0.3 (1.0) FirstGroup Annual Report and Accounts 2021Financial statements 25 Financial instruments continued Interest rate risk The Group has variable rate debt and cash and therefore net income is exposed to the effects of changes to interest rates. The Group treasury policy objective is to maintain fixed interest rates at a minimum of 50% of on-balance sheet net debt over the medium term, so that volatility is substantially reduced year-on-year to EPS. The policy objective is primarily achieved through fixed rate debt. The main floating rate benchmarks on variable rate debt are US Dollar LIBOR and pounds Sterling LIBOR. At 27 March 2021, 50% (2020: 46%) of gross debt (pre IFRS16) was fixed. This fixed rate protection had an average duration of 2.9 years (2020: 4.2 years). Interest rate risk within operating leases is hedged 100% by agreeing fixed rentals with the lessors prior to inception of the lease contracts. The following sensitivity analysis details the Group’s sensitivity to a 100 basis points (1%) increase in interest rates throughout the reporting period with all other variables held constant. Impact on profit after tax 2021 £m 1.2 2020 £m (0.6) Interest rate hedges The following table details the notional amounts of interest rate swap contracts designated as a cash flow or fair value hedge which were outstanding at the reporting date, the average fixed rate payable or receivable under these swaps and their fair value. The average interest rate is based on the outstanding balances at the reporting date. The fair value of interest rate swaps is determined by discounting the future cash flows. The interest rate swaps settle on a quarterly or semi-annual basis. The differences between the fixed and floating rates are settled on a net basis. Fair value hedges Less than one year One to two years Two to five years Average fixed rate Notional principal amount Fair value asset 2021 % – – – 2020 % – 2.21 – 2021 £m – – – 2020 £m – 350 – 2021 £m – – – 2020 £m – 6.4 – Fuel price risk The Group purchases its fuel on a floating price basis in its First Bus, First Rail, US and Canadian bus operations and is therefore exposed to changes in diesel prices. The Group’s policy objective is to maintain a significant degree of fixed price protection in the short term with lower levels of protection in the medium term, so that the businesses affected are protected from any sudden and significant increases and have time to prepare for potentially higher costs, whilst retaining some access for potentially lower costs over the medium term. To achieve this the Group operates a progressive hedging policy. The policy hedge target levels differ by division but are monitored monthly and appropriate actions taken to maintain satisfactory hedge levels. Gasoil derivatives are used to hedge UK exposure and Nymex Heating Oil derivatives used to hedge North American exposure. Risk component hedging has been adopted under IFRS 9, meaning that the hedged price risk component of the purchased diesel matches that of the underlying derivative commodity. The hedged risk component is considered to be separately identifiable and reliably measurable. Gasoil and Nymex Heating Oil are considered to be risk components of the fuel grade ultimately purchased and there is a very strong correlation between the movements in the prices of the derivative underlying and the purchased fuel. Variances in pricing of the derivative commodities and the purchased fuel are primarily driven by further refinement of the fuel or the associated transportation costs which were excluded from the hedge relationship. Currently the Group is hedged 49% to March 2022 and 18% to March 2023 for UK diesel price risk exposure and 0% to March 2022 and 0% to March 2023 for US diesel price risk exposure. The Group has entered into swaps for periods from April 2020 to March 2023 with the majority of these swaps relating to the 52 weeks ending 28 March 2020. The swaps give rise to monthly cash flow exchanges with counterparties to offset the underlying settlement of floating price costs, except where they have a deferred start date. Gains or losses on fuel derivatives are recycled from equity into inventory on qualifying hedges to achieve fixed rate fuel costs within operating results. The following analysis details the Group’s sensitivity on profit after tax and equity if the price of diesel fuel had been $10 per barrel higher during the 52 weeks ending 27 March 2021 and at the year end: Impact on profit after tax Impact on hedging reserve 2021 £m (3.9) 8.0 2020 £m (2.7) 11.9 Volume at risk for the year to 26 March 2022 is 1.7m (year to 27 March 2021: 2.1m) barrels for which 49% is hedged to diesel price risk. 197 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 26 Deferred tax The major deferred tax liabilities/(assets) recognised by the Group and movements thereon during the current and prior reporting periods are as follows: Accelerated tax depreciation £m Retirement benefit schemes £m Other temporary differences £m Tax losses £m (255.7) 7.1 – (14.6) (263.2) 15.6 – 223.3 24.3 Total £m (28.8) 24.5 12.8 (3.3) 5.2 2.0 (5.5) (33.6) (3.1) At 31 March 2019 Charge to income statement Charge/(credit) to other comprehensive income and equity Foreign exchange and other movements At 29 March 2020 Charge/(credit) to income statement (Credit)/charge to other comprehensive income and equity Transferred to held for sale – discontinued operations Foreign exchange and other movements At 27 March 2021 188.9 10.5 – 7.9 207.3 6.8 – (185.8) (17.6) 10.7 (60.0) 6.4 24.6 (1.6) (30.6) 6.4 (15.5) 6.3 1.0 98.0 0.5 (11.8) 5.0 91.7 (26.8) 10.0 (77.4) (10.8) (32.4) (13.3) – (35.0) Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes: Deferred tax assets Deferred tax liabilities 2021 Continuing £m 2021 Discontinued £m (35.0) – (35.0) – 33.6 33.6 2021 £m (35.0) 33.6 (1.4) 2020 £m (33.6) 38.8 5.2 The deferred tax asset relates to the UK and is recognised as the Group forecasts sufficient taxable profits in future periods. No deferred tax has been recognised on deductible temporary differences of £232.2m (2020: £220.6m) and tax losses of £430.4m (2020: £478.7m) and US tax credits of £9.7m (2020: £10.7m) have not been recognised. £42.7m of the losses are subject to expiry with £28.4m expiring in 2024, £11.5m expiring in 2025 to 2028 and £2.8m expiring thereafter. In the Spring Budget 2021, the Government announced that from 1 April 2023 the corporation tax rate will increase to 25%. Since the proposal to increase the rate to 25% had not been substantively enacted at the balance sheet date, its effects are not included in these financial statements. However, it is likely that the overall effect of the change, had it been substantively enacted by the balance sheet date, would be to increase the deferred tax asset by £11.6m. 2021 £m 111.9 22.8 0.8 135.5 2020 £m 382.8 34.6 1.6 419.0 27 Provisions Insurance claims Legal and other Pensions 198 FirstGroup Annual Report and Accounts 2021Financial statements27 Provisions continued On 27 March 2021 provisions of £400.6m (2020: £nil) have been transferred to discontinued operations, see note 21. At 29 March 2020 Charged to the income statement Utilised in the year Transferred from accruals Notional interest Transferred to held for sale – discontinued operations Foreign exchange movements At 27 March 2021 Current liabilities Non-current liabilities At 27 March 2021 Current liabilities Non-current liabilities At 28 March 2020 Insurance claims £m Legal and other £m Pensions £m 588.9 205.4 (186.0) – 3.8 (389.4) (50.5) 172.2 60.3 111.9 172.2 206.1 382.8 588.9 60.6 13.3 (19.3) (3.8) – (11.2) (3.1) 36.5 13.7 22.8 36.5 26.0 34.6 60.6 1.6 – – (0.4) – – – 1.2 0.4 0.8 1.2 – 1.6 1.6 Total £m 651.1 218.7 (205.3) (4.2) 3.8 (400.6) (53.6) 209.9 74.4 135.5 209.9 232.1 419.0 651.1 The insurance claims provision arises from estimated exposures for incidents occurring prior to the balance sheet date. It is anticipated that the majority of such claims will be settled within the next five years although certain liabilities in respect of lifetime obligations of £10.3m (2020: £35.4m) can extend for up to 30 years. The utilisation of £205.3m (2020: £219.4m) represents payments made against the current liability of the preceding year as well as the settlement of certain large aged claims. The insurance claims provisions contains £24.7m (2020: £22.1m) which is recoverable from insurance companies and is included within other receivables in note 17. Legal and other provisions relate to estimated exposures for cases filed or thought highly likely to be filed for incidents that occurred prior to the balance sheet date. It is anticipated that most of these items will be settled within ten years. Also included are provisions in respect of costs anticipated on the exit of surplus properties which are expected to be settled over the remaining terms of the respective leases and dilapidation, other provisions in respect of contractual obligations under rail franchises and restructuring costs. The dilapidation provisions are expected to be settled at the end of the respective franchise. The pensions provision relates to unfunded obligations that arose on the acquisition of certain First Bus companies. It is anticipated that this will be utilised over approximately five years. At the Half Year to September 2020 a provision was made for estimated Rail termination sums of £161.1m. Final Rail termination sums are £47.4m and are included within accruals, with balance of £127.9m reversed in the second half of the year. 28 Called up share capital Allotted, called up and fully paid 1,221.8m (2020: 1,219.5m) ordinary shares of 5p each The Company has one class of ordinary shares which carries no right to fixed income. During the year 2.3m shares were issued to satisfy principally SAYE exercises. 29 Reserves The hedging reserve records the movement on designated hedging items. 2021 £m 61.1 2020 £m 61.0 The share premium account represents the premium on shares issued since 1999 and arose principally on the rights issue on the Ryder acquisition in 1999 and the share placings in 2007 and 2008. The reserve is non-distributable. The Hedging reserve includes £1.2m in relation to the cost of hedging. The own shares reserve represents the cost of shares in FirstGroup plc purchased in the market and either held as treasury shares or held in trust to satisfy the exercise of share options. 199 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 29 Reserves continued Hedging reserve The movements in the hedging reserve were as follows: Balance at 29 March/31 March Transfer to hedging reserve through consolidated statement of comprehensive income Fuel derivatives Currency forwards Tax on derivative hedging instrument movements through statement of comprehensive income Transfer from hedging reserve to the balance sheet: Fuel derivatives Currency forwards Tax on derivative hedging instrument movements to the balance sheet Balance at 27 March/28 March Transfer to translation reserve 2021 £m (28.3) 22.5 (6.1) 16.4 (3.6) 21.2 (2.1) 19.1 (3.9) (0.3) (3.1) (3.4) 2020 £m 17.5 (33.5) 4.2 (29.3) 5.9 (20.8) (7.5) (28.3) 5.9 (28.3) – (28.3) Own shares The number of own shares held by the Group at the end of the year was 15,432,525 (2020: 8,650,254) FirstGroup plc ordinary shares of 5p each. Of these, 15,242,776 (2020: 8,460,505) were held by the FirstGroup plc Employee Benefit Trust, 32,520 (2020: 32,520) by the FirstGroup plc Qualifying Employee Share Ownership Trust and 157,229 (2020: 157,229) were held as treasury shares. Both trusts and treasury shares have waived the rights to dividend income from the FirstGroup plc ordinary shares. The market value of the shares at 27 March 2021 was £14.2m (2020: £4.4m). Other reserves At 27 March 2021 and 28 March 2020 Capital redemption reserve £m Capital reserve £m Total other reserves £m 1.9 2.7 4.6 There have been no movements on the capital redemption reserve or capital reserve during the year ended 27 March 2021. The capital redemption reserve represents the cumulative par value of all shares bought back and cancelled. The capital reserve arose on acquisitions in 2000. Neither reserve is distributable. 30 Translation reserve At 29 March/31 March Movement for the financial year At 27 March/28 March 2021 £m 635.6 (110.9) 524.7 2020 £m 544.3 91.3 635.6 The translation reserve records exchange differences arising from the translation of the balance sheets of foreign currency denominated subsidiaries offset by movements on loans used to hedge the net investment in those foreign subsidiaries. The movement in the year includes £114.0m (2020: £(13.1)m) in relation to movements on loans used to hedge the net investment in foreign subsidiaries. The cumulative movement on loans used to hedge the net investment in foreign subsidiaries is £(370.5)m (2020: £(484.5)m). 200 FirstGroup Annual Report and Accounts 2021Financial statements31 Acquisition of businesses and subsidiary undertakings Provisional fair value of net assets acquired: Property, plant and equipment Other intangible assets Other liabilities Goodwill Satisfied by cash paid and payable 2021 £m 0.6 0.9 – 1.5 – 1.5 2020 £m 16.2 11.1 (3.2) 24.1 1.7 25.8 On 21 August 2020 the Group completed the acquisition of Wubs Transit, a provider of school and charter transportation services based in Ontario Canada. The total consideration of £1.5m in 2021 represents £1.4m cash paid during the year and £0.1m deferred to be paid in future periods. In 2020 the total consideration of £25.8m represents £21.8m cash paid during the year and £4.0m deferred to be paid in future periods The businesses acquired during the year contributed £0.5m (2020: £7.9m) to Group revenue and £0.2m profit (2020: £2.4m profit) to Group operating profit from date of acquisition to 27 March 2021. If the acquisition of the businesses acquired during the year had been completed on the first day of the financial year, Group revenue from acquisitions for the period would have been £0.8m (2020: £27.5m) and the Group operating profit from this acquisition attributable to equity holders of the parent would have been £0.2m (2020: £5.5m). 32 Net cash from operating activities Operating profit/(loss) from: Continuing operations Discontinued operations Total operations Adjustments for: Depreciation charges Capital grant amortisation Software amortisation charges Other intangible asset amortisation charges Impairment charges Share-based payments Profit on disposal of property, plant and equipment Operating cash flows before working capital and pensions Increase/(decrease) in inventories Increase in receivables Increase in payables due within one year (Increase)/decrease in provisions due within one year Increase in provisions due over one year Defined benefit pension payments in excess of income statement charge Cash generated by operations Tax paid Interest paid¹ Net cash from operating activities2 2021 £m 224.3 61.5 285.8 962.3 (13.3) 11.2 4.1 16.6 11.9 (73.0) 1,205.6 12.0 (5.9) 197.0 (1.7) 10.9 (59.2) 1,358.7 (4.5) (149.8) 1,204.4 2020 (restated) £m (215.2) 62.5 (152.7) 889.4 (53.4) 16.1 4.9 189.0 10.3 (12.9) 890.7 (1.7) (9.0) 167.9 9.7 67.1 (38.8) 1,085.9 (2.9) (125.9) 957.1 1 Interest paid includes £73.1m relating to lease liabilities (2020: £42.6m) 2 Net cash from operating activities is stated after an outflow of £17.3m (2020: inflow of £13.2m) in relation to financial derivative settlements. Ring-fenced cash has been restated and increased by £17.2m at 29 March 2020 and £18.3m as at 31 March 2019, as cash balances relating to companies under the control of First Transit had not been recognised in prior periods. The cashflow impact of these changes has been reflected in payables since the liabilities relating to companies under the control of First Transit had not been recognised in prior periods. 201 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 33 Analysis of changes in net debt Components of financing activities: Bank loans Bonds Fair value of interest rate coupon swaps Senior unsecured loan notes CCFF Supplier financing1 Lease liabilities2 Other debt Total components of financing activities Cash Bank overdrafts Ring-fenced cash Cash and cash equivalents At 29 March 2020 (restated) £m (573.9) (877.5) 6.4 (219.8) – – (2,473.2) (9.4) (4,147.4) 319.5 (82.4) 649.4 886.5 Foreign exchange movements £m Cash flow £m (28.1) – – – (298.2) – 669.2 8.7 351.6 532.5 28.6 15.4 576.5 35.7 – – 21.3 – – 41.1 – 98.1 (17.7) – (1.9) (19.6) At 27 March 2021 £m (566.3) (873.1) – (198.8) (298.2) (159.2) (1,972.9) (0.7) (4,069.2) 834.3 (53.8) 662.9 1,443.4 Other £m – 4.4 (6.4) (0.3) – (159.2) (210.0) – (371.5) – – – – Net debt (including held for sale – discontinued operations) (3,260.9) 928.1 78.5 (371.5) (2,625.8) 1 Supplier financing relates wholly to First Student and the payable in respect of these items is included within discontinued operations in note 21. 2 Lease liabilities ‘other’ includes £242.6m inception of new leases, this comprises £107.5m of PCV and property leases in First Student, £105.2m of rolling stock leases across TOCs and £29.9m of other PCV and property leases across the Group, offset by £32.4m of lease terminations in the year. On 27 March 2021 net debt of £289.4m (2020: £nil) relates to held for sale – discontinued operations, see note 21. ‘Bank overdrafts’ and ‘cash’ have been restated and increased by £82.4m at 29 March 2020, as an overdraft had been set off against the cash balance in prior periods. Ring-fenced cash has been restated and increased by £17.2m at 29 March 2020, as cash balances relating to companies under the control of First Transit had not been recognised in prior periods. Components of financing activities: Bank loans Bonds Fair value of interest rate coupon swaps Senior unsecured loan notes Lease liabilities1 Other debt Total components of financing activities Cash Bank overdrafts Ring-fenced cash Cash and cash equivalents Net debt (including held for sale – discontinued operations) At 31 March 2019 (restated) £m IFRS 16 transitional adjustment £m Foreign exchange movements £m Cash flow £m (446.7) (879.7) 9.4 (210.0) (59.9) (9.4) (1,596.3) 249.2 (81.9) 543.9 711.2 – – – – (1,168.2) – (1,168.2) – – – – (122.9) – – – 596.9 – 474.0 67.7 (0.5) 105.5 172.7 (4.1) – – (9.8) (12.8) – (26.7) 2.6 – – 2.6 At 28 March 2020 (restated) £m (573.9) (877.5) 6.4 (219.8) (2,473.2) (9.4) (4,147.4) 319.5 (82.4) 649.4 886.5 Other £m (0.2) 2.2 (3.0) – (1,829.2) – (1,830.2) – – – – (885.1) (1,168.2) 646.7 (24.1) (1,830.2) (3,260.9) 1 Lease liabilities ‘other’ includes an increase of £820.9m on commencement of Avanti West Coast, £729.7m on commencement of GWR DA-3, £114.4m in relation to new rolling stock leases in TPE and £32.7m in Hull Trains. The remaining amount is due to modifications to existing leases and new PCV and property leases entered into in First Bus and North American divisions. ‘Bank overdrafts’ and ‘cash’ have been restated and increased by £81.9m at 31 March 2019 and increased by £82.4m at 29 March 2020, as an overdraft had been set off against the cash balance in prior periods. ‘Ring-fenced cash’ has been restated and increased by £18.3m at 31 March 2019 and £17.2m at 29 March 2020, as cash balances relating to companies under the control of First Transit had not been recognised in prior periods. Accrued interest of £42.9m (2020: £43.4m) is excluded from the values above and derivative valuations are presented as the clean values. 202 FirstGroup Annual Report and Accounts 2021Financial statements34 Contingent liabilities To support subsidiary undertakings in their normal course of business, the FirstGroup plc and certain subsidiaries have indemnified certain banks and insurance companies who have issued performance bonds for £743.0m (2020: £990.0m) and letters of credit for £422.8m (2020: £393.8m). The performance bonds relate to the North American and First Bus businesses of £517.3m (2020: £686.5m) and the First Rail franchise operations of £225.7m (2020: £303.5m). The letters of credit relate substantially to insurance arrangements in the UK and North America. The parent company has committed further support facilities of up to £120.2m to First Rail Train Operating Companies of which £49.7m remains undrawn. Following the sale of First Student and First Transit, the letters of credit, surety bonds and parent company guarantees relating to First Student and First Transit have been cancelled or in the process of being released. The Group is party to certain unsecured guarantees granted to banks for overdraft and cash management facilities provided to itself and subsidiary undertakings. The Company has given certain unsecured guarantees for the liabilities of its subsidiary undertakings arising under certain loan notes, HP contracts, finance leases, operating leases and certain pension scheme arrangements. It also provides unsecured cross guarantees to certain subsidiary undertakings as required by VAT legislation. First Bus subsidiaries have provided unsecured guarantees on a joint and several basis to the Trustees of the First Bus Pension Scheme. The Company’s North American subsidiaries participate in a number of multi-employer pension schemes in which their contributions are pooled with the contributions of other contributing employers. The funding of these schemes is therefore reliant on the ongoing participation by third parties. In its normal course of business First Rail has ongoing contractual negotiations with Government and other organisations. The Group is party to legal proceedings and claims which arise in the normal course of business, including but not limited to employment and safety claims. The Group takes legal advice as to the likelihood of success of claims and counterclaims. No provision is made where due to inherent uncertainties, no accurate quantification of any cost, or timing of such cost, which may arise from any of the legal proceedings can be determined. The Group’s operations are required to comply with a wide range of regulations, including environmental and emissions regulations. Failure to comply with a particular regulation could result in a fine or penalty being imposed on that business, as well as potential ancillary claims rooted in non-compliance. The inquest relating to the death of seven passengers in the Croydon tram incident in November 2016 completed on 22 July 2021. The Office of Rail & Road (ORR) investigations into the incident are ongoing and it is uncertain when they will be concluded. The tram was operated by Tram Operations Limited (‘TOL’), a subsidiary of the Group, under a contract with a TfL subsidiary. TOL provides the drivers and management to operate the tram services, whereas the infrastructure and trams are owned and maintained by a TfL subsidiary. Management continue to monitor developments. To date, no formal ORR proceedings have been commenced and, as such, it is not possible to assess whether any financial penalties or related costs could be incurred. First MTR South Western Trains Limited (FSWT), a subsidiary of the Company and the operator of the SWR rail franchise, is currently facing proposed collective proceedings before the UK Competition Appeal Tribunal (the CAT) in respect of alleged breaches of UK competition law. Stagecoach South Western Trains Limited (SSWT) (the former operator of the SWR rail franchise) is also a proposed defendant to these proceedings. A separate set of proceedings has been issued against London & South Eastern Railway Limited (LSER) in respect of another rail franchise. The two sets of proceedings are being heard together. The first substantive hearing, at which the CAT was asked to determine whether or not to certify the proposed collective proceedings, took place between 9 and 12 March 2021, and judgement is currently awaited. The proposed class representative alleges that FSWT, SSWT and LSER breached their obligations under UK competition law by not making boundary fares sufficiently available for sale, and/or by failing to ensure that customers were aware of the existence of boundary fares and/or bought an appropriate fare in order to avoid being charged twice for part of a journey. At present the Company cannot accurately determine the likelihood, quantum or timing of any damages and costs which may arise from these proceedings. 203 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 35 Operating commitments Minimum payments made under contractual terms recognised in the income statement for the year: Plant and machinery Track and station access Hire of rolling stock Other assets Discontinued operations 2021 £m 3.9 455.7 – 3.5 3.6 466.7 2020 £m 4.0 384.9 25.1 7.4 – 421.4 At the balance sheet dates, the Group, including discontinued operations had outstanding commitments for future payments under non-cancellable operating contracts, which fall due as follows: Within one year In the second to fifth years inclusive After five years 2021 £m 495.4 1,112.0 – 1,607.4 2020 £m 413.7 1,067.5 3.3 1,484.5 Included in the above commitments are contracts relating to discontinued operations of £0.3m which fall due within one year and £nil falling due after one year. Included in the above commitments are contracts held by the First Rail businesses with Network Rail for access to the railway infrastructure, track, stations and depots of £1,595.1m (2020: £1,472.5m). 36 Share-based payments Equity-settled share option plans The Group recognised total expenses of £11.9m (2020: £10.3m) related to equity-settled share-based payment transactions. (a) Save as you earn (SAYE) The Group operates an HMRC approved savings-related share option scheme. Grants were made as set out below. The scheme is based on eligible employees being granted options and their agreement to opening a sharesave account with a nominated savings carrier and to save weekly or monthly over a specified period. Sharesave accounts are held with Computershare. The right to exercise the option is at the employee’s discretion at the end of the period previously chosen for a period of six months. Outstanding at the beginning of the year Exercised during the year Lapsed during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price (pence) Weighted average share price at date of exercise (pence) SAYE Dec 2016 Options Number SAYE Dec 2017 Options Number SAYE Dec 2018 Options Number 1,363,371 (17,144) (1,346,227) 7,594,487 (507,339) (1,242,891) 8,574,766 (8,740) (1,052,848) – 5,844,257 7,513,178 – 86.0 52.0 5,844,257 83.0 92.1 – 70.0 83.2 204 FirstGroup Annual Report and Accounts 2021Financial statements36 Share-based payments continued (b) Deferred bonus shares (DBS) DBS awards vest over a three-year period following the financial year that they relate to and are typically settled by equity. Outstanding at the beginning of the year Exercised during the year Lapsed during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price (pence) Weighted average share price at date of exercise (pence) Outstanding at the beginning of the year Granted during the year Forfeited during the year Lapsed during the year Exercised during the year Outstanding at the end of the year DBS 2010 Options Number 39,200 (26,901) (12,299) – – Nil 55.71 DBS 2016 Options Number 525,549 – – – (47,355) DBS 2011 Options Number 54,281 (22,548) – 31,733 31,733 Nil 87.99 DBS 2017 Options Number 1,460,912 – (587,624) (6,263) (521,618) DBS 2012 Options Number 52,646 – – DBS 2013 Options Number 128,922 – – DBS 2014 Options Number 156,406 (4,990) – 52,646 128,922 151,416 52,646 Nil Nil 128,922 Nil Nil 151,416 Nil 32.82 DBS 2018 Options Number 686,665 – (14,953) – (95,115) DBS 2019 Options Number 2,141,376 – (60,793) (61,138) (161,265) DBS 2020 Options Number – 2,245,095 – (81,478) – DBS 2015 Options Number 301,212 – – – (10,260) 290,952 478,194 345,407 576,597 1,858,180 2,163,617 Exercisable at the end of the year Weighted average exercise price (pence) Weighted average share price at date of exercise (pence) 290,952 Nil 61.27 478,194 Nil 41.60 345,407 Nil 36.67 91,647 Nil 60.04 143,940 Nil 47.55 – Nil N/A (c) Buy As You Earn (BAYE) BAYE enables eligible employees to purchase shares from their gross income. The Company provides two matching shares for every three shares bought by employees, subject to a maximum Company contribution of shares to the value of £20 per employee per month. If the shares are held in trust for five years or more, no income tax and national insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares are removed from trust within three years of award. At 27 March 2021 there were 4,869 (2020: 5,439) participants in the BAYE scheme who have cumulatively purchased 27,988,255 (2020: 23,832,265) shares with the Company contributing 9,027,444 (2020: 7,755,927) matching shares on a cumulative basis. (d) Long-Term Incentive Plan (LTIP) LTIP awards have TSR, ROCE and EPS targets and vest over a three-year period following the financial year that they relate to and are settled by equity where an award exceeds a performance target. Outstanding at the beginning of the year Granted during the year Forfeited during the year Lapsed during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average share price at date of exercise (pence) LTIP 2016 Options Number 47,815 – – – (17,464) 30,351 30,351 43.39 LTIP 2017 Options Number 5,243,883 – (67,826) (4,641,721) (379,215) LTIP 2018 Options Number 7,270,187 – – (645,568) – LTIP 2019 Options Number 4,260,429 2,510,564 – (530,483) – LTIP 2020 Options Number – 14,254,616 – (213,474) – 155,121 6,624,619 6,240,510 14,041,142 155,121 36.50 – Nil – Nil – Nil 205 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 36 Share-based payments continued (e) Divisional Incentive Plan (DIP) The DIP were one-off awards which vested over the period 16 December 2015 to 16 June 2019 and are typically settled by equity. Outstanding at the beginning of the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price (pence) Weighted average share price at date of exercise (pence) DIP Options Number 72,296 (42,374) 29,922 29,922 Nil 45.60 (f) Executive Share Plan (ESP) ESP awards vest over a three-year period following the financial year that they relate to and are typically settled by equity. Outstanding at the beginning of the year Granted during the year Forfeited during the year Lapsed during the year Exercised during the year Outstanding at the end of the year ESP 2015 Options Number 203,558 – – – (16,415) ESP 2016 Options Number 245,558 – – – (20,696) ESP 2017 Options Number 1,540,449 – (125,208) (19,668) (654,507) ESP 2018 Options Number 3,251,253 – (252,944) (123,677) (611,307) ESP 2019 Options Number 9,959,413 103,173 (537,511) (627,059) (980,238) ESP 2020 Options Number – 17,168,395 – (439,506) – 187,143 224,862 741,066 2,263,325 7,917,778 16,728,889 Exercisable at the end of the year Weighted average exercise price (pence) Weighted average share price at date of exercise (pence) 187,143 Nil 76.1 224,862 Nil 75.1 741,066 Nil 67.2 926,168 Nil 45.5 506,394 Nil 46.1 – Nil N/A The fair values of the options granted during the last two years were measured using a Black-Scholes model except for the TSR element of the LTIPs which were measured using a Monte Carlo model. The inputs into the models were as follows: Weighted average share price at grant date (pence) – DBS – LTIP – ESP Weighted average exercise price at grant date (pence) – DBS – LTIP – ESP Expected volatility (%) – DBS – LTIP – ESP Expected life (years) – DBS – SAYE schemes – LTIP – ESP Rate of interest (%) – DBS – LTIP – ESP Expected dividend yield (%) – DBS – LTIP – ESP 206 2021 2020 54.3 53.7 47.3 – – – N/A 57 N/A 3.0 3.0 2.41 3.0 N/A – – – – – 98.1 122.1 111.3 – – – N/A 33 N/A 3.0 3.0 2.58 3.0 N/A – – – – – FirstGroup Annual Report and Accounts 2021Financial statements36 Share-based payments continued Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous five years. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Allowances have been made for the SAYE schemes for the fact that, amongst a group of recipients some are expected to leave before an entitlement vests. The accounting charge is then adjusted over the vesting period to take account of actual forfeitures, so although the total charge is unaffected by the pre-vesting forfeiture assumption, the timing of the recognition of the expense will be sensitive to it. Fair values for the SAYE include a 10% per annum pre-vesting leaver assumption whereas the Executive, LTIP and deferred share plans exclude any allowance for pre-vesting forfeitures. The Group used the inputs noted above to measure the fair value of the new share options. Weighted average fair value of options at grant date – DBS – LTIP – ESP 2021 pence 54.3 53.7 47.3 2020 Pence 98.1 122.2 111.3 37 Retirement benefit schemes Non-Rail Defined contribution plans (shown on a continuing basis) Payments to defined contribution plans are charged as an expense as they fall due. There is no further obligation to pay contributions into a defined contribution plan once the contributions specified in the plan rules have been paid. The main defined contribution arrangements are summarised below. The total expense recognised in the consolidated income statement of £36.6m (2020: £34.2m) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. UK The Group operates defined contribution plans for all Group and First Bus employees who have joined a pension arrangement since April 2013. They receive a company match to their contributions, which varies by salary and/or service. North America Employees in the US have been able to join a defined contribution arrangement for many years. They receive a company match which varies by employment status. All new employees in Canada join a defined contribution arrangement. Union employees join the Eastern plan, whilst managers and supervisors join the Supervisory Plan. They receive a company contribution dependent on their personal contribution and the Plan they are in. Defined benefit plans (shown on a continuing basis) The Group sponsors 9 funded defined benefit plans across its non-rail operations, covering approximately 45,000 former and current employees. These defined benefit arrangements, which are all closed to new entrants, are summarised below. Overall, the duration of the company’s obligations is approximately 19 years although the durations of the individual schemes tend to vary with the UK exposures tending to be of longer duration and the North American exposures tending to be of shorter duration. UK The majority of defined benefit provision is through trust-based schemes. The assets of the trust-based schemes are invested separately from those of the Group, and the schemes are run independently of the Group by trustee boards. There is a requirement for the trustee boards to have some member representation, with the other trustee directors being company appointed. The trustee boards are responsible for the investment policy in respect of the assets of the fund, although the employer must be consulted on this, and typically has some input into the investment decisions. Triennial valuations assess the cost of future service and the funding position. The employer and Trustee are required to agree on assumptions for the valuations and to agree the contributions that result from these. Deficit recovery contributions may be required in addition to future service contributions. In agreeing contribution rates, reference must be made to the affordability of contributions by the employer. Surplus after benefits that have been paid/secured, can be repaid to the employer, in line with the rules of the schemes. 207 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 37 Retirement benefit schemes continued The First UK Bus Pension Scheme This provides pension benefits to employees in First Bus. Historically it provided salary related benefits on a shared cost basis, but from April 2013, all new members have been enrolled in the defined contribution section. The scheme closed to defined benefit accrual on 5 April 2018. A smaller Group scheme provides defined benefit pensions to Group employees. This scheme closed to defined benefit accrual on 5 April 2018. The rules governing both these schemes grant the employer influence over the allocation of any residual surplus once the beneficiaries’ rights have been secured. Accordingly, the net surplus/deficit is recognised in full for these schemes. Local Government Pension Schemes The Group participates in two Local Government Pension Schemes (LGPS), one in England and one in Scotland, which provide salary related benefits. These differ from trust-based schemes in that their benefits and governance are prescribed by specific legislation, and they are administered by local authorities. New members have not been admitted to the LGPS for several years, although benefit accrual continues for existing members. Contribution rates are agreed for the three-year period until the next valuation. The balance sheet position in respect of the LGPS funds is restricted per the requirements of IFRIC14. North America US The Group operates two defined benefit arrangements in the US although benefit accrual ceased some years ago. The plans are valued annually, when the funding position and minimum and maximum contributions are established. Deficits are paid off as required by legislation. As at the balance sheet date, the Group’s transit subsidiary companies sponsored a total of 7 single-employer pension arrangements. The Group is indemnified against any pension liabilities by the relevant transit authorities, and pension costs are reimbursed as they fall due. The Group will not retain any pension liability upon expiry of the contract or if the contracts are reassigned. Greyhound Canada There are three plans, relating to Eastern, Western and Supervisory employees. All the plans are closed to new members, although benefit accrual continues for existing members. The plans are being merged into a single plan (subject to regulatory approval) in order to be able to improve oversight and streamline investment strategy, which are expected to generate efficiency savings. The plans are valued annually, when the cost of future service and the funding position are identified. Future service costs are shared between the members and the Company, with deficit contributions being met entirely by the Company. Valuations At their last valuations, the defined benefit schemes had funding levels between 75% and 114% (2020: 71% and 114%). The market value of the assets at 27 March 2021 for all non-rail operation defined benefit schemes totalled £3,071m (2020: £2,994m) (see disclosure 36(e) for information about the impact of current market conditions on the valuations of some of these assets). Rail The Railways Pension Scheme (RPS) The Group currently sponsors six sections of the RPS, relating to its franchising obligations for its TOCs, and a further section for Hull Trains, its Open Access operator. The RPS is managed by the Railways Pension Trustee Company Limited, and is subject to regulation from the Pensions Regulator and relevant UK legislation. The RPS is a shared cost arrangement. All costs, and any deficit or surplus, are shared 60% by the employer and 40% by the members. For the TOC sections, under the contractual arrangements with the DfT, the employer’s responsibility is to pay the contributions following triennial funding valuations while it operates the franchise. These contributions are subject to change on consideration of future statutory valuations. At the end of the franchise, any deficit or surplus in the scheme section passes to the subsequent train operating company with no compensating payments from or to the outgoing TOC. The latest triennial statutory valuation of the various Rail Pension Scheme sections in which the Group is involved, carried out with an effective date of 31 December 2013 (31 December 2016 for Hull Trains) and the IAS 19 actuarial valuations are carried out for different purposes and may result in materially different outcomes. The IAS 19 valuation is set out in the disclosures below. The accounting treatment for the time-based risk-sharing feature of the Group’s participation in the RPS is not explicitly considered by IAS 19 Employee Benefits (Revised). The contributions currently committed to being paid to each TOC section are lower than the share of the service cost (for current and future service) that would normally be calculated under IAS 19 (Revised) and the Group does not account for uncommitted contributions towards the sections’ current or expected future deficits. Therefore, the Group does not need to reflect any deficit on its balance sheet. A franchise adjustment (asset) exists that exactly offsets any section deficit that would otherwise remain after reflecting the cost sharing with the members. This reflects the legal position that some of the existing deficit and some of the service costs in the current year will be funded in future years beyond the term of the current franchise and committed contributions. The franchise adjustment on the balance sheet date reflects the extent to which the Group is not currently committed to fund the deficit. 208 FirstGroup Annual Report and Accounts 2021Financial statements37 Retirement benefit schemes continued Movements in the franchise adjustment in a period arise from and are accounted for as follows: Any service cost for the period for which the contribution schedule requires no contributions from the entity are reflected as a franchise adjustment to the service cost in the income statement, which is considered to be in line with paragraphs 92-94 of IAS 19 (Revised). Under circumstances where contributions are renegotiated, such as following a statutory valuation, any adjustment necessary to reflect an obligation to fund past service cost will be recognised in the income statement. At the previous year end, we noted that The Pensions Regulator (TPR) had been in discussion with the RPS(the Scheme) regarding the assumptions used to determine the Scheme’s funding requirements. Discussions are ongoing, and the possibility remains of changes to contributions that could impact all rail operators sponsoring this industry-wide scheme. TPR and the DfT had requested that the RDG co-ordinate the Train Operators’ involvement in an industry-wide review of Scheme’s funding. The RDG, comprising participants from each of the large owning groups, has been seeking to develop a framework which meets TPR, DfT, RPS and RDG objectives. There has been continuing engagement between the key parties during the year, and efforts to develop a framework to take forward to a formal consultation are ongoing. Management continues to believe that the protections contained within current contractual agreements with the DfT will allow the Scheme to continue with its current funding strategy in the short term. Nevertheless, TPR believes that a higher level of funding is required in the longer term, and the Group has been engaged with the industry-wide project to consider the funding of the Scheme. Management continues to believe that an approach that meets TPRs key objectives while maintaining stability and fairness, and retaining protection against unacceptable risk, for both operators and scheme members, is achievable. Management do not believe that the current EMAs and NRCs have impacted the position in relation to the Group’s funding obligations towards the RPSs and no allowance has therefore been made within the disclosures for these Agreements. Valuation assumptions The valuation assumptions used for accounting purposes have been made uniform to Group standards, as appropriate, when each scheme is actuarially valued. Key assumptions used: Discount rate Expected rate of salary increases Inflation – CPI Future pension increases Post retirement mortality (life expectancy in years)1 Current pensioners at 65: Future pensioners at 65 aged 45 now: 1 Life expectancies reflect the largest underlying plans in each region. First Bus 2021 % First Rail 2021 % North America 2021 % First Bus 2020 % First Rail 2020 % 2.05 2.55 2.55 2.55 19.1 20.6 2.05 3.05 2.55 2.55 20.1 21.9 2.87 2.50 2.00 – 20.1 21.5 2.40 1.80 1.80 1.80 19.1 20.6 2.40 2.75 1.80 1.80 21.1 22.3 North America 2020 % 3.30 2.50 2.00 – 20.1 21.3 The Group reviews its longevity assumptions for each scheme following completion of funding valuations. The assumptions adopted reflect recent scheme experience and views on future longevity which may include industry specific adjustment where appropriate. The Group obtains specialist actuarial advice before agreeing longevity assumptions. 209 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 37 Retirement benefit schemes continued Sensitivity of retirement benefit obligations to changes in assumptions The method used to derive the sensitivities is the same as that used to calculate the main disclosures. The exception is longevity where we have instead applied a general rule that one year’s extra life expectancy adds c.4% to the defined benefit obligation (with resultant impacts on rail and irrecoverable surplus adjustments). This is consistent with the method applied to deriving last year’s sensitivities. A 0.1% movement in the discount rate would impact the 2020/21 balance sheet position by approximately £32m. A 0.1% movement in the inflation rate would impact the 2020/21 balance sheet position by approximately £27m. A one-year movement in life expectancy would impact the balance sheet position by approximately £90m. Management considers that, while greater variation might also be reasonably possible, the figures provide a suitable indication of the potential impact of each 0.1% change in the financial assumptions and one-year change in the mortality assumption. (a) Income statement Amounts (charged)/credited to the income statement in respect of these defined benefit schemes are as follows: 52 weeks ending 27 March 2021/year ended 31 March 2021 Current service cost Past service gain including curtailments and settlements Impact of franchise adjustment on operating cost Net interest cost Impact of franchise adjustment on net interest cost Less discontinued operations 52 weeks ending 28 March 2020/year ended 31 March 2020 Current service cost Impact of franchise adjustment on operating cost Net interest cost Impact of franchise adjustment on net interest cost Less discontinued operations Net interest comprises: 52 weeks ending 27 March 2021 Interest cost (table (c)) Interest income on assets (table (d)) Interest on irrecoverable surplus (table (h)) Less discontinued operations First Bus £m North America £m Total non-rail £m First Rail £m (8.2) (0.9) – (1.7) – (10.8) – (10.8) (8.0) (1.5) – (5.8) – (15.3) 2.9 (12.4) (16.2) (2.4) – (7.5) – (26.1) 2.9 (23.2) (115.1) – 58.0 (19.2) 19.1 (57.2) – (57.2) First Bus £m North America £m Total non-rail £m First Rail £m (10.7) – (2.9) – (13.6) – (13.6) (8.7) – (5.7) – (14.4) 2.9 (11.5) (19.4) – (8.6) – (28.0) 2.9 (25.1) (114.1) 68.3 (19.4) 19.4 (45.8) – (45.8) 2021 £m (135.2) 113.7 (5.1) (26.6) 1.2 (25.4) Total £m (131.3) (2.4) 58.0 (26.7) 19.1 (83.3) 2.9 (80.4) Total £m (133.5) 68.3 (28.0) 19.4 (73.8) 2.9 (70.9) 2020 £m (136.0) 112.5 (4.5) (28.0) 1.3 (26.7) During the year £23.5m (2020: £20.8m) of gross administrative expenses were incurred. Net administration expenses were £17.9m (2020: £16.7m). 210 FirstGroup Annual Report and Accounts 2021Financial statements37 Retirement benefit schemes continued (b) Balance sheet (continuing operations only) The amounts included in the balance sheet arising from the Group’s obligations in respect of its defined benefit pension schemes are as follows: At 27 March 2021/31 March 2021 Fair value of schemes’ assets Present value of defined benefit obligations Deficit before adjustments Adjustment for irrecoverable surplus1 (table (h)) First Rail franchise adjustment (table (f)) (60%) Adjustment for employee share of RPS deficits (40%) Deficit in schemes Liability recognised in the balance sheet The amount is presented in the consolidated balance sheet as follows: Non-current assets Non-current liabilities First Bus £m 2,720.3 (2,775.2) (54.9) (108.7) – – (163.6) (163.6) 52.9 (216.5) (163.6) North America £m 364.9 (469.6) (104.7) – – – (104.7) (104.7) – (104.7) (104.7) Total non-rail £m 3,085.2 (3,244.8) (159.6) (108.7) – – (268.3) (268.3) 52.9 (321.2) (268.3) First Rail £m 3,382.7 (5,336.2) (1,953.5) – 1,168.8 781.4 (3.3) (3.3) – (3.3) (3.3) Total £m 6,467.9 (8,581.0) (2,113.1) (108.7) 1,168.8 781.4 (271.6) (271.6) 52.9 (324.5) (271.6) 1 The irrecoverable surplus represents the amount of the surplus that the Group could not recover through reducing future Company contributions to LGPS. On 27 March 2021 a net pension liability of £24.7m (2020: £nil) comprising assets of £72.9m and liabilities of 97.6m was transferred to held for sale – discontinued operations, see note 21. Total assets including Transit Management subsidiaries (see note 37 (i)) and discontinued operations are £6,890.4m (2020: £6,078.9m) and total liabilities are £9,132.8m (2020: £7,753.3m). At 28 March 2020/31 March 2020 Fair value of schemes’ assets Present value of defined benefit obligations (Deficit)/surplus before adjustments Adjustment for irrecoverable surplus1 (table (h)) First Rail franchise adjustment (table (f)) (60%) Adjustment for employee share of RPS deficits (40%) Deficit in schemes Liability recognised in the balance sheet The amount is presented in the consolidated balance sheet as follows: Non-current assets Non-current liabilities First Bus £m 2,576.2 (2,452.2) 124.0 (216.6) – – (92.6) (92.6) 53.2 (145.8) (92.6) North America £m 417.6 (636.1) (218.5) – – – (218.5) (218.5) – (218.5) (218.5) Total non-rail £m 2,993.8 (3,088.3) (94.5) (216.6) – – (311.1) (311.1) 53.2 (364.3) (311.1) First Rail £m 2,796.2 (4,245.5) (1,449.3) – 867.3 579.7 (2.3) (2.3) – (2.3) (2.3) Total £m 5,790.0 (7,333.8) (1,543.8) (216.6) 867.3 579.7 (313.4) (313.4) 53.2 (366.6) (313.4) 1 The irrecoverable surplus represents the amount of the surplus that the Group could not recover through reducing future Company contributions to LGPS. 211 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 37 Retirement benefit schemes continued (c) Defined benefit obligations (DBO) Movements in the present value of DBO were as follows: At 29 March 2020/1 April 2020 Current service cost Past service costs including curtailments Effect of settlements Interest cost Employee share of change in DBO (not attributable to franchise adjustment) Experience loss on DBO Loss on change of assumptions (demographic) Gain on change of assumptions (financial) Benefit payments Transferred to held for sale – discontinued operations Currency gain At 27 March 2021/31 March 2021 At 31 March 2019/1 April 2019 Current service cost Interest cost Employee share of change in DBO (not attributable to franchise adjustment) Experience loss on DBO Loss on change of assumptions (demographic) (Loss)/gain on change of assumptions (financial) Benefit payments Currency loss Business acquisition At 28 March 2020/31 March 2020 (d) Fair value of schemes’ assets Movements in the fair value of schemes’ assets were as follows: At 29 March 2020/31 March 2020 Impact on settlement of assets Interest income on assets Company contributions Employee contributions Employee share of interest on assets Actuarial gain on assets Benefit paid from schemes Employer administration expenses Transferred to held for sale – discontinued operations Currency loss At 27 March 2021/31 March 2021 First Bus £m 2,452.2 8.2 0.9 – 57.4 0.7 (20.2) (44.2) 433.2 (113.0) – – 2,775.2 First Bus £m 2,644.9 10.7 62.1 0.9 (8.9) – (129.9) (127.6) – – 2,452.2 First Bus £m 2,576.2 – 60.9 43.9 0.7 – 151.6 (108.3) (4.7) – – 2,720.3 212 North America £m 636.1 8.0 – (13.1) 18.7 0.2 (12.7) (0.6) 25.7 (58.0) (97.6) (37.1) Total non-rail £m 3,088.3 16.2 0.9 (13.1) 76.1 0.9 (32.9) (44.8) 458.9 (171.0) (97.6) (37.1) First Rail £m 4,245.5 115.1 – – 59.1 116.2 15.8 (221.1) 1,124.1 (118.5) – – Total £m 7,333.8 131.3 0.9 (13.1) 135.2 117.1 (17.1) (265.9) 1,583.0 (289.5) (97.6) (37.1) 469.6 3,244.8 5,336.2 8,581.0 North America £m 632.4 8.7 21.6 0.5 (13.3) 21.5 7.7 (61.3) 18.3 – 636.1 North America £m 417.6 (14.6) 12.9 34.1 0.2 – 68.0 (51.7) (6.2) (72.9) (22.5) Total non-rail £m 3,277.3 19.4 83.7 1.4 (22.2) 21.5 (122.2) (188.9) 18.3 – First Rail £m 3,451.2 114.1 52.3 110.9 (11.9) – (535.9) (88.7) – 1,153.5 3.088.3 4,245.5 Total non-rail £m 2,993.8 (14.6) 73.8 78.0 0.9 – 219.6 (160.0) (10.9) (72.9) (22.5) First Rail £m 2,796.2 – 39.9 56.9 37.1 26.6 544.5 (104.4) (14.1) – – 3,382.7 364.9 3,085.2 Total £m 6,728.5 133.5 136.0 112.3 (34.1) 21.5 (658.1) (277.6) 18.3 1,153.5 7,333.8 Total £m 5,790.0 (14.6) 113.7 134.9 38.0 26.6 764.1 (264.4) (25.0) (72.9) (22.5) 6,467.9 FirstGroup Annual Report and Accounts 2021Financial statements37 Retirement benefit schemes continued At 31 March 2019/1 April 2019 Settlement impact on assets Interest income on assets Company contributions Employee contributions Employee share of interest on assets Actuarial gain on assets Benefit paid from schemes Employer administration expenses Currency gain At 28 March 2020/31 March 2020 First Bus £m 2,693.4 – 63.7 37.8 0.9 – (92.1) (121.6) (5.9) – 2,576.2 North America £m 468.0 – 15.9 20.6 0.5 – (37.1) (55.0) (6.3) 11.0 417.6 Total non-rail £m 3,161.4 – 79.6 58.4 1.4 – (129.2) (176.6) (12.2) 11.0 First Rail £m 2,077.9 785.0 32.9 45.6 30.4 21.9 (108.6) (78.7) (10.2) – 2,993.8 2,796.2 Total £m 5,239.3 785.0 112.5 104.0 31.8 21.9 (237.8) (255.3) (22.4) 11.0 5,790.0 (e) Asset allocation The vast majority of the assets held by the pension arrangements are invested in pooled funds with a quoted market price. The analysis of the schemes’ assets at the balance sheet dates were as follows: At 27 March 2021/31 March 2021 Global equity (listed) Private equity Fixed income/liability driven Other return seeking assets Real estate Annuities Cash and cash equivalents* First Bus North America Total non-rail First Rail 14% 3% 62% 10% 2% 6% 3% 34% 0% 40% 2% 18% 0% 6% 17% 3% 57% 9% 4% 6% 4% 0% 8% 0% 91% 0% 0% 1% Total 7% 6% 28% 52% 2% 2% 3% 100% 100% 100% 100% 100% * Includes net current assets. In Canada, a downwards adjustment of c. £8m has been applied in respect of lump sums expected to be paid out as part of an ongoing redundancy exercise. The UK Bus Scheme achieves equity exposure both directly and synthetically. The table above includes the market value of instruments designed to give synthetic exposure to equities, within the ‘global equity’ category. As at 27 March 2021 these had a market value of £16m. The table above includes a cash holding of £140m that is a component of an investment designed to provide exposure to the equity market. The portfolio will therefore benefit from equity market investment that is £140m higher than shown under equities above. In aggregate, the plans’ assets performed well over the year, leading to an overall increase in assets. Following the market fall in March 2020, global equity markets have seen significant rallies since the previous year-end, with c. 40% pounds sterling returns over the 52 weeks ending 27 March 2021. However, financial markets are still volatile as a result of the coronavirus pandemic and uncertainty over the extent and timing of economic recovery. Note that a number of the Company’s pension schemes have protections in place to reduce exposure to changes in equity markets. Sovereign bond yields increased over the year as the medium-term growth and inflation outlook was boosted by vaccine rollouts and continued Government support for hard hit industries. Global investment-grade credit spreads have fallen significantly since the previous year end in response to central bank purchase programmes and Government programmes alleviating initial concerns around defaults and downgrades. In January 2021, the Aberdeen City Council Transport Fund secured a £230m buy-in covering its pensioner obligations. For IAS19 purposes this generated an OCI loss of c. £65m although, due to irrecoverable surplus restrictions, the underlying economic loss is significantly lower. The buy in provides a direct match to the underlying benefits thereby eliminating future balance sheet volatility in respect of these obligations. The buy in assets at the year-end are categorised as ‘annuities’ in the table above. 213 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 37 Retirement benefit schemes continued At 28 March 2020/31 March 2020 Global equity Private equity Fixed income/liability driven Other return seeking assets Real estate Cash and cash equivalents First Bus North America Total non-rail First Rail 12% 3% 69% 12% 2% 2% 29% 0% 48% 1% 20% 2% 15% 2% 66% 10% 5% 2% 0% 9% 0% 89% 1% 1% Total 7% 6% 34% 48% 3% 2% 100% 100% 100% 100% 100% The table above includes a cash holding of £140m that is a component of an investment designed to provide exposure to the equity market. The portfolio will therefore benefit from equity market investment that is £140m higher than shown under equities above. The assets held by the pension scheme are not used by the Group and as such are transferable without detriment to the Group’s ongoing business operations. (f) Accounting for First Rail pension arrangements In relation to the defined benefit pension arrangements it sponsors for employees of the TOCs it operates, FirstGroup’s obligations differ from its obligations to its other pension schemes. These are shared cost arrangements. All the costs, and any deficit or surplus, are shared 60% by the employer and 40% by the members. In addition, at the end of the term of the contract, any deficit or surplus in the scheme passes to the subsequent TOC with no compensating payments from or to the outgoing TOC. FirstGroup’s obligations are thus limited to its contributions payable to the schemes during the period over which it operates the contract. The disclosed information has been set out to illustrate the effect of this on the costs borne by FirstGroup. In particular, 40% of the costs, gains or losses and any deficit are attributed to the members. In addition, the total surplus or deficit is adjusted by way of a ‘franchise adjustment’ which includes an assessment of the changes that will arise from contracted future contributions and which is the portion of the deficit or surplus projected to exist at the end of the franchise which the Group will not be required to fund or benefit from. The remaining balance sheet items and gains or losses relate to Hull Trains which is operated under direct access, rather than under contract. Reconciliation of Rail franchises: Assets £m Liabilities £m 2,796.2 (4,245.5) Adjustment for employee share of RPS deficits (40%) £m 579.7 Franchise adjustment £m 867.3 – – – 66.5 66.5 57.0 37.1 (118.5) (24.4) 2,838.3 – – 544.4 – 544.4 (177.8) (14.1) (191.9) (98.5) (290.4) – – 118.5 118.5 (4,417.4) (1,124.1) 221.1 – (15.8) (918.8) 3,382.7 (5,336.2) 71.2 5.6 76.8 12.8 89.6 (22.7) (14.9) – (37.6) 631.7 449.6 (88.4) (217.8) 6.3 149.7 781.4 58.1 – 58.1 19.1 77.2 22.7 (22.2) – 0.5 945.0 671.9 (132.2) (325.6) 9.7 223.8 1,168.8 Net £m (2.3) – – (48.5) (8.5) (57.0) (0.1) (57.1) – 57.0 – – 57.0 (2.4) (2.6) 0.5 1.0 0.2 (0.9) (3.3) At 1 April 2020 Income statement Operating – Service cost – Admin cost Total operating Financing Total income statement Amounts paid to/(from) scheme Employer contributions Employee contributions Benefits paid Total Expected closing position Change in financial assumptions Change in demographic assumptions Return on assets in excess of discount rate Experience Total At 31 March 2021 214 FirstGroup Annual Report and Accounts 2021Financial statements37 Retirement benefit schemes continued At 1 April 2019 Business acquisition Income statement Operating – Service cost – Admin cost Total operating Financing Total income statement Amounts paid to/(from) scheme Employer contributions Employee contributions Benefits paid Total Expected closing position Change in financial assumptions Return on assets in excess of discount rate Experience Total At 31 March 2020 Assets £m 2,077.9 785.0 Liabilities £m (3,451.2) (1,153.7) Adjustment for employee share of RPS deficits (40%) £m 549.3 147.4 Franchise adjustment £m 820.9 221.3 – – – 54.8 54.8 45.6 30.4 (88.9) (12.9) 2,904.8 – (108.6) – (108.6) (180.0) (10.2) (190.2) (87.2) (277.4) – – 88.9 88.9 (4,793.4) 536.0 – 11.9 547.9 2,796.2 (4,245.5) 72.1 4.1 76.2 13.0 89.2 (18.2) (12.3) – (30.5) 755.4 (214.3) 43.4 (4.8) (175.7) 579.7 (g) Consolidated statement of comprehensive income Amounts presented in the consolidated statement of comprehensive income comprise: Actuarial (loss)/gain on DBO Actuarial gain/(loss) on assets Actuarial gain/(loss) on franchise adjustments Adjustment for irrecoverable surplus Less discontinued operations Actuarial losses on defined benefit schemes (h) Adjustment for First Bus irrecoverable surplus Movements in the adjustment for the First Bus irrecoverable surplus were as follows: At 29 March/31 March Interest on irrecoverable surplus Actuarial gain/(loss) on irrecoverable surplus At 27 March/28 March 68.3 – 68.3 19.4 87.7 18.0 (18.0) – – 1,129.9 (320.6) 65.1 (7.1) (262.6) 867.3 2021 £m (1,300.0) 764.1 373.6 113.0 (49.3) (20.5) (28.8) 2021 £m (216.6) (5.1) 113.0 (108.7) Net £m (3.1) – (39.6) (6.1) (45.7) – (45.7) 45.4 0.1 – 45.5 (3.3) 1.1 (0.1) – 1.0 (2.3) 2020 £m 670.8 (237.7) (438.3) (23.8) (29.0) 12.5 (41.5) 2020 £m (188.2) (4.5) (23.9) (216.6) 215 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 37 Retirement benefit schemes continued (i) Transit management contracts The Group is retaining 10 Transit Management Contacts which contain defined benefit pension arrangements covering seven single employer pension schemes. The pension contributions and deficits relating to these schemes are fully indemnified by the contracting authority. Details of the assets and liabilities of these schemes is as follows: Assets Liabilities Deficits in schemes Amounts recoverable from contracting authorities Net deficits in schemes 2021 £m 349.6 (454.2) (104.6) 104.6 – 2020 £m 288.9 (419.5) (202.6) 202.6 – Cash contributions The estimated amounts of employer contributions expected to be paid to the defined benefit schemes during the 52 weeks ending 26 March 2022 is £138m based on current contributions schedules in force (27 March 2021: £132m). Risks associated with defined benefit plans: Generally the number of employees in defined benefit plans is reducing rapidly, as these plans are largely closed to new entrants, and in most cases to future accrual. Consequently, the number of defined contribution members is increasing. The First Bus Pension Scheme and the FirstGroup Pension Scheme both closed to future accrual on 5 April 2018. This change will serve to limit the risks associated with defined benefit pension provision by the Group. Despite remaining open to new entrants and future accrual, the risks posed by the RPS are limited, as under the contractual arrangements with DfT, the First Rail TOCs are not responsible for any residual deficit at the end of a franchise. As such, there is only short-term cash flow risk within this business. The key risks relating to the defined benefit pension arrangements and the steps taken by the Group to mitigate them are as follows: Risk Asset volatility Description Mitigation The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. Most of the defined benefit arrangements hold a significant proportion of return-seeking assets (equities, diversified growth funds and global absolute return funds) which, though expected to outperform corporate bonds in the long-term, create volatility and risk in the short term. Asset liability modelling has been undertaken to ensure that any risks taken are expected to be rewarded and, in relation to the Company’s largest pension exposures, further work is being undertaken to ensure that the investment strategy remains the most appropriate. Inflation risk A significant proportion of the UK benefit obligations are linked to inflation and higher inflation will lead to higher liabilities. Investment strategy reviews have led to increased inflation hedging, mainly through swaps or holding Index Linked Gilts in the UK schemes. Uncertainty over level of future contributions Contributions to defined benefit schemes can be unpredictable and volatile as a result of changes in the funding level revealed at each valuation. The Group engages with the Trustees and Administering Authorities to consider how contribution requirements can be made more stable. The level of volatility and the Group’s ability to control contribution levels varies between arrangements. Life expectancy Legislative risk The majority of the scheme’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. Linking retirement age to State Pension Age (as in The First Bus Pension Scheme and LGPS) has mitigated this risk to some extent. Future legislative changes are uncertain. In the past these have led to increases in obligations, through introducing pension increases, and vesting of deferred pensions, or reduced investment return through the ability to reclaim Advance Corporation Tax. The Group receives professional advice on the impact of legislative changes. 216 FirstGroup Annual Report and Accounts 2021Financial statements38 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Remuneration of key management personnel The remuneration of the Directors, which comprise the plc Board who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the Directors’ Remuneration Report on pages 108 to 131. Basic salaries1 Benefits in kind Fees Share-based payment 52 weeks ending 27 March 2021 £m 52 weeks ending 28 March 2020 £m 1.1 0.1 0.7 0.1 2.0 1.2 0.1 0.8 0.8 2.9 1 Basic salaries include cash emoluments in lieu of retirement benefits and car allowances. 39 Post balance sheet events ■ On 23 April announced sale of First Student and First Transit (see discontinued operations note 21) and completed the sale on 21 July ■ Cancelled the £300m bridge facility that matures in March 2022 ■ Repaid Sterling bond 2021 of £350m on 15 April 2021 ■ Repaid a further £527m of indebtedness and contributed £220m to UK Bus Pension Scheme in applying some of the sales proceeds from the sale of First Student and First Transit ■ Following the sale of First Student and First Transit, the letters of credit, surety bonds and parent company guarantees relating to First Student and First Transit have been cancelled or in the process of being released ■ Agreed a nil termination sum with the DfT relating to TPE franchise ■ Signed National Rail Contracts for SWR and TPE in May for initial two year term with the DfT having an option to extend the respective contracts for a further two years to May 2025 ■ Agreed with the DfT the extension of the Emergency Measures Agreement for GWR to December 2021 ■ Announced the closure of Greyhound Canada on 15 May 2021 217 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 40 Information about related undertakings In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries and equity accounted investments as at 31 March 2021 is disclosed below: Subsidiaries – wholly owned and incorporated in the United Kingdom A E & F R Brewer Limited, Heol Gwyrosydd, Penlan, Swansea, SA5 7BN Airport Buses Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Airport Coaches Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Butler Woodhouse Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Cawlett Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ CCB Holdings Limited (03128545),4 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF CentreWest Limited (02844270),4 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF CentreWest London Buses Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF CentreWest ESOP Trustee (UK) Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF Chester City Transport Limited, Bus Depot, Wallshaw Street, Oldham, OL1 3TR Crosville Limited, Bus Depot, Wallshaw Street, Oldham, OL1 3TR Don Valley Buses Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA East Coast Trains Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH East West Rail Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH Eastern Scottish Omnibuses Limited, Carmuirs House, 300 Stirling Road, Larbert, Stirlingshire, FK5 3NJ ECOC (Holdings) Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Evolutionary Rail Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH FB Canada Holdings Limited (SC356482),4 395 King Street, Aberdeen, AB24 5RP 218 FG Canada Investments Limited (SC356484),4 395 King Street, Aberdeen, AB24 5RP FG Properties Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FGI Canada Holdings Limited (SC356485),4 395 King Street, Aberdeen, AB24 5RP First Aberdeen Limited, 395 King Street, Aberdeen, AB24 5RP First Beeline Buses Limited, Bus Depot, Empress Road, Southampton, Hampshire, SO14 0JW First Bus Central Services Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Caledonian Sleeper Limited, 395 King Street, Aberdeen, AB24 5RP First Games Transport Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Glasgow Limited,1 100 Cathcart Road, Glasgow, G42 7BH First Glasgow (No.1) Limited, 100 Cathcart Road, Glasgow, G42 7BH First Glasgow (No.2) Limited, 100 Cathcart Road, Glasgow, G42 7BH First Great Western Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Great Western Trains Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Greater Western Limited, Milford House 1 Milford Street, Swindon, Wiltshire, SN1 1HL First Capital Connect Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Hampshire & Dorset Limited, Bus Depot, Empress Road, Southampton, Hampshire, SO14 0JW First Capital East Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR First Capital North Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First CentreWest Buses Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First City Line Ltd, 8th Floor The Point, 37 North Wharf Road, London, W2 1AF First Coaches Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ First Customer Contact Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Cymru Buses Limited, Heol Gwyrosydd, Penlan, Swansea, West Glamorgan, SA5 7BN First Dublin Metro Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Eastern Counties Buses Limited, Davey House, 7b Castle Meadow, Norwich, Norfolk, NR1 3DE First Essex Buses Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR First European Holdings Limited (05113697),1&4 8th Floor The Point, 37 North Wharf Road, London, W2 1AF First Information Services Limited (SC288178),1&4 395 King Street, Aberdeen, AB24 5RP First International (Holdings) Limited (08743641),1&4 8th Floor The Point, 37 North Wharf Road, London, W2 1AF First International No.1 Limited (08746564),4 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Manchester Limited, Wallshaw Street, Oldham, OL1 3TR First Merging Pension Schemes Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Metro Limited, 4th Floor Capital House, 25 Chapel Street, London, NW1 5DH First Midland Red Buses Limited, Abbey Lane, Leicester, England, LE4 0DA First North West Limited (02862042)4, Wallshaw Street, Oldham, OL1 3TR First Northern Ireland Limited, 21 Arthur Street, Belfast, BT1 4GA First Pioneer Bus Limited, Wallshaw Street, Oldham, OL1 3TR First Potteries Limited, Abbey Lane, Leicester, England, LE4 0DA First Provincial Buses Limited, Empress Road, Southampton, Hampshire, SO14 0JW FirstGroup Annual Report and Accounts 2021Financial statementsSubsidiaries – wholly owned and incorporated in the United Kingdom (continued) First Rail Holdings Limited,1 4th Floor Capital House, 25 Chapel Street, London, NW1 5DH First Rail Procurement Limited,1 4th Floor Capital House, 25 Chapel Street, London, United Kingdom, NW1 5DH First Rail Support Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Scotland East Limited, Carmuirs House, 300 Stirling Road, Larbert, Stirlingshire, FK5 3NJ First ScotRail Limited, 395 King Street, Aberdeen, AB24 5RP First ScotRail Railways Limited, 395 King Street, Aberdeen, AB24 5RP First Shared Services Limited, 395 King Street, Aberdeen, AB24 5RP First South West Limited, Union Street, Camborne, Cornwall, TR14 8HF First South Yorkshire Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA First Student UK Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Thameslink Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Trains Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First TransPennine Express Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Travel Solutions Limited, Unit 5 Petre Court, Petre Road Clayton Business Park, Clayton Le Moors, Accrington, BB5 5HY FirstBus Investments Limited (02205797),1&4 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstGroup American Investments (SC330038),4 395 King Street, Aberdeen, AB24 5RP FirstGroup Canadian Finance Limited (03486937),1&4 8th Floor The Point, 37 North Wharf Road, London, W2 1AF FirstGroup Construction Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstGroup Holdings Limited,1 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstGroup (QUEST) Trustees Limited,1 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstGroup US Finance Limited (SC330060),1&4 395 King Street, Aberdeen, AB24 5RP FirstGroup US Holdings (SC330054),4 395 King Street, Aberdeen, AB24 5RP Fleetrisk Management Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA G.E. Mair Hire Services Limited, 395 King Street, Aberdeen, AB24 5RP G.A.G. Limited,1 Enterprise House, Easton Road, Bristol, BS5 0DZ GB Railways Group Limited,1 4th Floor Capital House, 25 Chapel Street, London, NW1 5DH Great Western Trustees Limited, Milford House, 1 Milford Street, Swindon, SN1 1HL Grenville Motors Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First Wessex National Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ Greyhound Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF First West of England Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ GRT Bus Group Limited (SC114203),1&4 395 King Street, Aberdeen, AB24 5RP First West Yorkshire Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL First York Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL FirstBus (North) Limited,1 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstBus (South) Limited,1 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF FirstBus Group Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF Gurna Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Halesworth Transit Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Hampshire Books Limited, Empress Road, Southampton, Hampshire, SO14 0JW Hull Trains Company Limited, The Point, 8th Floor, 37 North Wharf Road, London, England, W2 1AF Indexbegin Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL KCB Limited, 100 Cathcart Road, Glasgow, G42 7BH Kelvin Central Buses Limited, 100 Cathcart Road, Glasgow, G42 7BH Kelvin Scottish Omnibuses Limited, 100 Cathcart Road, Glasgow, G42 7BH Kirkpatrick of Deeside Limited, 395 King Street, Aberdeen, AB24 5RP Lynton Bus and Coach Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Lynton Company Services Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Mainline Partnership Limited,1 Olive Grove, Sheffield, South Yorkshire, S2 3GA Midland Bluebird Limited, Carmuirs House, 300 Stirling Road Larbert, Stirlingshire, FK5 3NJ Midland Travellers Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL Mistral Data Limited, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH North Devon Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF Northampton Transport Limited, Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Quickstep Travel Ltd, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL Reiver Ventures Properties Limited, Carmuirs House, 300 Stirling Road, Larbert, Stirlingshire, FK5 3NJ Reiver Ventures Limited, Carmuirs House, 300 Stirling Road, Larbert, Stirlingshire, FK5 3NJ Reynard Buses Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL Rider Holdings Limited (02272577),4 Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL Rider Travel Limited, Hunslet Park Depot, Donisthorpe Street, Leeds, Yorkshire, LS10 1PL Scott’s Hospitality Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF Sheafline (S.U.T.) Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA 219 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 40 Information about related undertakings continued Subsidiaries – wholly owned and incorporated in the United Kingdom (continued) Subsidiaries – wholly owned and incorporated in the United States of America Americanos USA, LLC, 350 N. St. Paul Street, Dallas, Texas 75201 ATE Management of Duluth, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Berkshire Transit Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Central Mass Transit Management Inc, Inc. 287 Grove St, Worcester, Massachusetts 01606 Central Virginia Transit Management, Co, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Champion City Transit Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Durham City Transit Company, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First DG, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 FirstGroup Investment Corporation, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Management Services LLC, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Mile Square Transportation LLC, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Student Management Services LLC, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 FirstGroup America, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 FirstGroup International, Inc. 2221 E Lamar Blvd, Suite 500, Arlington, Texas 76007 FirstGroup Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 FirstGroup Services, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Franklin Transit Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Greyhound Lines, Inc. 350 N. St. Paul Street, Dallas, Texas 75201 H.N.S. Management Company, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw International Finance, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw Medical Holdings, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw Transportation Holdings, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw Transportation Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw Transportation, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Laidlaw Two, Inc.3 Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801 Laredo Transit Management, Inc. 2221 E Lamar Blvd, Suite 500, Arlington, Texas 76007 First Student, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 LSX Delivery, LLC, 350 N. St. Paul Street, Dallas, Texas 75201 First Student of Orleans LLC 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Transit, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Transit Management of Lowell, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Transit Rail Services of TX LLC, 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Vehicle Services, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 FirstGroup America Holdings, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Merrimack Valley Area Transportation, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 MidSouth Transportation Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 National Insurance and Indemnity Corporation, 30 Main Street, Suite 330, Burlington, Vermont 05401 Sheffield & District Traction Company Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA Sheffield United Transport Limited, Olive Grove, Sheffield, South Yorkshire, S2 3GA Skillplace Training Limited, Heol Gwyrosydd, Penlan, Swansea, West Glamorgan, SA5 7BN Smiths of Portland Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ SMT Omnibuses Limited, Carmuirs House, 300 Stirling Road, Larbert, Stirlingshire, FK5 3NJ Southampton CityBus Limited, Empress Road, Southampton, Hampshire, SO14 0JW Southampton City Transport Company Limited, Empress Road, Southampton, Hampshire, SO14 0JW Strathclyde Buses Limited, 100 Cathcart Road, Glasgow, G42 7BH Streamline Buses (Bath) Limited,1 Enterprise House, Easton Road, Bristol, BS5 0DZ Taylors Coaches Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ The FirstGroup Pension Scheme Trustee Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF The First UK Bus Pension Scheme Trustee Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF Totaljourney Limited,1 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH Tram Operations Limited, Tramlink Depot, Coomber Way, Croydon, CR0 4TQ Transportation Claims Limited, Abbey Warf, 57-75 King Road, Reading RG1 3AB Truronian Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF West Dorset Coaches Limited, Enterprise House, Easton Road, Bristol, BS5 0DZ Western National Holdings Limited, 8th Floor, The Point, 37 North Wharf Road, London, W2 1AF 220 FirstGroup Annual Report and Accounts 2021Financial statementsSubsidiaries – wholly owned and incorporated in the United States of America (continued) Transit Management of Denton, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Subsidiaries – wholly owned and incorporated in US Virgin Islands Transit Management of Dutchess County, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Mobile, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Montgomery, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Racine, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Richland, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Rocky Mount, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Sherman, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Spartanburg, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of St Joseph, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Volusia, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Wilmington, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Valley Area Transit Company, Inc. 350 N. St. Paul Street, Dallas, Texas 75201 Valley Garage Co, 350 N. St. Paul Street, Dallas, Texas 75201 Valley Transit Co, Inc. 350 N. St. Paul Street, Dallas, Texas 75201 Subsidiaries – not wholly owned but incorporated in the United States of America DG 21 LLC (51%), 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transportation Realty Income Partners LP (50%), 600 Vine Street Suite 1400, Cincinnati, Ohio 45202 Primaisla, Inc. 1 Estate Hope, St. Croix Subsidiaries – wholly owned and incorporated in Ireland Aeroporto Limited, 25-28 North Wall Quay, Dublin Last Passive Limited, 25–28 North Wall Quay, Dublin Subsidiaries – wholly owned and incorporated in Panama First Transit de Panama, Inc. Morgan & Morgan, Costa del Este, MMG Tower, 23rd Floor, Panama City Subsidiaries – wholly owned and incorporated in Canada Autobus Transco (1988) Ltd, Blake, Cassels & Graydon LLP, 1 Place Ville Marie, Suite 3000, Montreal, Quebec FC Investment Limited, Blake, Cassels & Graydon LLP, 3500, 855 – 2 Street SW, Calgary, Alberta, T2P 4J8 FirstCanada ULC, Blake, Cassels & Graydon LLP, 3500, 855 – 2 Street SW, Calgary, Alberta, T2P 4J8 FirstCanada Transportation BC Ltd, Blake, Cassels & Graydon LLP, 595 Burrard Street, P.O. Box 49314, Suite 2600, Three Bentall Centre, Vancouver, British Columbia V7X 1L3 First Transit Canada Inc, 1111 International Blvd, Suite 700, Burlington, Ontario L7L 6W1 GCT Holdings Ltd, Blake, Cassels & Graydon LLP, 3500, 855 – 2 Street SW, Calgary, Alberta, T2P 4J8 GCT Investment LP Limited Partnership, Blake, Cassels & Graydon LLP, 3500, 855 – 2 Street SW, Calgary, Alberta, T2P 4J8 Greyhound Canada Transportation ULC, Blake, Cassels & Graydon LLP, 595 Burrard Street, P.O. Box 49314, Suite 2600, Three Bentall Centre, Vancouver, British Columbia V7X 1L3 Manhattan Equipment Supply Company Limited, 1111 International Blvd, Suite 700, Burlington, Ontario L7L 6W1 On Time Delivery Service, Inc. 350 N. St. Paul Street, Dallas, Texas 75201 Paratransit Brokerage Services TM, Inc. 287 Grove Street, Worchester, Massachusetts 01606 Paratransit Management of Berkshire, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Paratransit Management of Brockton, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Saferide Safe Ride Services, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Safe Transport LLC. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 South Coast Transit Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Southwestern Virginia Transit Management, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Special Transportation Services, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Springfield Area Transit Company, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 SuTran. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Abilene, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Ada County, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Alexandria, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Asheville 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Beaumont, Inc. 1999 Bryan Street, Suite 900, Dallas, Texas 75201 Transit Management of Canyon County, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Central Maryland, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 Transit Management of Clinton County, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 221 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the consolidated financial statements continued 40 Information about related undertakings continued Subsidiary not wholly owned but incorporated in Canada Subsidiaries not wholly owned but incorporated in the United Kingdom Mikisew-FirstCanada GP Ltd (49%) 2400 43rd Street Vernon British Columbia Careroute Limited (80%), Empress Road, Southampton, Hampshire, SO14 0JW Mikisew-FirstCanada Limited Partnership (49%) 2400 43rd Street Vernon British Columbia First/Keolis Holdings Limited (55%)1, 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Kitamaat Limited Partnership (49%) 2400 43rd Street Vernon British Columbia GACCTO Limited (50%), 130 King Street West, #1600, Toronto, Ontario M5X 1J5 Subsidiaries – wholly owned and incorporated in Puerto Rico First Transit of Puerto Rico, Inc. 600 Vine Street, Suite 1400, Cincinnati, Ohio 45202 First Transit Rail of Puerto Rico, Inc. 361 San Francisco Street, San Juan Subsidiary – wholly owned and incorporated in Mexico Greyhound Lines Mexico, S de R.L. de C.V. 350 N. St. Paul Street, Dallas, Texas 75201 First/Keolis TransPennine Holdings Limited (55%), 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First/Keolis TransPennine Limited (55%), 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First MTR South Western Trains Limited (70%), 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Trenitalia East Midlands Rail Limited (70%), 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH First Trenitalia West Coast Rail Limited (70%), 4th Floor, Capital House, 25 Chapel Street, London, NW1 5DH Leicester CityBus Benefits Limited (94%), Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Leicester CityBus Limited (94%),2 Abbey Lane, Leicester, England, LE4 0DA LCB Engineering Limited (94%), Bus Depot, Westway, Chelmsford, Essex, CM1 3AR Nicecon Limited (50%), 395 King Street, Aberdeen, AB24 5RP Somerset Passenger Solutions Ltd (50%), J24 Hinkley Point C, Park and Ride, Huntworth Business Park, Bridgwater, TA6 6TS 1 Directly owned by FirstGroup plc. 2 All shares held in subsidiary undertakings are ordinary shares, with the exception of Leicester CityBus Limited where the Group owns 100% of its redeemable cumulative preference shares and 94% of its ordinary shares. 3 In liquidation. 4 For the year ending 27 March 2021 these subsidiaries are exempt from audit of individual accounts under S479A of the UK Companies Act 2006. 222 FirstGroup Annual Report and Accounts 2021Financial statementsIndependent auditors’ report to the members of FirstGroup plc Report on the audit of the financial statements Opinion In our opinion: ■ FirstGroup plc’s group financial statements and company financial statements (the “financial statements”) give a true and fair view of the state of the group’s and of the company’s affairs as at 27 March 2021 and of the group’s profit and the group’s cash flows for the 52 week period then ended; ■ the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; ■ the company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and ■ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: consolidated balance sheet and the company balance sheet as at 27 March 2021; consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and the consolidated cash flow statement for the period then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Our opinion is consistent with our reporting to the Audit Committee. Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union As explained in note two to the financial statements, the group, in addition to applying international accounting standards in conformity with the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In our opinion, the group financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided. Other than those disclosed in note 6, we have provided no non-audit services to the company or its controlled undertakings in the period under audit. Our audit approach Context COVID-19 and the impact of lockdowns has had a significant impact on the group’s performance with all divisions being impacted by reduced demand for services. Throughout the pandemic, the Group has received government and customer support to ensure continuity of services in each of the divisions. In the Rail Division, the agreement of the Emergency Measures Agreements (EMA), which were superseded by Emergency Recovery Measures Agreements (ERMA’s) in Autumn 2020 for Avanti West Coast (AWC), South Western Railway (SWR) and TransPennine Express (TPE), meant a fixed management fee was received to operate at agreed service levels, as well as a performance-based fee element. This has reduced the revenue and cost risk compared to the franchise arrangements. First Bus has continued to receive the rolling Covid-19 Bus Services Support Grant (CBSSG) to ensure continuity of service on certain crucial routes.Greyhound has benefited from subsidy funding made available under the terms of the US CARES Act and First Student and Transit have gained support from the U.S government, through the Employee Retention Credit scheme that was introduced as part of the CARES Act. Post year end the sale of the First Student and First Transit business was agreed. We revised our risk assessment for potential impairment of these businesses, noting a decreased risk given the agreed sale. These businesses are shown as discontinued operations in the financial statements. 223 Financial statementsFirstGroup Annual Report and Accounts 2021Independent auditors’ report to the members of FirstGroup plc continued Overview Audit scope ■ The scope of our audit determines where we go and what we do, the best types of audit evidence to obtain, the right areas of operations to focus on and the resources needed to deliver this. As group auditors we are required to obtain sufficient audit evidence from the components of the group. We have determined there are eight components for group reporting purposes: — Each Rail Train Operating Company (TOC) is a separate component, totalling four components being Great Western Railway (GWR), South Western Railway (SWR), TransPennine Express (TPE) and Avanti West Coast (AWC) — UK Bus — In the US we have four components three of which are trading businesses (US Student, US Transit and US Greyhound) and two entities which hold insurance reserves and various other related balances, are together considered as one separate component (FirstGroup America Inc and National Insurance and Indemnity Corporation). Key audit matters ■ Valuation of pension liabilities driven by salary increase, mortality and discount rate assumptions (group) ■ Valuation of complex investments within the pension assets (group) ■ Valuation of North American insurance reserves (group) ■ Valuation of assets held in Greyhound division (group) ■ Ability of the group and company to continue as a going concern (group and company) ■ Recoverability of the company’s investments in subsidiary undertakings (company) ■ Impact of COVID-19 (group and company) Materiality ■ Overall group materiality: £10,500,000 based on 0.25% of revenue from continuing operations and based on 0.15% of total revenues ■ Overall company materiality: £15,000,000 (based on 1% of net assets restricted for the purposes of the group audit) ■ Performance materiality: £7,875,000 (group) and £11,250,000 (company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. 224 FirstGroup Annual Report and Accounts 2021Financial statementsKey audit matter How our audit addressed the key audit matter Valuation of pension liabilities driven by salary increase, mortality and discount rate assumptions (Group) The group has gross defined benefit obligations in the UK and US totalling £8,581.0m at 27 March 2021 (2020: £7,333.8m) from continuing operations (excluding agent arrangements), and £97.6m from discontinued operations which is significant in the context of the overall balance sheet. The valuation of pension plan liabilities requires estimation in determining appropriate assumptions such as salary increases, mortality rates, discount rates and inflation levels. Movement in these assumptions can have a material impact on the determination of the liability. Management uses external actuaries to assist in determining these assumptions In addition, there are restrictions under IAS19 and IFRIC 14 as to when a net pension surplus should be recognised, as well as balance sheet adjustments in respect of First Rail due to the franchise contracts. Refer note 37 and the Critical accounting judgements and key sources of estimation uncertainty section in note 2. Refer to the Audit Committee report on page 99 for a description of its assessment of significant judgement We used our actuarial experts to assess whether the assumptions used in calculating the defined benefit liabilities for the US and UK were reasonable. We assessed whether salary increases and mortality rate assumptions were consistent with the specifics of each plan and, where applicable, with relevant national benchmarks. We also assessed whether the discount rate and inflation rates were consistent with our internally developed benchmarks and in line with other companies’ recent external reporting. We reviewed the trust deeds and statutory legislation relevant to each plan and concur with management’s view that the surplus in the Local Government Pension Schemes cannot be recognised in full on the balance sheet. We tested the IFRIC 14 adjustments in respect of these plans and found it to be reasonable, based on the specifics of each plan. We also assessed management judgement with regard to the rail franchise adjustment and found no exception. We evaluated the calculations prepared by the external actuaries to assess the consistency of the assumptions used. We tested the census data for each scheme by comparing the number of members to the latest triennial valuation performed for each scheme and investigated any differences. In addition we performed two-way testing of the listings of active members back to the scheme administrator records, or alternate procedures where appropriate. We have reviewed the controls report of the administrator and identified no exceptions relating to members data. Based on procedures performed we consider that the assumptions used to value the pension obligation are within an acceptable range. We assessed the appropriateness of the related disclosures in note 37 of the group financial statements and consider them to be materially appropriate. Valuation of complex investments within the pension assets (Group) As set out in note 37, the group has gross defined benefit plan assets in the UK and US totalling £6,467.9m at 27 March 2021 (2020: £5,790.0m) from continuing operations (excluding agent arrangements) and £72.9m from discontinued operations. The pension schemes in which the Group participates hold unquoted plan assets in private equity, infrastructure and property funds. Significant judgement is required in determining the valuation of the investments which are based on inputs that are not directly observable. The funds where the valuation requires significant judgement across the group total £720m. The funds are present in the UK and US businesses, with £94m present in the US businesses and £627m in the UK. The majority of the complex assets (£558m) sit in the First UK Bus Pension Scheme. There is a potential range of reasonable outcomes to the valuations of these assets greater than our materiality for the financial statements as a whole. We highlight that changes in the valuations of these assets do not impact the net pensions deficit disclosed by the Group owing to the fact that the First UK Bus scheme has a surplus which cannot be fully recognised in the financial statements of the Group under IFRS. We obtained pricing confirmations directly from investment managers as primary sources of evidence. We also performed additional procedures on investments that are more complex in nature to evaluate whether there is any contradictory evidence suggesting that the pricing confirmations do not reflect an appropriate valuation as at the balance sheet date. These procedures included one or more of the following: Obtained third party controls assurance reports and bridging letters on the investment managers’ operations for the current financial year; Reviewed the pricing of transactions taking place close to the balance sheet date; Performed look back testing of previous valuations provided by investment managers to audited financial statements of the underlying funds; Performed an independent web based search for information suggesting any doubts in the investment managers’ capability of pricing; or Reviewed investment contributions and distributions between the valuation date and the balance sheet date and obtaining affirmations from investment managers that the price taken is the latest price available to date where the valuation date is different to the balance sheet date. Based on the procedures performed we have no findings to report. 225 Financial statementsFirstGroup Annual Report and Accounts 2021Independent auditors’ report to the members of FirstGroup plc continued Key audit matter How our audit addressed the key audit matter Valuation of North American self-insurance reserves (Group) As set out in note 2, the Group has recorded a provision of £477.7m in respect of North American self insurance reserves including discontinued operations. These provisions reflect management’s best estimate of the likely settlement of claims for all known incidents which have occurred as part of the operations of the FirstGroup North American businesses. The calculation of the reserve is based on actuarial methods and assumptions used to estimate the unpaid claims. There are a number of significant factors in this calculation including claim type, range of possible outcomes, volume, severity and size of claims and the time taken to settle these claims. Management has highlighted North American self-insurance provisioning as a key source of estimation uncertainty in the notes to the consolidated financial statements. The provision has primarily increased due to adverse market developments and settlements across the claim portfolio, and deterioration of loss development factors Refer to the Critical accounting judgements and key sources of estimation uncertainty section in note 2 and note 27, for management’s disclosures of the relevant judgements and estimates involved in assessing this provision valuation. Refer to the Audit Committee report on page 99 for a description of its assessment of significant judgement. Valuation of assets held in Greyhound division (Group) We have assessed management’s processes and controls for developing the provision. We used our actuarial experts in the US to assess whether the assumptions used in management’s calculation of the provision fall within our independently calculated acceptable range. In addition, we have assessed the methodology and assumptions used by management as well as testing the mathematical accuracy of the model. We engaged actuarial specialists in the UK to review and assess the procedures performed by our US actuarial team. We corroborated key assumptions and tested key inputs to the actuarial calculations through agreement to supporting third party data and other information as appropriate. We are satisfied that the assumptions used in the valuation of the North American self-insurance reserve are within our independently assessed actuarial range and that the related disclosures are reasonable. Assets totalling £266.1m (2020: £261.4m) are held in the Greyhound division. As set out in note 2 (Impairment of tangible and intangible assets excluding goodwill) where management has identified an impairment indicator, an impairment assessment is performed. See also note 11. Management has identified the impact of Covid-19 as an indicator and has assessed the recoverable amount by reference to a fair value less costs to sell (“FVLCTS”) model. We obtained management’s impairment assessment and ensured the calculations were mathematically accurate. We evaluated and challenged the future cash flow forecasts of the CGU. We compared the forecast used for the impairment test to the latest Board-approved plans. We challenged the key assumptions for long term growth rate, discount rate and operating margin. Included with the FVLCTS model are a number of properties for which the market value is judged to be in excess of the book value the properties are held at, Judgement is required in assessing the value of these properties. We recalculated management’s own sensitivity analysis of key assumptions used and also performed our own independent sensitivity analysis by replacing key assumptions with alternative scenarios in order to ascertain the extent of change in those assumptions that either individually or collectively would be required for the assets to be impaired. We inspected property valuations to support the property disposal proceeds included within the Greyhound FVLCTS model; We have reviewed the proceeds received from property sales completed recently noting that they were in excess of included in the FVLCTS model for the prior year Based on the work performed, as summarised above, we have concluded that the carrying value of Greyhound assets is materially correct. 226 FirstGroup Annual Report and Accounts 2021Financial statementsKey audit matter How our audit addressed the key audit matter Ability of the group and company to continue as a going concern (Group and Company) COVID-19 and the impact of lockdowns has had a significant impact on the group’s performance with all divisions being impacted by reduced demand for services. Our procedures and conclusions in respect of going concern are set out below in the ‘Conclusions relating to going concern’ section on page 229. At the half year management disclosed material uncertainties, relating to covenant compliance and availability of additional funding to repay the COVID Corporate Financing Facility (‘CCFF’) in December 2021. Since the half year management has successfully raised £550m of new debt improving the liquidity position and now has greater certainty over the cashflows with the agreement of new rail contracts. There is on-going uncertainty regarding the medium to longer-term impact of the COVID19 on passenger travel patterns. Taking into consideration this uncertainty management has modelled a base and downside position assessing liquidity and covenant compliance for its going concern assessment. The Directors have concluded that there is sufficient liquidity available for at least the period of its going concern assessment to September 2022. As the going concern assessment is dependent on management’s future cash flow forecasts there is significant judgement involved in determining these and concluding that there is not a material uncertainty. Refer to the Critical accounting judgements and key sources of estimation uncertainty section in note 2 and the Going Concern Statement at pages 164. Refer to the Audit Committee report on page 99 for a description of its assessment of significant judgement. Recoverability of the company’s investments in subsidiary undertakings (Company) As set out in note 5 to the Company financial statements, investments in subsidiaries are £1,534.8m (2020: £1,530.9m). These are accounted for at cost less provision for impairment in the Company balance sheet at 27 March 2021. Investments are tested for impairment if impairment indicators exist. If such indicators exist, the recoverable amounts of the investments in subsidiaries are estimated in order to determine the extent of any impairment loss. Judgement is required in this area, particularly in assessing whether the carrying value of an asset can be supported by the recoverable value, being the higher of fair value less cost of disposal or the net present value of future cash flows which are estimated based on the continued use of the asset in the business. The investments principally relate to the First Bus business and the North American business (First Student, First Transit and Greyhound). The carrying value of the investment is supported by the recoverable amount which for the North American businesses is calculated using the fair value less cost to sell and for First Bus on a value in use basis. We evaluated management’s determination of whether any indicators of impairment existed by comparing the carrying value of investments in subsidiary undertakings to the market capitalisation of the group at 27 March 2021 and agreed that an impairment assessment is necessary. The recoverable value of the investment in the North American business is assessed by comparing the proceeds from the signed sale and purchase agreement for First Student and First Transit, plus the FVLTCS of Greyhound to the book value of the investment. We have agreed the sale proceeds to the signed sale agreement and tested the FVLCTS of Greyhound as described in the key audit matter above. We agree with management’s assessment that the investment value is recoverable. The recoverable value of the investment in First Bus was determined from the discounted future cash flows of the Bus division. We have tested the reasonableness of the key assumptions used, including revenue, profit and cash flow growth rates, terminal growth rates and the discount rate As a result of our work, we did not identify any material impairment We have assessed the disclosures provided and consider them to be appropriate. 227 Financial statementsFirstGroup Annual Report and Accounts 2021Independent auditors’ report to the members of FirstGroup plc continued Key audit matter How our audit addressed the key audit matter Impact of COVID-19 (Group and Company) The COVID-19 pandemic has had a significant impact on the Group’s business during the financial year with the performance of the business being significantly adversely affected. COVID-19 has had a pervasive impact across the Group and has required management to reconsider a number of accounting judgements and estimates. These included adjusting business plans and models which underpin the annual assessments of impairment and going concern; assessing the recognition criteria for government support. Separate key audit matters cover our conclusions on going concern and impairment of assets in Greyhound. Disclosure of the risk to the Group and Company of the impact of Covid-19, and management’s conclusions on going concern and viability, have been included within the relevant sections of the financial statements. In advance of the year end, and throughout the course of our audit procedures, we assessed the risks arising from Covid-19. We focused on areas where significant additional audit effort might be required, as well as those areas that we considered might be susceptible to a material financial impact on the performance and position of the Group and Company for the year ended 27 March 2021. Certain judgements are based on forecast financial information such as the impairment assessments across the divisions. Where forecast financial information is relevant to an accounting judgement we have considered how management has modelled the impact of COVID-19 in its forecasts for 2021 and 2022. In performing this assessment we have taken into account the impact that the first wave of the virus and the associated government restrictions had on the Group’s results and considered how further lockdowns and restrictions may affect the business in subsequent periods. We have considered whether financial support received from governments and customers due to the impact of the pandemic meets the revenue recognition criteria under IFRS 15. We have reviewed the disclosures included within the financial statement in respect to the impact of COVID-19 to ensure that the disclosures are consistent with published guidance and the presentation of additional costs incurred by the Group in responding to the pandemic is appropriate. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate. The Group is organised into five operating divisions, First Student, First Transit, Greyhound, First Bus and First Rail. There are 115 reporting units within the consolidation, the majority of which are inactive although there is limited trading activity in 6 reporting units in addition to those included in Group reporting scope as discussed below. We have defined a component as a business unit where legal entities have been grouped together based on the fact they have the same management, the same control environment and also considering the way the component reports to the group. We have determined there are nine components required for Group reporting as follows: ■ Each Rail Train Operating Company (TOC) is a separate component, with four components being Great Western Railway (GWR), South Western Railway (SWR), TransPennine Express (TPE) and Avanti West Coast (AWC) in scope for group reporting ■ UK Bus ■ In the US we have four components in scope for group reporting, three of which are trading businesses (US Student, US Transit and US Greyhound) and two entities which hold insurance reserves and various other related balances, are together considered as one separate component (FirstGroup America Inc and National Insurance and Indemnity Corporation). Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determined our audit scope for each of component within the group. Each component above required a complete audit of its financial information. The Rail TOC’s (excluding TPE), UK Bus, US Student and US Transit were considered financially significant to the group. National Insurance and Indemnity Corporation was considered a significant risk component. US Greyhound and the Rail TOC TPE were considered material components. The Group audit team tested certain balances centrally including IFRS 16 adjustments posted at Group level, tax balances, pensions obligations and pension assets, and share based payments. In addition the group team performed audit procedures on the material balances in the parent company including testing investments, borrowings, cash and derivatives. This approach ensures that appropriate audit coverage has been obtained over all financial statement line items. Where work was performed by component auditors, we determined the appropriate level of involvement we needed to have in that audit work to ensure we could conclude that sufficient appropriate audit evidence had been obtained for the Group financial statements as a whole. We issued written instructions to all component auditors and had regular communications with them throughout the audit cycle. Due to COVID-19 restrictions we have not been able to perform site visits at our component auditor locations. However we have obtained and reviewed their working papers virtually. We have also been actively involved in key meetings to plan, execute and conclude the audits of all components. 228 FirstGroup Annual Report and Accounts 2021Financial statementsMateriality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Financial statements – group Financial statements – company Overall materiality £10,500,000 £15,000,000 How we determined it Based on 0.25% of revenue from continuing operations and 0.15% of total revenues Based on 1% of net assets, restricted for the purposes of group reporting Rationale for benchmark applied Revenue is considered to be the most appropriate benchmark for the financial year as it has remained consistent with the prior year despite volatile profits/ losses. In the engagement leader’s judgement £10.5 million is an appropriate materiality for a group of the scale and size of FirstGroup plc. The entity is a holding company of the rest of the Group and is not a trading entity. Therefore an asset based measure is considered appropriate. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was £2,500,000 - £7,000,000. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to £7,875,000 for the group financial statements and £11,250,000 for the company financial statements. In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount in the upper end of our normal range was appropriate. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £525,000 (group audit) and £525,000 (company audit) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern Our evaluation of the directors’ assessment of the group’s and the company’s ability to continue to adopt the going concern basis of accounting included: ■ obtaining and agreeing management’s going concern assessment to the business’s board approved plan and ensuring that the base case scenario, indicates that the business generates sufficient cash flows to meets its long and short term obligations while complying with covenant arrangements; ■ considering the extent to which the group’s and company’s future cash flows might be adversely affected by COVID-19; reviewing management’s cash flow forecasts, assessing the existing sources of finance and considering the overall impact on liquidity ■ ensuring the mathematical accuracy of management’s models; ■ evaluating management’s severe but plausible scenario of disruptions continuing into the future and ensuring this is appropriately modelled through the cash flows; ■ considering the risk of breach of the covenant arrangements in place for external borrowings under the severe but plausible scenario; ■ observing that climate change is expected to have a limited impact during the period of the going concern assessment; ■ performing further sensitivity analysis on the severe but plausible scenario; ■ considering the adequacy of the disclosures in the financial statements Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s and the company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. 229 Financial statementsFirstGroup Annual Report and Accounts 2021Independent auditors’ report to the members of FirstGroup plc continued However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group’s and the company’s ability to continue as a going concern. In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Directors’ report and additional disclosures, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. Strategic report and Directors’ report and additional disclosures In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report and additional disclosures for the period ended 27 March 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ report and additional disclosures. Directors’ Remuneration In our opinion, the part of the Remuneration Committee Report to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance statement The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Governance Report is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: ■ The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks; ■ The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; ■ The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; ■ The directors’ explanation as to their assessment of the group’s and company’s prospects, the period this assessment covers and why the period is appropriate; and ■ The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the group and company and their environment obtained in the course of the audit. 230 FirstGroup Annual Report and Accounts 2021Financial statementsIn addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit: ■ The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group’s and company’s position, performance, business model and strategy; ■ The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and ■ The section of the Annual Report describing the work of the Audit Committee. We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to non-compliance with UK and overseas tax legislation, employment laws and regulations, health and safety legislation, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue and management bias within accounting estimates. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included: ■ Enquiries of management at the Group and divisional levels; ■ Enquiries of the Group, Rail and US legal teams; ■ Enquiries with component auditors; ■ Review of internal audit reports in so far as they related to the financial statements; ■ Identifying and testing journal entries, in particular certain journal entries posted with unusual account combinations which result in an impact to revenue; ■ Challenging estimates and judgements made by management in determining significant accounting estimates, in particular in relation to insurance reserves, valuation of pensions liabilities, valuation of complex investments within the pension assets, impairment of goodwill and going concern. There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors’ report. 231 Financial statementsFirstGroup Annual Report and Accounts 2021Independent auditors’ report to the members of FirstGroup plc continued Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: ■ we have not obtained all the information and explanations we require for our audit; or ■ adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or ■ certain disclosures of directors’ remuneration specified by law are not made; or ■ the company financial statements and the part of the Remuneration Committee Report to be audited are not in agreement with the accounting records and returns; or We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the Audit Committee, we were appointed by the directors on 5 November 2020 to audit the financial statements for the year ended 27 March 2021 and subsequent financial periods. This is therefore our first year of uninterrupted engagement. Matthew Mullins (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 27 July 2021 232 FirstGroup Annual Report and Accounts 2021Financial statementsGroup financial summary Unaudited Consolidated income statement (includes discontinued operations of First Student and First Transit) Group revenue Operating profit before amortisation charges and other adjustments Amortisation charges Other adjustments Operating profit/(loss) Net finance cost Investment income Ineffectiveness on financial derivatives Profit/(loss) before tax Tax Profit/(loss) for the year EBITDA Earnings per share Adjusted Basic Consolidated balance sheet Non-current assets Net current (liabilities)/assets Non-current liabilities Held for sale – discontinued operations Provisions Net assets Share data Number of shares in issue At year end Average (excluding treasury shares and shares in trusts) Share price At year end High Low Market capitalisation At year end Continuing operations Revenue Adjusted operating profit Operating profit/(loss) EBITDA 2019 £m 7,126.9 314.8 (11.8) (293.2) 9.8 (107.7) – – (97.9) (10.1) (108.0) 670.3 pence 13.3 (5.5) 2018 £m 6,398.4 317.0 (70.9) (442.3) (196.2) (130.7) – – (326.9) 36.0 (290.9) 690.6 pence 12.3 (24.6) 2017 £m 5,653.3 339.0 (60.2) 4.8 283.6 (132.0) 1.0 1.0 152.6 (36.5) 116.1 686.6 pence 12.4 9.3 2021 £m 6,845.0 209.4 (4.1) 80.5 285.8 (172.0) 2.0 – 115.8 (24.7) 91.1 2020 £m 7,754.6 256.8 (4.9) (404.6) (152.7) (146.9) – – (299.6) (25.0) (324.6) 1,169.5 1,108.9 pence 6.8 (27.0) pence 2.4 6.5 £m 2,641.2 (888.7) (2,817.7) 2,354.8 (135.5) 1,154.1 £m £m £m £m 6,225.1 (701.9) (3,927.5) – (419.0) 1,176.7 4,003.5 10.7 (1,958.9) – (532.0) 1,523.3 3,802.9 (300.3) (1,671.0) – (341.0) 1,490.6 4,524.9 (153.0) (2,011.8) – (284.2) 2,075.9 millions 1,207.7 1,204.8 millions 1,221.8 1,203.6 millions 1,219.5 1,210.9 millions 1,213.9 1,205.9 millions 1,210.8 1,205.1 pence pence pence pence pence 92 95 31 £m 1,124 2021 £m 4,641.8 101.9 224.3 799.8 50 138 28 £m 610 2020 £m 4,642.8 69.7 (215.2) 658.4 91 117 79 £m 1,105 2019 £m 4,205.2 107.9 (128.6) 246.6 82 153 77 £m 993 2018 £m 3,554.6 102.3 (318.9) 275.6 132 133 89 £m 1,594 2017 £m 2,831.0 94.6 93.3 246.0 233 Financial statementsFirstGroup Annual Report and Accounts 2021Company balance sheet As at 27 March 2021/28 March 2020 Non-current assets Trade and other receivables Derivative financial instruments Investments Current assets Cash and cash equivalents Derivative financial Instruments Total assets Current liabilities Trade and other payables Derivative financial instruments Net current liabilities Non-current liabilities Trade and other payables Derivative financial instruments Total liabilities Net assets Equity Share capital Share premium Other reserves Own shares Retained earnings Total equity Note 3 4 5 4 7 4 7 4 8 9 2021 £m 1,768.1 0.3 1,534.8 3,303.2 659.5 13.5 673.0 2020 (restated) £m 2,210.8 15.8 1,530.9 3,757.5 219.8 4.8 224.6 3,976.2 3,982.1 1,025.1 7.8 1,032.9 471.5 9.5 481.0 (359.9) (256.4) 1,289.4 0.6 1,290.0 2,322.9 1,653.3 61.1 689.6 149.7 (9.0) 761.9 1,780.0 1.0 1,781.0 2,262.0 1,720.1 61.0 688.6 258.6 (10.2) 722.1 1,653.3 1,720.1 The prior year cash and cash equivalents balance has been restated. The total impact is an increase of £82.4m at 28 March 2020. Overdrafts of £82.4m which in the prior year were offset against cash balances when the group had no ability for net physical settlement. This has been grossed up and the impact is to increase cash balances by £82.4m with a corresponding increase in borrowings of the same amount. At 31 March 2019, the impact of the correction is to increase borrowings by £81.9m and increase cash and cash equivalents by the same amount. The company reported a loss for the 52 weeks ending 27 March 2021 of £69.3m (2020: loss of £382.3m). Ryan Mangold 27 July 2021 Company number SC157176 234 FirstGroup Annual Report and Accounts 2021Financial statementsStatement of changes in equity As at 27 March 2021/28 March 2020 Balance at 31 March 2019 60.7 684.0 (4.7) – 166.4 Share capital £m Share premium £m Own shares £m Hedging reserve £m Merger reserve £m Capital reserve £m 93.8 Capital redemption reserve £m Retained earnings £m Total £m 1.9 1,098.3 2,100.4 Loss for the year Other comprehensive loss for the year Total comprehensive loss for the year Shares issued Movement in EBT and treasury shares Share-based payments – – – 0.3 – – – – – 4.6 – – – – – – (5.5) – Balance at 28 March 2020 61.0 688.6 (10.2) Balance at 29 March 2020 61.0 688.6 (10.2) Loss for the year Other comprehensive loss for the year Total comprehensive loss for the year Reserves reclassification Shares issued Movement in EBT and treasury shares Share-based payments Reclassification to retained earnings – – – – 0.1 – – – – – – – 1.0 – – – – – – – – 1.2 – – – (3.5) (3.5) – – – (3.5) (3.5) – (3.4) (3.4) (3.1) – – – – – – – – – – – – – – – – – – – – – – (382.3) – (382.3) – (4.2) 10.3 (382.3) (3.5) (385.8) 4.9 (9.7) 10.3 166.4 93.8 1.9 722.1 1,720.1 166.4 93.8 1.9 722.1 1,720.1 – – – – – – – (102.4) – – – – – – – – – – – – – – – – (69.3) (2.2) (71.5) 3.1 – (6.1) 11.9 102.4 (69.3) (5.6) (74.9) – 1.1 (4.9) 11.9 – Balance at 27 March 2021 61.1 689.6 (9.0) (10.0) 64.0 93.8 1.9 761.9 1,653.3 Merger reserves relating to disposal of investments for qualifying consideration and those relating to the extent related investments are impaired are considered realised and transferred to retained earnings. 235 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the Company financial statements 1 Significant accounting policies Basis of accounting The separate financial statements of the Company are presented as required by the Companies Act 2006. The financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments and on a going concern basis as described in the going concern statement within the Strategic report on pages 72 and 73. The Company meets the definition of a qualifying entity under Financial Reporting Standard (FRS 101) ‘Reduced Disclosure Framework’ issued by the Financial Reporting Council. Accordingly, these financial statements have been prepared in accordance with FRS 101. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share- based payment, financial instruments, capital management, presentation of a cash-flow statement, certain related party transactions and the requirement to present a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of its financial statements. The financial statements for the 52 weeks ending 27 March 2021 include the results and financial position of the Company for the 52 weeks ending 27 March 2021. The financial statements for the 52 weeks ending 28 March 2020 include the results and financial position of the Company for the 52 weeks ending 28 March 2020. Where relevant, equivalent disclosures have been given in the consolidated financial statements. The principal accounting policies adopted are the same as those set out in note 2 to the consolidated financial statements except as noted below. Investments Investments in subsidiaries and associates are shown at cost less provision for impairment. For investments in subsidiaries acquired for consideration in the form of shares, including the issue of shares qualifying for merger relief, cost is measured by reference to the fair value only of the shares issued. Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Dividends receivable from the Company’s subsidiaries are recognised only when they are approved by shareholders. Key sources of estimation uncertainty The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Investment in subsidiaries Estimation is required in relation to the recoverability of the investments and are sensitive to changes in cash flow forecasts supporting the recoverable amount. There is a significant risk that material adjustment to the carrying amounts of the investments and receivables could be required within the next financial year. The carrying value of investments at 27 March 2021 is £1,534.8m (2020: £1,530.9m). 2 Loss for the year As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account for the year. The Company reported a loss for the financial year ended 27 March 2021 of £69.3m (2020: loss of £382.3m). Fees payable to the Company’s auditors for the audit of the Company’s annual financial statements are disclosed in note 6 of the Group accounts. The Company had no employees in the current or preceding financial year. 3 Trade and other receivables Amounts due from subsidiary undertakings Loss allowance Net amounts due from subsidiary undertakings Deferred tax asset (note 6) 236 2021 £m 1,771.6 (3.5) 1,768.1 – 1,768.1 2020 £m 2,212.4 (3.6) 2,208.8 2.0 2,210.8 FirstGroup Annual Report and Accounts 2021Financial statements4 Derivative financial instruments Total derivatives Total assets – due after more than one year Total assets – due within one year Total assets Total creditors – amounts falling due within one year Total creditors – amounts falling due after more than one year Total creditors Derivatives designated and effective as hedging instruments carried at fair value Non-current assets Cross currency swaps (net investment hedge) Coupon swaps (fair value hedge) Total assets Current liabilities Currency forwards (net investment hedge) Total liabilities Derivatives classified as held for trading Non-current assets Currency forwards (cash flow hedge) Current assets Currency forwards (net investment hedge) Currency forwards (cash flow hedge) Total assets Current liabilities Fuel derivatives (cash flow hedge) Non-current liabilities Fuel derivatives (cash flow hedge) Total liabilities 2021 £m 0.3 13.5 13.8 7.8 0.6 8.4 0.3 – 0.3 7.5 7.5 7.5 – 13.5 – 13.5 13.5 0.3 0.3 0.6 0.6 0.9 2020 £m 15.8 4.8 20.6 9.5 1.0 10.5 – 13.3 13.3 4.4 4.4 4.4 2.5 – 4.8 4.8 7.3 5.1 5.1 1.0 1.0 6.1 Full details of the Group’s financial risk management objectives and procedures can be found in note 25 of the Group accounts. As the holding company for the Group, the Company faces similar risks over foreign currency and interest rate movements. 237 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the Company financial statements continued 5 Investments in subsidiary undertakings Cost At 29 March 2020 Additions At 27 March 2021 Provision for impairment At 29 March 2020 Impairment At 27 March 2021 Carrying amount At 27 March 2021 At 28 March 2020 Unlisted subsidiary undertakings £m 2,186.9 11.9 2,198.8 656.0 8.0 664.0 1,534.8 1,530.9 The carrying value of the investment in subsidiary undertakings is reviewed for impairment on an annual basis. The recoverable amount is the higher of fair value less cost of disposal or the net present value of future cash flows which are estimated based on the continued use of the asset in the business; The investments of £1,535m principally relate to the First Bus and the North American business (First Student, First Transit and Greyhound). The carrying value of the investment is supported by the recoverable amount which for the North American businesses is calculated using the fair value less cost to sell and for First Bus on a value in use basis. The First Bus value in use requires the determination of appropriate assumptions (which are sources of estimation uncertainty) in relation to the cash flow forecasts, the long-term growth rate to be applied and the discount rate used to discount the estimated cash flows to present value. The FVLCTS calculation for First Student, First Transit and Greyhound require judgement in assessing the earn out value associated with First Transit in the sale of the businesses and judgement in assessing the valuation of surplus properties in Greyhound. The Directors have determined that no impairment charge is required. In the North American investments break even would arise if there was either a reduction of the earn out to £44.0m or a 20% reduction of Greyhound property proceeds and reduction of terminal margin to 3%. Similarly the First Bus investments would break even with a discount rate of 10% and reduction of terminal margin to 1.2% The additions in the year relate to IFRS 2 share based charges. A full list of subsidiaries and investments can be found in note 40 to the Group accounts. 6 Deferred tax The major deferred tax asset recognised by the Company and the movements thereon during the current and prior reporting periods are as follows: At 29 March 2020 Debit to income statement Charged to reserves Credit to hedging reserve At 27 March 2021 The following is the analysis of the deferred tax balances for financial reporting purposes: Deferred tax liability/(asset) due after more than one year 238 Other temporary differences £m (2.0) 2.3 2.4 (1.6) 1.1 2020 £m (2.0) 2021 £m 1.1 FirstGroup Annual Report and Accounts 2021Financial statements7 Creditors Amounts falling due within one year Bank overdraft CCFF £350.0m Sterling bond – 8.750% 2021 £325.0m Sterling bond − 5.250% 2022 £200.0m Sterling bond – 6.875% 2024 Amounts due to subsidiary undertakings Accruals and deferred income Amounts falling due after more than one year Syndicated loan facilities £350.0m Sterling bond – 8.750% 2021 £325.0m Sterling bond − 5.250% 2022 £200.0m Sterling bond – 6.875% 2024 Senior unsecured loan notes Amounts due to subsidiary undertakings Deferred tax liability (note 6) 2021 £m 53.8 298.2 380.1 5.6 7.1 278.8 1.5 1,025.1 566.3 – 323.4 199.8 198.8 – 1.1 2020 (restated) £m 82.4 – 30.4 5.8 7.2 342.9 2.8 471.5 574.0 355.1 322.6 199.8 219.7 108.8 – 1,289.4 1,780.0 Bank overdraft has been restated and increased by £82.4m at 28 March 2020 as an overdraft had been offset against the cash balance in the prior period. Borrowing facilities The maturity profile of the Company’s undrawn committed borrowing facilities is as follows: Facilities maturing: Due in more than two years Details of the Company’s borrowing facilities are given in note 22 to the Group accounts. 8 Called up share capital Allotted, called up and fully paid 1,221.8m (2020: 1,219.5m) ordinary shares of 5p each 2021 £m 2020 £m 350.1 348.6 2021 £m 61.1 2020 £m 61.0 The number of ordinary shares of 5p in issue, excluding treasury shares held in trust for employees, at the end of the period was 1,206.4m (2020: 1,210.8m). At the end of the period 15.4m shares (2020: 8.7m shares) were being held as treasury shares and own shares held in trust for employees. 9 Own shares At 29 March 2020 Movement in EBT, QUEST and treasury shares during the year At 27 March 2021 Own shares £m (10.2) 1.2 (9.0) The number of own shares held by the Group at the end of the year was 15,432,525 (2020: 8,650,254) FirstGroup plc ordinary shares of 5p each. Of these, 15,242,776 (2020: 8,460,505) were held by the FirstGroup plc Employee Benefit Trust, 32,520 (2020: 32,520) by the FirstGroup plc Qualifying Employee Share Ownership Trust and 157,229 (2020: 157,229) were held as treasury shares. Both trusts and treasury shares have waived the rights to dividend income from the FirstGroup plc ordinary shares. The market value of the shares at 27 March 2021 was £14.2m (2020: £4.4m). 239 Financial statementsFirstGroup Annual Report and Accounts 2021Notes to the Company financial statements continued 10 Contingent liabilities To support subsidiary undertakings in their normal course of business, the FirstGroup plc and certain subsidiaries have indemnified certain banks and insurance companies who have issued performance bonds for £743.0m (2020: £990.0m) and letters of credit for £422.8m (2020: £393.8m). The performance bonds relate to the North American and First Bus businesses of £517.3m (2020: £686.5m) and the First Rail franchise operations of £225.7m (2020: £303.5m). The letters of credit relate substantially to insurance arrangements in the UK and North America. The parent company has committed further support facilities of up to £120.2m to First Rail Train Operating Companies of which £49.7m remains undrawn. Following the sale of First Student and First Transit, the letters of credit, surety bonds and parent company guarantees relating to First Student and First Transit have been cancelled or in the process of being released. The Group is party to certain unsecured guarantees granted to banks for overdraft and cash management facilities provided to itself and subsidiary undertakings. The Company has given certain unsecured guarantees for the liabilities of its subsidiary undertakings arising under certain loan notes, HP contracts, finance leases, operating leases and certain pension scheme arrangements. It also provides unsecured cross guarantees to certain subsidiary undertakings as required by VAT legislation. First Bus subsidiaries have provided unsecured guarantees on a joint and several basis to the Trustees of the First Bus Pension Scheme. The Company’s North American subsidiaries participate in a number of multi-employer pension schemes in which their contributions are pooled with the contributions of other contributing employers. The funding of these schemes is therefore reliant on the ongoing participation by third parties. In its normal course of business First Rail has ongoing contractual negotiations with Government and other organisations. The Group is party to legal proceedings and claims which arise in the normal course of business, including but not limited to employment and safety claims. The Group takes legal advice as to the likelihood of success of claims and counterclaims. No provision is made where due to inherent uncertainties, no accurate quantification of any cost, or timing of such cost, which may arise from any of the legal proceedings can be determined. The Group’s operations are required to comply with a wide range of regulations, including environmental and emissions regulations. Failure to comply with a particular regulation could result in a fine or penalty being imposed on that business, as well as potential ancillary claims rooted in non-compliance. The inquest relating to the death of seven passengers in the Croydon tram incident in November 2016 completed on 22 July 2021. The Office of Rail & Road (ORR) investigations into the incident are ongoing and it is uncertain when they will be concluded. The tram was operated by Tram Operations Limited (‘TOL’), a subsidiary of the Group, under a contract with a TfL subsidiary. TOL provides the drivers and management to operate the tram services, whereas the infrastructure and trams are owned and maintained by a TfL subsidiary. Management continue to monitor developments. To date, no formal ORR proceedings have been commenced and, as such, it is not possible to assess whether any financial penalties or related costs could be incurred. First MTR South Western Trains Limited (FSWT), a subsidiary of the Company and the operator of the SWR rail franchise, is currently facing proposed collective proceedings before the UK Competition Appeal Tribunal (the CAT) in respect of alleged breaches of UK competition law. Stagecoach South Western Trains Limited (SSWT) (the former operator of the SWR rail franchise) is also a proposed defendant to these proceedings. A separate set of proceedings has been issued against London & South Eastern Railway Limited (LSER) in respect of another rail franchise. The two sets of proceedings are being heard together. The first substantive hearing, at which the CAT was asked to determine whether or not to certify the proposed collective proceedings, took place between 9 and 12 March 2021, and judgement is currently awaited. The proposed class representative alleges that FSWT, SSWT and LSER breached their obligations under UK competition law by not making boundary fares sufficiently available for sale, and/or by failing to ensure that customers were aware of the existence of boundary fares and/or bought an appropriate fare in order to avoid being charged twice for part of a journey. At present the Company cannot accurately determine the likelihood, quantum or timing of any damages and costs which may arise from these proceedings 240 FirstGroup Annual Report and Accounts 2021Financial statementsShareholder information Annual General Meeting The AGM will be held on 13 September 2021 at The Brewery, 52 Chiswell Street, London, EC1Y 4SD. The Notice of AGM is available on the Company’s website and will have been posted to you if you have chosen to receive hard copy communications from the Company. Either a Form of Proxy or online Voting Card has been posted to all shareholders registered on the Company’s register of members. We are intending to hold the AGM as a physical meeting, however, we will be monitoring restrictions over public gatherings and the UK Government’s safety guidance in light of the pandemic. Any changes to the arrangements will be communicated to shareholders before the meeting through our website and, where appropriate, by RIS announcement. We will also be making arrangements for shareholders to follow the meeting remotely via an audiocast. Shareholders are encouraged to submit proxies for the 2021 AGM electronically by logging on to www.sharevote.co.uk. Electronic proxy appointments must be received by the Company’s Registrar, Equiniti, no later than 48 hours, excluding non-business days, before the time fixed for the AGM. Shareholders who wish to ask questions relating to the business of the AGM are encouraged to do so by submitting questions in advance of the AGM by email to companysecretariat@firstgroup.com, or by post for the attention of the General Counsel & Company Secretary (see addresses on the next page). We will consider all questions received and, to the extent practicable, answers will also be published on the Company’s website. For all other queries regarding the AGM, please contact the General Counsel & Company Secretary. Website and shareholder communications A wide range of information on FirstGroup is available at the Company’s website including: ■ financial information – annual and half-yearly reports as well as trading updates ■ share price information – current trading details and historical charts ■ shareholder information – AGM results, details of the Company’s advisers and frequently asked questions ■ news releases – current and historical. FirstGroup uses its website as its primary means of communication with its shareholders provided that the shareholder has agreed or is deemed to have agreed that communications may be sent or supplied in that manner. Electronic communications allow shareholders to access information instantly as well as helping FirstGroup to reduce its costs and its impact on the environment. Shareholders that have consented or are deemed to have consented to electronic communications can revoke their consent at any time by contacting Equiniti. Equiniti also offers a postal dealing facility for buying and selling FirstGroup plc ordinary shares; please write to them at the address shown above or telephone 0371 384 2248. They also offer a telephone and internet dealing service which provides a simple and convenient way of dealing in FirstGroup shares. For telephone dealing call 0345 603 7037 between 8.30am and 4.30pm, Monday to Friday, and for internet dealing log on to www.shareview.co.uk/dealing. Shareholders can sign up for electronic communications online by registering with Shareview, the internet-based platform provided by Equiniti. In addition to enabling shareholders to register to receive communications by email, Shareview provides a facility for shareholders to manage their shareholding online by allowing them to: ■ receive trading updates by email ■ view their shareholdings ■ update their records, including change of address ■ view payment and tax information ■ vote in advance of Company general meetings. To find out more information about the services offered by Shareview, please visit www.shareview.co.uk. Shareholder enquiries The Company’s share register is maintained by Equiniti. Shareholders with queries relating to their shareholding should contact Equiniti directly using one of the methods listed below: Registrar Equiniti Limited Aspect House Spencer Road Lancing, West Sussex BN99 6DA Tel: 0371 384 2046* (or from overseas on Tel: +44 (0)121 415 7050) Online: help.shareview.co.uk (from here, you will be able to email Equiniti securely with your enquiry). * Telephone lines are open from 8.30am to 5.30pm, Monday to Friday. If you receive more than one copy of the Company’s mailings this may indicate that more than one account is held in your name on the register. This happens when the registration details of separate transactions differ slightly. If you believe more than one account exists in your name, please contact Equiniti to request that the accounts are combined. There is no charge for this service. ShareGift If shareholders have a small number of shares and the dealing costs or the minimum fee make it uneconomical to sell them, it is possible to donate these to ShareGift, a registered charity, which provides a free service to enable you to dispose charitably of such shares. More information on this service can be found at www.sharegift.org or by calling +44 (0)20 7930 3737. A ShareGift transfer form can also be obtained from Equiniti. FirstGroup’s policy on discounts for shareholders It is not the Group’s policy to offer travel or other discounts to shareholders. FirstGroup is focused on overall returns which are of benefit to all shareholders. Unsolicited advice on the Company’s shares Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount, or offers of free reports about the Company. These are typically from overseas-based ‘brokers’ who target US or UK shareholders, offering to sell them what often turn out to be worthless or high risk shares. These operations are commonly known as ‘boiler rooms’ and the ‘brokers’ can be very persistent and extremely persuasive. Shareholders are advised to deal only with financial services firms that are authorised by the FCA. You can check a firm is properly authorised by the FCA before getting involved by visiting www.fca.org.uk/register. If you do deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme if anything goes wrong. For more detailed information on how you can protect yourself from an investment scam, or to report a scam, go to www.fca.org.uk/consumers/scams/report- scam or call 0800 111 6768. Half-yearly results The half-yearly results, normally announced to the market in November, will continue to be available on the Company’s website in the form of a press release and not issued to shareholders in hard copy. 241 Financial statementsFirstGroup Annual Report and Accounts 2021Number of accounts % of total accounts Number of ordinary shares % of ordinary share capital 28,794 776 29,570 21,507 5,732 1,290 773 268 29,570 97.38 2.62 100 72.73 19.38 4.36 2.61 0.91 45,505,373 1,176,312,711 1,221,818,084 5,088,066 13,732,490 9,040,886 17,893,272 1,176,063,370 3.72 96.28 100 0.42 1.12 0.74 1.46 96.26 100.00 1,221,818,084 100.00 Shareholder information continued Analysis of shareholders at 27 March 2021 By category of shareholders Individual Institutional Total By size of holding 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 Over 100,000 Total Contact information General Counsel & Company Secretary David Isenegger Tel: +44 (0)20 7291 0505 Registered office FirstGroup plc 395 King Street Aberdeen AB24 5RP Tel: +44 (0)1224 650 100 Corporate office FirstGroup plc 8th Floor The Point 37 North Wharf Road London W2 1AF Tel: +44 (0)20 7291 0505 Joint corporate brokers Goldman Sachs Plumtree Court 25 Shoe Lane London EC4A 4AU J.P. Morgan Cazenove Limited 25 Bank Street Canary Wharf London E14 5JP External auditor PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH 242 FirstGroup Annual Report and Accounts 2021Financial statementsGlossary Set out below is a guide to commonly used financial, industry and Group related terms in the Annual Report and Accounts. These are not precise definitions and are included to provide readers with a guide to the general meaning of the terms. Adjusted cash flow Net cash inflow is described in the table shown on page 31 of the Financial review CEBR Centre for Economics and Business Research, an economics consultancy Adjusted net debt Net debt excluding First Rail ring-fenced cash and IFRS 16 lease liabilities from net debt CEWS Canada Emergency Wage Subsidy, a coronavirus temporary relief measure Adjusted measures (other) References to ‘adjusted operating profit’, ‘adjusted profit before tax’, and ‘adjusted EPS’ throughout this document are before rail termination sums net of impairment reversal, gain on disposal of properties, impairment of land and buildings, strategy costs and certain other items as set out in note 4 to the financial statements AGM Annual General Meeting APTA American Public Transportation Association ASE National Institute for Automotive Service Excellence, a US non-profit organisation promoting excellence in vehicle repair Avanti Avanti West Coast train operating company BAYE Buy As You Earn The Board The Board of Directors of the Company CARES Act Coronavirus Aid, Relief, and Economic Security Act; the US economic relief package signed into law on 27 March 2020 CBSSG COVID-19 Bus Service Support Grant, a UK Government measure to secure continuity of service on crucial bus routes which may otherwise have ceased during the pandemic CCFF Covid Corporate Financing Facility, a UK Government commercial paper lending facility CDP An international non-profit organisation that helps companies and cities disclose their environmental impact CGU Cash Generating Unit CJRS Coronavirus Job Retention Scheme, under which grant income may be claimed in respect of certain costs to the Group of furloughed employees CO2(e) Carbon dioxide equivalent, allowing other greenhouse gas emissions to be expressed in terms of carbon dioxide based on their relative global warming potential. Usually expressed as per kilometre or per passenger kilometre Company FirstGroup plc, a company registered in Scotland with number SC157176 whose registered office is at 395 King Street, Aberdeen AB24 5RP COP26 2021 United Nations Climate Change Conference to be held in Glasgow in October/ November 2021 Coronavirus / Covid-19 Covid-19 is an infectious disease caused by a newly discovered coronavirus CPI Consumer price index, an inflation measure that excludes certain housing-related costs CPT Confederation of Passenger Transport UK, the voice of the bus and coach industry bringing together more than 1,000 operators Defra Department for Environment, Food and Rural Affairs (UK Government) DfT Department for Transport (UK Government) Dividend Amount payable per ordinary share on an interim and final basis EABP Executive Annual Bonus Plan EBITDA Earnings before interest, tax, depreciation and amortisation, calculated as adjusted operating profit less capital grant amortisation plus depreciation EBT Employee benefit trust EDF Employee Directors’ forum EMA/ERMA Emergency Measures Agreements and Emergency Recovery Measures Agreements were introduced by the DfT to ensure that rail services could continue to operate during the pandemic EPS Earnings per share ESG Environmental, Social and Governance EV Electric vehicle GED Group Employee Director GHG Greenhouse gas emissions GPS Global positioning system Group FirstGroup plc and its subsidiaries GVA Gross Value Added represents the value added to the economy and is often used as a proxy for estimating the contribution of a firm or industry to GDP GWR Great Western Railway train operating company IAS International Accounting Standards IFRS International Financial Reporting Standards 243 Financial statementsFirstGroup Annual Report and Accounts 2021Glossary continued KPIs Key performance indicators, financial and non financial metrics used to define and measure progress towards our strategic objectives LBG London Benchmarking Group, an organisation that has created a framework for measuring community impact NOx A generic term for the nitrogen oxides that are most relevant for air pollution NSTA National School Transportation Association Ordinary shares FirstGroup plc ordinary shares of 5p each SAV Shared Automated Vehicles are low-speed driverless vehicles that are shared between multiple users SAYE Save As You Earn SECR Streamlined Energy and Carbon Reporting regulations, which took effect on 1 April 2019 PLC Public limited company PMs Particulate matter, which is emitted during the combustion of fuel; a source of air pollution SWR South Western Railway train operating company PPE Personal Protective Equipment PPM The UK rail industry’s Public Performance Measure (punctuality and reliability). Trains are punctual if they arrive at their destination, having made all timetabled stops, within five minutes of scheduled time for London and South East and regional/commuter services and ten minutes for long distance trains RCF Revolving credit facility TCFD Task Force on Climate-Related Financial Disclosures TfL Transport for London, the transport authority responsible for most aspects of London’s transport system TOC Train operating company TPE TransPennine Express train operating company RDG Rail Delivery Group, the UK rail industry membership body that brings together passenger and freight rail companies, Network Rail and High Speed 2. TSR Total shareholder return, the growth in value of a shareholding over a specified period assuming that dividends are reinvested to purchase additional shares USPP The US Private Placement market is a US private bond market which is available to both US and non-US companies Road divisions Combines First Student, First Transit, Greyhound, First Bus and Group items ROCE Return on capital employed is a measure of capital efficiency and is calculated by dividing adjusted operating profit after tax by all year end assets and liabilities excluding debt items RSSB Rail Safety and Standards Board LGPS Local Government Pension Scheme Like-for-like revenue Revenue adjusted for changes in the composition of a divisional portfolio, holiday timing, severe weather and other factors, for example engineering possessions in First Rail, that distort the period-on-period trends in our passenger revenue businesses Local authority Local government organisations in the UK, including unitary, metropolitan, district and county councils LTIP Long-Term Incentive Plan MaaS Mobility as a Service integrates various forms of transport services into a single mobility service accessible on demand NBS National Bus Strategy, announced by UK Government in March 2021 NRC National Rail Contract NSC National Safety Council Net debt The value of Group external borrowings excluding the fair value adjustment for coupon swaps designated against certain bonds, excluding accrued interest, less cash balances Network Rail Owner and operator of Britain’s rail infrastructure 244 FirstGroup Annual Report and Accounts 2021Financial statementsDesigned and produced by MerchantCantos www.merchantcantos.com Printed by Park Communications on FSC® certified paper. Park works to the EMAS standard and its Environmental Management System is certified to ISO 14001. This publication has been manufactured using 100% offshore wind electricity sourced from UK wind. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled and the remaining 1% used to generate energy. This document is printed on Revive 100 Uncoated paper containing 100% recycled fibre. The FSC® label on this product ensures responsible use of the world’s forest resources. Registered office FirstGroup plc 395 King Street Aberdeen AB24 5RP Tel. +44 (0)1224 650100 Registered in Scotland number SC157176 www.firstgroupplc.com Corporate office FirstGroup plc 8th floor, The Point 37 North Wharf Road Paddington London W2 1AF Tel. +44 (0)20 7291 0505 F i r s t G r o u p p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 1 

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