LONDON, UK: FirstGroup plc has agreed a strategic partnership with Hitachi as part of the Group’s bus fleet and infrastructure decarbonisation programme. The partnership will provide the following:
- a newly formed 50:50 joint venture, NextGen AssetCo Limited, to purchase up to 1,000 electric bus batteries valued at c.£100m, as part of First Bus’s expanding electric bus fleet;
- an anticipated contribution to the Group’s adjusted earnings of c.£3m per annum by FY 2026 before any potential operational benefits;
- a c.£20m saving in the Group’s FY 2024 capital expenditure, combined with future savings of c.£40m to FY 2027; the Group now anticipates an FY 2024 year end adjusted net cash position of £40-50m.
Graham Sutherland, FirstGroup Chief Executive Officer said: “The pioneering alliance with Hitachi is a major strategic partnership for the Group as we progress towards our ambitious 2035 decarbonisation target for our bus fleet.
It will allow us to continue the electrification of our fleet and depots with increased efficiency and greater visibility of our financial commitment, and unlike other possible arrangements, we will retain much of the residual value in the batteries as they are taken off our buses. Looking ahead,
we are also excited about the possibilities for future value creation as Hitachi ZeroCarbon delivers market leading decarbonisation solutions to transport operators worldwide, leveraging our joint experience.”
The key terms of the strategic partnership with Hitachi ZeroCarbon Limited (`Hitachi ZeroCarbon’) include:
- an option for the Group to participate, via a small minority interest, in future value creation through the deployment of Hitachi ZeroCarbon’s decarbonisation solutions to commercial fleet operators worldwide;
- the batteries will be leased from NextGen to First Bus over an initial eight-year period, at an underlying debt finance rate in line with the Group’s borrowing rate, with the potential to extend the lease by a further two years at zero cost depending on battery capacity;
- the Group will retain 75% of the residual value of the batteries at the end of its bus useful life, with material second life value opportunities given that the majority of the battery’s capacity remains;
- the provision of Battery and Charging Management Services (`BCMS’) by Hitachi ZeroCarbon for 1,000 buses powered by the new batteries as well as a further commitment of 500 vehicles beyond FY 2026 as part of First Bus fleet decarbonisation;
- the BCMS services will ensure efficient energy utilisation, maximise battery health and residual value and potentially extend battery bus useful life for a further two years beyond the OEM warranty period.
Alistair Dormer, Executive Vice President and Executive Officer, General Manager of Green Energy & Mobility Strategy Planning Division, Hitachi Ltd. said: “Hitachi is committed to becoming a climate change innovator.
We continuously strive for growth through collaboration and co-creation with our partners and customers, and this specific partnership enables us to use our innovative technologies and global expertise to help decarbonise fleets efficiently, discover untapped revenue streams and maximise the residual value of assets.
I’m delighted we’ve successfully grown our existing relationship with FirstGroup, which will further add to our decarbonisation experience and combined learnings, in developing solutions for transport operators globally.”
Increasing modal shift from cars to public transport powered by sustainable energy is a key component of the Group’s decarbonisation journey. It is estimated that taking 1,500 diesel buses off the road and replacing these with electric buses could save c.84,000 tCO2e a year.
The newly formed 50:50 joint venture, NextGen, will purchase up to 1,000 electric bus batteries valued at c.£100m which will be installed on First Bus’s expanding electric bus fleet. Both the Group and Hitachi have each committed a cash investment of £10m into NextGen, with the remaining investment to be funded by debt.
It is anticipated that the first c.400 of the 1,000 batteries to be purchased by NextGen will be deployed to First Bus in FY 2024, with the remaining c.600 batteries to be deployed over the following 24 months.
The batteries will be leased from NextGen to First Bus (via another wholly-owned Group subsidiary, FirstGroup Energy Limited) over an initial eight-year period on an operating lease basis, at an underlying debt finance rate in line with the Group’s borrowing rate, with the potential to extend by a further two years beyond the OEM warranty period at zero lease cost depending on battery capacity.
The Group anticipates a c.£20m capital expenditure saving in FY 2024, with further savings totalling c.£40m over the subsequent months, as the batteries are acquired as part of the electrification of the First Bus fleet, partially offset by the lease costs referenced above.
The Group now anticipates an FY 2024 year end adjusted net cash position of £40-50m.
Once these batteries have been removed from the bus fleet, the Group will retain 75% of any residual value of the batteries providing significant upside exposure from material second life value opportunities, given that the majority of the battery’s capacity remains at the end of its bus useful life.
Opportunities include the redeployment of batteries for energy storage or alternative commercial use, and ultimately recycling to extract valuable metals for sale on secondary markets.
Under the BCMS agreement, Hitachi ZeroCarbon will provide a range of services including charger management services and battery health monitoring and reporting.
This will allow the Group to optimise battery efficiency and cost, potentially resulting in materially lower future capital deployment by extending the batteries’ useful bus life beyond their initial eight-year OEM warranty periods, at zero lease cost.
This may also enhance the batteries’ residual value due to the batteries being in better health. The Group also anticipates a reduction in electricity consumption through smart charging and dynamic energy management specific to the operating requirements of each individual bus.
The Group will also have an option to participate in future value creation via a small minority interest in Hitachi ZeroCarbon, through the development and provision of Hitachi ZeroCarbon’s market leading decarbonisation solutions to transport operators worldwide, aided by its learnings from working with First Bus.
These solutions include Charging Management Services, Battery Management Services and Telematics Services for operators of buses, commercial vehicles, HGVs and trains.
The Group’s £10m investment in NextGen will be classified as “Joint Operations” per IFRS 11, with a requirement to proportionately (50%) consolidate NextGen financial statements.
NextGen is a wholly-owned subsidiary of NextGen MidCo Limited, which in turn is owned by Hitachi and the Group on a 50/50 basis.
The investment in NextGen is expected to result in an anticipated contribution to Group’s adjusted earnings of c.£3m per annum by FY 2026, before any potential operational benefits generated through battery efficiency, extended battery life and residual value.
In addition, the Group expects a material benefit to cash flows through a reduction in capex, both from the joint venture as well as the potential extension of the battery useful life delaying the need for replacement.
Any participation in Hitachi ZeroCarbon value creation will be reflected as a financial asset on the balance sheet, with any fair value movements recognised in the Profit and Loss Account.