Stagecoach warns it will fight changes to leasing contracts

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Rail and bus group Stagecoach was on a collision course with the Government last night after warning that it would resort to law if regulations were imposed to curb the profits from its rolling stock company, Porterbrook. Michael Harrison reports.

Brian Souter, the chairman of Stagecoach, served notice that any attempt to alter the leasing contracts Porterbrook has with the train operating companies would be resisted through the courts.

The warning follows confirmation that ministers may extend the regulatory regime governing the privatised rail industry to include the three rolling stock companies.

The businesses were sold off two years ago with guaranteed leasing contracts worth more than pounds 2bn and have since proved a goldmine. Stagecoach, which paid pounds 825m to acquire Porterbrook, disclosed yesterday that the rolling stock business generated pounds 63m in operating profits in the first half of the year - more than 60 per cent of the group total - on sales of just pounds 136m.

Mr Souter said: "If anyone tried to change our existing Porterbrook contracts it would be a major legal issue. Our view is that these are contracts under law and any change would be challenged by us under law."

Stagecoach's finance director, Keith Cochrane, added that it expected to hold discussions with ministers or officials in the near future to argue its case.

Mr Cochrane said that amending the contracts would be unprecedented and would deter other private sector businesses from providing finance for the rail industry. Porterbrook has placed rolling orders worth pounds 250m since privatisation and is about to place a further pounds 25m contract for diesel trains which it will let on short-term rentals.

As an alternative the Government could leave existing contracts in place but impose new regulatory controls when they run out. Most of the contracts do not expire until 2004 although some will start to come up for renewal from next March.

But Mr Cochrane said Porterbrook had already given undertakings to offer reasonable renewal terms at the end of the existing contracts.

Porterbrook was initially sold to its management and a group of venture capital funds for pounds 527m but they made a pounds 300m profit by selling the business on to Stagecoach a year later. Similar windfall profits were made when the management and venture capitalists involved in the purchase of Eversholt Leasing sold out earlier this year to a subsidiary of HSBC.

Stagecoach subsequently securitised pounds 545m of the debt used to fund the Porterbrook takeover by issuing bonds backed against its revenue stream. Mr Cochrane said these bonds would be affected if the lease contracts were altered.

The sparkling performance from Porterbrook helped Stagecoach to a 50 per cent increase in pre-tax profits to pounds 70.5m for the six months to the end of October. Its other rail business, South West Trains, made an operating profit of pounds 7.8m on revenues up by 8 per cent.

Mr Cochrane confirmed that SWT was considering introducing one-man operation on its trains and extending its experiment with automatic ticket barriers to more of its stations. SWT ran into a storm of protest and was fined by the rail regulator earlier this year after axeing 10 per cent of its drivers and then being forced to cancel hundreds of services because of staff shortages.