Proposed sale of Tube Lines interest - Construction Funding and Refinancing transactions

Jarvis plc today announces that it has reached a conditional agreement with Amey in respect of transactions (the “Tube Lines Transaction”) involving the sale of the shareholding of Jarvis JNP Limited (“JJNP”) in Tube Lines Holdings Limited (“TLH”) (the “TLH Equity”) and the Secondment Business of Jarvis LUL Limited (“JLUL”) for a total gross consideration of £146.8 million and the release of the contingent liability of £11.7 million to subscribe for further equity in TLH.

The Tube Lines Transaction will effect a realisation of value from Jarvis’s various interests in the
Tube Lines PPP Project. In view of its size, the Tube Lines Transaction is conditional upon, amongst other things, the approval of Shareholders, which is to be sought at an extraordinary general meeting of the Company to be held on 10 January 2005. Completion of the Tube Lines Transaction is also conditional upon legally binding documentation to refinance the Group’s core financing arrangements (the “Refinancing”) becoming effective. In turn, the Refinancing is expected to be conditional upon legally binding documentation for the funding of the construction contracts for the Group’s PFI and UPP projects (the “Construction Funding”) being entered into and becoming effective.

Information on the Tube Lines PPP Project, TLH and the Secondment Business

In 1998 the Government invited bids for a public private partnership involving the London
underground rail network, to increase investment in the underground rail infrastructure and to
attract best practice and management efficiencies from the private sector into the maintenance and upgrading of the network. An incorporated joint venture between Jarvis, Bechtel and Amey, known as Tube Lines, successfully bid for and was awarded a 30 year franchise under a Service Contract with London Underground Limited to provide the infrastructure services on the Jubilee, Northern and Piccadilly lines, for which it assumed responsibility on 31 December 2002.

Tube Lines Limited (“TLL”) is the special purpose company that is a party to the Service Contract and responsible for the management, maintenance and upgrade of the assets and infrastructure of the Jubilee, Northern and Piccadilly lines. TLL is a 100 per cent. subsidiary of TLH. The share capital and loan stock of TLH is divided equally between JJNP, JNP Ventures Limited, an indirect wholly owned subsidiary of Amey UK Plc (“Amey”) and UIC Transport Limited, an indirect wholly owned subsidiary of Bechtel Enterprises Holdings Inc. (“Bechtel”). Each of these three shareholders holds 1,000 ordinary shares of 10p each in the capital of TLH.

To ensure that TLL has the necessary combination of expertise and experience available to fulfil its obligations under the Service Contract, it entered into secondment agreement under which senior personnel employed by the Jarvis, Amey and Bechtel groups are seconded to TLL to manage various aspects of the business. The secondment agreements contain detailed provisions under which the seconding partners share with TLL portions of the benefits of higher than expected performance and portions of the cost of lower than expected performance. One of the secondment agreements is with Bechtel Limited, a wholly owned subsidiary of Bechtel, pursuant to which personnel seconded from Bechtel manage the implementation of TLL’s capital works programme under the Service Contract. The other agreement (the “Secondment Agreement”) is with an unincorporated 50:50 joint venture between JLUL and Amey LUL 2, wholly owned subsidiaries of Jarvis plc and Amey plc respectively, pursuant to which personnel seconded from the Jarvis and Amey groups assist TLL in managing the operation and maintenance works programme under the Service Contract.

TLH
TLH’s initial investment in TLL consisted of shares and £90 million of loan stock. It funded this
through an equity bridge loan from a syndicate of banks led by HSBC Bank PLC. Each shareholder in TLH was obliged to arrange credit support for one third of the loan by way of a financial guarantee or letter of credit. JJNP arranged the LC Facility under which a £46.5 million letter of credit (“LC1”) was issued to the lenders of the equity bridge loan. JJNP is also liable to inject up to a further £11.7 million of contingent equity in TLH (reduced from £15 million following a refinancing of Tube Lines earlier this year). This contingent obligation is guaranteed by a letter of credit (“LC2”) also issued under the LC Facility.

As security for the LC Facility, the Company agreed to allocate to the LC Facility lenders certain project cashflows, comprising its distributions from TLH and the substantial part of its revenues under the Secondment Agreement. No regular equity dividends are payable by TLL during the first seven year review period under the Service Contract. Accordingly, TLH’s revenue during the first review period is based on a 16 per cent. annual coupon payment on the loan stock it holds in TLL. TLH’s income is applied first to paying the interest cost and margin on the equity bridge loan with the balance being distributed as dividends to its three shareholders.

JJNP accounts for a one third share in the profits of the TLH group. Although these profits appear in the Group profit and loss account, they are not matched by cash amounts received by the Group because TLH has agreed not to receive dividends from TLL during the first review period.

The Secondment Business
Under the Secondment Agreement, JLUL and Amey LUL 2 receive fees consisting of direct
compensation for the cost of their seconded employees (the “Reimbursable Costs”) and share
equally an annual base fee (the “Base Fee”), an accrued development fee (effectively representing deferred reimbursement of the parties’ bid costs incurred up to the closing of the original Tube Lines PPP Project) and certain incentive payments for achieving and outperforming TLL’s budgeted operations and maintenance programme. With the exception of the Reimbursable Costs and a portion of the Base Fee, TLL may require that all fees paid to JLUL and Amey LUL 2 during the relevant year and for up to the three preceding years be repaid to TLL in the event of underperformance against the TLL operations and maintenance programme (so called, “clawback”).

Jarvis plc has provided a parent company guarantee to TLL of JLUL’s obligations under the Secondment Agreement. As JLUL and Amey LUL 2 have joint and several liability to TLL under the Secondment Agreement, Jarvis plc and Amey plc have also each guaranteed to the other their respective subsidiaries’ obligations under a Co-operation Agreement which they have entered into to regulate their relationship in respect of, and performance under, the Secondment Agreement. As further security, JLUL was also obliged to provide TLL with a letter of credit equal to 25 per cent. of the fees at risk of clawback. This was satisfied by the issue of a further letter of credit under the LC Facility (“LC4”), which currently amounts to £6.1 million.

Under the terms of the LC Facility, Jarvis is obliged to cash collateralise all of LC4 and to use any cashflow from the Base Fee, dividends from TLH and the incentive payments to augment the cash collateral for LC1 and LC2. All of LC4 has been cash collateralised and £45.2 million of the £58.2 million outstanding under LC1 and LC2 has been cash collateralised.

In November 2003, Jarvis sold most of its rights to the Reimbursable Costs (less the actual salaries and personnel costs paid to the seconded employees) and to the Base Fee not at risk of clawback (but only from the end of the first seven and a half year Tube Lines’ review period) for approximately £20 million to Luso, a special purpose vehicle established and financed by its parent, Banco Espirito Santo with a receivables financing facility (the “Junopi Receivables Financing”).

Background to and reasons for the Tube Lines Transaction

As outlined in the 2004 Annual Report, the Directors are implementing a Business Plan that is designed to develop a simpler, leaner and more cash generative business that is sustainable in the long-term. This Business Plan has several core elements, as set out in the section headed “The Business Plan” below. The strategy underlying the Business Plan is for the Group to focus primarily on UK rail, road and plant hire activities. The Directors believe this will enable Jarvis to maintain a competitive advantage and grow its market share by capitalising on its investment in technology, new products and equipment.

A key element of the implementation of this strategy has been determining how best to realise the long-term value of the Company’s investment in Tube Lines.

As a 33.3 per cent. shareholder in TLH, Jarvis does not control TLL nor will its investment generate any meaningful cash in the short to medium term due to the dividend and secondment fee restrictions discussed above. Accordingly, it was decided to dispose of the Group’s interest in the Tube Lines PPP Project. Taken as a whole, the Directors believe that the Tube Lines Transaction represents the best opportunity available to realise such value. The Directors consider that the value of the Group derived from the sale of both the Secondment Business and the TLH Equity interest justifies the price received from Amey.

Use of proceeds and the financial effects of the Tube Lines Transaction

Amey will acquire the TLH Equity and the Secondment Business for a cash consideration of
£95.5 million. In addition, it will assume all liabilities under LC1 and LC4 of £46.5 million and
£6.1 million respectively, being £52.6 million in total. This will result in cash collateral being released under those letters of credit of £45.2 million and £6.1 million respectively. £146.8 million of cash (before any Tube Lines Transaction costs) will therefore become available to the Group to repay debt and for working capital purposes, including payment of the Transactions’ costs.

Of the £146.8 million of cash that will become available to the Group, approximately £21 million will be used to repay the Junopi Receivables Financing with Banco Espirito Santo and a further £29 million will be used to reduce the Company’s indebtedness to its Core Lenders. The remainder of the proceeds after deducting estimated Tube Lines Transaction costs (including a variation fee due to London Underground Limited) of approximately £15 million will be used for working capital purposes, predominantly to fund the Company’s contribution to the Construction Funding arrangements (described below).

On the basis of Jarvis’ financial position as at 31 March 2004, the net proceeds of the Tube Lines Transaction would have increased the Continuing Group’s consolidated shareholders’ funds and reduced its consolidated net debt by approximately £77 million.

The Business Plan

The 2004 Annual Report sent to Shareholders in September 2004 described the Business Plan adopted by the Board to stabilise the Group’s finances and reduce indebtedness to more acceptable levels.

The Business Plan was central to the Core Lenders’ decision to continue to support the Group and provide continued facilities to 25 March 2005. The plan assumed that a number of important measures would be successfully implemented in a timely manner for indebtedness to be brought back to an acceptable level so that working capital facilities adequate for the Group’s needs could be secured.

In addition to the strategic repositioning of the Group, the other principal components of the Business Plan are set out below with an update on the Group’s progress in achieving them:

1. The timely realisation of value from the Group’s assets, in particular, the Company’s Investment in the Tube Lines PPP Project, and the European Roads businesses.

   The realisation of value from the Tube Lines PPP Project forms the subject of this announcement. Additionally, on 22 December 2004, the Company announced the sale of the European Roads businesses, which is conditional upon Shareholders’ approval and is expected to complete on or after 1 April 2005.



2. A substantial reduction in the Group’s overheads, including accommodation costs, achieved through re-location to a smaller number of sites.

   A programme to achieve annualised future savings of more than £20 million has been implemented ahead of plan. In November, further annual savings approaching £30 million were identified and action to achieve these savings is underway. The disposal of properties and re-location of the Group’s headquarters described in the circular to Shareholders dated 7 December 2004 will achieve the majority of the reduction in the Group’s accommodation costs envisaged in the Business Plan.

3. The rationalisation of the Group’s accommodation services business, including the withdrawal from construction activities on new projects. Progress in this area of the Business Plan is described below under the heading “Construction Funding arrangements”.
4. The satisfactory renegotiation of the Group’s core financing arrangements, which are currently repayable on 25 March 2005. Progress on this matter is described below under the heading “Renegotiation of core financing arrangements”.

Construction Funding arrangements
The rationalisation of the Group’s accommodation services business has been a key component of the Business Plan, particularly given the impact of this business on the Group’s cash position as announced on 8 November 2004. The disposals of the PFI and UPP bidding operations, announced on 3 December and 7 December 2004 respectively, represented important steps in this process.

However, the most significant element of future cash outflow in Jarvis’s accommodation services business relates to the completion of a number of ongoing construction contracts. Consequently, with respect to the largest 14 unfinished construction contracts, the Group has conducted negotiations with the key stakeholders in each project including project equity and debt providers and surety bond providers and, where appropriate, local authorities, hospital trusts and universities. The two key objectives of the negotiations are to obtain financial contributions to assist with funding the completion of the projects, and to obtain releases of Jarvis’s related liabilities wherever possible.

An important component of the second objective is to limit the Group’s exposure to future cost overruns by introducing of one or more replacement construction contractors in respect of five of the construction contracts. For the remainder of the projects still at the construction phase most of which are nearing completion, Jarvis expects to retain the construction contracts. In both of these scenarios, the Company would limit its exposure to cost overruns in the ongoing contracts by release of the performance guarantees provided by the Company. While the Group’s risk profile would be significantly reduced by implementing these arrangements, it will nevertheless retain a degree of cost exposure in relation to the completion of these construction projects, principally through its ongoing relationship with sub-contractors. Further, the Group’s exposure to any future latent defect claims in relation either to those projects, or to its previously completed construction contracts, will continue until this exposure is restructured in conjunction with the planned disposal of Jarvis’s facilities management business.

Negotiations concerning the Construction Funding arrangements are at an advanced stage and
non-binding documentation has been signed or is expected to be signed shortly. Each of these
documents is subject to conditions including the application of certain of the proceeds from the
Tube Lines Transaction and the provision of consents from local authorities, hospital trusts and
universities. Jarvis envisages all 14 project agreements will become effective simultaneously with or shortly after the completion of the Tube Lines Transaction. However, to the extent that any project agreements do not become effective, Jarvis would incur costs in excess of those included in its financial forecasts.

Renegotiation of core financing arrangements
On 30 July 2004, the Group’s Core Lenders agreed terms to extend the Group’s facilities until
25 March 2005 and to provide an additional working capital facility of £25 million and a new
bonding facility of £9 million. On 27 August 2004, this agreement was documented in the
Override Agreement. On 3 December 2004, the new working capital facility was increased to £29 million and the bonding facility reduced to £5 million. On 15 December 2004 the new working capital facility was further increased by a priority £8 million advance, £4 million of which was repaid from the proceeds of certain property disposals. Under the Override Agreement, all amounts owed to the Group’s Core Lenders become repayable on 25 March 2005.

Today, the Company and the Core Lenders agreed terms for a Refinancing through an extension of the Override Agreement to 27 March 2006 and the provision of £5.5 million further bonding facilities. The heads of terms setting out the terms on which the Override Agreement will be extended are not legally binding. Legally binding documentation for the Refinancing is a condition precedent to the Tube Lines Transaction.

Current trading and prospects

The interim results for the six months ended 30 September 2004 will be announced by the end of December 2004. The Board has not yet completed its review of the interim results but it is considering the need for a number of provisions and write offs. These may include the write off of the goodwill connected with the UK Roads businesses, a provision for construction losses (as foreshadowed in the announcement dated 8 November 2004), the write off of FM enhancement assets (following the decision to sell rather than retain the PFI and UPP facilities management business) and providing for the estimated costs of restructuring. The net result is likely to show a very substantial deterioration in the Group’s financial position since 31 March 2004.

On completion of the Tube Lines Transaction and the other Transactions, the Directors anticipate an improvement in the financial and trading prospects of the Continuing Group for the remainder of the current financial year.

Working Capital

The Directors are of the opinion that the Continuing Group does not have sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this document.

The Directors make this statement because the terms of the Construction Funding and Refinancing transactions have not been finalised and, thereafter, remaining within the Continuing Group’s facilities will be dependent on the critical assumptions listed below. However it should be noted that the Group’s financial position will be substantially enhanced as a consequence of the Tube Lines Transaction.

In the period up to the receipt of proceeds from the Tube Lines Transaction, which it is anticipated will be on 10 January 2005, headroom will continue to be very tight and the Group will remain reliant upon the continued support of its Group creditors. In this respect, it should be noted that arrangements have already been agreed for the deferred settlement of significant Group creditors. In addition, existing creditors who are owed money by the Group’s accommodation services business in respect of construction contracts are assured of settlement of the amounts due to them upon the completion of the Construction Funding and the Refinancing transactions.

If Shareholders do not approve the Tube Lines Transaction or if it otherwise does not complete (due to the Transactions failing to complete or otherwise), then alternative sources of emergency working capital funding would be required by the middle of January. It is unlikely that there would be sufficient time for the Directors to make such alternative arrangements to provide for the Group’s working capital needs and it is therefore likely that the Group would be unable to continue to trade.

In order to assess the adequacy of the Continuing Group’s working capital, the Board has prepared a set of financial forecasts (the “Forecasts”) based on the fundamental assumptions that the Tube Lines Transaction will be approved by Shareholders and that it and the Construction Funding and Refinancing transactions will be completed without material adjustment to their proposed heads of terms.

Provided that the Continuing Group trades in line with the Forecasts, it will be able to operate within its revised finance facilities for a period of at least twelve months following the expected date of completion of the Tube Lines Transaction and the Construction Funding and Refinancing transactions.

Following completion of these three Transactions, the Board will seek to improve the Continuing Group’s working capital and trading positions, whilst keeping its requirements within the available facilities. In particular, with more management time available to focus on the business, rather than on the time-intensive restructuring and refinancing of the Group which has taken place during much of 2004, the Board will develop initiatives targeted at enhancing revenues, profit and cash flow whilst also ensuring that the cost base is contained appropriately. The Forecasts do not include any such additional revenues, profit and cash flows. In addition and in due course, the Board will explore the opportunities for restructuring the Company’s funding base through the introduction of new shareholders and/or the further restructuring of the Group’s debt arrangements.

As they are required to do, the Directors have considered the impact of sensitivities on the Forecasts. These show that there is limited margin to accommodate any unforeseen adverse trading or other developments which might impact the Continuing Group’s ability to operate within its facilities. Aside from the specific sensitivities that were considered, the Board recognises that the Forecasts are based upon the following critical assumptions:

• completion of the disposal of the European Roads businesses for which a binding sale agreement was signed on 22 December 2004 but where completion is conditional upon the approval of Shareholders and the French competition authorities. This transaction is expected to be completed on or after 1 April 2005, with proceeds providing a further repayment to Core Lenders and payments to certain specified creditors, with the balance being available for the Continuing Group’s working capital. It is not anticipated that the Group will need to provide funding to the European Roads businesses prior to their sale;


• delivery of the expected benefits from the Construction Funding arrangements;


• the Group’s businesses have suffered recently from cash shortages and uncertainty about the Group’s future. It has been assumed that the Continuing Group’s businesses recover in early 2005 and are able to strengthen, and where necessary, re-build relationships with customers, suppliers and other stakeholders, particularly resulting in the retention (and renewal where applicable) of key contracts;


• the programme of cost reductions (including significant staff redundancies) and restructuring being implemented by the Directors will not have a detrimental impact on the Continuing Group’s operational effectiveness;


• the Directors and senior management will manage the reputational risks inherent within the businesses of the Continuing Group; and


• no material adverse event occurs which would cause the Core Lenders to terminate the Refinancing.

If some or all of the assumptions above should prove to be incorrect or if other unforeseen events should occur, the impact of which the Directors are unable to manage, this might lead to a situation in which the Continuing Group would be unable to continue within its finance facilities. In such event, the Board would need to accelerate the restructuring of the Company’s funding base in the manner outlined above and might also need to seek further short term facilities. However, in such event and if the Directors were not successful in their endeavours, the Group would not be in a position to continue to trade.

Extraordinary General Meeting

Completion of The Tube Lines Transaction is conditional, amongst other things, upon the approval of Shareholders. A circular containing a Notice of Extraordinary General Meeting will be despatched to shareholders shortly.

Alan Lovell, Chief Executive commented:

“I am pleased that we have been able to achieve significant progress on these three crucial areas to the survival and future profitability of Jarvis. There are continuing objectives and targets to be achieved if the core business based on UK rail, roads and plant hire operations is to realise its full potential, but the disposals we have now agreed will provide the much needed working capital and pay down of debt that were conditional to the refinancing agreement we have reached with our lenders.

“I am confident that we can now move forward in 2005 toward rebuilding Jarvis and return it to growth as a profitable business in future with its roots in these viable core operational areas.”

Enquiries:

Jonathan Haslam, Jarvis plc	Tel: 020 7017 8147
Paul Downes, Merlin PR	Tel: 020 7653 6620
Paul Baines / Andrew Speirs, Hawkpoint Partners Limited	Tel: 020 7665 4500
Chris Treneman / Mark Smith, Dresdner Kleinwort Wasserstein	Tel: 020 7475 7375

DEFINITIONS

The following definitions apply throughout this announcement unless the context requires otherwise:

“2004 Annual Report”	the Jarvis plc annual report and accounts for the year ended 31 March 2004
“Amey”	Amey Plc and its subsidiaries
“ Amey LUL 2”	Amey LUL 2 Limited, a private limited company incorporated in England under registered number 4602504
“Board” or “Directors”	the directors of the Company
“Business Plan”	the recovery programme described within the 2004 Annual Report
“Company”	Jarvis plc, a public limited company incorporated in England under registered number 2238084
“ Continuing Group”	the Group and all of its assets (excluding the investment in the TLH Equity and the Secondment Business), following Completion
“Core Lenders”	the Lenders who are party to or have acceded to the Override Agreement, announced 30 July 2004 (as amended and restated from time to time)
“Extraordinary General Meeting” or “EGM”	the extraordinary general meeting of Jarvis plc, convened to approve the Tube Lines Transaction, to be held at 9.00 a.m. on 10 January 2005 at the offices of Slaughter and May, One Bunhill Row, London EC1Y 8YY or any adjournment thereof
“Group” or “Jarvis”	the Company, its subsidiaries and its subsidiary undertakings
“JJNP”	Jarvis JNP Limited
“JLUL”	Jarvis LUL Limited
“LC Facility”	the letter of credit facility made available pursuant to the terms of the £94,700,000 standby letter of credit facility agreement dated 21 December 2002 between (1) JLUL and JJNP as requesting parties (2) the Company and various other companies as original guarantors (3) the Royal Bank of Scotland as arranger, agent and trustee (4) National Westminster Bank PLC as fronting bank and (5) the Royal Bank of Scotland and Bayerische Landesbank, London branch as participating banks
“Lenders”	the Core Lenders, other providers of finance to members of the Group and the providers of finance to certain special purpose PFI or UPP companies
“Override Agreement”	the override agreement, dated 2 July 2004 (as extended by an extension agreement dated 30 July 2004, amended and restated by an agreement dated 27 August 2004, amended by letters dated 28 October 2004, 2 December 2004 and 3 December 2004 and as further amended or extended from time to time) between Jarvis plc, certain other members of the Group and the Core Lenders
“Secondment Agreement”	the amended and restated agreement for the secondment of personnel, dated 31 December 2002, between JLUL and Amey LUL 2 and TLL, which expression shall include the amendments to the amended and restated agreement for the secondment of personnel entered into between JLUL and Amey LUL 2 dated 12 May 2004
“Secondment Businesses”	the TLH Equity, certain intellectual property rights used by Amey LUL 2 in performance of its obligations under the Secondment Agreement and certain named employees
“Service Contract”	the amended and restated service contract dated 31 December 2002 between London Underground and TLL as amended by supplemental agreements dated 31 December 2002 and 12 May 2004
“Shareholders”	holders of Ordinary Shares in issue from time to time
“Transactions”	The Tube Lines Transaction, the Refinancing and the Construction Funding Transactions
“TLH”	Tube Lines Holdings Limited
“TLL”	Tube Lines Limited
“Tube Lines PPP Project”	the public private partnership for the management, maintenance and upgrade of the assets and infrastructure of the Jubilee, Northern and Piccadilly lines on the London underground rail network

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