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Thursday 7 Jun 2012

NETWORK RAIL INFRASTRUCTURE LIMITED: FULL-YEAR RESULTS 2011/12

Region & Route:

National

Network Rail reduced operating costs by a further £120m in 2011/12. Its post-tax profits increased by £441m, reflecting these reductions and increased revenues. The company is making steady progress in delivering the challenging efficiency targets set out by its regulator – the Office of Rail Regulation – for its current funding period – control period 4 (CP4) – which runs between 2009-2014.

 

Group finance director, Patrick Butcher, said: “Our results today demonstrate clear and steady progress in meeting our efficiency targets. These targets are tough but we are committed to succeeding.

“In a year where Network Rail has maintained financial discipline, we have continued to deliver a larger capital programme, building the capacity of the railway of tomorrow.

“At the same time Network Rail has shown it is open to change and reform – with the aim of delivering greater accountability and better value and service for our customers and funders.”

Financial highlights

• Revenue was £6,004m (2010/11: £5,712m)
• Operating profits were £2,337m (2010/11: £2,028m)
• Profit after tax was £754m (2010/11: £313m)
• Capital expenditure was £4,600m (2010/11: £3,997m)
• Net debt at year end was £27,281m (2010/11: £25,049m)
• Gearing ratio (debt to regulated asset base) was 62.5% (2010/11: 63.4%)
• Actual and projected financial performance over CP4 has meant Network Rail has been able to return £153m in the last two years to governments in London and Edinburgh

Efficiencies

• Operating costs, excluding depreciation reduced to £2,347m from £2,467m
• Staff costs fell to £1,679m from £1,734m. Average staff numbers fell to 35,253 from 35,606 although average salaries rose by 2.2%
• Operating and maintenance costs per train mile in real terms have fallen by 84p to £7.04 during the last year – down from £12.05 (2011/12 prices) in 2003/04

Performance results

• In 2011/12 91.6% of passenger trains ran on time up on the 2010/11 figure of 90.9%
• Performance targets for the long distance sector remain a tough challenge and the ORR recently announced a suspended fine for being behind target. Although the sector is currently running at record high levels, with passenger and train numbers running at much higher rates than was assumed, it is still behind the target agreed back in 2007 and we are working closely with the train operators to make further improvements
• In ten years Network Rail has added over a million more train services a year, increased passenger numbers by half a billion and doubled the number of passengers arriving on time
• Traffic growth is running double what was forecast in 2009

 

Projects

Network Rail is managing many vital enhancement projects, to add capacity to the railway and drive economic growth. Some highlights include:

• The new concourse building at King’s Cross opened in March and the remainder of the works are on track for completion in 2013
• The programme of work for the London 2012 Olympics is complete. This included new lines, new stations and better facilities on the North London Line and the East London Line, in addition to works to support the transport links being developed in the Stratford area
• Construction is well advanced on the Thameslink programme – major work is now complete at Blackfriars, the first station to span the Thames, and work at Farringdon continues – creating a hub for Thameslink and Crossrail
• Work is ahead of schedule on the Reading project, new platforms opened in January
• The Birmingham Gateway project advances
• Work on electrification schemes in the north west and on the Western route has started
• Key funding has been secured for elements of the Northern Hub

Organisation

Network Rail made huge strides in restructuring the group and devolving control from the centre, to improve safety, service and efficiency. Highlights were:

• All ten Network Rail routes were devolved as of November 2011
• ‘Deep alliance’ agreed with South West Trains on the Wessex route, bringing train and track under a single management scheme
• Six alliances agreed with other train operators
• Network Rail Infrastructure Projects now set up as a separate business unit open to competition and able to bid for business elsewhere
• A new client function set up within Network Rail to clearly define project outputs and work with delivery organisations much earlier in the project lifecycle
• Network Rail, along with its industry partners, set up the Rail Delivery Group to provide strategic leadership to the railway and implement industry wide efficiency reforms

Mr Butcher concluded: “Amidst structural change and progress in achieving tough efficiency targets, Network Rail remains focused on the day job of providing a safe and reliable railway. In tough economic times, we are carrying more passengers and more freight.

“Punctuality increased this year, although progress was not uniform and we agree with the ORR that we have more to do, especially for the long-distance sector. By continuing to invest in greater capacity and connectivity – as the government’s command paper recommends – we will be able to meet the challenge of further increases in passenger and freight traffic.

“This will involve looking at tough choices to balance reliability, capacity growth and efficiency. These discussions will inform the rail industry’s strategic business plan, published later this year, which will set out our proposals for the next control period.

“By finding fresh ways of working both within the business and with the rest of the industry, Network Rail believes that the railway in Great Britain can secure a bright future – popular, punctual and providing better value to passengers and taxpayers.”
Financial highlights

For the year ended 31 March 2012

 

2012

 

2011

 

£m

 

£m

    

Revenue

6,004

 

5,712

    

Operating profit

2,337

 

2,028

    

Profit before tax

471

 

438

    

Profit after tax

754

 

313

    

Net cash from operating activities

2,691

 

2,486

    

Net debt

(27,281)

 

(25,049)

    

Net assets

8,514

 

7,689

    

Railway network fixed assets

43,112

 

39,577

    

Investment property

878

 

778

    

Capital expenditure

4,600

 

3,997

    

 

Income statement

For the year ended 31 March 2012

Results pre debt and derivative

Debt
and derivative

   

  

revaluations

revaluations

    

Notes

2012

2012

2012

2011

   

Group

Group

Group

Group

   

£m

£m

£m

£m

 

Revenue

2

6,004

-

6,004

5,712

 

Net operating costs

3

(3,667)

-

(3,667)

(3,684)

 

Operating profit

 

2,337

-

2,337

2,028

 

Property revaluation movements and profits on disposal

 

19

-

19

11

 

Total profits from operations

4

2,356

-

2,356

2,039

 

Investment revenue

 

51

-

51

83

 

Other gains and losses

 

-

(567)

(567)

(183)

 

Finance costs

 

(1,369)

-

(1,369)

(1,501)

 

Profit before tax

 

1,038

(567)

471

438

 

Tax

5

136

147

283

(125)

 

Profit for the year attributable to equity shareholder

1,174

(420)

754

313

 

 

Statement of other comprehensive income

For the year ended 31 March 2012

 

 

2012

2011

 

Group

Group

 

£m

£m

Profit for the year

754

313

   

Gain on revaluation of the railway network

313

222

   

Losses on movement in fair value of hedging derivatives

(93)

(251)

Reclassification of balances in hedging reserve to the income statement

67

365

 

26

114

   

Actuarial (losses)/gains on defined benefit pension schemes

(245)

545

   

Tax relating to components of other comprehensive income

29

(60)

   

Other comprehensive income for the year

71

821

   

Total comprehensive income for the year attributable to equity shareholder

825

1,134

 

 

Statement of changes in equity

For the year ended 31 March 2012

 

Share

Share

Revaluation

Other

Hedging

Retained

 

Group

capital

premium

reserve

reserve*

reserve

earnings

Total

 

£m

£m

£m

£m

£m

£m

£m

Balance at 1 April 2010

160

85

3,448

1,458

(334)

1,738

6,555

Profit for the year

-

-

-

-

-

313

313

Other comprehensive income

       

Impact of change in tax rate

  

103

 

(10)

(18)

75

Revaluation of the railway network

-

-

222

-

-

-

222

Transfer of deemed cost depreciation from revaluation reserve

-

-

(158)

-

-

158

-

Increase in deferred tax liability on the railway network

-

-

(17)

-

-

(41)

(58)

Actuarial gains on defined benefit pension schemes

-

-

-

-

-

545

545

Deferred tax on actuarial gains

-

-

-

-

-

(142)

(142)

Decrease in fair value of hedging derivatives

-

-

-

-

(251)

-

(251)

Deferred tax on all hedging reserve movements/retained earnings

-

-

-

-

65

-

65

Reclassification of balances in hedging reserve to the income statement

-

-

-

-

365

-

365

        

Total comprehensive income

-

-

150

-

169

815

1,134

Balance at 31 March 2011

160

85

3,598

1,458

(165)

2,553

7,689

Profit for the year

-

-

-

-

-

754

754

Other comprehensive income

       

Impact of change in tax rate

  

107

-

(49)

(12)

46

Revaluation of the railway network

-

-

313

-

-

-

313

Transfer of deemed cost depreciation from revaluation reserve

-

-

(235)

-

-

235

-

Increase in deferred tax liability on the railway network

-

-

(19)

-

-

(56)

(75)

Actuarial losses on defined benefit pension schemes

-

-

-

-

-

(245)

(245)

Deferred tax on actuarial losses

-

-

-

-

-

59

59

Decrease in fair value of hedging derivatives

-

-

-

-

(93)

-

(93)

Deferred tax on all hedging reserve movements/retained earnings

-

-

-

-

(1)

-

(1)

Reclassification of balances in hedging reserve to the income statement

-

-

-

-

67

-

67

        

Total comprehensive income

-

-

166

-

(76)

735

825

Balance at 31 March 2012

160

85

3,764

1,458

(241)

3,288

8,514

*Other reserves of £1,458m (2011: £1,458m) include the vesting reserve on privatisation.

 

 

Balance sheet

At 31 March 2012

 

 

Note

 

2012

 

2011

 

 

 

 

 

Group

 

Group

 

 

 

 

 

£m

 

£m

 

Assets

    

Non-current assets

    

Intangible assets

  

70

 

71

 

Property, plant and equipment - the railway network

 

6

 

43,112

 

39,577

 

Investment property

  

878

 

778

 

Loan to immediate parent company

  

405

 

397

 

Derivative financial instruments

  

672

 

576

 

Finance lease receivables

  

5

 

6

 

Interest in joint venture

  

6

 

5

 

Total non-current financial assets

  

1,088

 

984

 

 

 

 

 

45,148

 

41,410

 

Current assets

  

 

  

Inventories

  

125

 

108

 

Finance lease receivables

  

1

 

1

 

Trade and other receivables

  

670

 

905

 

Current tax assets

  

3

 

-

 

Derivative financial instruments

  

1

 

104

 

Cash and cash equivalents

  

1,886

 

771

 

 

 

 

 

2,686

 

1,889

 

Total assets

 

 

 

47,834

 

43,299

 

Current liabilities

  

 

  

Trade and other payables

  

(2,704)

 

(2,823)

 

Current tax liabilities

  

-

 

(7)

 

Borrowings

  

(1,156)

 

(2,314)

 

Derivative financial instruments

  

(411)

 

(373)

 

Provisions

  

(12)

 

(17)

 

Obligations under finance leases

  

(1)

 

(1)

 

 

 

 

 

(4,284)

 

(5,535)

 

Net current liabilities

 

 

 

(1,598)

 

(3,646)

 

Non-current liabilities

  

 

  

Borrowings

  

(27,929)

 

(23,345)

 

Derivative financial instruments

  

(797)

 

(574)

 

Other payables

  

(2,579)

 

(2,293)

 

Retirement benefit obligation

  

(661)

 

(485)

 

Deferred tax liabilities

  

(3,070)

 

(3,377)

 

Obligations under finance leases

  

-

 

(1)

 

 

 

 

 

(35,036)

 

(30,075)

 

Total liabilities

 

 

 

(39,320)

 

(35,610)

 

Net assets

 

 

 

8,514

 

7,689

 

Equity

  

 

  

Share capital

  

160

 

160

 

Share premium account

  

85

 

85

 

Revaluation reserve

  

3,764

 

3,598

 

Other reserve

  

1,458

 

1,458

 

Hedging reserve

  

(241)

 

(165)

 

Retained earnings

  

3,288

 

2,553

 

Total shareholder’s funds and equity attributable to equity holders of the parent company

 

8,514

 

7,689

 

 

 

Statement of cash flows

For the year ended 31 March 2012

 

Note

2012

2011

  

Group

Group

  

£m

£m

Net cash generated from operating activities

7

2,691

2,486

Investing activities

   

Interest received

 

40

77

Purchases of property, plant and equipment

(4,521)

(3,759)

Proceeds on disposal of property

 

29

12

Capital grants received

 

400

186

Capital element of finance lease receipts

 

1

2

    

Net cash used in investing activities

 

(4,051)

(3,482)

Financing activities

   

Repayments of borrowings

 

(2,545)

(1,926)

Repayments of obligations under finance leases

 

(1)

-

New loans raised

 

5,489

1,782

Collateral repaid to counterparties

 

(78)

(395)

Cash flow on settlement of derivatives

 

(390)

(15)

Net cash generated from/(used in) financing activities

 

2,475

(554)

Net increase/(decrease) in cash and cash equivalents

1,115

(1,550)

Cash and cash equivalents at beginning of the year

 

771

2,321

Cash and cash equivalents at end of the year

 

1,886

771

 

Notes to the financial statements

For the year ended 31 March 2012

1. General information

The financial information set out in this preliminary announcement does not constitute the Group’s statutory accounts for the years ended 31 March 2012 or 31 March 2011, but is derived from those accounts. Whilst the financial information has been prepared in accordance with International Financial Reporting Standards (IFRSs) and IFRS Interpretations Committee updates as adopted by the European Union, this announcement itself does not contain sufficient information to comply with IFRSs. Statutory accounts for the year ended 31 March 2011 have been delivered to the Registrar of Companies and those for the year ended 31 March 2012 will be delivered following the Group’s annual general meeting. The auditors have reported on those accounts; their reports were unqualified. The preliminary announcement has been prepared on the basis of the accounting policies as stated in the previous year’s financial statements as no new Standards, Amendments or Interpretations that became effective in the financial year had an impact on the Group’s results. The preliminary announcement was approved by the board on 6 June 2012.

 

Going concern

The Group has considerable financial resources together with long term contracts with a number of customers and suppliers. As a consequence, the Directors believe that the Group is well placed to manage its business risks.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

2. Revenue

 

2012

2011

 

Group

Group

 

£m

£m

   

Franchised track access and grant income

5,706

5,408

Freight revenue

51

43

Property rental income

215

244

Other income

32

17

   

Revenue for the year

6,004

5,712

The net effect of the performance regimes on the results of the Group was a net income of £6m (2011: net loss £14m).

 

3. Net operating costs

 

2012

2011

 

Group

Group

 

£m

£m

   

Employee costs

1,679

1,734

Own costs capitalised

(684)

(623)

Other external charges (including infrastructure maintenance costs)

1,594

1,601

Other operating income

(242)

(245)

   

Net operating costs before depreciation

2,347

2,467

   

Depreciation

1,378

1,271

Capital grants amortised

(58)

(54)

   

Net operating costs

3,667

3,684

 

 

4. Profit from operations

Profit from operations is stated after charging/(crediting):

 

2012

2011

 

Group

Group

 

£m

£m

   

Research and development costs expensed

2

1

   

Amortisation of intangible fixed assets

1

1

   

Profit on sale of properties

(27)

(12)

   

Decrease in the fair value of investment properties

8

1

   

Cost of inventories recognised as an expense

165

176

   

Write downs of inventories recognised as an expense

1

10

   

Amounts payable to auditors

  

Fees payable to the Company's auditors for the audit of the Company's annual accounts

0.4

0.3

Fees payable to the Company's auditors for other services to the Group

  

- The audit of the Company's subsidiaries pursuant to legislation

-

-

Total audit fees

0.4

0.3

   

Other services pursuant to legislation

  

- Regulatory accounts audit and interim review

0.1

0.1

- Other

0.1

-

   

Total non-audit fees

0.2

0.1

Total amounts payable to auditors

0.6

0.4

 

5. Tax

 

 

2012

 

2011

  

Group

 

Group

  

£m

 

£m

     

Current tax:

    

UK Corporation tax at 26% (2011: 28%):

    

Corporation tax charge

 

(12)

 

(19)

Less advance corporation tax (ACT) set-off

 

5

 

13

Corporation tax liability

 

(7)

 

(6)

Prior year credit

 

15

 

4

Group relief payable to Network Rail Holdco Limited

 

(3)

 

(6)

Total current tax

 

5

 

(8)

     

Deferred tax:

    

Deferred tax at 24% (2011: 26%)

    

Current year charge

 

(96)

 

(131)

Effect of rate change

 

168

 

163

Prior year credit/(charge)

 

206

 

(149)

Total deferred tax

 

278

 

(117)

Total tax

 

283

 

(125)

UK corporation tax is calculated at a rate of 26% (2011: 28%).

 

6. Property, plant and equipment – the railway network

 

 

Group

  

£m

Valuation

  

At 1 April 2010

 

36,629

Additions

 

3,997

Depreciation charge for the year

 

(1,271)

Revaluation in the year

 

222

At 31 March 2011

 

39,577

Additions

 

4,600

Depreciation charge for the year

 

(1,378)

Revaluation in the year

 

313

At 31 March 2012

 

43,112

Given the interdependency of the assets comprising the railway network, the Group has concluded that the railway network is a single class of asset. The railway network is carried at its fair value, which is measured as the estimated future cash flows that are expected to be generated in perpetuity, discounted at the Group’s pre-tax rate of return, as set by the independent rail regulator, the Office of Rail Regulation (ORR) in its Access Charges Review. This rate reflects the risks and opportunities that exist in the regulated market for railway infrastructure assets and equates to the cost of capital for this market.

As there is no active market in railway infrastructure assets, the Group has derived the fair value of the railway network using an income approach. The income approach assesses the discounted future cash flows that are generated by the railway network. This valuation is carried out annually and revaluation gains and losses are reflected in other comprehensive income.

The depreciation charge for the year is calculated using the average carrying value for the year and the estimated weighted average remaining useful economic life of the railway network. The weighted average remaining economic life of the railway network was calculated using the engineering assessment of serviceable economic lives of the major categories of asset that comprise the railway network. The estimated weighted average remaining useful economic life of the network is currently 30 years (2011: 30 years).

As at 31 March 2012 the comparable valuation of the railway network according to the historical cost convention is £38,372m (2011: £35,015m).

At 31 March 2012, the Group had entered into contractual commitments in respect of capital expenditure amounting to £1,706m (2011: £1,501m).

 

7. Notes to the statement of cash flows

 

2012

2011

 

Group

Group

 

£m

£m

   

Operating profit

2,337

2,028

Adjustments for:

  

Depreciation of the railway network

1,378

1,271

Amortisation of capital grants

(58)

(54)

Amortisation of intangible assets

1

1

Movement in retirement benefit obligations

(72)

-

Decrease in provisions

(5)

(39)

Operating cash flows before movements in working capital

3,581

3,207

   

(Increase)/decrease in inventories

(17)

24

Decrease in receivables

47

52

Increase in payables

50

139

Cash generated from operations

3,661

3,422

   

Interest paid

(970)

(936)

   

Net cash generated from operating activities

2,691

2,486

Cash and cash equivalents

Cash and cash equivalents (which are represented as a single class of assets on the face of the Balance sheet) comprise cash at bank, collateral, commercial paper and money market deposit investments, all of which are on call with the exception of £20m of short term deposits with an average term of two days (2011: £21m one day) from the Balance sheet date. In 2011/12 cash and money market deposits had an average maturity of one day (2011: one day) from the Balance sheet date.

 

8. Analysis of changes in net debt

At

1 April

2011

Cash

flows

Non-cash

movements

 

 

Capital

accretion

Fair

value

through profit and loss and fair value hedging movements

Foreign

exchange

movements

At 31

March

2012

   

£m

£m

£m

£m

£m

£m

£m

        

Cash and cash equivalents*

612

1,193

-

-

-

-

1,805

Borrowings due within one year

(2,314)

2,043

(933)

-

81

(33)

(1,156)

Borrowings due after one year

(23,345)

(4,987)

933

(521)

(12)

3

(27,929)

Obligations under finance leases

(2)

1

-

-

-

-

(1)

         

(25,049)

(1,750)

-

(521)

69

(30)

(27,281)

At

1 April

2010

Cash

flows

Non-cash

movements

Capital

accretion

Fair

value

through profit and loss and fair value hedging movements

Foreign

exchange

movements

At 31

March

2011

   

£m

£m

£m

£m

£m

£m

£m

        

Cash and cash equivalents*

1,767

(1,155)

-

-

-

-

612

Borrowings due within one year

(2,223)

1,860

(2,360)

-

65

344

(2,314)

Borrowings due after one year

(23,380)

(1,716)

2,360

(657)

32

16

(23,345)

Obligations under finance leases

(2)

-

-

-

-

-

(2)

         

(23,838)

(1,011)

-

(657)

97

360

(25,049)

* Excludes collateral of £81m (2011: £159m).