Railtrack plc

Final results - year ended 31 March 2000, part 1
_______________________________________________________________

date 1 June 2000
source Railtrack plc
type Press release

RAILTRACK GROUP PLC PRELIMINARY RESULTS
YEAR TO 31 MARCH 2000

Announcing its preliminary results today, Railtrack's
Chairman, Sir Philip Beck said that last year had been
the most demanding than any during its existence.
Overshadowed by the terrible tragedy at Ladbroke Grove in
October, the past six months has been dominated by
safety initiatives. The year had also seen strong
growth in traffic, a two billion pound investment
programme, a substantial improvement in train performance
and progress in delivering against Railtrack's public
service obligations. The additional costs associated
with delivering these improvements has impacted on pre
tax profits which at £360 million, after the exceptional
item, were down 16% on the previous year.

Safety
With the rest of the industry, Railtrack is reviewing
its management of safety and is determined to quickly
learn and act upon the lessons from Ladbroke Grove.
Safety initiatives in the year included:

* acceleration of plans to introduce the Train
Protection Warning System by the end of 2002 (12 months
earlier than planned) at a cost to Railtrack of some
£330m
* a new confidential reporting system (CIRAS) to be
introduced nationally
* a host of measures to reduce the risk of signals
passed at danger, reduce the number of broken rails and
mitigate against trespass and vandalism.

Operating Performance
Operating results demonstrated improvements on all key
measures:
* Railtrack train delays down 11% - (passenger delays
down 10%; freight delays down 16%) - Railtrack passenger
delays now around 44% below 1995/96 level
* Investment up to almost £2 billion including CTRL -
over twice the level of three years ago
* Continued improvement in track quality - now only
1.2% short of the 2001 target
* Reduction in broken rails - 4% year on year - 5%
reduction in the fourth quarter
* Continued traffic growth with passenger kms up 4.9%
and train kms up 3.5%
* Signals passed at danger down 12.2% to 595 - lowest
ever recorded figure
* Improvements in temporary speed restrictions,
signalling repeat failures, and other operating measures.

Financial results
To deliver these performance improvements and to
meet the demands of continuing growth, the company put in
place a £100 million additional investment programme
early in the financial year. This was supported by
increased operating expenditure of £17 million. The
higher level of renewals spend than originally planned
resulted in an exceptional depreciation charge of £61
million for the year. The overall impact of this
additional expenditure on the results for the year ended
31 March 2000 was:

* Profit before tax after the exceptional item was
£360m - down 16% on the previous year
* Profit before tax and the exceptional item was £421m
- 2% below the previous year.
* Earnings per share after the exceptional item fell by
12.7% to 73.3p (85.3p before the exceptional item, up
1.5%).

Railtrack was set up in 1994 and financed against a
background of no growth and no specified outputs.
Railtrack's access charges, which are largely fixed, have
not compensated for the 20% increase in the number of
trains on the network. By 2001, Railtrack will have
spent over £2 billion more on renewing the network than
it was funded to do in 1995. Although this has affected
last year's profit and will affect this year's. Railtrack
expects the Regulatory Review to address this issue and
ensure it is appropriately funded going forward.

'We are now delivering a bigger and better railway
than we were funded for in 1995. The cost of
accommodating the strong growth we have seen and
delivering better outputs is now being reflected in our
profits. We have some way to go in delivering the
railway everyone wants to see - it is our number one
priority' said Gerald Corbett

Dividend
The directors are recommending that the final
dividend be held at 17.6p per share giving a total for
the year of 26.9p, an increase of 2.3%. This reflects
the impact on short term profitability of the drive to
meet the safety performance, and other operating targets,
together with the current regulatory uncertainty. The
Board remains committed to a progressive dividend policy.

Outlook
In the current year to March 2001, the increased
level of capital and revenue investment to achieve output
and safety targets, when combined with the net impact of
built-in revenue deflation versus cost inflation is
likely to result in a level of profit before tax and
exceptional items materially lower than the £421 million
of last year. This year's capital investment programme
of £2.5 billion will be reviewed in September once the
results of the Regulatory Review are known.


Announcing the results, Gerald Corbett, Chief
Executive said: 'This has been a difficult and demanding
year for Railtrack. We and the rest of the industry have
responded vigorously to the awful tragedy of Ladbroke
Grove. Rail is the safest form of land transport - but
our programme of initiatives will and must make it safer.

'We have totally focused with some success on
delivering our public service obligations as agreed with
our Regulator, although much remains to be done. There
is now a chance for the Government and the industry to
reset the framework for the railways. The Regulatory
Review and the Government's 10 year transport plan will
be completed this summer and should result in Railtrack
being properly funded to deliver the bigger, better
railway the country wants. The prize, of an industry,
working in harmony, incentivised to deliver a better
railway, is within our grasp. This new era for the
railway will have Railtrack at its heart working in
partnership with Government and the Strategic Rail
Authority. It is an exciting opportunity' he concluded.

For more information please call the Railtrack press
office on 020 7557 8292/3.
All recent press releases can be found on the Railtrack
web site at the following address:
http://www.railtrack.co.uk/corporate/notice
an interview with the Chief Executive, Gerald Corbett can
be viewed on the site.


Railtrack PLC Railtrack House Euston Square London
NW1 2EE

Telephone 020 7557 8292/8293


Review of the Year


The past year has been as important for Railtrack as any
during its existence. Overshadowing everything else has
been the tragic accident at Ladbroke Grove. It reminded
all in the rail industry that we can never relax our
search for continued improvements in safety. With the
rest of the industry, we are determined to learn the
lessons of the accident. Our commitment to running a
safe railway is absolute.

Ladbroke Grove - Inquiries and Follow up Actions

Ladbroke Grove has been, and is, the subject of two
inquiries - the railway industry's formal inquiry and a
public inquiry - together with a number of independent
safety reviews. The preliminary conclusion of the Health
& Safety Executive (HSE) was that the primary cause of
the accident was the Thames train going through a red
light. The conclusions on why that happened and the
contributory causes will be more complex and various.
There is no doubt that the inquiry will result in many
recommendations. The translation of desire into action
is something the industry must improve on. The lessons
have to be quickly learned and acted upon.

A review by the HSE into Railtrack's safety management
system was published in February. It concluded that
Railtrack had a complex, but well developed, safety
system; that significant resources were devoted to safety
management within the company; and that there was no
evidence of commercial interests outweighing safety
considerations. As importantly, the HSE review concluded
that Railtrack's responsibility is to manage our own
activities and to monitor the safety of our industry
partners. It contained a number of recommendations now
being implemented.

Since Ladbroke Grove the 222 signals most frequently
passed at danger have been reviewed and, where
appropriate, actions have been taken. This includes
detailed driver briefing by the train operators and
changes to their training programme. We have also
strengthened our research and development programme to
investigate new ways of preventing signals passed at
danger ('SPADs').

Railtrack chairs the National Safety Task Force set up
after Ladbroke Grove to develop and co-ordinate industry-
wide safety improvement. This is monitoring the review
of driver training arrangements and the implementation,
from April 2000 onwards, of a national safety incident
reporting system, enabling 100,000 frontline staff to
report any safety concerns on a confidential basis.

Our £330m programme to fit the Train Protection and
Warning System, which should reduce the risk arising from
SPADs by over 70%, has been accelerated by 12 months and
will be completed by December 2002.

It is of no comfort to those affected by Ladbroke Grove
that last year the number of SPADs, at 595, was the
lowest on record. The safety record of the railway has
been steadily improving along almost all dimensions. It
is the safest form of land transport. Our
responsibility, together with the train operating
companies, is to make the railway system ever safer.

Our Public Service Agenda

The regulatory context for the year has been an intense
focus on our public service agenda. Both our new
regulators - Sir Alastair Morton at the shadow Strategic
Rail Authority (sSRA) and the Rail Regulator, Tom
Winsor, have publicly emphasised the importance of
Railtrack delivering on its public service obligations.

Delivering improvements in safety, train performance,
track quality, broken rails, and asset stewardship,
against the background of continuing network growth and
an ever larger investment programme, is the heart of our
agenda. The change programmes we have put in place to
address these objectives and the extra investment and
expenditure have moved us forwards. Although we are not
yet achieving all we should, we are delivering
improvement against almost every measure:

* Railtrack related passenger train delays down 10% -
now almost 50% below the level of 1995/96
* Railtrack related freight delays down 16%
* Reduction in broken rails - 4% year on year
* Continued improvement in track quality - now only 1.2%
short of the 2001 target
* SPADs down 12.2% to 595 - lowest ever recorded figure
* Continued traffic growth, with passenger kms up 4.9%
and train kms up 3.5% - now almost 30% and 15% higher
than 1995/96 respectively
* Investment up 17% to £1.7bn (£2bn including CTRL) -
over twice the level we achieved three years ago.

The 10% improvement in passenger delays fell short of the
Regulator's target of 12.7%, although it was ahead of our
own initial plan of 7.5%. He has indicated that he
intends to add the shortfall to the 5% target set for
2000/01. This will not easily be achieved, as traffic
volumes continue to increase, but we shall make every
effort to rise to the challenge. Every 1% increase in
growth leads to 2.5% extra minutes' delay, based on
industry congestion models.

The Regulator's enforcement order proposed a financial
penalty of £4m for each 1% by which we missed the
target of 12.7%. Accordingly, we have made an accrual
in this year's accounts for a fine of £10m. In the
meantime, we have lodged a judicial appeal against the
proposed level of the fine, which we feel is
disproportionate. We support and share the Regulator's
agenda and will do all we can to meet his targets, but we
feel that an approach which may result in a fine of this
magnitude for an improvement of 10% needs challenging.

The cost of delivering a bigger, better railway

In order to deliver these improvements we have had to
increase expenditure on a whole variety of dimensions.
The operating expenditure on improved performance,
safety, broken rails and track quality was increased by
£17m ahead of planned levels early in the financial year.

In addition, we have spent £61m more than anticipated in
our asset maintenance plan on track renewals. This
arose from additional work on the West Coast route
modernisation project, meeting the requirements of
additional growth and maintaining the improved operating
capability of the track and has been reflected in the
exceptional depreciation charge.

When we were set up in 1994, the Regulator set our access
charges assuming renewals investment in the period 1995-
2001 of £3.5bn (in 1995/96 prices). The network has
grown, however, more than anyone expected and was in
worse condition than anticipated. Moreover, in 1998 a
whole new set of output targets was agreed and
subsequently imposed without amendment to access charges.

We are now delivering a network vastly bigger than we
were set up and funded to deliver and we are delivering a
quality along most dimensions, especially infrastructure
delays, far superior to what was expected in 1995 when
our access charges were set. We will, by 2001, have
spent over £2bn more on renewing the network than was
allowed in our access charges (indeed, the need for £1bn
extra renewals expenditure was indentified before
flotation). It is inevitable that this level of
currently uncompensated spend ultimately impacts on
profitability and funding constraints.

In addition, under the current charging system,
Railtrack's revenues are largely fixed. The variable
element of our access charges is intended to cover the
marginal costs of more trains using the network. The
Regulator has already acknowledged, however, that the
additional charges we levy for additional trains do not
reflect the additional cost. There are now over 20%
more trains on the network than four years ago. This
uncompensated cost is now affecting our profits.

A third factor affecting profitability is the cost of
responding to our various regulators' developing agendas.
The HSE, the Office of the Rail Regulator and the shadow
Strategic Rail Authority are all adding people and
developing initiatives, each perfectly valid in its own
right. The cost burden of responding to these various
and developing agendas is not insignificant and is likely
to be a feature of the privatised railway going forward.

Accordingly, the board is adopting a prudent position in
recommending that the final dividend be held at the same
level as the previous year, resulting in a full year
dividend increase of 2.3%.

In the longer term, the board remains fully committed to
a progressive dividend policy which will be vital to our
ability to attract the necessary funding for investment.

In the current year, this increased level of capital and
revenue investment, when combined with the net impact of
built-in revenue deflation vs cost inflation, is likely
to result in a level of profit before tax and exceptional
items materially lower than last year.

For the period 2001/06 we must look to the Regulator to
ensure we are adequately funded to deliver the
improvements and growth we, he and the travelling public
seek. Unless access charges rise, we will be forced to
cut the programme and will be unable to deliver the
outputs and the type of railway everyone wants.

Against this background - demands for better outputs, the
additional safety and performance programmes, the
increased investment programme and the continued network
growth - there was no increase in underlying costs for
the year.

Investment

The scale of our investment has been transformed over the
past four years, with almost £2bn invested last year -
over twice the level we achieved three years ago.

At the start of last year we brought in a new team to run
the West Coast route modernisation project. This
followed concerns that the project - as originally
configured back in 1994 - would involve unacceptable
levels of operational, technological and financial risk.
During 1999 the new project team undertook an in-depth
review of the project. As a result, the board decided
to abandon the unproven 'moving block' train control
technology. The board opted instead for more mature
signalling technology, to de-risk the project and ensure
delivery of the committed outputs. As a consequence of
this reconfiguration, and a better understanding of the
underlying asset condition, the total project cost is now
estimated at £5.8bn, of which £4bn is renewal.

Following the reconfiguration of the project, phase one
is well underway, with work to the value of £700m
completed and contracts awarded with a value of £1.2bn.
The proposals for phase two of the project are currently
being reviewed by the Rail Regulator and the shadow
Strategic Rail Authority.

Lessons learned from that review are now reflected in our
process for managing enhancement projects from initial
evaluation to delivery.

Section one of the Channel Tunnel Rail Link is now over
30% complete, on budget and on schedule. We are currently
undertaking due diligence on section two.

Several significant schemes were completed during the
year, on time and to budget. These included the
Manchester Victoria area resignalling scheme (£56m),
major re-signalling between Glasgow and Edinburgh (£25m),
Luton Airport Parkway (£23m) and track renewals at Settle
& Carlisle (£18m).

The improvements that we have made in the planning and
management of our investment programme are delivering
tangible results as we complete projects that we
inherited and move forward with those that we have
initiated ourselves. Further improvement will result
from more effective management of our supply chain.

Meeting the Demands of Growth

Our 2000 Network Management Statement, published at the
end of March, set out our central forecast for passenger
growth of 47% over the next 10 years. Our forecast is
derived from an industry wide model developed in
conjunction with the Association of Train Operating
Companies and is built up on a route-by-route basis.
Our ten year forecasts for freight range from 30% growth,
if there is no change in government policy or in
industry's service standards, to a 224% growth if
government subsidies are combined with service and
capacity improvements, together with increases in taxes
on road freight.

What is apparent from our modelling is that future
growth, be it passenger or freight, will be determined
largely by government action.

The investment schemes in our Network Management
Statement have been prioritised according to their effect
in relieving congestion and their pay-back profile, when
both financial and socio-economic benefits are taken into
consideration. Most of these schemes cannot be justified
on purely commercial grounds, but do offer significant
benefits in terms of reduced congestion, pollution and
accident risk.

It is entirely appropriate that those schemes should be
partially funded from the public purse, rather than by
the industry, and we await the government's response to
this in its ten year transport plan, to be published in
July.

Funding the Investment

A substantial part of the investment programme will still
depend on private sector funding. We believe that, to
provide the capacity to meet the industry's growth
projections, we will need to deliver enhancement
investment of up to £8bn in the next control period, 2001
to 2006. Railtrack's role in attracting the necessary
finance at the most competitive rates will be key to
ensuring that this can be delivered.

Regulatory Review

This significant programme cannot be funded on the basis
of the Rail Regulator's preliminary determination on our
corporate finance framework, published last December.
Delivering investment on this scale, whilst maintaining
our investment-grade credit rating, will require access
charges to rise significantly. We expect that some of
this will come from extra revenue from fares (which has
risen by around 55% in the past six years), but it is
also inevitable that the public subsidy will have to
rise. Put another way, unless access charges increase,
the current investment programme will have to be cut back
to avoid the company hitting its banking covenants during
the next control period 2001 to 2006. The Rail
Regulator is aware of this and his public statements
indicate his intention to put us in a position where we
can continue to invest strongly.

In July the Rail Regulator will publish his final draft
determination, which will pull together and develop the
conclusions in his earlier consultation documents.

We have been encouraged by the extent to which the
Regulator has listened to our arguments with regard to
the framework and principles and we sense that there is
now a growing alignment of objectives. We do believe
that he needs to adopt realistic assumptions about our
ability to drive out efficiencies; that he should reflect
fully the impact of traffic growth and service
improvement in his conclusions on the volume of necessary
renewal work; and take a balanced view on the
remuneration of costs associated with the West Coast
route modernisation project, the bulk of which is
renewal. Adopting a more appropriate position on each
of these parameters would go some way towards enabling
Railtrack to attract competitive financing. For our
part, we must ensure that we are energetic and
imaginative in seeking new forms of financing - something
we are getting on with.

Despite the much needed clarity on the framework for
enhancement, we do not believe the Regulator's proposals
go far enough in providing the correct or sufficient
incentives and therefore the means to invest at the
current level, let alone higher levels. For example,
in proposing the same rate of return for the enhancement
investment as for the sustained network, the Regulator is
taking insufficient account of the greater risks
associated with complex construction projects on an
operational railway.

As the sole provider of an essential public service, we
have obligations to the travelling public and the
communities in which we operate. We believe those
duties can best be discharged by us having a clear
understanding with our Regulator about what we will
deliver by way of outputs - safety, growth, asset
stewardship, investment and performance - and for the
price of those outputs to be reflected adequately in our
charging regime.

Outlook

The franchise replacement process, which is still at an
early stage, raises many questions in terms of the train
services tomorrow's train operating companies will want
to offer and what changes to the rail infrastructure
these will require. However, not until every user of a
route has had their ideas tested and integrated into the
rest of the strategy for that route can a meaningful
enhancement plan be developed. This will take years,
not months. There are no short cuts.

The role of the sSRA in setting the strategic framework
and deciding what to buy will be key. We hope that soon
what our regulators, customers and government want, and
what they will be willing to pay for, will be clarified.

Notwithstanding the current uncertainty, we are
optimistic for the future. The indications are that the
government's ten-year plan for transport, to be unveiled
in the summer, will be supportive for rail, with a clear
strategy, backed up by an increase in public funding.
Relationships within the industry and its regulators are
now calmer. There is a growing alignment of objectives.
We look forward to working in partnership with the sSRA.
We expect a regulatory review with real incentives and a
clarity of output to enable investment and growth. Our
modernisation programme will deliver outputs and
efficiencies within a clear framework. This will enable
us to grow shareholder value and develop new
opportunities as we move forward into the new era for
rail.


Financial Review

Profits and Dividends
Profit before tax for the year ended 31 March 2000 was
£421m before the exceptional item (£360m after the
exceptional item), representing a 2% reduction on the
previous year (down 16% including the exceptional item).
This included profits from property disposals, net of
clawback, of £76m (1998/99 - £69m). Profit before tax,
property disposals and the exceptional item was down 4%
on the previous year to £345m. Earnings per share,
before the exceptional item grew by 1.5% to 85.3p (73.3p
after the exceptional item, down 12.7%).

The directors are recommending that the final dividend
be held at 17.6p per share, giving a total for the year
of 26.9p, an increase of 2.3%. This is broadly in line
with earnings growth before the exceptional item and
reflects the current uncertainty as to the company's
overall funding position as we await the outcome of our
regulatory review in September 2000.

Turnover 2000 1999 Change
£m £m %

Passenger franchise revenue 2,175 2,169 -
Freight revenue 158 169 (7)
Property rental income 135 131 3
Other income 59 63 (6)
Proceeds from the sale of
commercial and development
properties 20 41 (51)
_____________________________ ______ ______
Total turnover 2,547 2,573 (1)
_____________________________ ______ ______

Passenger franchise revenue includes a contribution
earned through the performance regime. Last year this
contribution was reduced from £73m to £52m. This was
largely a result of the £22m reduction in our access
charge supplement. It also reflects the asymmetry
between the financial impact of the performance regime
and minutes saved. Whilst we improved our overall
performance, as measured in minutes' delay, by 10% last
year, this was not reflected in the profit contribution
through the performance regime. There are three key
reasons for this:
* delays have tended to arise during peak times, which
are more expensive;
* and on routes which have a higher performance value;
and
* historic commercial deals with certain train
operators which deny Railtrack the benefit of improved
Autumn performance.

2000 1999
Performance regime £m £m
Access charge supplements 35 57
Net bonus from customers 17 16
_______________________ ______ ______
Contribution to turnover 52 73
_______________________ ______ ______

Costs
There was a small real decline in underlying costs for
the year, despite an additional £17m of performance and
safety expenditure and the substantial resources required
at HQ and in the Zones to cope with the needs of the
regulatory review and refranchising activities.

2000 1999
£m £m

Production and management 575 547
Joint industry 227 227
Infrastructure maintenance 663 694
Depreciation* 658 634
_______________________ ________ _______
Total operating costs* 2,123 2,102
_______________________ ________ ________
* before exceptional item


Production and management expenses were up 5%. This
includes staff costs of £322m (1998/99 - £295m) which
reflects the resourcing up of project teams and the
import of necessary new skills. The increase in costs
mainly reflects one-off costs including the ORR
performance fine and the write-off of LUL costs.

Infrastructure maintenance costs were down 4%, despite
the additional volume of work undertaken during the year
to meet our output targets. The reduction has two
principal components: unit cost savings achieved through
efficiencies under existing contracts; and the settlement
of contractor claims at lower than anticipated levels.

Depreciation excluding the exceptional item increased by
4% to £658m. This comprises depreciation on track,
route structures, stations and depots (the AMP assets) of
£520m (1998/99 - £504m) and depreciation on other assets
of £138m (1998/99 - £130m). During the 2000-01 financial
year, we will be undertaking a thorough review of our 10-
year asset maintenance plans (AMP). Taking into account
the outcome of the review, we shall consider to what
extent the ongoing charge needs to be adjusted. In the
meantime, we have taken a £61m depreciation charge in
respect of additional AMP expenditure as an exceptional
item.

We have also argued vigorously that all additional spend
over that originally allowed be incorporated in the
Regulatory Asset Base (thereby attracting a return) so
shareholders are not unfairly penalised.

Property
Proceeds from fixed asset property sales, net of expenses
and property clawback, were £132m (1998/99 - £113m) with
profits amounting to £56m (1998/99 - £28m).

Taxation
There was a tax credit for the period of £13m. This
results principally from capital allowances substantially
exceeding depreciation in respect of which deferred tax
has not been provided.

Cash Flow
2000 1999
£m £m
Cash flow from operations 1,123 988
Net interest paid (83) (65)
Net investment (1,414) (1,275)
Tax - (89)

Dividends paid (114) (42)
Capital grants and finance
lease receipts 51 50
__________________________ ______
Increase in net debt (437) (433)
from cash flows ====== ======
Closing net debt 1,731 1,271
===== =====


The ongoing cash outflow will result in a rising debt
profile that, taking into account committed enhancement
schemes, will increase for several more years. In
conjunction with the requirement for an acceptable
regulatory review, including appropriate investment
incentives, further debt financing arrangements will be
put in place.

Pension Costs
Railtrack provides benefits for its employees through the
Railtrack Section of the Railways Pension Scheme. At
the most recent valuation of the Section, at 31 December
1998, the Section was 108% funded. After a package of
benefit improvements, including an extension to the
period over which both the Group and its employees will
enjoy reduced contributions, the Section was 102% funded.

Post Balance Sheet Event
On 4 May this year the Rail Regulator made a final order
under the Railways Act 1993 in respect of the West Coast
route modernisation project. We are seeking to review
that decision, but we intend also to work with the
Regulator to try to meet his requirements.

Railhub Archive ::: 2000-06-01 RTK-001