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![]() Railhub Archive | ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() ![]() Railtrack plcFinal results - year ended 31 March 2000, part 1
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.
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