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Railhub Archive 2001-04-02 RTK-001 Railtrack plc0
Railtrack secures £1.5 bn funding settlement and details final quarter business progress
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         Railtrack secures £1.5 bn funding settlement and details final quarter business progress _______________________________________________________________

 related documents
type Press release
o £1.5 billion accelerated funding settlement
o Statement of principles agreed with Her Majesty's Government
o New partnership arrangements with the SRA
o CTRL Sections 1 and 2 finalised
o Railtrack trading update
Funding Settlement
Railtrack announces agreement with the Strategic Rail Authority (SRA) and the Government (HMG) for the securing of £1.5 billion of funding: £1.3bn to support the core business and £0.2bn to support project development. In addition the Company will be insulated from freight charging changes.
The acceleration of this income, deferred in the original regulatory determination beyond 2006, will provide a stable financial basis for the Company and will ensure that a credit rating within the A category is maintained. The satisfactory resolution of this issue means that Railtrack need not now approach the Regulator for an interim review of its financeability.
Statement of Principles with Her Majesty's Government
As part of this agreement the Company has agreed a statement of principles with the Government, which endorses Railtrack's role as the national infrastructure operator. These undertakings recognise Railtrack's unique role as a Public Company, which provides an important public service attracting significant public funding. Against this background the Board has agreed to appoint, after consultation with Government, a non-executive Director (NED) to its main Board with the background and credentials to provide a powerful public and consumer interest voice around the boardroom table. The nominee will be selected by the Board and will have obligations identical to other NEDs.
In addition the Company has signalled its intention not to pay any exceptional or special dividends to shareholders over the next five years. The rate of growth in dividends paid up from Railtrack PLC, the regulated entity, will not exceed earnings growth. Railtrack has also agreed, subject to market conditions and shareholder approval, to raise £250 million of preferred equity by 31 March 2002 for the benefit of Railtrack PLC.
A detailed statement of the principles, agreed between HMG and Railtrack, are attached as appendix one.
SRA / Railtrack partnership
In addition Railtrack has reached agreement on a framework for a more clearly defined partnership with the SRA. As previously announced by the Railtrack Board, the total number and aggregate cost of proposed railway enhancement projects is too much for any one company. A more participative approach to future enhancements is therefore required (a list of Railtrack's current projects is attached in appendix two). Railtrack will continue to have an essential ongoing involvement in all major upgrades as the network integrator. The degree of involvement by Railtrack in terms of managerial and financial control and the allocation of risk will differ on a project-by-project basis.
Railtrack has agreed to work with the SRA to establish a competitive procurement process for future large projects. This new approach will be reflected in part 2 of Railtrack's network management statement, which will be published in autumn 2001.
Channel Tunnel Rail Link - Section2
Railtrack welcomes the agreement with Government, announced today, to proceed with phase 2 of the Channel Tunnel Rail Link (CTRL 2) without the need for Railtrack to exercise its purchase option. This option will cease, by mutual agreement, and the project will be built by Bechtel and London and Continental Railways with Railtrack providing a range of railway services on a cost plus fixed fee basis. In addition Railtrack will be paid a performance-related fee for operating the completed railway. This is an example of the more participative approach that the Railtrack Board and the SRA has been advocating for future enhancements and will restrict the Company's overall exposure to construction risk while it continues to deliver its existing projects.
Commenting on the successful outcome to the discussions Chief Executive Steve Marshall said:
'I am pleased that we have secured the cash, which the Regulator had said we need to maintain the existing network. Our long-term role as the national infrastructure owner and operator has been fully endorsed by the Government. The challenge now is to deliver the improved services that our customers and the travelling public expect.
' Railtrack has an enormous programme of major projects - we are not being stripped of enhancements. The investment burden and construction risk of all the further enhancement demanded is too large for any one company. A flexible approach must be right.'
Business Developments
In addition to resolving the Company's funding issues, over the final quarter of the financial year the focus has been on:
o putting customers and engineering skills at the top of our agenda
o delivering the National Recovery Programme
o completing a detailed review of the business to 'flush out' and address legacy issues
o beginning to develop the business plan and future strategy
National Recovery Programme
On the 18th January Railtrack published plans for each train company, which showed that it had been necessary to impose over 1,000 speed restrictions to deal with gauge corner cracking post Hatfield. Railtrack has delivered against its commitments with over 400 miles of track already re-railed against the 450 planned, 710 sets of points replaced and 800 speed restrictions now lifted. The Company is on target to return well over 90% of services to normal timetable by Easter.
Since January our extensive programme of track inspection has found some 218 additional gauge corner cracking sites where it has been necessary and prudent to impose a speed restriction to ensure safety. We are striving to remove as many of these as quickly and safely as possible ahead of Easter. However it does mean that some services will not return to normal until 21 May, as outlined in our updated plan that we presented to the Regulator and our customers on 12 March.
We are aware that a number of train and freight operators have indicated that they are not satisfied with the level of compensation paid, and some have suggested that legal action may follow. Having sought further legal advice, Railtrack remains of the view that its obligations have been met in full.
Business Review
The Operating Railway
Increasing inspection activity arising from the National Recovery Programme and recent adverse weather conditions have shown the variable quality of the existing infrastructure, and the need for a greater amount of future investment than the Company had previously recognised. Decades of under investment pre-dating privatisation, increasing traffic since privatisation and the nature of the maintenance contracts put in place at privatisation have all contributed to this. The exceptional weather has also caused deterioration with landslips and flooding. The need to invest in stabilising embankments, for example, is estimated to exceed the level previously predicted by some £ 250m over the next 5 years.
The immediate consequences are poorer train performance and increased future maintenance and renewals costs. Railtrack is committed to improving the reliability of the network. However it will be a significant challenge to return performance to pre Hatfield levels and performance regime payments are likely to total £400 million to £500 million over the five-year period commencing 1 April 2001.
An increased focus on engineering and a wide-ranging review of our maintenance and renewal delivery processes is well underway. New 'IMC 2000' contracts have been let, incorporating changes to enable Railtrack to better control the work on the network. The cost of improving the reliability of the infrastructure will be higher than previously expected, although some of this will be addressed as part of the 2002 interim ORR review of ongoing costs arising from Hatfield.
Major Projects
The Company has undertaken a detailed review of its major projects as detailed below:
West Coast Route Modernisation
Phase one of the programme is progressing well, with construction 56% complete. Delivery of phase one is scheduled for October 2002. A detailed cost review of the total programme including phase two which is still in reasonably early stages of development, has resulted in projected project costs increasing by £500 million to £6.3 billion. This increase represents £200 million additional scope (e.g. bi-directional signalling now required in certain locations) and £300 million additional TOC compensation. In addition there are a number of significant outstanding commercial issues, which will be addressed in discussion with our customers and the SRA over the coming months.
Channel Tunnel Phase 1
The project is progressing to budget and is now 60% complete. The agreement with Government on CTRL2, announced today, will enable Railtrack to put in place a structured project financing for phase 1 of the project to assist in the funding of the £1.7 billion acquisition of Section 1. We are anticipating that the equity return on the £400 million to £450 million equity component of the acquisition should be in the order of 9 - 10% real.
Thameslink 2000
Railtrack and the SRA are both committed to this strategically important project. Implementation timescales have slipped due to delays in the planning process although this is drawing to a close shortly. In the meantime, work is progressing and a joint procurement review will also be undertaken with the SRA during the balance of the year.
Cross Country Route Modernisation
A supplemental track access agreement was signed with Virgin trains at the beginning of March for the Cross Country Route Modernisation. The total project is estimated to cost around £200 million, including £98 million of track renewals, and completion is scheduled for summer 2003.
While it is disappointing that there have been further cost increases, particularly on the West Coast project, there have been some significant successes on the delivery side and many lessons have been learned. The review has shown again the danger of early contractual commitments and Railtrack will not make commitments on this basis in future. The recent presentation of costs to the SRA on the East Coast Main Line was an example of how the Company's approach has now changed to ensure that increasing costs are identified before commitment as a result of thorough feasibility and planning work. This is in line with the ORR's current enhancement framework.
Business Performance
As previously announced, after taking into account an exceptional item totalling some £600 million, Railtrack will report a substantial loss in the financial year ended 31 March 2001. Reported trading results have continued to be impacted by generally poor train performance (£5m further deterioration excluding the effects of gauge corner cracking) and additional costs in other areas.
Financial performance in the year ended March 2002 will be impacted by poor train performance, compounded by the more onerous performance regime, increased costs of maintenance and renewal activities and higher project costs. In addition it is unlikely that any efficiencies will be achievable in the first year of the new regulatory control period.
Outlook
Looking out across the five-year regulatory control period, 2001 - 2006, the regulatory settlement remains extremely challenging. The management team are developing plans to restructure the business which will result in an increased focus on the operating railway and a more discrete enhancement business which enables the level of risk and stretch that Railtrack can shoulder to be supplemented by other parties.
A revised structure will need to deliver improved network quality, better customer focus and a lower cost base. As previously announced the Company will still apply for an interim ORR review, likely to commence in summer 2002, to cover the longer-term very substantial implications, both direct and indirect, of Hatfield.
Further details will follow in the Company's Preliminary Results to be announced on 24 May 2001.
Steve Marshall Chief Executive said:
'Railtrack has in the past been guilty of over promising and under delivering, particularly to its customers but also to its shareholders - this has got to stop. We must be ambitious, but we must also be realistic in equal measure.
During recent months, alongside managing the National Recovery Plan, we have undertaken a thorough and realistic review of the business. This has shown problems in some areas. We now need to get on and address these and this will require significant changes to the way we do things.
Railtrack can and will rise to the challenge - but it needs the support of its stakeholders and the public. It will take time, focus and money. Decades of under investment cannot be fixed overnight.'
APPENDIX 1
Statement of Principles agreed between the Government and Railtrack
A. General
1. The Government stands behind the rail system but not behind individual rail companies and their shareholders, who need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face.
2. Railtrack recognises that it must intensify its efforts and raise the performance of its core business - the safe operation, maintenance and renewal of the existing railway.
3. Railtrack needs to raise funds from the financial markets in order to meet its obligations to customers and stakeholders. The company also needs to receive sufficient Government funding, as determined by the Regulator.
4. Railtrack agrees that the responsibility for the funding and delivery of major enhancement schemes can rest with other companies or consortia. Nevertheless, the Government recognises that Railtrack's network integration role will require its active involvement in all major enhancement schemes. The financial and other resources that it devotes to enhancements should constitute a reasonable proportion of its business in relation to its core activities and, for large enhancements, should be deployed through public private partnerships with the Government and others.
5. Railtrack recognises that the structure of its organisation needs to change to address existing weaknesses and to provide a better service to its customers and must evolve to meet future challenges. This includes the separate management of enhancement activities from operations, maintenance and routine renewals.
6. The Government recognises, within the context of the current statutory framework, that the respective responsibilities of the Rail Regulator and the SRA will be clarified to guard against potential overlaps through the issue of General Guidance to the Regulator and revised Directions and Guidance to the SRA.
7. Railtrack agrees to co-operate with Government and the SRA in taking forward integrated transport schemes to realise the 10 Year Plan targets.
8. Railtrack undertakes to work constructively and co-operatively with HSE and other stakeholders in implementing decisions arising from the Cullen/ Uff and Cullen public inquiries into rail safety. The Government recognises that this is likely to require additional funding.
B. The Existing Network
1. The Rail Regulator is responsible for monitoring and enforcing Railtrack's stewardship of the network and its relations with its customers.
2. Railtrack has already agreed a series of licence modifications designed to strengthen its public accountability. These include a commitment to establish and maintain a comprehensive register of the condition and capability of its assets together with arrangements for improved monitoring and reporting. This requirement is currently out for consultation. Railtrack has publicly stated that it needs to develop a much stronger customer focus and, as a start, is discussing with the Regulator a further licence modification to this end.
3. Railtrack's forthcoming network management statement on the core railway (Part 1) will be published by the end of May 2001 and will address its asset stewardship obligations. In particular, the company will set out how it will:
o deliver effective and coherent management of contracted out work, particularly maintenance, where the company will examine the scope for establishing an in-house comparator;
o deliver consistency and customer focus across all its activities, with a view to implementing partnerships and joint action plans at local level with train operators and other industry players;
o reinforce both Railtrack's and the industry's engineering skills base.
4. In developing these reforms Railtrack will continue to work closely with other stakeholders, where appropriate through the Rail Industry Group chaired by the SRA, and the industry's National Task Force.
C. Expanding the Network
1. The SRA and Railtrack will develop jointly a methodology for identifying the minimum scale of project suitable for competitive procurement. All projects above this threshold will be subject to competitive procurement. This new approach will be reflected in part 2 of the 2001 NMS, which in addition to identifying potential future projects will set out the agreed method of procurement.
2. For enhancement projects subject to competitive procurement, Project Development Groups (PDGs)- to include Railtrack, the SRA, specialist advisers, and, where appropriate, other stakeholders (e.g. TOCs) - will be established to assess likely costs and benefits and to develop each project to the point where it can be tendered competitively. Over the summer SRA together with HMT and DETR will establish, in discussion with Railtrack, a new procurement and funding framework for project development work. This is likely to involve project development work being purchased from third parties in addition to Railtrack. In the meantime, Railtrack will continue with its current programme of project development work.
3. Once each project has been developed to the point it can be competitively tendered, and the specification has been endorsed by the SRA, bids will be invited from project management and financing and engineering consortia. Projects will be taken forward through public private partnerships with the Government, where appropriate Railtrack, and third parties, using the SRA's £7bn Rail Modernisation Fund to lever in private capital.
4. In carrying out its core operations, maintenance and renewal business, Railtrack will act to facilitate enhancement schemes, and work with potential third party providers thereof. In all cases Railtrack will ensure that new schemes are compatible with the safe and efficient operation of the network, and in many cases it may be appropriate for Railtrack to take a financial stake in the successful delivery of enhancement projects.
5. Subject to the establishment of effective Chinese walls, Railtrack may also choose to participate directly in one of the consortia bidding for a project. Ultimately Railtrack may choose to bid in its own right, but not before the performance of the network has improved to the point where it can afford to devote sufficient management effort. In order to avoid potential conflicts of interest it is not expected that specialist advisers involved in PDGs will be able to participate as bidders for the main construction contract.
6. The intention is that Railtrack should operate the whole of the existing railway network even where enhancements have been delivered by other firms. Once a project on the existing railway has been successfully completed by a third party, the aim is to provide Railtrack with the opportunity to purchase it. Railtrack and the SRA will explore financing and other mechanisms to facilitate this.
D. CTRL phase 2
1. Railtrack supports the Channel Tunnel Rail Link and has agreed to participate on reasonable terms with the LCR led delivery of CTRL phase 2.
E. Bringing Forward Government Grants
1. The Government agrees to accelerate the payment of revenues payable under the October 2000 periodic review final conclusions.
2. Bringing forward these payments will help to stabilise the financial planning of the company, pending further reviews by the Rail Regulator. It will also reduce long-term public sector support costs as a result of consequential adjustments to the regulatory asset base that applies from 2006 onwards.
3. In agreeing to bring forward these payments the Government reiterates its firm view and Railtrack has accepted that the immediate financial consequences of the Hatfield accident, including the cost of delivery of the National Rail Recovery Plan, must fall to Railtrack's shareholders.
4. Railtrack Group do not intend to pay any exceptional or special dividends over the next five years, nor does the Group intend to make any return of capital to equity holders over the same period. In addition, dividends paid up from Railtrack PLC will only be paid in line with earnings growth over Control Period 2 as a whole.
5. Railtrack agrees to make any necessary changes to its Board structure to recognise the new approach to enhancement schemes and the public private partnerships that this will entail.
F. Public interest
1. Railtrack's Board fully recognises that it has a responsibility to its passengers and other customers and the public at large as well as to its shareholders. In consultation with Government, it proposes to appoint a non-executive director to its main Board with a remit to provide a powerful public and consumer interest voice within the Board.
G. Conclusions
1. The Government, The SRA and Railtrack believe that the new relationship summarised above will enable the company to concentrate on the core network and its all important relationships with its customers and other stakeholders, while offering the prospect of longer term growth through proportionate participation in and eventual purchase of enhancement projects.
Appendix two
Railtrack Enhancement Schemes
o Railtrack will proceed with:
- West Coast Route Modernisation
- Cross Country Route Modernisation
- East Coast Main Line phase 1
- Sunderland Direct
- Manchester Masterplan
- Thameslink (subject to procurement review)
- Channel Tunnel Rail Link section 1
o Proceeding under new arrangements
- Chiltern
- modern facilities at stations
- incremental output statements
- South Central SPV, being explored
o Feasibility and project development
- East Coast Main Line phases 2-4 and others
Railhub Archive ::: 2001-04-02 RTK-001
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