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2001-01-15 RTK-001
Railtrack Group PLC

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Revised exceptional charge for the current financial year and response to the Regulatory Review


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Railtrack Group PLC



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Railtrack Group PLC

Revised exceptional charge for the current financial year and response to the Regulatory Review
_______________________________________________________________


date
15 January 2001
source Railtrack Group PLC
type Press release



Railtrack has now assessed the financial impact of the
Hatfield rail accident and the subsequent National Recovery
Programme. The scope of the National Recovery Programme has
grown considerably since November. The total cost is now
expected to be some £580 million. The majority of the cost,
some £400 million, is expected to relate to payments
contractually due to the Train Operating Companies and Freight
Operators. The balance of £180 million is primarily the cost
of the re-railing of around 450 miles of track and the renewal
of points to restore normal operations.

In addition there is a £20 million exceptional charge,
net of insurance, to cover the cost of the recent flooding.

The exceptional item, totalling some £600 million, will
fall into the 2000/01 financial year and will be entirely
borne by Railtrack's shareholders. Reported trading results
will also be affected by the generally poor train performance
levels, excluding the effects of gauge corner cracking, with
payments to train operators to rise by around £50 million
against prior expectations. In addition, a further £20
million of additional costs arise in other areas, principally
asset write-offs and a review of property sales.

The above items in combination will result in a
significant loss for the year. Performance levels, were
clearly affected by the current situation on the network as a
consequence of Hatfield and recent extreme weather conditions.
Other key operational areas continued to reflect progress. In
particular, ongoing positive trends in the numbers of broken
rails and signals passed at danger continued with reductions
of 33% and 23% respectively.

The Board of Railtrack also announces that, it has
accepted the final conclusions of the Regulatory Review.
However, the immediate consequences of Hatfield, when combined
with other factors, will leave it in a materially worse
financial position from the start of the second control period
to that which the Regulator assumed in reaching his final
conclusions. The statement issued separately today by the
Rail Regulator indicates the ways in which existing interim
review mechanisms may be utilised to address these providing
that Railtrack makes a compelling case.

Areas to be addressed within terms of Periodic Review
-----------------------------------------------------

* Deferred Funding and the Timing of Agreed Revenues
--------------------------------------------------

The regulatory determination defers payment of in excess of
£1 billion of revenue which the Regulator has agreed that
Railtrack needs to spend on the rail network. This and the
delay in receipt of grant income, will result in the Company
having to increase borrowing by approximately an additional
£2 billion between now and March 2003, on top of its already
significant financial commitments. Taking net debt to £8
billion by 31st March 2003 represents an unrealistic financial
challenge.

However, Railtrack is already in discussion with the
Strategic Rail Authority (SRA) about the possibility of
accelerating the deferred revenue that is currently not
paid until beyond 2006. There is no question of increasing
the total value of revenue due, rather to match better the
timing of payments to meet Railtrack's ongoing investment
programme.

Additionally, the Regulator's separate statement
issued today also makes clear that there is the opportunity
for Railtrack to request an interim review of its
financeability from the commencement of this coming control
period. He has indicated that, providing an application is
made on a timely basis and Railtrack makes a compelling
case, he would expect to be able to publish his conclusions
and, if appropriate, implement them in advance of the first
SRA payment due in October 2001.

The Board has also noted and strongly supports the
Regulator's intention to assess any interim financial
review proposals in the light of the relevant financial
indicators that would be required to maintain a flat A
credit rating.

* Post Hatfield Implications
--------------------------

It has already been made clear that that initial costs of
the accident at Hatfield and the subsequent National Recovery
Programme will be fully borne by Railtrack's shareholders.

It will also be necessary to take account through a
further interim review the longer term implications, both
direct and indirect, for the necessary levels of efficient
costs that Railtrack must incur over the entire five year
control period. The Regulator's statement of today
summarises likely areas to be covered in such a review
which might include:

- changes to maintenance and renewal activity and,
therefore, efficient capital and operating expenditure
requirements, particularly on track;

- any implications for the achievable rates of improvement
in operational performance, efficiency, and possession costs;


- any other effects such as necessary and appropriate
changes to wider asset management policies triggered in whole
or in part by the events of Hatfield; and

- any implications for Railtrack's revenue requirements,
for the associated level of track access charges over the
second control period and for the value of the Regulatory
Asset Base (RAB) at the end of that period

It would be for Railtrack to demonstrate that such
increases in total costs were material and would make it
unduly difficult for the company to finance its activities.
It is anticipated that it would take in excess of 12 months
for the detailed analysis and support for an interim review
request to be produced.

Current Priorities
------------------

Quite separately, the Board recognises that
Railtrack has much to do to re-establish its reputation in
the eyes of its customers and the travelling public. It is
committed to doing everything that is required to achieve
this. Steve Marshall, Chief Executive, said: 'Safety will
always be our No. 1 priority, but customer service and cost
efficiency are also critical indicators of success - these
are not optional extras'.

Among Railtrack's current operational priorities
are:

- Progress on safety critical schemes across the network
such as TPWS.

- Continued delivery and completion of the National
Recovery Plan

- Re-assess how we manage our network to higher standards
of service and reliability, particularly in the light of
lessons learned from Hatfield.

- Delivering major network upgrades including West Coast
Main Line and Channel Tunnel Rail Link

In addition, the acceptance of the Regulatory review
carries with it a set of very challenging requirements which
the management team must address. In particular:

* Renewal and Maintenance spend:

The Regulator has allowed £1 billion less than Railtrack
estimated in its August presentation would be needed for
maintenance and renewals on the network over the next five
years, excluding West Coast modernisation. The review
requires Railtrack to deliver its maintenance and renewals
programme during the next five years at broadly the same cost
as it has in the last five.

* Performance:

Railtrack has committed to improve performance by 2.5%
in each of the next five years. However, the proposed
opening performance benchmark does not reflect where
Railtrack's performance would be in April 2001 even excluding
the impact of the Hatfield accident. The large gap between
the Regulator's assumptions and actual 2001 performance
could, in Railtrack's view, lead to it making performance
related compensation payments of at least £300 million over
the next five year period.

* Efficiencies:

Railtrack is committed to further improving the efficiency of
its operations. The Regulator's target of a 17% reduction in
total costs over the five-year period remains highly
challenging given the scale of our agenda and the need to
improve safety, outputs and accommodate growth and investment
on the network. It is unlikely that any efficiencies will be
achieved in the current year, in the light of the Hatfield
accident.



The Regulator's statement explains how the proposed
interim review process may be used to account for possible
longer term implications of Hatfield.

Steve Marshall, Chief Executive, commented: 'The £600
million cost of Hatfield will be borne by Railtrack. We are
accepting the regulatory review which remains very
challenging. We need to resolve the issue over the timing of
our revenues and we welcome the fact that there are now
processes in place to deal with this.

'Through the National Recovery Programme, services are
progressively improving. Although there still remain
significant challenges ahead we are fully committed to
delivering the safe, reliable and efficient network that our
train operator customers, their passengers and users expect.'




For more information please contact the Railtrack press office
on 0207 557 8292.
All recent press releases can be found on the Railtrack web
site www.railtrack.co.uk/corporate


Railhub Archive ::: 2001-01-15 RTK-001





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