Financial framework
Network Rail Limited is a company limited by guarantee and is the ultimate parent company of Network Rail Infrastructure Limited. Network Rail has no external shareholders and funds all investment by raising debt through its financing vehicle or by investing profits.
Ultimately the cost of all investment will be borne either by users of the railway or by government. In the shorter term, investment is financed by borrowing from the capital markets, primarily through the issuance of bonds.
The Group benefits from the financial indemnity mechanism provided by the Secretary of State for Transport. This means that in the event of non-payment of financial cash flows by Network Rail, the United Kingdom Government would meet these obligations. The chance of that indemnity ever being called upon should remain remote given the stable capital structure and regulatory regime in which Network Rail operates.
How much did the Group need to borrow this year?
The Group needs to borrow principally to fund part of its £4bn investment programme in the year.
| |
£bn |
| Cash generated from operations |
2.5 |
| Capital grants |
0.2 |
| Borrowing to fund investment (see above) |
1.3 |
| Total investment |
4.0 |
During the year ended 31 March 2011 Network Rail raised £1.8bn of bonds under the Debt Issuance Programme.
| |
£bn |
| Borrowing to fund investment (see above) |
1.3 |
| Borrowing to refinance |
0.5 |
| Bonds issued in the year |
1.8 |
These bonds comprised £750m of fixed rate sterling bonds and $1.6bn of US dollar bonds. Part of this new debt was used to pay back existing loans, whilst the remainder was used to invest in the railway infrastructure. As a result, net debt rose from £23.8bn to £25.1bn.
Can Network Rail afford this level of debt?
During CP4, provided we meet our financial targets, the business will generate enough funds from its operations to cover the interest expense. The value of debt to discounted future cash flows is at comparable levels to other regulated utilities.
Financial indicators
Gearing: debt to regulatory asset base (RAB)
The debt to RAB ratio measures the value of Network Rail’s debt against the value of the RAB. This establishes whether the Group debt is at sustainable levels. The RAB is a regulatory funding mechanism that acts as a proxy for future discounted cash flows generated from the railway network.
The debt to RAB ratio for the year was 63.4 per cent (2010: 63.9 per cent). At this level the business has a buffer to absorb rising costs.
The ORR places regulatory limits on this gearing ratio. The gearing ratio is well within the licence condition target of 70 per cent. Both the gearing ratio and the licence condition target are set to rise over the next three years as Network Rail invests heavily in enhancing the rail infrastructure. By 2013/14 we expect this ratio to have risen to 66 per cent against the licence condition target of 75 per cent.
Affordability: interest cover
The adjusted interest cover ratio (AICR) measures the Group’s ability to pay interest on its debt after taking into account all running costs including steady state renewals. Network Rail’s AICR for the year was 1.93 (2010: 1.80), which is better than both the business plan and the ORR determination.
This demonstrates that the current level of interest payable is affordable as business generated operational revenue is 93 per cent greater than the cash required to pay net financing costs.
Retirement benefits
The Group’s share of the pension deficit fell in the year, from £985m to £485m through better performance of pension fund assets and changes to inflation assumptions. However the discounted obligations of the scheme are still significantly higher in value than the scheme’s assets.
The triennial funding valuation is due to be completed in the summer of 2011. The trustees will review the funding position following that report.
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