TIDM85MJ

RNS Number : 4567T

Network Rail Infrastructure Finance

03 July 2018

Network Rail Infrastructure Finance PLC

Full year results

Year ended 31 March 2018

Strategic report

The directors present their strategic report of Network Rail Infrastructure Finance PLC ("NRIF" or "the company") for the year ended 31 March 2018.

Business review

NRIF was incorporated on 31 March 2004 and entered into documentation to facilitate debt issuance on 29 October 2004.

As of 4 July 2014 Network Rail's funding requirement was met by the Department for Transport ("DfT") via a loan facility to Network Rail Infrastructure Limited ("NRIL") the owner and operator of the national rail network of Great Britain. As a result, NRIF continues to operate as the administrator of existing debt issues and derivatives under the Debt Issuance Programme ("DIP"), but will not be issuing new debt for the foreseeable future. Existing debt, derivatives and related interest payments within NRIF are reimbursed by NRIL in the form of an intercompany loan and embedded derivative.

The company was incorporated for the sole purpose of acting as the issuer under Network Rail's DIP and legally is not a member of the Network Rail group. However, for accounting purposes the company is treated as a subsidiary in the consolidated accounts of Network Rail Limited ("NRL"). The DIP is guaranteed by a financial indemnity from the Secretary of State for Transport and as a result the financial indemnity is a direct sovereign obligation of the Crown and Network Rail's debt is zero per cent risk weighted.

The financial indemnity is an unconditional and irrevocable obligation of the UK Government to make payments directly to a security trustee to cover all debt service shortfalls, whatever the cause. The financial indemnity is also designed to ensure timely payment as well as ultimate recourse to the UK Government.

Within the DIP, which is administered by NRIL, is a GBP40,000m multi-currency note programme which has been assigned the following credit ratings: AA by Standard and Poor's, Aa2 (outlook stable) by Moody's and AA (outlook negative) by Fitch.

Financial review

During the year the company incurred finance costs of GBP1,330m relating the interest on bonds in issue. These costs were passed onto NRIL in the form of finance income. NRIF also made a loss of GBP244m on the mark to market value of its derivatives (including the effect of a GBP170m loss on a derivative maturing in the year), and a gain of GBP480m on the retranslation of its foreign currency debt (including the effect of a GBP170m gain on settlement of bond maturing in the year). These gains and losses were passed through to NRIL as part of the embedded derivative. On the Network Rail group level the majority of these derivatives are in a hedge accounting relationships against future DfT drawdowns for the current control period.

NRIF made a profit before tax of GBP110,000 (2017: GBP110,000) in the year ended 31 March 2018, being the excess of the fee charged to NRIL for the provision of the facility over the fee charged by NRIL for the administration of the facility. On wind up of the company all shares and distributable reserves in the company are held for charitable purposes.

Reclassification of Network Rail

In December 2013, the Office for National Statistics announced the reclassification of Network Rail as a Central Government Body in the UK National Accounts and Public Sector Finances with effect from 1 September 2014. This is a statistical change driven by new guidance in the European System of National Accounts 2010 (ESA10).

As part of Network Rail's formal reclassification to the public sector, an arrangement was agreed whereby funding would be provided by the DfT in the form of a loan made directly to NRIL. As a result, from 4 July 2014, Network Rail borrows directly from the UK Government and currently has no plans to issue debt in its own name through NRIF.

In the unlikely event that the DfT withdraws or breaches its obligations on the loan facility to NRIL, NRIF may issue further bonds or commercial paper. NRIF's future debt service obligations will be met through repayments of the intercompany loan by NRIL.

All of the outstanding bonds under the DIP, including nominal and index-linked benchmarks and private placements in all currencies, will continue to benefit from a direct and explicit guarantee from the UK Government under the financial indemnity.

During the year ending 31 March 2018, GBP1,524m of bonds matured under the DIP. UK RPI index-linked debt was 74 per cent of gross debt at 31 March 2018.

There was no issued commercial paper outstanding as at 31 March 2018 (2017:GBPnil).

The cash and cash equivalents balance as at 31 March 2018 totalled GBP1m, having decreased by GBP3m compared to year end 2017. Cash balances are required for settlement of maturing bonds and for the purposes of managing collateral posted by financial derivative counterparties. These cash requirements are met by NRIL through repayment of the intercompany loan.

Counterparty limits are set with reference to published credit ratings. These limits dictate how much and for how long management deals with each counterparty, and are monitored on a regular basis (further details are provided in note 12).

Treasury operations

The treasury operations of NRIL, who administers the programme on behalf of NRIF, are co-ordinated and managed in accordance with policies and procedures approved by the Treasury Committee, being a full sub-committee of the Network Rail board. Treasury operations are subject to regular internal audits and the company does not engage in trades of a speculative nature.

Liquidity is provided by monitoring that NRIL has sufficient funds to meet its obligations to NRIF. NRIL are able to vary drawdowns under the DfT loan agreement in order to maintain liquidity. In addition a GBP4,000m commercial paper programme is available to provide liquidity in the event of the withdrawal of, or default by, DfT under the DfT Loan Facility.

The major financing risks that the company faces are interest rate risk, foreign currency fluctuation risk and liquidity risk. Treasury operations seek to provide sufficient liquidity to meet the company's needs, while reducing financial risks and prudently maximising interest receivable on surplus cash (further details are provided in note 12).

The company has certain debt issuances which are index-linked and thus exposed to movements in inflation rates. The company does not enter into any derivative arrangements to hedge these.

The credit risk with regard to all classes of derivative financial instruments entered into before 1 January 2013 is limited because Network Rail has arrangements in place which limits each counterparty to a threshold (based on credit ratings) which if exceeded requires the counterparty to post cash collateral. Trades entered into after 1 January 2013 are governed by new agreements where both Network Rail and its counterparties post collateral on their full adverse net derivative positions. The new agreements do not contain threshold provisions.

Treasury operations are co-ordinated and managed in accordance with policies and procedures approved by NRIL's board. Treasury operations are subject to regular internal audits and treasury does not engage in trades of a speculative nature.

Looking forward to Control Period 6 (2019-2024) NRIF will continue in operation to manage the existing bond portfolio. NRIF does not anticipate entering into any new derivative contracts in the future and existing derivatives will be fully utilised by the end of Control Period 5. Currently Network Rail is working with DfT to assess the means by which liquidity is provided to the group as a whole in CP6

Approved by the board of directors and signed by order of the board

Samantha Pitt (director)

2 July 2018

Directors' report

The directors present their report and the annual financial statements of the company for the year ended 31 March 2018.

Principal activities

The principal activity of NRIF is to act as issuer for Network Rail's DIP.

Dividends

No dividend was paid or proposed in the current year (2017: GBPnil).

Directors

NRIF maintains directors' and officers' liability insurance for its directors with a cover limit of GBP150 million for each claim or series of claims against them in their capacity as directors of the company. The company also indemnifies its directors and officers to the extent permitted by law.

Going concern

All of NRIF's activities are administered by NRIL's employees and therefore the company does not have any employees.

After making enquiries, the directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future.

In reaching this conclusion the directors considered: the Financial Indemnity as described on above; the collateral arrangements with banking counterparties as described in note 12 of the financial statements; and that the company has an intercompany agreement that recovers all net costs from NRIL.

The loan arrangement agreed between DfT and NRIL has resulted in loans being made by DfT direct to NRIL. NRIF does not anticipate issuing further bonds and NRIF's debt service obligations will continue to be met through repayments of the intercompany loan by NRIL.

Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Corporate Governance

NRIF employs no staff, and relies entirely on the governance structures of its effective controlling party Network Rail Limited, including its audit and risk committee. The role of these governance structures is scoped to include NRIF's activities in full. As permitted by DTR rule 1B.1.6, since it has not issued shares which are admitted to trading, NRIF does not itself apply a corporate governance code. However, it is subject to an appropriate

degree of control and accountability as a result of Network Rail Limited (NRL) applying the UK Corporate Governance Code, subject to a small number of exceptions as disclosed in its accounts. The principal exception to Code compliance at NRL is that due to the public sector reclassification of the Network Rail group as a whole, the Department for Transport expects (as described in Network Rail's Framework Agreement) the Comptroller and Auditor General to be appointed for Network Rail and its key subsidiaries, including NRIF. NRL's annual reports and accounts consolidate NRIF's financial results; describe the governance structures for NRL, to which NRIF is also subject, and the activity of its audit and risk committee; and describe Code compliance for the group as a whole. These reports are available at http://www.networkrail.co.uk

Approved by the board of directors and signed by order of the board

Samantha Pitt (director)

2 July 2018

Statement of comprehensive income

for the year ended 31 March 2018

 
 
 
                                   Notes      2018     2017 
                                              GBPm     GBPm 
 
Result from operations                           -        - 
 
Finance income                      5        1,330    1,017 
Finance costs                       5      (1,330)  (1,017) 
Other gains and losses              6            -        - 
 
Profit before taxation                           -        - 
Tax                                              -        - 
 
Profit and total comprehensive                   -        - 
 income for the year 
 
 

All income and expense is recognised in the statement of comprehensive income.

Statement of changes in equity

 
                                     Share   Retained    Total 
                                   capital   earnings   equity 
                                      GBPm       GBPm     GBPm 
                                  - 
-------------------------------   --------  ---------  ------- 
At 31 March 2016                         -          1        1 
Profit and total comprehensive           -          -        - 
 income for the year 
 
At 31 March 2017                         -          1        1 
Profit and total comprehensive 
 income for the year 
 
At 31 March 2018                         -          1        1 
 
 

Balance sheet

at 31 March 2018

 
                                          Notes      2018      2017 
                                                     GBPm      GBPm 
 
Non-current assets 
Receivables: amounts falling due after 
 more than one year                         7      23,379    24,730 
Derivative financial instruments           11         269       864 
 
Total non-current assets                           23,648    25,594 
 
Current assets 
Derivative financial instruments           11       1,278     1,524 
Receivables: amounts falling due within 
 one year                                   7       2,669     2,333 
Cash and cash equivalents                               1         4 
 
Total current assets                                3,948     3,861 
 
Total assets                                       27,596    29,455 
 
Current liabilities 
Loans                                      10     (1,962)   (1,745) 
Derivative financial instruments           11        (19)         - 
Other payables                              8       (269)     (444) 
 
Total current liabilities                         (2,250)   (2,189) 
 
Net current assets                                  1,698     1,672 
 
Non-current liabilities 
Loans                                      10    (24,199)  (25,738) 
Derivative financial instruments           11     (1,146)   (1,527) 
 
Total non-current liabilities                    (25,345)  (27,265) 
 
Total liabilities                                (27,595)  (29,454) 
 
Net assets                                              1         1 
 
Equity 
Share capital                              13           -         - 
Retained earnings                                       1         1 
 
Total equity                                            1         1 
 
 

The financial statements were approved by the board of directors and authorised for issue on 2 July 2018. They were signed on its behalf by:

Samantha Pitt (director)

Helena Whitaker (director)

Company registration number: 5090412

Statement of cash flows

for the year ended at 31 March 2018

 
 
                                                       2018        2017 
                                              Note     GBPm        GBPm 
 
Cash flow from operating activities            14     1,819       2,167 
Interest paid*                                        (652)       (593) 
 
Net cash inflow from operating activities             1,167       1,574 
 
Investing activities 
Interest received                                       651         601 
 
Net cash inflow from investing activities               651         601 
 
Financing activities 
Repayment of borrowings                             (1,524)     (2,388) 
Net collateral movement with counterparties           (297)         123 
Cash settlement derivatives not hedge 
 accounted                                                -         (6) 
 
Net cash outflow from financing activities          (1,821)     (2,271) 
 
Net decrease in cash and cash equivalents               (3)        (96) 
 
Cash and cash equivalents at beginning 
 of the year                                              4         100 
 
Cash and cash equivalents at end of 
 the year                                                 1           4 
 
 

*Balance includes the net interest on derivative financial instruments

Notes to the Financial Statements

for the year ended 31 March 2018

1. General information

The financial information set out in this preliminary announcement does not constitute the company's statutory accounts for the years ended 31 March 2018 or 31 March 2017, but is derived from those accounts. Whilst the financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee updates as adopted by the European Union, this announcement itself does not contain sufficient information to comply with IFRSs. Statutory accounts for the year ended 31 March 2017 have been delivered to the Registrar of Companies and those for the year ended 31 March 2018 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified. This announcement has been prepared on the basis of the accounting policies as stated in the previous year's financial statements as no new Standards, Amendments or Interpretations that became effective in the financial year. This announcement was approved by the board on 2 July 2018.

2. Significant Accounting Policies

These financial statements have been prepared in accordance with IFRS as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 as applicable to companies reporting under IFRS.

The financial statements have been prepared under the historical cost basis, except for the revaluation of derivative financial instruments to fair value, and the principal accounting policies have been applied consistently throughout the year.

The principal accounting policies are set out below.

Adoption of new and revised standards

The accounting policies adopted in this set of financial statements are consistent with those set out in the annual financial statements for the year to 31 March 2017.

The following accounting standards have not been early adopted by the group but will become effective in future years and are considered to have a material impact on the group:

i) IFRS 9 'Financial Instruments'. This is a new standard that addresses the classification, measurement and recognition of financial assets and liabilities. It is effective for accounting periods starting after 1 January 2018 and will be effective in NRIF's 2018-2019 annual accounts. NRIF has assessed that the financial impact will be a grossing up of the financial assets and liabilities of up to GBP50m.

There are no other IFRS or IFRS Interpretation Committee interpretations not yet effective that would be expected to have a material impact on the company.

Operating segments

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the company that are regularly reviewed by the board to allocate resources to the segments and to assess their performance. The company has adopted IFRS 8 for these financial statements. However, there has been no material change in presentation of these statements because the company operates one class of business, that of acting as issuer for Network Rail's DIP and undertakes that class of business in one geographical area, Great Britain. The company's debt is often issued in currencies other than sterling and sold to overseas investors.

Debt

Debt instruments are initially recorded at fair value, net of discount and direct issue costs, and are subsequently measured at amortised cost using straight line amortisation as a proxy for the IAS 39 effective interest rate method. Finance charges, including premiums payable on settlement or redemption and direct issue costs are recognised in the statement of comprehensive income over the life of the debt instrument. They are added to the carrying value of the debt instrument to the extent that they are not settled in the period in which they arise.

Derivative financial instruments and hedge accounting

The company's activities expose it primarily to the financial risks of changes in interest rates and foreign currency exchange rates. The company uses interest rate swaps and foreign exchange forward contracts to hedge these exposures.

Interest rate swaps and foreign exchange forward contracts are recorded at fair value at inception and at each balance sheet date. Movements in fair value are recorded in other gains and losses in the statement of comprehensive income.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. Unrealised gains or losses are reported in the statement of comprehensive income.

Derivatives are presented in the balance sheet in line with their maturity dates.

Investments

Investments are recognised on a trade date where a purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, including transaction costs.

Investments are classified as available-for-sale and measured at subsequent reporting dates at fair value. For available-for-sale investments, gains or losses from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the statement of comprehensive income for the period.

Foreign currencies

Monetary assets and liabilities expressed in foreign currencies are translated into sterling at exchange rates prevailing at the end of the financial year. Individual transactions denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the date payment takes place. Gains or losses realised on any foreign exchange movements are recognised in 'Other gains and losses' in the statement of comprehensive income.

Intra-group borrowings

The company provides the Network Rail group with funding. It passes all transactions and balances through the intra-group borrowings to NRIL. Existing debt, derivatives and related interest payments within NRIF are passed onto NRIL in the form of an intercompany loan and embedded derivative. As such any gains and losses relating to debt and derivatives are also passed through to NRIL.

Tax

The tax expense represents the sum of the current tax payable and deferred tax. The company's current tax liability is calculated using the tax rates that have been enacted or substantively enacted by the balance sheet date.

Current taxes are based on the taxable results of the company and calculated in accordance with tax rules in the United Kingdom.

3. Staff costs

The directors received no remuneration for their services in the current or prior year. Other than the directors, there were no employees of the company in the current or prior year. Administration services are provided by NRIL.

4. Auditors' remuneration

Fees payable to the company auditors for the audit of the company's annual accounts of GBP20,000 (2017: GBP20,000) have been borne by NRIL. No other fees were payable by the company to the company auditors in the current or prior year.

5. Finance income and finance costs

 
                                               Year       Year 
                                              ended      ended 
                                           31 March   31 March 
                                               2018       2017 
                                               GBPm       GBPm 
 
Finance income 
 Interest receivable from NRIL                1,325      1,010 
Interest receivable on investments                5          7 
 
Total finance income                          1,330      1,017 
 
Finance costs 
 Interest payable on debt issued 
 under the DIP                              (1,144)      (928) 
Interest on bank loans and overdrafts          (22)       (14) 
Net interest on derivative instruments        (164)       (75) 
 
Total finance costs                         (1,330)    (1,017) 
 
 

6. Other gains and losses

 
 
                                              Year          Year 
                                             ended         ended 
                                          31 March      31 March 
                                              2018          2017 
                                              GBPm          GBPm 
 
Gain/(loss) on retranslation of 
 external debt                                 480         (164) 
Net (loss)/gain on fair value of 
 external 
 derivative financial instruments            (244)            25 
(Loss)/gain on fair value of embedded 
 derivative                                  (236)           139 
 
 
Total gains and (losses)                         -             - 
 
 

All gains and losses on intra-group borrowings are passed onto NRIL through the embedded derivative. More details are provided in the intra-group borrowings section of Note 2.

7. Receivables

 
                                                 31 March  31 March 
                                                     2018      2017 
                                                     GBPm      GBPm 
 
Non-current assets 
Loans to NRIL                                      23,379    24,730 
 
                                                   23,379    24,730 
 
 
Current assets 
Interest on loans to NRIL                             181       184 
Loans to NRIL                                       1,738     1,524 
Interest on investments                                 -         - 
Collateral placed with banking counterparties         750       625 
 
                                                    2,669     2,333 
 
Total receivables                                  26,048    27,063 
 
 

8. Other payables

 
 
                                                   31 March    31 March 
                                                       2018        2017 
                                                       GBPm        GBPm 
 
Current liabilities 
Collateral received from banking counterparties          87         259 
Interest payable on bonds issued under 
 the DIP                                                180         183 
Interest payable on European Investment 
 Bank long term loans                                     2           2 
 
Total payables                                          269         444 
=================================================  ========  ========== 
 

9. Loans

Bonds issued under the DIP are analysed as follows:

 
                                                31 March   31 March 
                                                     2018       2017 
                                                     GBPm       GBPm 
   -------------------------------------------  ---------  --------- 
    1.085% sterling index linked bond due 
     2052                                             134        129 
    0% sterling index linked bond due 2052            144        137 
    1.003% sterling index linked bond due 
     2051                                              25         24 
    0.53% sterling index linked bond due 2051         129        124 
    0.517% sterling index linked bond due 
     2051                                             130        125 
    0% sterling index linked bond due 2051            144        138 
    0.678% sterling index linked bond due 
     2048                                             127        122 
    1.125% sterling index linked bond due 
     2047                                           5,559      5,366 
    0% sterling index linked bond due 2047             91         87 
    1.1335% sterling index linked bond due 
     2045                                              52         50 
    1.5646% sterling index linked bond due 
     2044                                             290        279 
    1.1565% sterling index linked bond due 
     2043                                              58         56 
    1.1795% sterling index linked bond due 
     2041                                              71         69 
    1.2219% sterling index linked bond due 
     2040                                             285        275 
    1.2025% sterling index linked bond due 
     2039                                              78         75 
    4.6535% sterling bond due 2038                    100        100 
    1.375% sterling index linked bond due 
     2037                                           5,447      5,247 
    4.75% sterling bond due 2035                    1,231      1,230 
    1.6492% sterling index linked bond due 
     2035                                             433        418 
    4.375% sterling bond due 2030                     872        871 
    1.75% sterling index linked bond due 2027       5,328      5,157 
    4.615% Norwegian krone bond due 2026               45         46 
    4.57% Norwegian krone bond due 2026                13         13 
    1.9618% sterling index linked bond due 
     2025                                             366        353 
    4.75% sterling bond due 2024                      740        738 
    3% sterling bond due 2023                         398        398 
    2.76% Swiss franc bond due 2021                   224        238 
    2.315% Japanese yen bond due 2021                  67         72 
    2.28% Japanese yen bond due 2021                   67         72 
    2.15% Japanese yen bond due 2021                   67         72 
    4.625% sterling bond due 2020                     999        999 
    1.75% US dollar bond due 2019                     713        797 
    0.875% US dollar bond due 2018                  1,249      1,394 
    0.75% US dollar bond due 2017                       -        996 
    1% sterling bond due 2017                           -        749 
 
                                                   25,677     27,016 
   ===========================================  =========  ========= 
 

Other long term loans are analysed as follows:

 
                                        31 March  31 March 
                                            2018      2017 
                                            GBPm      GBPm 
--------------------------------------  --------  -------- 
Index linked European Investment Bank 
 due 2036 and 2037                           484       467 
 
                                             484       467 
======================================  ========  ======== 
 

The Secretary of State for Transport has provided an unlimited financial indemnity in respect of the above borrowings and those borrowings under the DIP which expires in 2052.

10. Net borrowings

 
                                                      31 March             31 March 
                                                          2018                 2017 
                                                          GBPm                 GBPm 
 
Net borrowings by instrument 
 
Cash and cash equivalents                                    1                    4 
Collateral receivable                                      750                  625 
Collateral obligation                                     (87)                (259) 
Bank loans                                               (484)                (467) 
Bonds issued under the DIP                            (25,677)             (27,016) 
 
                                                      (25,497)             (27,113) 
 
Movement in net borrowings 
At the beginning of the year                          (27,113)             (28,702) 
Decrease in cash and cash equivalents                      (3)                 (96) 
Movement in collateral receivable                          125                (194) 
Movement in collateral obligation to counterparties        172                   71 
Repayments of borrowings                                 1,524                2,388 
Capital accretion on index-linked bonds                  (715)                (449) 
Exchange differences                                       480                (164) 
Fair value and other movements                              33                   33 
 
At the end of the year                                (25,497)             (27,113) 
 
 
Net borrowings are reconciled to the balance 
 sheet as set out below: 
Cash and cash equivalents*                                   1                    4 
Collateral receivable                                      750                  625 
Collateral obligation                                     (87)                (259) 
Borrowings included in current liabilities             (1,962)              (1,745) 
Borrowings included in non-current liabilities        (24,199)             (25,738) 
 
At the end of the year                                (25,497)             (27,113) 
====================================================  ========  =================== 
 

11. Derivative financial instruments

 
                                          31 March 2018        31 March 2017 
                                        Fair   Notional      Fair   Notional 
                                       value    amounts     value    amounts 
                                        GBPm       GBPm      GBPm       GBPm 
==================================  ========  =========  ========  ========= 
 Derivative financial assets 
  included in non-current 
  assets                                 269      3,495       864      9,271 
 Derivative financial assets 
  included in current assets             228      3,100       237      2,959 
 Embedded derivatives in 
  the inter-company loan to 
  NRIL (included in current 
  assets)                              1,050     32,009     1,287     29,908 
==================================  ========  =========  ========  ========= 
                                       1,547     38,604     2,388     42,138 
==================================  ========  =========  ========  ========= 
 
                                          31 March 2018        31 March 2017 
                                        Fair   Notional      Fair   Notional 
                                       Value    amounts     Value    amounts 
                                        GBPm       GBPm      GBPm       GBPm 
==================================  ========  =========  ========  ========= 
 Derivative financial liabilities 
  included in current liabilities       (19)      2,352         -          - 
 Derivative financial liabilities 
  included in non-current 
  liabilities                        (1,146)     23,062   (1,527)     17,678 
==================================  ========  =========  ========  ========= 
                                     (1,165)     25,414   (1,527)     17,678 
==================================  ========  =========  ========  ========= 
 

12. Funding and financial risk management

Introduction

The company is not a member of the Network Rail group. However, for accounting purposes the company is treated as a subsidiary in the consolidated accounts of NRL. The Network Rail group is largely debt funded.

Summary table of financial assets and liabilities

The following table presents the carrying amounts and the fair values of the company's financial assets and liabilities at 31 March 2018 and 31 March 2017.

The fair values of financial assets and liabilities are recognised at the amount at which the instrument could be exchanged for in a current transaction between willing parties, other than in a forced or liquidation sale. With the exception of bank loans and bonds, all financial assets and liabilities are carried at amounts that approximate to their fair value. Those amounts are in accordance with the significant accounting policies set out in Note 2. Bank loans are valued based on market data at the balance sheet date and the net present value of discounted cash flows. Bonds issued under the DIP are valued based on market data at the balance sheet date. Where market data is not available valuations are obtained from dealing banks.

 
                                                 31 March 2018                 31 March 2017 
                                     Carrying value       Fair   Carrying value         Fair 
                                                         value                         value 
                                               GBPm       GBPm             GBPm         GBPm 
==================================  ===============  =========  ===============  =========== 
 Financial assets 
 Cash and cash equivalents                        1          1                4            4 
 Loans and receivables 
  - Loans to NRIL                            25,117     25,117           26,254       26,254 
 Collateral receivable                          750        750              625          625 
==================================  ===============  =========  ===============  =========== 
                                             25,868     25,868           26,883       26,883 
==================================  ===============  =========  ===============  =========== 
 
 Other non-derivative 
  financial assets 
 Trade and other receivables 
  at amortised cost                             181        181              184          184 
 
 Derivatives 
 Derivative financial 
  instruments                                   497        497            1,101        1,101 
----------------------------------  ---------------  ---------  ---------------  ----------- 
 Total derivatives                            1,547      1,547            2,388        2,388 
==================================  ===============  =========  ===============  =========== 
 Total financial assets                      27,596     27,596           29,455       29,455 
==================================  ===============  =========  ===============  =========== 
 
                                                 31 March 2018                   31 March 2017 
                                           Carrying       Fair   Carrying value     Fair value 
                                              value      value 
                                               GBPm       GBPm             GBPm           GBPm 
----------------------------------  ---------------  ---------  ---------------  ------------- 
 Financial liabilities 
 Financial liabilities held 
  at amortised cost: 
 Collateral held                               (87)       (87)            (259)          (259) 
 European Investment Bank loans               (484)      (811)            (467)          (872) 
 Bonds issued under the DIP                (25,677)   (30,893)         (27,016)       (33,435) 
----------------------------------  ---------------  ---------  ---------------  ------------- 
                                           (26,248)   (31,791)         (27,742)       (34,566) 
 
 Trade and other payables at 
  amortised cost                              (182)      (182)            (185)          (185) 
 
 Derivatives 
 Derivative financial instruments           (1,165)    (1,165)          (1,527)        (1,527) 
----------------------------------  ---------------  ---------  ---------------  ------------- 
 Total derivatives                          (1,165)    (1,165)          (1,527)        (1,527) 
----------------------------------  ---------------  ---------  ---------------  ------------- 
 Total financial liabilities               (27,595)   (33,138)         (29,454)       (36,278) 
==================================  ===============  =========  ===============  ============= 
 
 

Derivatives

The company has contracted with NRIL to administer the DIP, the terms of which are set out in an administration agreement. NRIL has a comprehensive risk management process and the Treasury Committee, being a full sub-committee of the Network Rail board, has approved and monitors the risk management processes, including documented treasury policies, counterparty limits, controlling and reporting structures.

Proceeds from the DIP are lent on to NRIL under the intercompany loan agreement which gives rise to an embedded derivative. In addition, the company also uses other derivatives to reduce the foreign exchange risk and interest rate risk of NRIL. The company does not use derivative financial instruments for speculative purposes. The use of derivative instruments can give rise to credit and market risk. Market risk is the possibility that future changes in foreign exchange rates and interest rates may make a derivative more or less valuable. Since the company uses derivatives for risk management, market risk relating to derivative instruments will principally be offset by changes in the valuation of the underlying assets or liabilities.

Credit risk

The credit risk with regard to all classes of derivative financial instrument is limited because counterparties are banks with high credit ratings assigned by international credit-rating agencies. A treasury sub-committee of the NRIL board authorises the policy for setting counterparty limits based on credit-ratings. The company spreads its exposure over a number of counterparties and has strict policies on how much exposure can be assigned to each counterparty before cash collateral is sought.

The concentration of the company's investments varies depending on the level of surplus liquidity. However, because of the strict criteria governing counterparties' suitability the risk is mitigated. A treasury sub-committee of the NRIL board also authorises the types of investment and borrowing instruments that may be used.

The credit risk on the intercompany loan with NRIL is considered limited as the Secretary of State for Transport has provided an unlimited financial indemnity in respect of borrowings under the DIP which expires in 2052 meaning that obligations to debt holders could still be fulfilled without NRIL.

Particular attention is paid to the credit risk of swap counterparties. The credit risk with regard to all classes of derivative financial instruments entered into before 1 January 2013 is limited because Network Rail has arrangements in place which limits each counterparty to a threshold (based on credit ratings) which if exceeded requires the counterparty to post cash collateral. The thresholds were agreed by the treasury committee. In December 2012 the group entered into new collateral agreements in respect of derivative trades entered into after 1 January 2013. Under the terms of the new agreements Network Rail and its counterparties are required to post collateral for the full fair value of their net out of the money positions.

Foreign exchange risk

The company is exposed to currency risks from its financing and, from time to time, investing activities. Foreign exchange risk for all currencies is managed by the use of currency swaps to limit the effects of movements in exchange rates on foreign currency denominated assets and liabilities.

The company considers a ten percentage point increase in the value of any currency against sterling to be a reasonably possible change and this would not have a material impact on the company's net profit before tax or equity. This is due to the workings of the intercompany loan agreement and the consequent embedded derivative.

Interest and inflation rate risk

The company is exposed to interest rate risk from its financing and investing activities. Interest rate risk for all debt is managed by the use of interest rate swaps to limit the effects of movements in interest rates on floating rate liabilities.

Due to the workings of the intercompany loan agreement and the consequent embedded derivative, an increase or decrease in average interest rates during the year would have no impact upon the statement of comprehensive income, the net assets or the reserves of the company.

The company has certain debt issuances which are index-linked and so is exposed to movements in inflation rates. The company does not enter into any derivative arrangements to hedge these.

Due to the workings of the intercompany loan agreement and the consequent embedded derivative an increase or decrease in average inflation rates during the year would have no impact upon the statement of comprehensive income, the net assets or the reserves of the company.

Embedded derivative

The obligations and rights of the company under the intercompany loan agreement with NRIL give rise to an embedded derivative in that agreement which reflects the external currency and interest rates risks to which the company is exposed. The embedded derivative is treated as a separate derivative and accounted for in accordance with the accounting policy in note 2.

Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the board of directors. A treasury sub-committee of the board of NRIL, who acts as administrator for NRIF, has built an appropriate liquidity risk management framework for the management of the company's short, medium and long-term funding and liquidity management requirements. Liquidity is provided by monitoring that NRIL has sufficient funds to meet its obligations to NRIF. NRIL are able to vary drawdowns under the DfT loan agreement in order to maintain liquidity. In addition a GBP4bn commercial paper programme is available to provide liquidity in the event of the withdrawal of, or default by DfT, under the DfT Loan Facility.

Treasury is subject to regular internal audits.

In addition, the Secretary of State for Transport has provided an unlimited financial indemnity in respect of borrowings under the DIP (which expires in 2052).

The following table details the company's remaining contractual maturity for its financial liabilities. The table has been drawn up on the undiscounted cash flows of financial liabilities based on the earliest date on which the company can be required to pay and, therefore, differs from both the carrying value and the fair value. The table includes both interest and principal cash flows.

 
                                  Within      1-2   2-5 years         5+      Total 
                                  1 year    years                  years 
                                    GBPm     GBPm        GBPm       GBPm       GBPm 
==============================  ========  =======  ==========  =========  ========= 
 31 March 2018 
 
 Non derivative financial liabilities 
 Bank loans and overdrafts           (5)      (5)        (14)      (483)      (507) 
 
 
 Sterling denominated 
  DIP bonds                        (196)    (196)     (1,496)    (4,573)    (6,461) 
 Sterling denominated 
  index linked DIP bonds           (256)    (264)       (839)   (38,849)   (40,208) 
 Foreign currency denominated 
  DIP bonds                      (1,993)     (13)       (454)       (69)    (2,529) 
 
 Derivative financial 
  liabilities 
 Net settled derivative 
  contracts                        (191)    (177)       (372)      (104)      (844) 
 Gross settled derivative 
  contracts - receipts             1,993       13         454         69      2,529 
 Gross settled derivative 
  contracts - payments           (1,757)      (5)       (282)       (61)    (2,105) 
 
 Collateral held                    (87)        -           -          -       (87) 
==============================  ========  =======  ==========  =========  ========= 
                                 (2,492)    (647)     (3,003)   (44,070)   (50,212) 
==============================  ========  =======  ==========  =========  ========= 
 
 
                                  Within       1-2   2-5 years         5+      Total 
                                  1 year     years                  years 
                                    GBPm      GBPm        GBPm       GBPm       GBPm 
==============================  ========  ========  ==========  =========  ========= 
 31 March 2017 
 
 Non derivative financial liabilities 
 Bank loans and overdrafts           (3)       (3)         (9)      (527)      (542) 
 
 Bonds issued under the DIP 
 Sterling denominated 
  DIP bonds                        (971)     (214)     (1,595)    (5,149)    (7,929) 
 Sterling denominated 
  index linked DIP bonds           (155)     (155)       (464)   (20,612)   (21,386) 
 Foreign currency denominated 
  DIP bonds                      (1,055)   (2,237)       (535)      (979)    (4,806) 
 
 Derivative financial 
  liabilities 
 Net settled derivative 
  contracts                        (160)     (280)       (916)      (409)    (1,765) 
 Gross settled derivative 
  contracts - receipts             1,040     2,225         495         73      3,833 
 Gross settled derivative 
  contracts - payments             (794)   (1,764)       (276)       (61)    (2,895) 
 
 Collateral held                   (259)         -           -          -      (259) 
==============================  ========  ========  ==========  =========  ========= 
                                 (2,357)   (2,428)     (3,300)   (27,664)   (35,749) 
==============================  ========  ========  ==========  =========  ========= 
 

Offsetting financial assets and liabilities

a) Financial assets

The following financial assets are subject to offsetting, enforceable master netting arrangements and similar agreements.

 
                                                                                  Related amounts 
                                                                                   not set off in 
                                                                                  the balance sheet 
                                  Gross            Gross      Net amount      Financial   Cash collateral   Net amount 
                                amounts          amounts    of financial    instruments          received 
                          of recognised    of recognised          assets 
                              financial        financial       presented 
                                 assets      liabilities          in the 
                                                 set off         balance 
                                                  in the           sheet 
                                                 balance 
                                                   sheet 
 31 March 2018                     GBPm             GBPm            GBPm           GBPm              GBPm         GBPm 
 
 Derivative financial 
  assets                          1,547                -           1,547          (406)               123        1,264 
 
 
 
                                                                                  Related amounts 
                                                                                   not set off in 
                                                                                  the balance sheet 
                                  Gross            Gross      Net amount      Financial   Cash collateral   Net amount 
                                amounts          amounts    of financial    instruments          received 
                          of recognised    of recognised          assets 
                              financial        financial       presented 
                                 assets      liabilities          in the 
                                                 set off         balance 
                                                  in the           sheet 
                                                 balance 
                                                   sheet 
 31 March 2017                     GBPm             GBPm            GBPm           GBPm              GBPm         GBPm 
 
 Derivative financial 
  assets                          2,388                -           2,388          (868)               (9)        1,511 
 
 

b) Financial liabilities

The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements.

 
                                                                                  Related amounts 
                                                                                   not set off in 
                                                                                  the balance sheet 
                                  Gross            Gross      Net amount      Financial   Cash collateral   Net amount 
                                amounts          amounts    of financial    instruments              paid 
                          of recognised    of recognised     liabilities 
                              financial        financial       presented 
                            liabilities           assets          in the 
                                                 set off         balance 
                                                  in the           sheet 
                                                 balance 
                                                   sheet 
 31 March 2018                     GBPm             GBPm            GBPm           GBPm              GBPm         GBPm 
 
 Derivative financial 
  liabilities                   (1,165)                -         (1,165)            406               540        (219) 
 
 
 
                                                                                  Related amounts 
                                                                                   not set off in 
                                                                                  the balance sheet 
                                  Gross            Gross      Net amount      Financial   Cash collateral   Net amount 
                                amounts          amounts    of financial    instruments             paid* 
                          of recognised    of recognised     liabilities 
                              financial        financial       presented 
                            liabilities           assets          in the 
                                                 set off         balance 
                                                  in the           sheet 
                                                 balance 
                                                   sheet 
 31 March 2017                     GBPm             GBPm            GBPm           GBPm              GBPm         GBPm 
 
 Derivative financial 
  liabilities                   (1,527)                -         (1,527)            868         375              (284) 
 
 

* due to over-collateralisation, the cash collateral paid is limited to the remaining amount of the net financial liabilities presented in the balance sheet

Fair value measurements recognised in the balance sheet

The following table provides an analysis of financial instruments measured at their fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

-- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities

-- Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of interest rate and cross currency swaps is calculated as the present value of the estimated future cash flows using yield curves at the reporting date; and

-- Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 
 As at 31 March 2018:                   Level     Level   Level      Total 
                                            1         2       3       GBPm 
                                         GBPm      GBPm    GBPm 
==================================  =========  ========  ======  ========= 
 Derivative financial assets                -     1,547       -      1,547 
 Financial assets at amortised 
  cost                                      -    26,049       -     26,049 
==================================  =========  ========  ======  ========= 
 Assets                                     -    27,596       -     27,596 
==================================  =========  ========  ======  ========= 
 
 Derivative financial liabilities           -   (1,165)       -    (1,165) 
 Financial liabilities held at 
  amortised cost                     (29,989)   (1,896)       -   (31,885) 
==================================  =========  ========  ======  ========= 
 Liabilities                         (29,989)   (3,061)       -   (33,050) 
==================================  =========  ========  ======  ========= 
 
 Total                               (29,989)    24,535       -    (5,454) 
==================================  =========  ========  ======  ========= 
 

There were no transfers between Level 1 and 2 during the year.

 
 As at 31 March 2017:                   Level     Level   Level      Total 
                                            1         2       3       GBPm 
                                         GBPm      GBPm    GBPm 
==================================  =========  ========  ======  ========= 
 Derivative financial assets                -     2,388       -      2,388 
 Financial assets at amortised 
  cost                                      -    27,067       -     27,067 
==================================  =========  ========  ======  ========= 
 Assets                                     -    29,455       -     29,455 
==================================  =========  ========  ======  ========= 
 
 Derivative financial liabilities           -   (1,527)       -    (1,527) 
 Financial liabilities held at 
  amortised cost                     (32,784)   (2,267)       -   (35,051) 
==================================  =========  ========  ======  ========= 
 Liabilities                         (32,784)   (3,794)       -   (36,578) 
==================================  =========  ========  ======  ========= 
 
 Total                               (32,784)    25,661       -    (7,123) 
==================================  =========  ========  ======  ========= 
 

There were no transfers between Level 1 and 2 during the prior year.

The fair value of Level 2 derivatives is estimated by discounting the future contractual cash flows using appropriate yield curves based on quoted market rates as at the current financial year end.

13. Share capital

 
 
                                          31 March    31 March 
                                              2018        2017 
                                               GBP         GBP 
 
Authorised, issued and partly paid: 
2 ordinary shares of GBP1 fully paid 
 up                                              2           2 
49,998 ordinary shares of GBP1 partly 
 paid to GBP0.25 each                       12,500      12,500 
 
                                            12,502      12,502 
 
 

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.

14. Notes to the cash flow statement

 
 
                                             31 March    31 March 
                                                 2018        2017 
                                                 GBPm        GBPm 
 
Profit before tax                                   -           - 
 
Operating cash flow before movements in                         - 
 working capital 
 
Increase in receivables                         1,819       2,167 
 
Net cash generated by operating activities      1,819       2,167 
 
 

Cash and cash equivalents (which are represented as a single class of assets on the face of the balance sheet) comprise cash at bank, money fund balances and money market deposit investments with a maturity of up to three months.

15. Controlling party and related party transactions

50,000 shares of the company are held by Intertrust Corporate Services Limited[a]. All shares and distributable reserves in the company are held for charitable purposes.

Legal control of the company is disclosed above but effective control of the company is held by Network Rail and therefore by the DfT and Secretary of State.

On this basis for accounting purposes the company is treated as a subsidiary in the consolidated accounts of Network Rail.

Transactions with NRIL are clearly identified within the relevant notes to the accounts.

[a] During the period NRIF was notified that HSBC Trustee (C.I.) Limited would no longer be providing share trustee responsibilities to its clients and the responsibilities needed to be transferred to another provider. Intertrust Corporate Services Limited was appointed on 5 October 2017 to fulfil these responsibilities.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR SSMFLDFASEFW

(END) Dow Jones Newswires

July 03, 2018 10:28 ET (14:28 GMT)

Net.r.i.4.75% (LSE:85MJ)
Historical Stock Chart
From Nov 2024 to Dec 2024 Click Here for more Net.r.i.4.75% Charts.
Net.r.i.4.75% (LSE:85MJ)
Historical Stock Chart
From Dec 2023 to Dec 2024 Click Here for more Net.r.i.4.75% Charts.