7 December 2022

 

Network Rail publishes its half-year financial results for the six months ending 30 September 2022.

 

Financial highlights

	Unaudited six months ended 30 September 2022 £m	Unaudited six months ended 30 September 2021 £m	Variance £m
Revenue	4,686	4,726	(40)
Net operating costs excluding depreciation and amortisation	(2,342)	(2,334)	(8)
Net operating costs	(3,404)	(3,339)	(65)
Operating profit	1,282	1,387	(105)
(Loss) / Profit before tax	(980)	126	(1,106)
Net cash from operating activities	2,063	2,254	(191)
Capital expenditure	2,996	3,043	(47)

 

	Unaudited 30 September 2022 £m	Audited 31 March 2022 £m	Variance £m
Net borrowings	(57,414)	(56,051)	(1,363)
Net assets	14,678	10,355	4,323
Property, plant and equipment - the railway network	81,398	75,890	5,508
Investment Property	210	212	(2)

Commentary

Summary

These results show the progress that we are making three and a half years into our 5-year funding plan.

Network Rail is on course to meet its five-year target of £4bn planned efficiencies from its cost base. In the last six months income has been impacted by a series of strikes by employees, severe weather events and changes in rail usage as we emerge from the pandemic.

The Government continues to support our industry so that our direct customers, the passenger and freight operating companies, have continued to pay amounts owed to Network Rail as they fall due.

In addition, Network Rail has been able to use the risk funds available in the five-year spending plan to mitigate revenue shortfalls. As a result, there has been no material change to our delivery plan outputs.

Resolution of the industrial dispute remains vital to help earn the trust and confidence of our customers and in doing so improve revenues and reduce the railways reliance on taxpayers' subsidies.

Revenues

Revenues decreased in comparison to the same period last year by £40m to £4,686m from £4,726m. Track access income was impacted by poorer performance than last year due primarily to  the impact of severe weather events including the record-breaking warm temperatures through the summer months,  industrial action and having a busier network as more services are brought on-line.

Property rental income, primarily from station retail tenants, improved by £35m and has increased alongside passenger volumes and footfall in stations.

Operating costs increased by £65m to £3,404m from £3,339m. This was due to non-cash increases in depreciation. Other costs are within budget and Network Rail is on track to deliver its stretched efficiency target of £4bn for the period 2019-2024.

In this half year Network Rail made an operating profit of £1,282m (2021: £1,387m). However, a loss before tax was made of £980m (2021: profit of £126m) due to increased finance costs relating to RPI-linked bonds. These non-cash finance costs increased by £984m as a result of higher inflation which caused the valuation of RPI-linked bonds to increase sharply.

Borrowings

Network Rail is not planning to issue any new debt in the 2019-2024 period. Net debt rose from £56.1bn at year end 31 March 2022 to £57.4bn as of 30 September 2022. This was due to increases in the valuation of RPI-linked bonds, offset by increased cash holdings.

Assets

The value of the railway network increased to £81.4bn from £75.9bn as of 30 September 2022. Capital investment in the infrastructure totalled £3bn (2021: £3bn), including £1.2bn that was grant-funded. Depreciation was £1bn, and, after considering prevailing inflation rates and forecasts regarding revenue and running costs, the network was valued upwards by £4.7bn. This is discussed in more detail in Note 6 to the Interim Financial Statements.

Investment

Investment in the first six months of the year was £3bn (2021: £3bn). Enhancement investment £1.2bn (2021: £1.2bn) included some of our flagship programmes to improve the network such as the Trans Pennine Route Upgrade.  Renewals £1.8bn (2021: £1.8bn) included £0.5bn on track renewals, signalling £0.4bn, civils £0.3bn, buildings £0.2bn, electrification £0.2bn and telecoms and I.T. £0.2bn.

Risks and Uncertainties

The principal risks and uncertainties affecting the business activities of the group were set out on pages 87 to 98 of the annual report and accounts for the year ended 31 March 2022, a copy of which is available on the group's website www.networkrail.co.uk. The group's key risks and uncertainties are summarised under the headings: safety; performance; and value.

In the view of the board, the key risks and uncertainties for the remaining six months of the financial year continue to be those set out in the risks and uncertainties section of the 31 March 2022 annual report and accounts.  It should be noted that the autumn and winter seasons provide additional performance risks, due to increases in weather-related and track adhesion-related delays.  The critical accounting judgements and key sources of uncertainties relating to these interim financial statements are set out on page 16.

Outlook

Wider economic cost pressures continue to weigh heavily on both the business and its employees. Finding a solution to the industrial dispute is key to improving business performance in the next six months.

Network Rail is carrying on with delivering the efficiency plans that have helped us to shrink the cost base over the last 3 and half years by around £2.4bn towards our £4bn five-yearly stretch target. In doing so putting the business on a firmer footing as we look forward to our next five-yearly control period.

The bottom line is that the rail industry is responding to changes in usage patterns and taking actions that will make the railway more affordable for taxpayers and rail users alike. In doing so we will become an increasingly important part of our national infrastructure and a key driver of clean, green and safe economic growth, with the power to reach across the whole of Great Britain. 

 

Statement of directors' responsibilities

The directors confirm that this condensed consolidated interim financial information has been prepared in accordance with International Accounting Standard ("IAS") 34 as adopted by the United Kingdom and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

·  an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·  material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Network Rail Limited are listed in the Network Rail Limited annual report for the year ended 31 March 2022. A list of current directors is available on the group's website: www.networkrail.co.uk.

By order of the board

Andrew Haines

Chief executive

6 December 2022

 

Independent review report

to Network Rail Limited

 

I have been engaged by the company to review the condensed consolidated interim financial statements of Network Rail Limited for the six months ended 30 September 2022 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and related explanatory notes.

 

Based on my review, nothing has come to my attention that causes me to believe that the condensed set of financial statements for the six months ended 30 September 2022 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

Basis for Conclusion

I conducted my review in accordance with International Standards on Review Engagement (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued for use in the United Kingdom.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable me to obtain assurance that I would become aware of all significant matters that might be identified in an audit. Accordingly, I do not express an audit opinion.

 

As disclosed in note 1, the annual statements of the group are prepared in accordance with UK adopted IFRSs.  The condensed set of financial statements has been prepared in accordance with UK adopted International Accounting Standard 34 "Interim Financial Reporting".

 

Conclusions Relating to Going Concern

Based on my review procedures, which are less extensive that those performed in an audit as described in the Basis on Conclusion section of this report, nothing has come to my attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified uncertainties relating to going concern that are not appropriately disclosed.

 

This conclusion is based on the review procedures performed in accordance with this ISRE, however, future events or conditions may cause the entity to cease to continue as a going concern.

 

Responsibilities of directors

The directors are responsible for preparing the condensed interim financial statements in accordance with Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

In preparing the condensed interim financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors wither intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

 

 

Auditor's Responsibilities for the review of the financial information

In reviewing the condensed interim financial statements, I am responsible for expressing to the Company a conclusion on the condensed set of financial statements in the condensed interim financial statements.  My conclusion, including my Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

 

Sarah Che (Senior Statutory Auditor) 

6 December 2022

         

For and on behalf of the

Comptroller and Auditor General (Statutory Auditor)

National Audit Office

157-197 Buckingham Palace Road

Victoria

London

SW1W 9SP

 

 

 

Consolidated income statement

			Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March  2022
	Notes		£m	£m	£m
Revenue	2		4,686	4,726	9,553
Net operating costs	3		(3,404)	(3,339)	(6,594)
Operating profit			1,282	1,387	2,959
Property revaluation movements and profits on disposal			(10)	27	51
Total profit from operations			1,272	1,414	3,010
Finance income	4		2	-	1
Other gains and losses	4		63	85	157
Finance costs	4		(2,317)	(1,373)	(2,844)
(Loss) / Profit before tax			(980)	126	324
Tax Credit / (Charge)	5		117	(1,060)	(925)
(Loss) / Profit after tax for the period			(863)	(934)	(601)

 

 

Consolidated statement of comprehensive income

	Unaudited six months ended 30 September 2022		Unaudited six months ended 30 September 2021		Audited year ended 31 March  2022
	£m		£m		£m
(Loss) / Profit for the period	(863)		(934)		(601)
Other comprehensive income/(expense):
Items that will not be reclassified to profit or loss
Gain on revaluation of the railway network	4,696		1,488		1,844
Remeasurement of defined benefit scheme obligations	2,160		(242)		966
Tax relating to components of other comprehensive income that will not be reclassified to profit or loss	(1,714)		(465)		(856)
Total items that will not be reclassified to profit or Loss	5,142		781		1,954
Items that may be reclassified to profit or loss
Loss on movement in fair value of hedging    derivatives	-		-		-
Reclassification of balances in the hedging reserve to     the income statement	44		66		95
Deferred tax relating to components of other comprehensive income	-		-		-
Total items that may be reclassified subsequently to profit or loss	44		66		95
Other comprehensive income for the period	5,186		847		2,049
Total comprehensive income /  (loss) for the period	4,323		(87)		1,448

 

 

Consolidated statement of changes in equity

	Revaluation Reserve		Other Reserve*		Hedging Reserve		Retained Earnings		Total
	£m		£m		£m		£m		£m
At 1 April 2022	2,432		249		(184)		7,858		10,355
Loss for the period	-		-		-		(863)		(863)
Other comprehensive income
Revaluation of the railway network	4,696		-		-		-		4,696
Transfer of deemed cost depreciation from revaluation reserve	(79)		-		-		79		-
Increase in deferred tax liability on the railway network	(1,174)		-		-		-		(1,174)
Actuarial gain on defined benefit scheme	-		-		-		2,160		2,160
Deferred tax on actuarial gain	-		-		-		(540)		(540)
Transfer between reserves - deferred tax	20		-		-		(20)		-
Reclassification of balances in the hedging reserve to the income statement	-		-		44		-		44
Total comprehensive income	3,463		-		44		816		4,323
Balance at 30 September 2022 (Unaudited)	5,895		249		(140)		8,674		14,678
	Revaluation Reserve		Other Reserve*		Hedging Reserve		Retained Earnings		Total
	£m		£m		£m		£m		£m
At 1 April 2021	1,074		249		(279)		7,863		8,907
Loss for the period	-		-		-		(934)		(934)
Other comprehensive income
Impact of change in tax rate	(80)		-		-		(74)		(154)
Revaluation of the railway network	1,488		-		-		-		1,488
Transfer of deemed cost depreciation from revaluation reserve	21		-		-		(21)		-
Increase in deferred tax liability on the railway network	(372)		-		-		-		(372)
Actuarial loss on defined benefit scheme	-		-		-		(242)		(242)
Deferred tax on actuarial losses	-		-		-		61		61
Transfer between reserves - deferred tax	(4)		-		-		4		-
Reclassification of balances in the hedging reserve to the income statement	-		-		66		-		66
Total comprehensive income	1,053		-		66		(1,206)		(87)
Balance at 30 September 2021 (Unaudited)	2,127		249		(213)		6,657		8,820
	Revaluation Reserve		Other Reserve*		Hedging Reserve		Retained Earnings		Total
	£m		£m		£m		£m		£m
At 1 April 2021	1,074		249		(279)		7,863		8,907
Loss for the period	-		-		-		(601)		(601)
Other comprehensive income
Impact of change in tax rate	-		-		-		(153)		(153)
Revaluation of the railway network	1,844		-		-		-		1,844
Transfer of deemed cost depreciation from revaluation reserve	(33)		-		-		33		-
Increase in deferred tax liability on the railway network	(461)		-		-		-		(461)
Actuarial gain on defined benefit pension schemes	-		-		-		966		966
Deferred tax on actuarial gain	-		-		-		(242)		(242)
Transfer of deferred tax	8		-		-		(8)		-
Reclassification of balances in the hedging reserve to the income statement	-		-		95		-		95
Total comprehensive income	1,358		-		95		(5)		1,448
Balance at 31 March 2022 (Audited)	2,432		249		(184)		7,858		10,355

*Other reserves of £249m include the vesting reserve of privatisation

 

Consolidated balance sheet

			Unaudited 30 September 2022			Unaudited 30 September 2021				Audited 31 March   2022
		Note	£m			£m				£m
Assets
Non-current assets
Intangible assets			60			61				60
Right of use assets			438			395				424
Property, plant and equipment - the railway network		6	81,398			74,395				75,890
Investment property			210			192				212
Derivative financial instruments		10	158			100				9
Interest in joint venture			20			35				27
			82,284			75,178				76,622
Current assets
Assets held for sale			27			82				36
Inventories			329			288				299
Trade and other receivables			1,368			1,550				1,597
Current tax assets			-			9				-
Derivative financial instruments		10	10			54				4
Cash and cash equivalents		7	787			1,068				477
			2,521			3,051				2,413
Total assets			84,805			78,229				79,035
Liabilities
Current liabilities
Trade and other payables			(4,098)			(3,941)				(3,666)
Current tax liabilities			-			-				(1)
Borrowings		7	(3,451)			(3,697)				(2,801)
Derivative financial instruments		10	(43)			(88)				(55)
Provisions			(83)			(87)				(78)
			(7,675)			(7,813)				(6,601)
Net current liabilities			(5,154)			(4,762)				(4,188)
Non-current liabilities
Borrowings		7	(54,932)			(52,600)				(53,982)
Derivative financial instruments		10	(304)			(379)				(206)
Other payables			(258)			(431)				(511)
Retirement benefit obligation		9	(241)			(3,313)				(2,259)
Deferred tax liabilities			(6,717)			(4,873)				(5,121)
			(62,452)			(61,596)				(62,079)
Total liabilities			(70,127)			(69,409)				(68,680)
Net assets			14,678			8,820				10,355
Equity
Revaluation reserve			5,895		2,127				2,432
Other reserve			249		249				249
Hedging reserve			(140)		(213)				(184)
Retained earnings			8,674		6,657				7,858
Total equity			14,678		8,820				10,355

 

 

This interim financial report was approved by the board of directors on 1 December 2022 and authorised for issue on 6 December 2022.
It was signed on its behalf by:
Andrew Haines (Chief executive)

Consolidated cash flow statement

		Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	Note	£m	£m	£m
Cash flows from operating activities
Cash generated from operations	8	2,601	2,798	5,278
Interest paid[1]		(536)	(544)	(1,232)
Income tax paid		(2)	-	-
Net cash generated from operating activities		2,063	2,254	4,046
Investing activities
Interest received		2	-	1
Purchases of property, plant and equipment		(2,758)	(2,837)	(6,182)
Proceeds on disposal of property		17	16	82
Capital grants received		1,029	920	2,131
Net cash inflows from joint ventures		7	3	11
Net cash flows used in investing activities		(1,703)	(1,898)	(3,957)
Financing activities
Repayment of borrowings		(1,385)	(5,703)	(8,060)
New loans raised		1,315	5,894	7,888
Decrease in collateral posted		59	26	114
Increase/(decrease) in collateral held		14	22	(105)
Repayment of lease liabilities		(53)	(49)	(133)
Cash flow on settlement of derivatives		-	-	162
Net cash from financing activities		(50)	190	(134)
Net increase/(decrease) in cash and cash equivalents		310	546	(45)
Cash and cash equivalents at beginning of the period		477	522	522
Cash and cash equivalents at the end of the period		787	1,068	477

[1] Balance includes the net interest on derivative financial instruments                                     

 

 

 

Notes to the interim financial statements

for the six months ended 30 September 2022

1.  General information

This condensed consolidated interim financial information does not comprise statutory financial statements within the meaning of Section 434 of the Companies Act 2006. Statutory financial statements for the year ended 31 March 2022 were approved by the board of directors on 12 July 2022 and delivered to the Registrar of Companies. The auditors' report on these accounts was unqualified, did not contain an emphasis of matter paragraph and did not report any matters by exception under Section 498 of the Companies Act 2006.

The condensed consolidated interim financial statements are prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom Financial Conduct Authority and International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the United Kingdom.

The condensed financial statements present the results for the first half of the year. The nature of Network Rail's business means there are seasonal impacts. The impact of the performance regime (Note 2) can vary across the year and the performance regime result in the first half of the year may not be indicative of performance in the second half of the year. However, due to the grant funding arrangements, the impact of this and any other seasonality would be expected to be minimal on profit or loss before tax.

This condensed consolidated interim financial information has been reviewed, not audited. The condensed consolidated interim financial information should be read in conjunction with the annual report and accounts for the year ended 31 March 2022, which have been prepared under International Financial Reporting Standards 'IFRSs' in conformity with the requirements of the Companies Act 2006. A copy of this document is available on the group's website: www.networkrail.co.uk.

      Significant accounting policies

 

The accounting policies adopted in this condensed set of financial statements are consistent with those set out in the annual financial statements for the year to 31 March 2022.

IFRS 17 'Insurance contracts' has been adopted by the IASB for periods beginning on or after 1 January 2023. Management have considered that this standard will not have a material impact on Network Rail's results.

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

Going concern

The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the interim financial statements.

In arriving at the conclusion, the following has been considered:

·    The Directors took into account plans to reform the rail industry. This includes the proposal that, a new public body, Great British Railways, will integrate the railways, owning the infrastructure, collecting fare revenue, running, and planning the network, and setting most fares and timetables. It is planned that Network Rail will be absorbed into the public body to bring about single, unified, and accountable leadership for the national network. At this stage it is not likely that this reform will involve the winding up of Network Rail Limited but in any event Great British Railways will assume the existing functions of Network Rail Limited as well as have a wider range of powers and functions. The transformation programme is dependent on further activities including legislation and will take time to fully deliver. The impact of this programme on the structure of the group and hence Network Rail Limited are currently not known and have therefore not led to any impact on the going concern assessment of Network Rail Limited.

·    The group has considerable financial resources together with long-term contracts with many customers and suppliers.

·    Network Rail does not expect to undertake any new borrowing in the next 12 months. Instead its activities will be largely funded by grants from the Department for Transport and revenue from customers. Network Rail has secured a £32.3bn loan facility with the Department for Transport (DfT), which it intends to draw upon to specifically refinance its' existing debt with DfT legacy commercial borrowing. This facility remains within its parameters.

·    Network Rail has eight separate grant agreements in place with DfT and Transport Scotland (TS) to fund activities in the period to 30 September 2022. These grants are: - with DfT - Network Grant; Enhancements Grant; British Transport Police Grant; Financing Costs Grant for DfT interest; Financing Costs Grant for external interest (bonds and swaps); and Corporation Tax Grant - with TS - Network Grant and Enhancements Grant.

·    Business plans and financial models are used to project cash flows and monitor financial risks and liquidity positions, forecast future funding requirements and other key financial ratios, including those relevant to our network licence.

Analysis is undertaken to understand the resilience of the group and its business model to the potential impact of the group's principal risks, or a combination of those risks. This analysis takes account of the availability and effectiveness of the mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risks. The board considers the likely effectiveness of such actions through regular monitoring and review of risk management and internal control systems. Further details are set out in the Viability Statement on pages 99 and 100 of the Network Rail Limited annual report and accounts 2021-22. In addition, Note 25 to those accounts includes the group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit, liquidity and foreign exchange risk. After making enquiries, including those detailed above, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the interim financial statements.

Business segments

No segmental analysis is provided because the group operates one class of business; that of managing the national rail infrastructure and undertakes that class of business in one geographical segment, Great Britain.

Critical accounting judgements and key sources of uncertainty

The principal risks managed by Network Rail are unchanged from those set out in the Network Rail Limited 2021-22 annual report and accounts. This can be found in the Risk Management section on pages 87-98. There are also further details on funding and financial risk management in note 25 on pages 203-208 of those accounts.

(i)         Property, plant and equipment - the railway network: the estimate of the fair value of the railway network is based on an income approach using the regulatory asset base, which equates to the discounted future cash flow associated with the network, adjusted for the net present value of the effects of any forecast variances from the Office of Rail and Road's determination using the building block model regulation. The methodology of the valuation and critical judgements therein are discussed in detail in Note 12 of the Network Rail Limited annual report and accounts 2022. Management have assessed the valuation methodology considering the ORR's Final Determination and have concluded that it remains appropriate. The 2 key judgements are CPI and WACC which combined have driven the revaluation of £4.7bn. These are discussed further in note 6.

 

(ii)  Investment property: Jones Lang LaSalle provided independent valuations of 15 one-off individual properties and value the balance of the estate under the Beacon method by splitting the portfolio into 17 homogeneous classes of property and areas. The method of calculation is the same as set out in Note 13 of the Network Rail Limited annual report and accounts 2022.

 

(iii)  Retirement benefit obligations: The calculations include several judgements and estimations in respect of the expected rate of return on assets, the discount rate, inflation assumptions, the rate of increase in salaries and life expectancy among others. Changes in these assumptions can have a significant effect on the value of the retirement benefit obligation. The key assumptions made are set out in Note 26 of the Network Rail Limited annual report and accounts 2021-22. At 30 September 2022, the discount rate has increased to 4.8% from 2.7% at 31 March 2022 in line with corporate bond prices and yields. The Retail Price Index assumption remained at 3.6%.  The Consumer Price Index assumption remained at 3.2%. The change in discount rate assumption from 31 March 2022 is the key driver behind the decrease in the pension liability reported in this period.

 

(iv)  Taxation: the group recognises and discloses its deferred tax assets in accordance with IAS 12. Where it is considered to be probable that deferred tax assets can be matched to future taxable profits then deferred tax assets are recognised or offset against the overall deferred tax provision as appropriate. This evaluation requires significant judgements to be made, including the uncertainty of the availability of future taxable profits. Further details are set out in note 10.

 

2.   Revenue

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Grant income	3,360	3,164	6,513
Franchised network access	1,194	1,446	2,768
Freight revenue	7	28	53
Property rental income	107	72	177
Other income	18	16	42
	4,686	4,726	9,553

The effect of the performance regimes on the results of the group was a net debit of £199m (six months to 30 September 2021: net credit of £158m).

The group has assessed its revenue recognition in accordance with IFRS15 and has deemed that it derives the vast majority of its revenue over time. Revenue recognised at a point in time is not material in the financial year and therefore is not disclosed separately.

 

Grant income, franchised network access, freight revenue and property rental income, recognised in line with the accounting policies, were recognised upon fulfilment of the contractual performance obligations, by providing track access or access to rental property, in line with the terms of the existing customer contracts. Recognition is over time, and the input method, specifically time lapsed, is used as the basis for revenue recognition. There are no alternative performance obligations identified for individual contracts within the disaggregated revenue streams.

 

There are no recognised contract assets, as defined by IFRS 15, that relate to recognised revenue disaggregated in the above table.

3.   Net operating costs

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Employee costs*	1,413	1,571	2,975
Own costs capitalised	(439)	(504)	(1,061)
Other external charges (including infrastructure maintenance costs)	1,539	1,419	3,057
Other operating income and recoveries	(171)	(152)	(326)
Net operating costs before depreciation	2,342	2,334	4,645
Depreciation and other amounts written off non-current assets	1,208	1,084	2,197
Amortisation of grants	(146)	(79)	(248)
Net operating costs	3,404	3,339	6,594

 

*The average number of employees (including executive directors) in the six months ended 30 September 2022 was 41,933 (six months ended 30 September 2021: 44,731). 

 

4.   Finance income, finance costs and other gains and losses

 

	Unaudited six months ended 30 September 2022		Unaudited six months ended 30 September 2021			Audited year ended 31 March 2022
	£m		£m			£m
Interest receivable on investments and deposits	2		-			1
Finance costs
Interest on bank loans and overdrafts	(24)		(4)			(26)
Interest on loan issued by Department for Transport	(309)		(306)			(611)
Interest on bonds issued under the Debt Issuance Programme	(1,894)		(946)			(1,987)
Interest on derivative instruments	(53)		(80)			(149)
Defined benefit pension schemes net interest cost	(31)		(32)			(60)
Lease interest payable	(6)		(5)			(11)
Total finance costs	(2,317)		(1,373)			(2,844)
Other gains and losses
Net ineffectiveness arising from cash flow hedge accounting		-			(8)		-
Net decrease in fair value of non-hedge accounted debt		3			2		-
Gain on derivatives not hedge accounted		60			91		157
Total other gains and losses		63			85		157

 

5.   Tax

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Current tax:
Current tax on profits	-	-	-
Adjustment in respect of prior years	-	-	(10)
Total current tax	-	-	(10)
Deferred tax:
Current period/year credit/(charge)	112	(35)	(97)
Effect of rate change	-	(934)	(883)
Adjustments in respect of prior years	5	(100)	65
Derecognition of deferred tax - prior year	-	9	-
Utilisation of losses previously derecognised	-	-	-
Total deferred tax credit/(charge)	117	(1,060)	(915)
Total tax credit/(charge)	117	(1,060)	(925)

 

 

Closing deferred tax is calculated at a rate of 25 per cent (31 March 2022: 25 percent, 30 September 2021: 25 percent). The amount at which timing differences crystallise is sensitive to the decisions on future tax laws to be taken by Parliament. 

 

UK corporation tax is calculated at 19 per cent (31 March 2022: 19 per cent).

 

 

6. Property, plant and equipment - the railway network

	Group Assets			Group Capital grants	Group Carrying value
	£m			£m	£m
Valuation
At 31 March 2020		78,690	(6,881)		71,809
Additions - Enhancements		2,029	(2,029)		-
Additions - Renewals		3,899	-		3,899
Total Additions		5,928	(2,029)		3,899
Disposals		(30)	-		(30)
Transfers held for sale		-	-		-
Transfer to investment property		(5)	-		(5)
(Depreciation charge)/ grant amortisation for the year		(1,992)	129		(1,863)
Revaluation in the year		(1,812)	-		(1,812)
At 31 March 2021		80,779	(8,781)		71,998
Additions - Enhancements		2,200	(2,200)		-
Additions - Renewals		3,939	-		3,939
Total Additions		6,139	(2,200)		3,939
Disposals		(27)	-		(27)
Transfers to held for sale		-	-		-
Transfer to investment property		(11)	-		(11)
(Depreciation charge)/ grant amortisation for the period		(2,093)	240		(1,853)
Revaluation in the period		1,844	-		1,844
At 31 March 2022		86,631	(10,741)		75,890
Additions - Enhancements		1,169	(1,169)		-
Additions - Renewal		1,827	-		1,827
Total Additions		2,996	(1,169)		1,827
Disposals		(17)			(17)
Transfer to held for sale		-	-		-
Transfer to investment property		-	-		-
(Depreciation charge)/ grant amortisation for the period		(1,140)	142		(998)
Revaluation in the period		4,696	-		4,696
At 30 September 2022		93,166	(11,768)		81,398

Given the economic and physical interdependency of the assets comprising the rail network, the company has concluded that the rail network is considered as a single class of asset. The rail network is carried at its fair value.

As there is no active market in railway infrastructure assets, the company has derived the fair value of the rail network using an income approach. Under this approach the cash flows that a network licence holder expects to generate from the rail network are assessed using a market rate of return. This valuation is carried out twice a year and revaluation gains and losses are reflected in other comprehensive income.

The independent rail regulator, the Office of Rail and Road (ORR), has stated (in the 2018 periodic review final determination: Supplementary document - financial framework) that a private network licence holder of the railway network would have its revenue requirement determined using the building block model of regulation. Under this model the network licence holder's annual income (received in the form of the network grant and track access charges) would comprise:

a) The regulator's assessment of the efficient costs of operating and maintaining the network

b) An allowance for Regulatory Asset Base (RAB) amortisation - qualifying capital expenditure is added to the RAB as incurred and recovered by the company through future amortisation allowances (in order to spread the cost to customers and stakeholders of investment in the rail network over many years).

c) An allowed return on the RAB - calculated by applying the rate of return permitted by the ORR (based on its assessment of the market's cost of capital) to the RAB balance.

In the determination for Control Period 6 (2019-2024), published on 31 October 2018, ORR explains that from 1 April 2019 the RAB will no longer be a building block in the determination of the company's revenue requirement, but that the previous method of revenue determination would be restored if the rail network asset were to be transferred to a private owner. IFRS 13 Fair Value Measurement requires management to assess fair value from the perspective of a theoretical market participant, rather than based on the value-in-use. Accordingly, the amendments made to the regulatory framework for Control Period 6, which reflect the proximity of Network Rail to the public sector and which would not apply to a market participant, are not relevant to the valuation.

Future cash flows under (a) are assumed to be equivalent over time to the network licence holder's actual costs of operation and maintenance, on the basis that the Regulator aims to set targets which are ambitious but achievable. These therefore have no net impact on forecast future cash flows, or the valuations. The allowed return (c) is based on a cost of capital which would be offset in a discounted future cash flows model (see Discount rate below). The economic rights inherent in ownership of the regulated rail network asset are therefore vested primarily in the value of the RAB, which will be recovered through future regulated income as the RAB is amortised (b).

This means that it is possible for the RAB itself to be used as the starting point for a discounted cash flow valuation. The RAB fluctuates in valuation; increasing in value principally as a result of allowances for capital expenditure and inflation indexation, whilst reducing for amortisation. The adjustments may give rise to upwards or downwards revaluations. Further changes are subject to:

a) Adjustment for any difference between regulatory rate of return and the market cost of capital that a third-party investor would use to assess the value of the network; and

b) Adjustment for forecast future under or out performance against the regulatory determination over the remainder of the current control period. No adjustment is made in respect of future control periods on the expectation of the Regulator setting, over the long term, ambitious but achievable determination.

When valuing the network, management is required to consider the value a knowledgeable willing party would place on the network in an arm's length transaction. On the grounds that third party investors are known to value the assets of regulated companies by reference to the RAB, and that the cash flows associated with the regulatory framework are considered sufficiently stable and robust to form the basis of a third-party valuation, management has used the RAB as the starting point for its valuation.

 

Revaluation

 

The valuation includes a £4.7bn upward movement in the value of the railway. There are 3 key drivers for the valuation, being:

·    The impact of indexation inflation (£8.3bn increase in the valuation) offset by,

·    The rate of return in the WACC has been adjusted by 2% for the remainder of the Control Period as a result of significant increases in the cost of borrowing. This results in a decrease in the valuation of £2.6bn. The valuation is sensitive to the WACC assumption. If WACC varied by 100bps then the valuation would change by £1.3bn and depreciation by £8m in the valuation of the network, and

·    The rate at which assets are amortised in the RAB and assets are depreciated under IAS 16 (£0.7bn decrease in the valuation.)

 

Impact of indexation inflation

Indexation inflation was based on the forecast November CPI, of 10.9 per cent, this has added £8.3bn to the valuation of the Regulatory Asset Base. The 10.9 per cent was the 2022 Q4 CPI rate forecast by the Monetary Policy Committee in its November Monetary Policy Report. 

The valuation is sensitive to the CPI assumption. If CPI varied by 1%, this would result in a £0.8bn change in the valuation of the network.

Rate of amortisation in the RAB

Grant income has been agreed across the five-year funding settlement and is drawn down to augment the other sources of revenue in meeting the in-year operations, maintenance and renewals expenses. Operations and maintenance expenditure passes directly through the Income Statement. Expenditure on renewals is instead treated as an addition to PPE since replacing elements of the network is within the scope of IAS 16; however, because the network is carried on a fair value basis with reference to the Regulatory Asset Base, and the Regulator allows for the amortisation of renewals in-year, any such PPE additions are also expensed in year. This expense is taken through Other Comprehensive Income as part of the revaluation of PPE in line with IAS 16 requirements. In line with this, the renewals related element of the network grant is (like operations and maintenance) credited to the Income Statement in the year of the relevant additions and revaluation; no expense remains to be recognised following the revaluation entry since the additions-related asset element has been eliminated through that revaluation. Until the revaluation reserve in relation to the railway network asset is fully utilised, this difference in in-year income and expense will result in the difference between in-year capitalised renewals and the depreciation charge (which is also subject to the same revaluation effect since it is out of scope for the RAB) representing an impact on profit or loss. In 2022 the net effect of this was a £0.7bn credit (2021: £0.9bn credit) to the Income Statement.

 

Third party funding

Additions to the railway network funded by capital grant, rather than via the RAB funding mechanism, are included in the valuation at cost. The carrying value of property, plant and equipment is calculated after netting off associated grant funding received or receivable.

 

Disposals

The disposals of £17m were as the result of the property sales in the usual course of business. In line with Regulatory Accounting Guidelines the net proceeds of sales are deducted from the RAB, reducing the valuation of the Railway Network Valuation. The valuation of the disposals is assessed as being equal to the reduction in the valuation of the Railway Network relating to property sales.

 

Depreciation

The depreciation charge for any year is calculated using the average carrying value for the year and the estimated remaining weighted average useful economic life of the rail network. The remaining weighted average useful economic life of the rail network was calculated using the engineering assessment of serviceable economic lives of the major categories that comprise the rail network. The estimated remaining weighted average useful economic life of the network is currently 40 years (2021: 40 years).

 

Forecast performance variations

In assessing the value of the rail network, management considers that a knowledgeable willing third party would take into account the perceived fairness and deliverability of the current regulatory determination. Accordingly, management makes an addition (or deduction) to the valuation for its assessment of the likely ORR determination in respect of the financial consequences of anticipated future out (or under) performance against the regulatory determination.

 

Cost outturns on capital work (renewals and enhancements) have an impact on future cash flows under the regulatory framework, since only efficient overspending in excess of regulated cost targets can be added to the RAB.

 

At 30 September 2022 the valuation included £400m (31 March 2022: £200m) of projected financial underperformance. This has been driven by the impact of post pandemic travel behaviours and trends and their impact on performance.

 

Measures taken to change franchise contracts by both DfT and Transport Scotland has continued to allow train operating companies to settle amounts owed to Network Rail as they fall due.

 

Capital commitments

At 30 September 2022, the group had entered into contractual commitments in respect of capital expenditure amounting to £4,038m (31 March 2022: £3,631m).

 

 

 

7.   Net borrowings

	Unaudited 30 September 2022	Unaudited 30 September 2021	Audited 31 March 2022
	£m	£m	£m
Net borrowings by instrument
Cash and cash equivalents	787	1,068	477
Collateral placed with counterparties	196	343	255
Collateral received from counterparties	(14)	(18)	-
Bank loans	(563)	(522)	(542)
Lease liabilities	(452)	(406)	(420)
Bonds issued under the Debt Issuance Programme (Including unamortised premium, discount and fees)	(26,495)	(24,404)	(24,880)
Department for Transport facility borrowings	(30,873)	(30,965)	(30,941)
	(57,414)	(54,904)	(56,051)
	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Movements in net borrowings
At the beginning of the period	(56,051)	(54,679)	(54,679)
Decrease / (increase) in cash and cash equivalents	310	546	(45)
Proceeds from borrowings	(1,315)	(5,894)	(7,888)
Repayment of borrowings	1,315	5,763	8,050
Capital accretion	(1,656)	(672)	(1,497)
Exchange differences	-	(8)	-
Movement in collateral placed with counterparties	(59)	(26)	(114)
Movement in collateral received from counterparties	(14)	87	105
Fair value and other movements	18	59	41
Movement in lease liabilities	(32)	(20)	(34)
(Increase) /decrease in DFT collateral facility	70	(60)	10
At the end of the period	(57,414)	(54,904)	(56,051)
Net borrowings are reconciled to the consolidated balance sheet as set out below:
	Unaudited 30 September 2022	Unaudited 30 September 2021	Audited 31 March 2022
	£m	£m	£m
Cash and cash equivalents	787	1,068	477
Collateral placed with counterparties (included in trade and other receivables)	196	343	255
Collateral received from counterparties (included in trade and other payables)	(14)	(18)	-
Borrowings included in current liabilities	(3,451)	(3,697)	(2,801)
Borrowings included in non-current liabilities	(54,932)	(52,600)	(53,982)
	(57,414)	(54,904)	(56,051)

 

 

8.    Notes to the cash flow statement

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
(Loss) / Profit before tax	(980)	126	324
Adjustments for:
Property revaluation movements and profits on disposal	10	(27)	(51)
Fair value gain on derivatives and debt	(63)	(85)	(157)
Net interest expense	2,315	1,373	2,844
Depreciation	1,208	1,084	2,197
Amortisation of capital grants	(146)	(79)	(248)
Amortisation of intangible assets	-	1	1
Adjustment for non-cash element of pensions charge	111	141	266
(Decrease)/Increase in provisions	5	(8)	(17)
Operating cash flows before movements in working capital	2,460	2,526	5,159
(Increase)/Decrease in inventories	(30)	(2)	(13)
Decrease/ (Increase) in receivables	57	117	(88)
Increase in payables	114	157	220
Cash generated from operations	2,601	2,798	5,278

Cash and cash equivalents (which are represented as a single class of assets on the face of the balance sheet) comprise cash at bank and commercial paper, all of which are on call with the exception of short-term deposits. There were £614m (excluding offsetting clearing accounts) of short-term deposits with the government banking scheme (GBS) held as at 30 September 2022 (31 March 2022: £558m).

 

 

9. Retirement benefit schemes

The amount included in the balance sheet arising from the company's obligations in respect of defined benefit schemes is as follows:

 

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Present value of defined benefit obligation	(9,045)	(14,651)	(12,940)
Fair value of scheme assets	8,643	9,130	9,175
Deficit in the scheme	(402)	(5,521)	(3,765)
Group's share (60%) of the scheme deficit recognised in the balance sheet	(241)	(3,313)	(2,259)

Key assumptions used are as follows:

	Unaudited six months ended 30 September 2022	Unaudited six months ended 30 September 2021	Audited year ended 31 March 2022
	£m	£m	£m
Future price inflation (RPI measure)	3.6%	3.4%	3.6%
Future price inflation (CPI measure)	3.2%	3.0%	3.2%
Discount rate	4.8%	2.0%	2.7%
Pensionable salary increases	3.6%	3.4%	3.6%

 

From 23 September to 6 October 2022, there was considerable volatility in bond markets and the IAS19 discount rate for the schemes fluctuated between a lower and upper bound of 4.8% and 5.7%. If the pension scheme liability had been valued using the higher discount rate, the Defined Benefit Obligation would decrease by approximately £1,500m.

 

 

10. Financial instruments

 

The fair values of financial assets and liabilities are recognised at the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Except for bank loans and bonds, the carrying amount of all financial assets and liabilities approximates to their fair value.  Bank loans and bonds are initially measured at fair value and subsequently at amortised cost; except for bonds designated as fair value through profit and loss.

The corresponding carrying values and fair values of bank loans and bonds are set out below:

 

	At 30 September 2022		At 30 September 2021		At 31 March 2022
	Carrying value     £m	Fair value     £m	Carrying value     £m	Fair Value     £m	Carrying value     £m	Fair Value (Restated)   £m
Bank loans	563	683	522	904	542	912
Bonds issued under the DIP	26,495	29,895	24,404	40,680	24,880	39,530
Borrowings issued by Department for Transport	30,873	28,640	30,965	31,040	30,941	30,342
Total	57,931	59,218	55,891	72,624	56,363	70,784

The borrowings issued by Department for Transport has been restated to include the £250m collateral facility that was previously excluded. Bonds issued under the Debt Issuance Programme benefit from a credit enhancement provided by the financial indemnity from the Secretary of State for Transport. This credit enhancement is reflected in the fair value of bonds held at fair value through profit or loss, but not in the fair value of bonds held at amortised cost.

 

Fair value hierarchy

The following table provides an analysis of assets and liabilities that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 as defined by IFRS 13, based on the degree to which the fair value is observable:

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

·    Level 2 fair value is based on 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).

 

 

 

	Unaudited 30 September 2022 £m	Unaudited 30 September 2021 £m	Audited 31 March 2022 £m
Level 2 Derivative financial assets	168	154	13
Assets	168	154	13
Level 2
Financial liabilities designated at fair value through profit and loss	(54)	(204)	(57)
Derivative financial liabilities	(347)	(467)	(261)
Liabilities	(401)	(671)	(318)
Total	(233)	(517)	(305)

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.

A review of the categorisation of the assets and liabilities into the three levels is made at each reporting date. There were no transfers between Level 1 and Level 2 fair value measurements and no transfers into or out of Level 3 fair value measurements in the current or prior periods.

 

 

11. Related parties

The Department for Transport (DfT) and Transport Scotland (TS) are considered related parties of Network Rail. Network Rail received grant income of £3,067m from the DfT in the six months ended 30 September 2022 (30 September 2021: £2,912m). Network Rail received grant income of £293m from TS for the six months ended 30 September 2022 (30 September 2021: £252m). The total of this income is "Grant income" in Note 2. At 30 September 2022 the company held £30,873m of loans issued by DfT (31 March 2022: £30,941m).

 

The British Transport Police (BTP), with whom Network Rail has a Police Service Agreement is also a related party. Network Rail incurred £58m (2021: £51m) of costs relating to services provided by the BTP in the six months ended 30 September 2022 and received £0.6m (30 September 2021: £0.5m) in property income from the BTP in the same period.

 

Network Rail is also a related party of High Speed 2 (HS2). At the interim date Network Rail held £69m (30 September 2021:  £13m) of capital work in progress relating to works on HS2 and had also received £96m (30 September 2021: £48m) of capital grants that was recorded against property, plant and equipment.

 

East West Rail (EWR) is also a related party of Network Rail. During the 6 months ended 30 September 2022, Network Rail received income of £647k (30 September 2021: £24k) from EWR for the provision of feasibility studies and development activities services.

 

Network Rail is one of DfT OLR Holdings Limited's main industry stakeholders, with common ownership brought about through both entities being wholly owned by the Secretary of State for Transport. Transactions between Network Rail and DfT OLR Holdings Limited are at arm's length. During the 6 months ended 30 September 2022, £221m (30 September 2021: £154m) for services rendered was received from DfT OLR Holdings Limited. Capital project funding paid, net of capital costs amounted to £5m (30 September 2021: £nil). At the end of the 6 month period balances with DfT OLR Holdings Limited included payables of £29m (31 March 2022: £11m) and receivables of £33m (31 March 2022: £13m).

 

12. Post balance sheet events

As at the date of signing these financial statements there have not been any significant post balance sheet events, whether adjusting or non-adjusting.