Half-year Results

Network Rail Infrastructure Finance

15 December 2023

 

15 December 2023

NETWORK RAIL INFRASTRUCTURE FINANCE PLC

HALF-YEAR RESULTS 2023/24

Commentary

Network Rail Infrastructure Finance PLC ("NRIF", "the company") 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 has been met by the Department for Transport ("DfT") via a loan facility and grants 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.

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.

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 £40,000m multi-currency note programme which, at 30 September 2023 had been assigned the following credit ratings: AA by Standard and Poor's, Aa3 (outlook negative) by Moody's and AA- (outlook negative) by Fitch.

Financial review

During the period the company incurred finance costs of £1,232m (September 2022: £1,918m) relating to the interest on bonds in issue.  These costs were lower due to the reduction in inflation on RPI-linked bonds.

NRIF received finance income as it passed on these costs onto NRIL in line with the intercompany loan agreement.

NRIF made a gain of £2,541m (September 2022: gain of £9,864m) on the fair value of its debt due primarily to increases in market interest rates in the period.

NRIF has a legacy hedging programme made up primarily of interest rate and cross-currency swaps. This programme is unwinding resulting in a gain of £30m (September 2022: £60m) in the period.

These gains and losses were passed through to NRIL in line with the intercompany loan agreement.

NRIF made a profit before tax of £55,000 (September 2022: £55,000) in the period, 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. All shares and distributable reserves in the company are held for charitable purposes.

On a fair value basis, net borrowings as described in note 3 have decreased from £30,395m to £27,924m, primarily as a result of a decrease in market prices and a decrease in RPI from March 2023 to September 2023 which has an impact on the fair value movement (£2,541m) during the period.

UK RPI index-linked debt was 90 per cent of gross debt at 30 September 2023.

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.

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 internal audits and committee reviews 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. 

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 managing interest receivable on surplus cash.

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 is limited because both Network Rail and its counterparties are required to post cash collateral on their full adverse net derivative positions. The collateral agreements do not contain threshold provisions.

NRIF will continue in operation to manage the existing bond portfolio.  The bond portfolio is expected to be held to maturity and as such while market sentiment will drive changes in fair value, the impact on fair value of the portfolio held is not considered to be a major financing risk. NRIF does not anticipate entering into any new derivative contracts in the future and existing derivatives are currently being fully utilised. Substantially all of the original derivatives held will have matured by the 31 March 2024.

Statement of directors' responsibilities

The directors confirm that this 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 Disclosure and Transparency Rules (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.

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

Paul Marshall (director)

12 December 2023

 

Independent review report

to Network Rail Infrastructure Finance PLC

I have been engaged by the company to review the condensed interim financial statements of Network Rail Infrastructure Finance PLC for the six months ended 30 September 2023 which comprise the Statement of Comprehensive Income, the Balance Sheet, the Cash Flow Statement, 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 interim financial statements for the six months ended 30 September 2023 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 company are prepared in accordance with UK adopted IFRSs.  The condensed interim financial statements have 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 statements, 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 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) 

 14 December 2023

For and on behalf of the

Comptroller and Auditor General (Statutory Auditor)

National Audit Office

157-197 Buckingham Palace Road

Victoria

London

SW1W 9SP

Statement of comprehensive income

	Unaudited six months ended 30 September 2023	Unaudited six months ended 30 September 2022	Audited year ended 31 March 2023
	£m	£m	£m
Profit from operations	-	-	-
Finance income	1,232	1,918	3,412
Finance costs	(1,232)	(1,918)	(3,412)
Other gains and losses	-	-	-
Profit before taxation	-	-	-
Tax	-	-	-
Profit and total comprehensive income for the period	-	-	-

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

Statement of changes in equity

	Share capital	Retained Earnings	Total
	£m	£m	£m
At 1 April 2022	-	1	1
Profit for the period	-	-	-
At 1 April 2023	-	1	1
Profit for the period	-	-	-
At 30 September 2023	-	1	1

 

 

 

 

 

 

 

Balance sheet

		Unaudited 30 September 2023 £m	Unaudited 30 September 2022 £m	Audited 31 March 2023 £m
	Notes
Non-current assets
Receivables: amounts falling due after more than one year	2	27,283	30,188	29,826
Derivative financial instruments		94	154	70
Total non-current assets		27,377	30,342	29,896
Current assets
Receivables: amounts falling due within one year	2	1,071	801	1,441
Derivative financial instruments		30	7	21
Cash and cash equivalents	3	-	1	2
Total current assets		1,101	809	1,464
Total assets		28,478	31,151	31,360
Current liabilities
Loans	3	(748)	(394)	(1,149)
Derivative financial instruments		(51)	(43)	(49)
Other payables	4	(213)	(225)	(153)
Total current liabilities		(1,012)	(662)	(1,351)
Net current assets		89	147	113
Non-current liabilities
Loans	3	(27,286)	(30,184)	(29,826)
Derivative financial instruments		(179)	(304)	(182)
Total non-current liabilities		(27,465)	(30,488)	(30,008)
Total liabilities		(28,477)	(31,150)	(31,359)
Net assets		1	1	1
Equity
Share capital		-	-	-
Retained earnings		1	1	1
Total equity		1	1	1

This interim financial report was approved by the board of directors on 6th December 2023 and authorised for issue on the date of the Independent Auditor's Review Report. They were signed on its behalf by:

Paul Marshall (director) 12 December 2023

Helena Whitaker (director)

Cash flow statement

		Unaudited six months ended 30 September 2023	Unaudited six months ended 30 September 2022	Audited year ended 31 March 2023
	Note	£m	£m	£m
Cash flows from operating activities	6	373	(74)	(89)
Interest paid		(221)	(213)	(530)
Net cash inflow / (outflow) from operating activities		152	(287)	(619)
Investing activities
Interest received		220	213	531
Net cash flow from investing activities		220	213	531
Financing activities
Repayment of borrowings		(400)	-	-
Net collateral movement with counterparties		30	73	115
Cash settlement derivatives		(4)	-	(27)
Net cash used in financing activities		(374)	73	88
Net decrease in cash and cash equivalents		(2)	(1)	-
Cash and cash equivalents at beginning of the period		2	2	2
Cash and cash equivalents at end of the period		-	1	2

 

 

Notes to the interim financial statements

Six months ended 30 September 2023

1.  General information

Network Rail Infrastructure Finance PLC is a company incorporated in Great Britain and registered in England and Wales under the Companies Act 2006.

The company's registration number is 5090412.  The company's registered office is situated at Waterloo General Office, London, ED1 8SW, United Kingdom.

The company's principal activities, details of the company's business activities and key events, and changes during the year are contained within the commentary.

This condensed interim financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2023 were approved by the board of directors on 18 July 2023 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 interim financial statements are prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. The condensed interim financial statements are prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the United Kingdom.

This condensed interim financial information has been reviewed, not audited. The condensed interim financial information should be read in conjunction with the annual report and accounts for the year ended 31 March 2023, which have been prepared in accordance with IFRSs in conformity with the requirements of the Companies Act 2006. A copy of this document is available on the Companies House website.

Accounting policies

The accounting policies and methods of computation 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 2023.

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

Going concern

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; the collateral arrangements with banking counterparties; and that the company has an inter-company agreement that recovers all net costs from NRIL.

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

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 was also issued in currencies other than sterling and sold to overseas investors.

Debt

Debt instruments are initially measured at fair value, and subsequently designated and measured at Fair Value Through Profit and Loss (FVTPL) using the mid-market price. The intra-group borrowings from NRIL are measured at FVTPL. Given the relationship between this balance and the debt instruments, the debt instruments were designated at fair value through profit or loss. This treatment results in all fair value movements on debt being passed to NRIL within these financial statements, in line with the intercompany agreement. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are recognised in the period in which they arise and are not capitalised against the financial instrument measured at FVTPL.

Derivative financial instruments

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

Interest rate swaps and cross currency swaps 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 are presented in the balance sheet in line with their maturity dates.

Foreign currencies

Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange prevailing at the balance sheet date. Individual transactions denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the dates payment takes place. Gains or losses realised on any foreign exchange movements are recognised 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. The nature of the arrangement means that the instrument fails the Solely Payment of Principal and Interest test under IFRS 9 and as such, the entire instrument is measured at fair value through profit or loss.

Critical accounting judgements and key sources of uncertainty

Valuation of the debt portfolio by its nature includes judgements and estimates.  Since the company's bonds are traded with varying frequency, valuations are derived with reference to both directly observed activity on the bonds themselves and to observations of frequently traded reference gilts which have similar characteristics.  Where bonds are frequently traded and independent prices are available, these are used in valuing the bonds.  Where bonds are infrequently traded, independent prices are determined using an independent pricing service.  These valuations include the analysis of similar but more frequently traded bonds in order to determine a price.  There are a small number of privately held bonds that are valued by management.  Management review comparator bonds and determine an appropriate yield rate based on similar bonds that have available prices.

2.  Receivables

	Unaudited 30 September 2023 £m		Unaudited 30 September 2022 £m	Audited 31 March 2023 £m
Non-current assets
Loans to Network Rail Infrastructure Limited		27,283	30,188	29,826
		27,283	30,188	29,826
Current assets
Interest on loans to Network Rail Infrastructure Limited		212	211	151
Loans to Network Rail Infrastructure Limited		748	394	1,149
Collateral receivable		111	196	141
		1,071	801	1,441
Total receivables		28,354	30,989	31,267

 

3.  Net borrowings

	Unaudited 30 September 2023 £m	Unaudited 30 September 2022 £m	Audited 31 March 2023 £m
Net borrowings by instrument
Cash and cash equivalents	-	1	2
Collateral receivable	111	196	141
Collateral obligation	(1)	(14)	(1)
Bank loans	(689)	(683)	(752)
Bonds issued under the Debt Issuance Programme	(27,345)	(29,895)	(30,223)
At the end of the period/year	(27,924)	(30,395)	(30,833)
Movements in net borrowings
At the beginning of the period	(30,833)	(40,185)	(40,185)
(Decrease) / increase in cash and cash equivalents	(2)	(1)	-
Movement in collateral receivable	(30)	(59)	(114)
Movement in collateral obligation to counterparties	-	(14)	(1)
Repayment of borrowings	400	-	-
Fair value and other movements	2,541	9,864	9,467
At the end of the period/year	(27,924)	(30,395)	(30,833)
Cash and cash equivalents	-	1	2
Collateral receivable	111	196	141
Collateral obligation	(1)	(14)	(1)
Borrowings included in current liabilities	(748)	(394)	(1,149)
Borrowings included in non-current liabilities	(27,286)	(30,184)	(29,826)
At the end of the period/year	(27,924)	(30,395)	(30,833)

Reduction in the market prices at the reporting date were the main driver of the £2,541m decrease in the fair value of bonds and loans since 31 March 2023.  The decrease in finance costs reported in the Statement of Comprehensive Income occurred largely as a result of the reduction in RPI from 31 March 2023 to 30 September 2023 which had a direct impact on the finance costs associated with index linked bonds.

4.  Other payables

	Unaudited 30 September 2023	Unaudited 30 September 2022	Audited 31 March 2023
	£m	£m	£m
Current liabilities
Interest payable on bonds issued	211	209	151
Interest on long term loans	1	2	1
Collateral obligation	1	14	1
Total payables	213	225	153

5.  Financial instruments

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at 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).

	Unaudited 30 September 2023	Unaudited 30 September 2022	Audited 31 March 2023
	£m	£m	£m
		(Restated)
Level 2: Derivative financial assets	124	161	91
Financial assets at fair value	28,354	30,989	31,267
Level 1:
Bonds	-	(2,108)	-
Level 2:
Derivative financial liabilities	(230)	(347)	(231)
Bonds	(28,034)	(28,470)	(30,975)
Financial liabilities held at fair value	(213)	(225)	(153)
Total	1	-	(1)

A small number of privately held bonds have been valued by management.

Fair values for Level 1 financial instruments are obtained from Bloomberg, and where applicable, directly from the relevant third parties.

Fair values for Level 2 financial instruments are derived from Bloomberg (bonds, interest rate swaps and cross currency swaps), apart from certain Level 2 financial liabilities (collateral and accrued interest), which are carried at an amortised cost that approximates the fair value.

A review of the categorisation of financial instruments into the three levels is made at each reporting date.  There were no transfers from Level 2 to Level 1 and 2 transfers into Level 2 fair value measurements. Following refined analysis relating to trade frequency, the levels of the prior interim year has been restated, resulting in 6 transfers from Level 1 to Level 2 (valued at 30 September 2023 £24,309m).

6.  Notes to the cash flow statement

	Unaudited six months ended 30 September 2023	Unaudited six months ended 30 September 2022	Audited year ended 31 March 2023
	£m	£m	£m
Profit before tax	-	-	-
Adjustments for:
Fair value gain on derivatives and debt	(2,571)	(9,929)	(9,551)
Operating cash flow before movements in working capital	(2,571)	(9,929)	(9,551)
Decrease / (Increase) in receivables	2,944	9,855	9,462
Cash generated from operations	373	(74)	(89)

Cash and cash equivalents (which are represented as a single class of assets on the face of the balance sheet) comprise cash at bank.

7.  Controlling party and related party transactions

50,000 shares of the company are held by Intertrust Corporate Services Limited. 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.

8. Post balance sheet events

Apart from the events disclosed above, there have not been any significant post balance sheet events, whether adjusting or non-adjusting.

 

END