Statement of cash flows

for the year ended at 31 March 2024

*Balance includes the net interest on derivative financial instruments

Notes to the Financial Statements

for the year ended 31 March 2024

1.  General information

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

The company's registration number is 05090412.

The company's registered office is situated at Waterloo General Office, London, SE1 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 strategic and directors' reports.

2.  Material Accounting Policies

These financial statements have been prepared in accordance with UK adopted international accounting standards.

The financial statements have been prepared under the fair value basis, as bank loans and bonds, financial assets and liabilities are carried at fair value, with the exception of interest which accrues on the nominal value of bonds in issue.  The principal accounting policies have been applied consistently throughout the year.

The material accounting policies are set out below.

Prior year restatement

The classification of items in the cashflow has been restated as follows:

·        Interest paid was presented under operating activities and has been moved to financing activities

·        Cash movements in relation to the NRIL loan were presented as operating activities and are now disclosed as investing activities

·        Cashflows in relation to collateral and external derivatives were recognised as financing activities and are now recognised as investing activities

·        Cash flows relating to collateral and derivatives in the movement of the NRIL loan were recognised as operating activities and are now disclosed as financing activities.

The impact of these changes is shown in the table below

The reclassifications have no impact on overall net cash flows. There was no repayment of external borrowings in 2022-23, or the resultant increase on the NRIL loan. For 2023-24 there were repayments of external borrowings and these have been presented as financing and investing activities respectively following a review of IAS 7.

Functional and presentation currency

The financial statements are presented in Pound Sterling (£) which is the functional and presentation currency of Network Rail Infrastructure Finance Plc.  All values are rounded to the nearest million pounds (£m) unless otherwise stated.

Adoption of new and revised standards

The accounting policies adopted in this set of financial statements are consistent with those set out in the financial statements for the year to 31 March 2023.

At the date of authorisation of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB or IFRIC. None of these Standards or amendments to existing Standards have been adopted early by the Company and no Interpretations have been issued that are applicable and need to be taken into consideration by the Company at the reporting date.

Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Company's financial statements.

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 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.

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.

Debt

Debt instruments are initially measured at fair value, and subsequently designated and measured at Fair Value Through Profit and Loss (FVTPL) using 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.

Finance income/expense

Finance income and expense is calculated based on the amortised cost of the underlying debt. This amount is calculated and presented to allow for comparability with the financial statements of NRIL where the debt is carried at amortised cost.

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 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 captured within the fair value line of 'Other Gains and Losses' in the statement of comprehensive income. 

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.

Critical accounting judgements and key sources of uncertainty

Valuation of the debt portfolio by its nature includes judgements and estimates. In making these estimates, the impact of credit risk is considered and is concluded to be immaterial. Credit risk is discussed further in Note 12.  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.

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 £32,300 (2023: £31,250) 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

6. Other gains and losses

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

7.  Receivables

The company believes that the collateral balance has a high level of credit quality and as such, no credit losses have been recognised.

8.  Other payables

9.  Loans

Bonds issued under the DIP are analysed as follows:

The Secretary of State for Transport has provided an unlimited financial indemnity, expiring in 2052, in respect of all DIP borrowings including all the bonds and bank loans listed above.

10.  Net borrowings

11.  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.

All financial assets and liabilities are carried at fair value. 

Bonds issued by NRIF 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 the bonds disclosed above.

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. Fair values for Level 1 financial instruments are obtained from Bloomberg.

·        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. For bonds, the majority of fair values for Level 2 financial instruments are obtained from Bloomberg. A small number of privately held bonds have been valued by management. Certain Level 2 financial liabilities (collateral and accrued interest) are carried at an amortised cost that approximates the fair value. 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).

A review of the categorisation of financial instruments into the three levels is made at each reporting date.  There were no transfers into and out of Level 1 and 2 fair value measurement in the current year, with 2 transfers into Level 2 from level 1 in the prior year, and no transfers into and out of Level 3 fair value measurements in the current or prior years.

Derivatives are split as follows:

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 as a whole 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 2024 and 31 March 2023.

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.  Bank loans and bonds, financial assets and liabilities are carried at 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.  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.

*Refer to Note 11 for detail on determination of fair values of financial assets and liabilities.

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 intercompany loan receivable.  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.  The treasury committee of the Network Rail 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 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.  The treasury committee of the Network Rail 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 limit each bank to a threshold (based on credit ratings), which if breached requires the bank to post collateral in cash or eligible securities.  The members of the banking group are required to post collateral on positive mark-to-market swaps above the threshold.  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 posts collateral on adverse net

derivative positions with its counterparties.  The new agreements do not contain a provision for thresholds; as such Network Rail or its counterparties are required to post collateral for the full fair value of net out of the money positions.  At 31 March 2024 the fair value of collateral held was £2m (2023: £1m). The group is the beneficial owner of this collateral.  The group is free to invest or otherwise utilise the collateral at its discretion, subject to acting within the authority sanctioned by the treasury committee.  The balance of collateral posted by the group at 31 March 2024 was £85m (2023: £141m).

Foreign exchange risk

The company is exposed to currency risks from its financing.  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.

Interest and inflation rate risk

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

Due to the workings of the intercompany loan agreement 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 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.

Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the board of directors.  The treasury committee of the board of Network Rail 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.

Treasury is subject to internal audits and committee reviews.

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.

Offsetting financial assets and liabilities

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

Collateral consists of £85m (2023: £141m) receivable (Note 7) and £2m (2023: £1m) payable (Note 8).

13.  Share capital

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.  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 on wind up.

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.

15. 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.