This year has seen Network Rail begin to build a better, simpler and greener railway whilst tackling the challenge of climate change

30 July 2024

Network Rail today published its annual report and accounts for the 12 months to 31 March 2024.

Andrew Haines, chief executive, said: "Over the past year we have been working hard on building a better, simpler and greener railway for Britain. Running the national rail network comes with undeniable challenges, severe weather being the one that stood out over all others in the last 12 months. I am hugely proud of the achievements of the thousands of colleagues who work skilfully and tirelessly to keep passengers and goods moving safely whatever the elements throw at them."

"We've successfully closed our sixth control period (2019-24) which saw record efficiencies of £4bn delivered, as well as strengthening the resilience of our network to climate change impacts and have also supported the smooth delivery of memorable national events."

"That said, while train service performance has shown some signs of improvement on key parts of the network, there is much more to be done and that remains a key focus for us."

"We are seeing far wetter and more volatile winters, our summers are less predictable, and our railway - built mostly on Victorian foundations - is vulnerable under these changing conditions and so we are significantly increasing our investment in climate resilience over the coming five years. This £2.8bn will help future-proof the railway, improving protection against more frequent and extreme weather, helping us to face this challenge and keep trains safely running. Our readiness to adapt to climate change will define our success as a railway of the future. The decisions we are making today are key to how we build a modern and resilient railway that Britain can be proud of."

"Predicting every uncertainty is not possible, but these significant investments are our signal to rail users that we take these risks seriously. The challenges we faced in the last year were immense. We have learnt valuable lessons, studied data carefully and are putting in place real action to improve our future readiness."

Financial highlights for the year include:

•     Investment was £6.8bn compared with £6.5bn last year

•     Revenue increased to £11.6bn from £10.0bn. Increases in revenue grants from governments, regulated charges to customers and retail income from shop units at stations were augmented by lower compensation to customers, than the strike-hit previous year

•     Operating costs increased from £7.0bn to £7.5bn as a result of increased depreciation, and the impact of inflation on our costs, particularly energy costs

•     Profit before tax of £1.5bn (2022/23: loss £1.1bn). The change in profit was almost entirely due to the impact of lower inflation on our debt and borrowing costs (£4.2bn to £2.6bn), as well as a planned increase in revenue recognising the remaining part of our five-year control period government grants.

Commenting on the financial results, chief financial officer, Jeremy Westlake, said: "Network Rail met its revised five-year target of £4bn planned efficiencies from its cost base. This exceeded our original five-year target by £500m. We delivered another £1.1bn this year against the start of control period cost baseline. We remain focused on further increasing productivity by reducing our cost base by another £3.9bn in the period 2024-2029."

"As we regain the confidence of our customers the industry's reliance on taxpayer's support will reduce. In the meantime, the Government continues to support our industry and our direct customers, the passenger and freight operating companies, have continued to pay amounts owed to Network Rail on-time."

"In this control period Network Rail also used its risk funds to mitigate revenue shortfalls. As a result, we realised our delivery plan outputs whilst remaining on a firm financial footing. The Office of Rail and Road (ORR) published Network Rail's determination of funding and outputs for 2024-29, providing clarity and certainty for the railway and its supply chain. The settlement, whilst a vote of confidence in the industry, also requires some tough strategic choices including managing the risk that inflation may impact our spending plans."

Financial highlights

for the year ended 31 March 2024

Income statement

for the year ended 31 March 2024

Under section 408 of the Companies Act 2006 the group has elected to take the exemption with regard to disclosing the company income statement. The company's result for the year was £nil (2023: £nil).

Statement of comprehensive income

for the year ended 31 March 2024

Statement of changes in equity

for the year ended 31 March 2024

* Other reserves of £249m (2023: £249m) include a £242m vesting reserve on privatisation.

There has been no movement in the current or prior year affecting the statement of changes in equity for the company.

Balance sheet

at 31 March 2024

Statement of cash flows

for the year ended 31 March 2024

*Balance includes the net interest on derivative financial instruments

The Restatement of the 2023 Group Cash Flow statement impacts the "Repayment of borrowings" and "New loans raised" lines by a reduction of £2,680m. This reflects the presentation of loan drawdowns from the Department for Transport.

Notes to the financial statements

for the year ended 31 March 2024

1.  General information

Network Rail Limited ('the company') is a company limited by guarantee which is incorporated and domiciled in Great Britain and registered in England and Wales under the Companies Act 2006. Network Rail Limited is an arm's length body of the Department for Transport.

The company registration number is 04402220.

The company's registered office is situated at Waterloo General Office, London, SE1 8SW, United Kingdom.

The company's and its subsidiaries' (together 'the group' or 'Network Rail') principal activities are detailed in the 'About us' section on pages 14 to 18.

Network Rail is organised as a single operating segment for financial reporting purposes.

The Secretary of State is the sole member of the Company.

Going concern

The group's business activities, together with the factors likely to affect its future development, performance and position are set out in the 'About us' section on pages 14 to 18, and 'Business unit summaries' on pages 32 to 73. The financial position of the group, its cash flows, liquidity position and borrowing facilities are described in the Chief Financial Officer's review on pages 27 to 31.

The directors took into account the publication of the Williams-Shapps Plan for Rail and its plans to reform the rail industry. This proposes 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.

Additionally in February 2024 the draft Rail Reform Bill was published which seeks to provide for there to be an Integrated Rail Body (IRB) - Great British Railways.

The group has considerable financial resources together with long-term contracts with a number of 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 (DfT) and revenue from customers. Network Rail has secured a £32.3bn loan facility with the DfT, which it intends to draw upon to specifically refinance its existing debt. This facility remains within its parameters.

Network Rail has nine separate grant agreements in place with DfT and Transport Scotland (TS) to fund activities in the next 12 months. These grants are: - with DfT - Network Grant; Enhancements Grant; GBRTT 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 100 to 103. In addition, note 23 to the accounts includes the group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; 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 annual report and accounts.

2.  Revenue

The effect of the performance regimes was a reduction in income of £360m (2023: reduction of £609m) which is included in the Franchised network access line in the above table.

Deferred income of £792m relating to Control Period 6 grants was recognised during the year. The recognition followed confirmation that working capital requirements were no longer considered to be temporary in nature. This is because working capital movements had not reversed by the end of the Control Period and new funding arrangements were in place for Control Period 7. It is included in the Grant income balance above.

3.  Net operating costs

Other operating income and recoveries includes income earned by the group's trading subsidiaries and ancillary income.

The impairment of HS2 related works is discussed further under Note 6

4.  Profit from operations

Total profit from operations is stated after charging/(crediting):

For financial years ended 31 March 2024 and 2023 no fees were payable to the company's auditors in respect of non-audit related services. In addition to the audit fee information given in the table the group pays £0.3m for the audit of subsidiaries that are not performed by the group auditor.

5.  Tax

The tax (charge)/credit is made up as follows:

The tax (charge)/credit for the year can be reconciled to the profit/(loss) per the income statement as follows:

Under IAS 12 deferred tax assets can only be recognised where it is probable that taxable profits will be available against which the deferred tax asset can be utilised. As in 2023, it remains improbable that Network Rail will produce a level of taxable profits that will allow for recognition of a deferred tax asset relating to the trading losses carried forward. Network Rail uses all its profits to fund capital expenditure. Management's current assessment is that there will be no significant taxable income for the year to 31 March 2025. Beyond the current funding regime, there is no certainty over the funding mechanism of Network Rail and hence the use of any losses.

Deferred tax at 31 March 2024 is calculated at a rate of 25 per cent (2023: 25 per cent) based on the tax rate expected to prevail based on legislative enactments at the point temporary differences resolve. The amount at which temporary differences crystallise is sensitive to the decisions on future tax laws to be taken by Parliament.

UK corporation tax is calculated at 25 per cent (2023: 19 per cent).

6.  Property, plant and equipment - the rail network

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 (the rate of return and market cost of capital are currently assessed as fully aligned); and

b) Adjustment for forecast future under or out performance against the regulatory determination over the remainder of the current control period. As this is the end of Control Period 6, this assessment has been made for Control Period 7. 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 £2.9bn upward movement in the value of the railway. The key drivers for the valuation are:

·      The impact of indexation inflation (£3.3bn increase in the valuation) offset by,

·      £250m adverse impact of expected performance. 

·      The valuation at 31 March 2023 was reduced by £1.7bn reflecting the impact of the sharp increase in the cost of borrowing in the year (and since the regulatory WACC was determined in late 2018) and more importantly the impact this change might have on notional buyers of the railway network. In the current year, the real weighted average cost of capital (and therefore the rate of return allowed on the RAB) has been assessed by the ORR for the period from 1st April 2024 to 31 March 2029 at 3.98 per cent compared with the prior real CP6 rate of return at 4.15 per cent. The real WACC as determined by the ORR is used as a proxy for that of a notional buyer. Given the determination has indicated a real WACC for CP7 similar to that of CP6, this indicates adequate compensation for the increased cost of borrowing from increases in global interest rates has been included in the valuation without any further adjustment required. Note that these returns are set at real rates and inflation is taken into account in calculating the underlying Regulatory Asset Base. We have therefore removed the reduction in the valuation at 31 March 2024. The removal of this adjustment increases the valuation by £1.7bn.

·      The rate at which assets are amortised in the RAB and assets are depreciated under IAS 16 (£1.5bn decrease in the valuation).

Impact of indexation inflation

Indexation inflation was based on management's forecast for November CPI, of 3.9 per cent. This has added £3.3bn to the valuation of the Regulatory Asset Base.

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.

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 £162m were as the result of 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. Renewals are completed at the end of the useful life of the asset and hence there is no value

attributable to the item being renewed that needs to be derecognised from PPE.

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 (2023: 40 years).

Impairment of HS2 related works

A review of works has been taken by Network Rail in relation to HS2 following the previous Government's published report 'Network North: Transforming British Transport' on 4 October 2023, which outlined significant changes to the High Speed Two (HS2) project to include scaling back the railway to a high-speed line between London Euston and Birmingham Curzon Street. This review has resulted in £145m of capitalised works being written off as well as capital grants of £57m, resulting in a £88m loss to the P&L.

Reclassification of deferred capital grants

£494m of deferred capital grants were reclassified during the year from Non-current payables. The balance relates to grants received to fund capital works and was reclassified following confirmation of the continuing grant funding mechanism.

Discount rate

The discount rate used in the income approach is the pre-tax rate of return set by the ORR. The ORR performs a periodic review every five years, which leads to the setting of the appropriate rate for the five-year period. The ORR's method encompasses advice from consultants, comparisons to similar infrastructure assets and discussions with Network Rail. Management believes this cost of capital reflects the assumptions that a market participant would make in arriving at a discount rate.

Should the ORR amend the permitted rate of return in future quinquennial reviews, the regulator would raise or lower the permitted charges to customers so as to achieve the new rate of return. In other words, the cash flows would change but the RAB would not.

The ORR confirmed that a conventionally funded market participant would receive an allowed return equal to the full market cost of capital. This has been reiterated in their final determination for CP7. Management expects that if the rail network asset were to be transferred to a private owner during CP7, ORR would determine the private owner's revenue requirement for CP7 using the original pre-tax (CPI) WACC of 3.98 per cent set out in their final determination for this Control Period amended

for the movement since then. Management expects that the rate of return set by the regulator in subsequent quinquennial reviews will be consistent with the market discount rates for infrastructure assets at the quinquennial review date.

7. Trade and other payables

Deferred income includes £Nil (31 March 2023: £792m) relating to cumulative timing differences between government grants received and expenditure being incurred which gives rise to the recognition of income under grant agreements. The £792m balance was released at the end of the Control Period.

The average credit period taken for trade purchases is 40 days (2023: 38 days).

Before accepting new suppliers, and upon letting significant contracts, the group evaluates suppliers' creditworthiness using external credit scoring systems and other relevant data.

The directors consider that the carrying value of trade and other payables approximates to their fair value. All balances are ordinarily non-interest bearing and denominated in sterling.

The Other accruals balances contains a degree of estimation uncertainty regarding the amounts to be paid. The majority of the balance relates to COWD which is disclosed as a key source of estimation uncertainty.

As part of the acquisition of Railtrack PLC, Network Rail received a grant of £300m from the Strategic Rail Authority to fund the purchase. In line with Network Rail's accounting policy this revenue is deferred and amortised over the average remaining life of the railway network (as this represents the substantial part of the assets purchased), currently 40 years, on a straight-line basis. The balance on the grant after amortisation at 31 March 2024 is £90m (2023: £98m).

8.  Notes to the statement of cash flows

Cash and cash equivalents

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 £463m (excluding offsetting clearing accounts) of short-term deposits with the government banking scheme ("GBS") held as at 31 March 2024 (2023: £384m).

9.  Borrowings

* As at 31 March 2024, a collateral facility of £80m (2023: £140m) was included within this balance.