Debt puts brake on Network Rail

NETWORK Rail lived up to its billing as a not-for-profit company today by seeing a return to the black at the operating level wiped out by the spiralling costs of its growing debt mountain.

Actual performance improvement on the tracks, meanwhile, remains stuck in the sidings.

Enhanced by Government handouts via Strategic Rail Authority grants, the State-backed successor to bust Railtrack reported operating profits of £225m in the six months to the end of September.

That compares with a £95m deficit in the previous half-year, its maiden operating period after the Department for Transport took control of the railways.

However, soaring interest more than doubled debt costs to £306m as it dealt with borrowings which increased by around a third to some £14bn.

That left a bottom-line loss of £34m, compared with £233m. And things are going to get tougher over the winter.

'In terms of profit, seasonal factors hit costs harder in the second half of the [financial] year and this effect, along with rising interest costs as debt increases and higher depreciation as the railway network grows, means that an increased loss is forecast for the six months to 31 March,' said chairman Ian McAllister.

The cut in bottom-line losses was heralded by chief executive John Armitt as encouraging, but came with a disappointingly slow performance enhancement in running the trains on time.

The company said it had accelerated the reduction in delay minutes during the period by 16%, but nearly one in five trains remains late, according to latest figures.

'On a moving annual average basis on time trains have increased from 81.2% in March to 81.8% by mid-September and to 82% by mid-October,' said McAllister. 'We expect to deliver further improvements as the year continues while we work towards our target of 90% punctuality by March 2009.'

Network Rail's accounts show a 25% increase in turnover to nearly £1.9bn.

But the details reveal revenue from passenger franchises - the privatised train operators - fell 10% to £818m while grants from the emasculated SRA (now a directly-controlled arm of the Department for Transport) doubled to £904m.

Network Rail bosses have committed to a £6bn-a-year spending programme over the next five years - good news for track-laying companies like Balfour Beatty and Jarvis and for the City's money men, who will reap the interest from lending the company £20bn.

The debt issuance programme kicked off this month with plans for £1bn of bonds with maturities of 11 or 31 years. They are being sold at a quarter of a percentage point above the returns from gilts.

Like the rest of Network Rail, the debt-raising plans only exist because of Government support, and the bonds have the highest possible credit rating on the basis that they are Treasury guaranteed.