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Network Rail Ifi PLC (85MJ)

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Monday 04 July, 2016

Network Rail Ifi PLC

Final Results

RNS Number : 1706D
Network Rail Infrastructure Finance
04 July 2016
 

Network Rail Infrastructure Finance PLC

Full year results 

Year ended 31 March 2016

Strategic report

The directors present their strategic report of Network Rail Infrastructure Finance PLC ("NRIF" or "the company") for the year ended 31 March 2016.

Business review

NRIF 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 will be met by the Department for Transport ("DfT") via a loan facility to Network Rail Infrastructure Limited ("NRIL") the owner and operator of the national rail network of Great Britain.  As a result, NRIF will continue 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 passed onto NRIL in the form of an intercompany loan and embedded derivative.

The company was incorporated for the sole purpose of acting as the issuer under Network Rail's DIP and 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 and Network Rail's debt is zero per cent risk weighted.

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 has been assigned the following credit ratings: AAA by Standard and Poor's, Aa1 (stable outlook) by Moody's and AA+ (stable outlook) by Fitch. 

 

Financial review

During the year the company incurred finance costs of £775m relating the interest on bonds in issue.  These costs were passed onto NRIL in the form of finance income.  NRIF also made a loss of £224m on the mark to market value of its derivatives and a loss of £104m on the retranslation of its foreign currency debt.  These losses were passed through to NRIL as part of the embedded derivative.

NRIF made a profit before tax of £110,000 (2015: £110,000) in the year ended 31 March 2016, 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. On wind up of the company all shares and distributable reserves in the company are held for charitable purposes.

 

 

Reclassification of Network Rail

In December 2013, the Office for National Statistics announced the reclassification of Network Rail as a Central Government Body in the UK National Accounts and Public Sector Finances with effect from 1 September 2014. This is a statistical change driven by new guidance in the European System of National Accounts 2010 (ESA10).

As part of Network Rail's formal reclassification to the public sector, an arrangement was agreed whereby funding would be provided by the DfT in the form of a loan made directly to NRIL.  As a result, from 4 July 2014, Network Rail borrows directly from the UK Government and currently has no plans to issue debt in its own name through NRIF.

In the unlikely event that the DfT withdraws or breaches its obligations on the loan facility to NRIL, NRIF may issue further bonds or commercial paper.  NRIF's future debt service obligations will be met through repayments of the intercompany loan by NRIL.

All of the outstanding bonds under the DIP, including nominal and index-linked benchmarks and private placements in all currencies, will continue to benefit from a direct and explicit guarantee from the UK Government under the financial indemnity.

During the year ending 31 March 2016, £3,065m of bonds matured under the DIP.  UK RPI index-linked debt was 62 per cent of gross debt at 31 March 2016.

There was no issued commercial paper outstanding as at 31 March 2016 (2015:£nil).

The cash and cash equivalents balance as at 31 March 2016 totalled £100m, having decreased by £229m compared to year end 2015.  Cash balances are required for settlement of maturing bonds and for the purposes of managing collateral posted by financial derivative counterparties.

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 (further details are provided in note 12).

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 regular internal audits 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.  In addition a £4,000m commercial paper programme is available to provide liquidity in the event of the withdrawal of, or default by, DfT under the DfT Loan Facility.

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 prudently maximising interest receivable on surplus cash (further details are provided in note 12).

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 entered into before 1 January 2013 is limited because Network Rail has arrangements in place which limits each counterparty to a threshold (based on credit ratings) which if exceeded requires the counterparty to post cash collateral.  Trades entered into after 1 January 2013 are governed by new agreements where both Network Rail and its counterparties post collateral on their full adverse net derivative positions.  The new agreements do not contain threshold provisions.

Treasury operations are co-ordinated and managed in accordance with policies and procedures approved by NRIL's board. Treasury operations are subject to regular internal audits and treasury does not engage in trades of a speculative nature.

 

Directors' report

The directors present their report and the annual financial statements of the company for the year ended 31 March 2016.

Principal activities

The principal activity of NRIF is to act as issuer for Network Rail's DIP.

Dividends

No dividend was paid or proposed in the current year (2015: £nil).

Directors

None of the directors had any interests in the shares of the company or any other company within the Network Rail group at any time in the year.

NRIF maintains directors and officers liability insurance for its directors with a cover limit of £150 million for each claim or series of claims against them in their capacity as directors of the company.  The company also indemnifies its directors and officers to the extent permitted by law.

Going concern

All of NRIF's activities are administered by NRIL's employees and therefore the company does not have any employees.

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 as described above; the collateral arrangements with banking counterparties as described in note 12 of the financial statements; and that the company has an intercompany agreement that recovers all net costs from NRIL.

The loan arrangement agreed between DfT and NRIL has resulted in loans being made by DfT direct to NRIL.  NRIF does not anticipate issuing further bonds and NRIF's debt service obligations will continue to be met through repayments of the intercompany loan by NRIL.

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

Post balance sheet events

On 23 June the referendum on membership of the European Union resulted in a decision to leave the EU. The credit ratings of the United Kingdom were subsequently revised by the major credit rating agencies.  As NRIF's Debt Issuance Programme is guaranteed by a financial indemnity from the Secretary of State for Transport, the credit ratings of the DIP follow those of the United Kingdom and have also been revised since the referendum.  The revised credit ratings that are assigned are: AA by Standard & Poor's, Aa1 (negative outlook) by Moody's and AA (negative outlook) by Fitch.  There are no major consequences that significantly impact the Annual Report & Accounts; however we will continue to monitor the consequences of the outcome of the referendum closely.

 

Statement of comprehensive income

for the year ended 31 March 2016


 

 

Notes




2016


2015






£m


£m

 

 

 

 

 

 

 

 

Result from operations





-


-

 

 

 

 

 

 

 

 

Finance income

5




775


830

Finance costs

5




(775)


(829)

Other gains and losses

6




-


-

 

 

 

 

 

 

 

 

Profit before taxation





-


1

Tax





-


-

 

 

 

 

 

 

 

 

Profit and total comprehensive income for the year





-


1

 

 

 

 

 

 

 

 

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

 

Statement of changes in equity



Share

capital

Retained earnings

Total

equity



£m

£m

£m

 

 

-

 

 

At 1 April 2014


-

-

-

Profit and total comprehensive income for the year


-

1

1

 

 

 

 

-

At 31 March 2015


-

1

1

Profit and total comprehensive income for the year


-

-

-

 

 

 

 

 

At 31 March 2016


-

1

1

 

 

 

 

 

 

 

 

 

Balance sheet

at 31 March 2016


Notes


2016

£m


2015

£m

 

 

 

 

 

 

Non-current assets






Receivables: amounts falling due after more than one year

7


25,324


27,534

Derivative financial instruments

11


651


717

 

 

 

 

 

 

Total non-current assets



25,975


28,251







Current assets






Derivative financial instruments

11


1,453


884

Receivables: amounts falling due within one year

7


3,691


4,071

Cash and cash equivalents



100


329

 

 

 

 

 

 

Total current assets



5,244


5,284

 

 

 

 

 

 

Total assets



31,219


33,535







Current liabilities






Loans

10


(2,681)


(3,134)

Derivative financial instruments

11


(9)


-

Other payables

8


(520)


(461)

 

 

 

 

 

 

Total current liabilities



(3,210)


(3,595)

 

 

 

 

 

 

Net current assets



2,034


1,689

 

 

 

 

 

 

Non-current liabilities






Loans

10


(26,610)


(28,917)

Derivative financial instruments

11


(1,398)


(1,022)

 

 

 

 

 

 

Total non-current liabilities



(28,008)


(29,939)







Total liabilities



(31,218)


(33,534)

 

 

 

 

 

 

Net assets



1


1

 

 

 

 

 

 

Equity



                      


                      

Share capital

13


-


-

Retained earnings



1


1

 

 

 

 

 

 

Total equity



1


1

 

 

 

 

 

 

The financial statements were approved by the board of directors and authorised for issue on 1 July 2016.  They were signed on its behalf by:

 

 

 

 

Samantha Pitt (director)

    Helena Whitaker (director)

 

Company registration number: 5090412

 

Statement of cash flows

for the year ended at 31 March 2016



 

2016

 

2015

                                                                                                  

Note

£m

£m

 

 

 

 

Cash flow from operating activities                      

14

2,849

2,653

            Interest paid*


(608)

(596)

 

 

 

 

Net cash inflow/(outflow) from operating activities                      


2,241

2,057

 

 

 

 

Investing activities




Interest received


608

597

 

 

 

 

Net cash (outflow)/inflow from investing activities


608

597

 

 

 

 

Financing activities




Repayment of borrowings


(3,065)

(2,733)

Proceeds from borrowings


-

-

Increase in collateral posted


(93)

(690)

Increase/(Decrease) in collateral held


80

(11)

 

 

 

 

Net cash (outflow)/inflow from financing activities


(3,078)

(3,434)

 

 

 

 

Net (decrease)/increase in cash and cash equivalents


(229)

(780)





Cash and cash equivalents at beginning of the year


329

1,109

 

 

 

 

Cash and cash equivalents at end of the year


100

329

 

 

 

 

 

*Balance includes the net interest on derivative financial instruments

 

 

Notes to the Financial Statements

for the year ended 31 March 2016

1.  General information

The financial information set out in this preliminary announcement does not constitute the company's statutory accounts for the years ended 31 March 2016 or 31 March 2015, but is derived from those accounts. Whilst the financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee updates as adopted by the European Union, this announcement itself does not contain sufficient information to comply with IFRSs. Statutory accounts for the year ended 31 March 2015 have been delivered to the Registrar of Companies and those for the year ended 31 March 2016 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified.  This announcement has been prepared on the basis of the accounting policies as stated in the previous year's financial statements as no new Standards, Amendments or Interpretations that became effective in the financial year had an impact on the company's results.  This announcement was approved by the board on 1 July 2016.

2.  Significant Accounting Policies

These financial statements have been prepared in accordance with IFRS as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 as applicable to companies reporting under IFRS.

The financial statements have been prepared under the historical cost basis, except for the revaluation of derivative financial instruments to fair value, and the principal accounting policies have been applied consistently throughout the year.

The principal accounting policies are set out below.

Adoption of new and revised standards

The accounting policies adopted in this set of financial statements are consistent with those set out in the annual financial statements for the year to 31 March 2015.

The following accounting standards have not been early adopted by the group but will become effective in future years and are considered to have a material impact on the group that has yet to be assessed:

i) IFRS 9 'Financial Instruments'. The standard addresses the classification, measurement and recognition of financial assets and liabilities.

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

 

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 is often issued in currencies other than sterling and sold to overseas investors.

Debt

Debt instruments are initially recorded at fair value, net of discount and direct issue costs, and are subsequently measured at amortised cost using straight line amortisation as a proxy for the IAS 39 effective interest rate method.  Finance charges, including premiums payable on settlement or redemption and direct issue costs are recognised in the statement of comprehensive income over the life of the debt instrument.  They are added to the carrying value of the debt instrument to the extent that they are not settled in the period in which they arise.

Derivative financial instruments and hedge accounting

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

Interest rate swaps and foreign exchange forward contracts 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 embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. Unrealised gains or losses are reported in the statement of comprehensive income.

Derivatives are presented in the balance sheet in line with their maturity dates.

Investments

Investments are recognised on a trade date where a purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, including transaction costs.

Investments are classified as available-for-sale and measured at subsequent reporting dates at fair value. For available-for-sale investments, gains or losses from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the statement of comprehensive income for the period.

Foreign currencies

Monetary assets and liabilities expressed in foreign currencies are translated into sterling at exchange rates 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 recognised in 'Other gains and losses' 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 and embedded derivative.  As such any gains and losses relating to debt and derivatives are also passed through to NRIL.

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.

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 £25,000 (2015: £12,500) 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

 



Year

 ended

31 March

2016

Year

 ended

31 March

2015



£m

£m

 

 

 

 

Finance income

Interest receivable from NRIL


769

824

Interest receivable on investments


6

6

 

 

 

 

Total Finance income


775

830

 

 

 

 

Finance costs

Interest payable on debt issued under the DIP


(761)

(818)

Interest on bank loans and overdrafts


(10)

(5)

Net interest on derivative instruments


(4)

(6)

 

 

 

 

Total finance costs


(775)

(829)

 

 

 

 

 

 

6.  Other gains and losses

 



 

Year

 ended

31 March

2016


 

Year

 ended

31 March

2015



£m


£m

 

 

 

 

 

Loss on retranslation of external debt


(104)


(663)

Net loss on fair value of external derivative financial instruments


(210)


(408)

Loss on settlement of external debt


(14)


-

Gain on settlement of external derivative financial instruments


14


-

Gain on fair value of embedded derivative


314


1,071






 

 

 

 

 

Total gains and (losses)


-


-

 

 

 

 

 

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

7.  Receivables

 


31 March

2016

31 March

2015


£m

£m

 

 

 

Non-current assets



Loans to NRIL

25,324

27,534

 

 

 


25,324

27,534

 

 

 




Current assets



Interest on loans to NRIL

190

211

Loans to NRIL

2,681

3,134

Interest on investments

1

-

Collateral placed with banking counterparties

819

726

 

 

 


3,691

4,071

 

 

 

Total receivables

29,015

31,605

 

 

 

 

8.  Other payables

 


 

31 March

2016

 

31 March

2015


£m

£m

 

 

 

Current liabilities



Collateral received from banking counterparties

330

250

Interest payable on bonds issued under the DIP

189

209

Interest payable on European Investment Bank long term loans

1

2

 

 

 

Total payables

520

461

 

9.  Loans

Bonds issued under the DIP are analysed as follows:


31 March

2016

31 March 2015


£m

£m

1.085% sterling index linked bond due 2052

126

124

0% sterling index linked bond due 2052

133

130

1.003% sterling index linked bond due 2051

24

23

0.53% sterling index linked bond due 2051

121

120

0.517% sterling index linked bond due 2051

121

120

0% sterling index linked bond due 2051

133

130

0.678% sterling index linked bond due 2048

119

118

1.125% sterling index linked bond due 2047

5,245

5,191

0% sterling index linked bond due 2047

83

81

1.1335% sterling index linked bond due 2045

49

48

1.5646% sterling index linked bond due 2044

274

270

1.1565% sterling index linked bond due 2043

55

54

1.1795% sterling index linked bond due 2041

67

66

1.2219% sterling index linked bond due 2040

270

267

1.2025% sterling index linked bond due 2039

73

72

4.6535% sterling bond due 2038

100

100

1.375% sterling index linked bond due 2037

5,122

5,063

4.75% sterling bond due 2035

1,229

1,228

1.6492% sterling index linked bond due 2035

410

406

4.375% sterling bond due 2030

871

871

1.75% sterling index linked bond due 2027

5,056

5,019

4.615% Norwegian krone bond due 2026

42

42

4.57% Norwegian krone bond due 2026

12

12

1.9618% sterling index linked bond due 2025

346

343

4.75% sterling bond due 2024

736

735

3% sterling bond due 2023

397

397

2.76% Swiss franc bond due 2021

217

208

2.315% Japanese yen bond due 2021

63

56

2.28% Japanese yen bond due 2021

63

56

2.15% Japanese yen bond due 2021

63

56

4.625% sterling bond due 2020

998

998

1.75% US dollar bond due 2019

696

675

0.875% US dollar bond due 2018

1,219

1,181

0.75% US dollar bond due 2017

870

844

Floating rate US dollar bond due 2017

348

337

1% sterling bond due 2017

748

747

6% Australian dollar bond due 2016

267

257

1.25% US dollar bond due 2016

696

675

1.125% US dollar bond due 2016

500

499

0.625% US dollar bond due 2016

870

844

4.4% Canadian dollar bond due 2016

-

266

Floating rate sterling bond due 2016

-

600

4.875% sterling bond due 2015

-

1,256

0.625% US dollar bond due 2015

-

1,012


 

28,832

 

31,597

 

Other long term loans are analysed as follows:


31 March

2016

31 March

2015


£m

£m

Index linked European Investment Bank due 2036 and 2037

459

454

 

 

 


459

454

The Secretary of State for Transport has provided an unlimited financial indemnity in respect of the above borrowings and those borrowings under the DIP which expires in 2052.

 

10.  Net borrowings


31 March

2016

31 March

2015


£m

£m

 

 

 

Net borrowings by instrument



Cash and cash equivalents*

100

329

Collateral receivable

               819

               726

Collateral obligation

                 (330)

                 (250)

Bank loans

                 (459)

                 (454)

Bonds issued under the DIP

            (28,832)

            (31,597)

 

 

 


(28,702)

(31,246)

 

 

 

Movement in net borrowings



At the beginning of the year

            (31,246)

            (33,031)

Decrease in cash and cash equivalents

(229)

(780)

Movement in collateral receivable

93

690

Movement in collateral obligation to counterparties

(80)

11

Repayments of borrowings

               3,065

               2,733

Capital accretion on index-linked bonds

                 (224)

                 (226)

Exchange differences

(118)

(663)

Fair value and other movements

                    37

                    20

 

 

 

At the end of the year

           (28,702)

           (31,246)

 

 

 




Net borrowings are reconciled to the balance sheet as set out below:



Cash and cash equivalents*

100

329

Collateral receivable

819

726

Collateral obligation

                 (330)

                 (250)

Borrowings included in current liabilities

              (2,681)

              (3,134)

Borrowings included in non-current liabilities

            (26,610)

            (28,917)

 

 

 

At the end of the year

            (28,702)

            (31,246)

 

* Includes collateral received from derivative counterparties of £330m (2015: £250m)

 

11.  Derivative financial instruments

 


31 March 2016

31 March 2015


Fair

value

Notional amounts

Fair

value

Notional amounts


£m

£m

£m

£m

 

 

 

 

 

Derivative financial assets included in non-current assets

651

9,860

717

8,610

Derivative financial assets included in current assets

305

2,388

50

963

Embedded derivatives in the inter-company loan to NRIL (included in current assets)

1,148

29,298

834

27,041

 

 

 

 

 


2,104

41,546

1,601

36,614

 

 

 

 

 







Fair

value

Notional amounts

Fair

value

Notional amounts


£m

£m

£m

£m

 

 

 

 

 

Derivative financial liabilities included in current liabilities

(9)

203

-

-

Derivative financial liabilities included in non-current liabilities

(1,398)

16,847

(1,022)

17,468

 

 

 

 

 


(1,407)

17,050

(1,022)

17,468

 

 

 

 

 

 

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 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 2016 and 31 March 2015.

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. With the exception of bank loans and bonds, all financial assets and liabilities are carried at amounts that approximate to their 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. Where market data is not available valuations are obtained from dealing banks.

 


31 March 2016

31 March 2015


Carrying value

Fair value

Carrying value

Fair

value


£m

£m

£m

£m

 

 

 

 

 

Financial assets





Cash and cash equivalents

100

100

329

329

Loans and receivables - Loans to NRIL

28,005

28,005

30,668

30,668

Collateral receivable

819

819

726

726

 

 

 

 

 


28,924

28,924

31,723

31,723

 

 

 

 

 






Other non-derivative financial assets





Trade and other receivables at amortised cost

191

191

211

211

 

 

 

 

 






Derivatives





Derivative financial instruments

956

956

767

767

Embedded derivative

1,148

1,148

834

834

 

 

 

 

 

Total derivatives

2,104

2,104

1,601

1,601

 

 

 

 

 

Total financial assets   

31,219

31,219

33,535

33,535

 

 

 

 

 

 

Financial liabilities





Financial liabilities held at amortised cost:





Collateral held

(330)

(330)

(250)

(250)

European Investment Bank loans

(459)

(719)

(454)

(731)

Bonds issued under the DIP

(28,832)

(32,256)

(31,597)

(36,414)

 

 

 

 

 


(29,621)

(33,305)

(32,301)

(37,395)

 

 

 

 

 






Trade and other payables at amortised cost

(190)

(190)

(211)

(211)

 

 

 

 

 






Derivatives





Derivative financial instruments

(1,407)

(1,407)

(1,022)

(1,022)

Embedded derivative

-

-

-

-

 

 

 

 

 

Total derivatives

(1,407)

(1,407)

(1,022)

(1,022)

 

 

 

 

 

Total financial liabilities

(31,218)

(34,902)

(33,534)

(38,628)

 

 

 

 

 

 

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 embedded derivative. 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. A treasury sub-committee of the NRIL 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 cash 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. A treasury sub-committee of the NRIL 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 limits each counterparty to a threshold (based on credit ratings) which if exceeded requires the counterparty to post cash collateral.  The thresholds were agreed by the treasury committee.  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 and its counterparties are required to post collateral for the full fair value of their net out of the money positions.

 

Foreign exchange risk

The company is exposed to currency risks from its financing and, from time to time, investing activities. 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 and the consequent embedded derivative.

 

Interest and inflation rate risk

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

Due to the workings of the intercompany loan agreement and the consequent embedded derivative, 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 and the consequent embedded derivative 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.

 

Embedded derivative

The obligations and rights of the company under the intercompany loan agreement with NRIL give rise to an embedded derivative in that agreement which reflects the external currency and interest rates risks to which the company is exposed. The embedded derivative is treated as a separate derivative and accounted for in accordance with the accounting policy in note 2.

 

Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the board of directors. A treasury sub-committee of the board of NRIL, who acts as administrator for NRIF, 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.  In addition a £4bn commercial paper programme is available to provide liquidity in the event of the withdrawal of, or default by DfT, under the DfT Loan Facility.

Treasury is subject to regular internal audits.

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.

 


Within 1 year


1-2

years


2-5 years


5+

years


Total


£m


£m


£m


£m


£m

 

 

 

 

 

 

 

 

 

 

31 March 2016




















Non derivative financial liabilities







Bank loans and overdrafts

(5)


(5)


(16)


(545)


(571)











Bonds issued under the DIP





Sterling denominated DIP bonds      

(709)


(954)


(1,589)


(4,873)


(8,125)

Sterling denominated index linked DIP bonds      

(241)


(248)


(790)


(39,485)


(40,764)

Foreign currency denominated DIP bonds     

(2,253)


(912)


(1,970)


(482)


(5,617)

 

 










Derivative financial liabilities      










Net settled derivative contracts

(90)


(152)


(493)


(249)


(984)

Gross settled derivative contracts - receipts      

2,252


909


1,970


 482


5,613

Gross settled derivative contracts - payments      

(1,921)


(797)


(1,769)


(337)


(4,824)











Collateral held

(332)


-


-


-


(332)

 

 

 

 

 

 

 

 

 

 


(3,299)


(2,159)


(4,657)


(45,489)


(55,604)

 

 

 

 

 

 

 

 

 

 

 


Within 1 year


1-2

years


2-5 years


5+

years


Total


£m


£m


£m


£m


£m

 

 

 

 

 

 

 

 

 

 

31 March 2015




















Non derivative financial liabilities







Bank loans and overdrafts

(5)


(6)


(18)


(1,010)


(1,039)











Bonds issued under the DIP





Sterling denominated DIP bonds      

(2,126)


(709)


(1,346)


(6,069)


(10,250)

Sterling denominated index linked DIP bonds      

(236)


(241)


(761)


(36,243)


(37,481)

Foreign currency denominated DIP bonds     

(1,365)


(2,182)


(2,781)


(467)


(6,795)

 

 










Derivative financial liabilities      










Net settled derivative contracts

(45)


(107)


(456)


(394)


(1,002)

Gross settled derivative contracts - receipts      

1,365


2,181


2,745


  59


6,350

Gross settled derivative contracts - payments      

(1,252)


(1,770)


(2,561)


(47)


(5,630)











Collateral held

(250)


-


-


-


(250)

 

 

 

 

 

 

 

 

 

 


(3,914)


(2,834)


(5,178)


(44,171)


(56,097)

 

 

 

 

 

 

 

 

 

 

 

Offsetting financial assets and liabilities

a) Financial assets

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





Related amounts not set off in the balance sheet



Gross amounts of recognised financial assets

Gross amounts of recognised financial liabilities set off in the balance sheet

Net amount of financial assets presented in the balance sheet

Financial instruments

 

Cash collateral received

Net amount

31 March 2016

£m

£m

£m

£m

£m

£m

 

Derivative financial assets

2,104

-

2,104

(686)

(257)

1,161

 

At the year ended 31 March 2016 Network Rail Infrastructure Finance plc paid GBP5.4m of collateral on behalf of Network Rail Infrastructure Limited through the intercompany loan arrangements.

 

 





Related amounts not set off in the balance sheet



Gross amounts of recognised financial assets

Gross amounts of recognised financial liabilities set off in the balance sheet

Net amount of financial assets presented in the balance sheet

Financial instruments

 

Cash collateral received

Net amount

31 March 2015

£m

£m

£m

£m

£m

£m

 

Derivative financial assets

1,601

-

1,601

(535)

(156)

910

 

b) Financial liabilities

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





Related amounts not set off in the balance sheet



Gross amounts of recognised financial liabilities

Gross amounts of recognised financial assets set off in the balance sheet

Net amount of financial liabilities presented in the balance sheet

Financial instruments

 

Cash collateral paid*

Net amount

31 March 2016

£m

£m

£m

£m

£m

£m

 

Derivative financial liabilities

(1,407)

-

(1,407)

686

721

-

 

 





Related amounts not set off in the balance sheet



Gross amounts of recognised financial liabilities

Gross amounts of recognised financial assets set off in the balance sheet

Net amount of financial liabilities presented in the balance sheet

Financial instruments

 

Cash collateral paid

Net amount

31 March 2015

£m

£m

£m

£m

£m

£m

 

Derivative financial liabilities

(1,022)

-

(1,022)

535

487

-

 

 

Fair value measurements recognised in the balance sheet

 

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).

 

As at 31 March 2016:

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

 

 

 

 

 

Derivative financial assets

-

2,104

-

2,104

Financial assets at amortised cost

-

29,115

-

29,115

 

 

 

 

 

Assets

-

31,219

-

31,219

 

 

 

 

 






Derivative financial liabilities

-

(1,407)

-

(1,407)

Financial liabilities held at amortised cost

(31,466)

(2,028)

-

(33,494)

 

 

 

 

 

Liabilities

(31,466)

(3,435)

-

(34,901)

 

 

 

 

 






 

 

 

 

 

Total

(31,466)

27,784

-

(3,682)

 

 

 

 

 

There were no transfers between Level 1 and 2 during the year.

 

 

As at 31 March 2015:

Level 1

£m

Level 2

£m

Level 3

£m

Total

£m

 

 

 

 

 

Derivative financial assets

-

1,601

-

1,601

Financial assets at amortised cost

-

31,934

-

31,934

 

 

 

 

 

Assets

-

33,535

-

33,535

 

 

 

 

 






Derivative financial liabilities

-

(1,022)

-

(1,022)

Financial liabilities held at amortised cost

(35,476)

(2,130)

-

(37,606)

 

 

 

 

 

Liabilities

(35,476)

(3,152)

-

(38,628)

 

 

 

 

 






 

 

 

 

 

Total

(35,476)

30,383

-

(5,093)

 

 

 

 

 

There were no transfers between Level 1 and 2 during the prior year.

 

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.

 

 

13.  Share capital



 

31 March

2016

 

31 March

2015



£

£

 

 

 

 

Authorised, issued and partly paid:




2 ordinary shares of £1 fully paid up


2

2

49,998 ordinary shares of £1 partly paid to £0.25 each


12,500

12,500

 

 

 

 



12,502

12,502

 

 

 

 

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.  Notes to the cash flow statement


 

31 March

2016

 

31 March

2015

£m

£m

 

 

-

1

 

 

-

1



2,849

2,652

 

 

2,849

2,653

 

 

 

15.  Controlling party and related party transactions

50,000 shares of the company are held by HSBC Trustee (C.I.) 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.

 


This information is provided by RNS
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