No matter what the guys in your finance department try to tell you, accounts just aren’t sexy. Eyes do tend to glaze over when the lay person looks beyond the first page, which is why some companies take such imaginative steps to jazz them up (here’s looking at you, WPP).
Network rail hasn’t done a bad job. It emphasised a record £3.4bn investment in the rail infrastructure, over double what it was five years ago, only addressing the small matter of profits (and losses – more of that later) in a fun Q&A further down the page.
Here are the key numbers. Operating profits were down 13.3% to £1.74bn for the year to March 31. Pre-tax profits halved to £506m while after tax profits collapsed from £1.26bn last year to a £376m loss.
That’s quite a spread, so which tells us how Network Rail is actually doing? The answer, of course, is all – and none. Obviously they are all accurate in their own way, but looking at them in isolation can be misleading.
When the tax man cometh
Let’s start with the after-tax loss. This in part reflects a £597m increase in Network Rail’s tax provision. That sounds painful, but essentially it’s just changing when it accounts tax, not actually paying any more to the Treasury.
Pre-tax profit was also significantly down, and far more so than operating profit. The reason for that, however, is a worsening position on ‘financial hedges’. Last year the company ‘made’ £304m on these; this year it ‘lost’ £41m.
Essentially, Network Rail is insuring itself against changing market conditions, such as interest rates. Last year it worked well, this year less so, but either way it’s not something that reflects the actual performance of the business.
Does the operating profit tell us how the business is doing then? In a manner of speaking. Operating profit essentially fell because the state’s subsidy decreased by £246m.
Network Rail gets most of its income by charging the rail operators to use its lines and stations, but it also gets some from the government. The Office of Rail Regulation sets the subsidy amount for a five year control period, and it decided there should be a cut.
The bottom line?
Operating profit, however, ignores investment, which as a body responsible for infrastructure is much of what Network Rail does. It doesn’t pay a dividend, investing any profits (really more of a surplus) back into the business.
Some of the £3.4bn it invested in infrastructure last year came from its operating profit, but at least some of the rest appears to have been funded by increased debt.
Essentially, it’s making money, but not enough to pay for the investments it’s making if it keeps going at the same pace. This might well cast some doubt over the cut to its state subsidy, or the scale of its investments.
Few commuters will be too bothered by this, of course, or by the finer points of its accounts, so long as the trains run on time, which apparently they’re not. Owing to record passenger numbers, Network Rail fell short of its punctuality target - only 90% of its trains ran on time.
And, after all that, there’s the nub.