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Name | Symbol | Market | Type |
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Net.r.i.4.75% | LSE:85MJ | London | Medium Term Loan |
Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
-0.10 | -0.10% | 102.925 | 100.95 | 104.90 | 103.075 | 102.875 | 103.075 | 0 | 11:11:11 |
TIDM85MJ
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 GBP40,000m 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 GBP775m 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 GBP224m on the mark to market value of its derivatives and a loss of GBP104m 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 GBP110,000 (2015: GBP110,000) 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, GBP3,065m 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:GBPnil).
The cash and cash equivalents balance as at 31 March 2016 totalled GBP100m, having decreased by GBP229m 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 GBP4,000m 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: GBPnil).
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 GBP150 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 GBPm GBPm 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 Retained Total capital earnings equity GBPm GBPm GBPm - ------------------------------- -------- --------- ------- 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 2015 GBPm GBPm 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 GBPm GBPm 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 GBP25,000 (2015: GBP12,500) 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 Year ended ended 31 March 31 March 2016 2015 GBPm GBPm 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 Year ended ended 31 March 31 March 2016 2015 GBPm GBPm 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 31 March 2016 2015 GBPm GBPm 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 31 March 2016 2015 GBPm GBPm 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 31 March 2016 2015 GBPm GBPm --------------------------------- --------- --------- 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 31 March 2016 2015 GBPm GBPm --------------------------------- -------- -------- 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 31 March 2016 2015 GBPm GBPm 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 GBP330m (2015: GBP250m)
11. Derivative financial instruments
31 March 2016 31 March 2015 Fair Notional Fair Notional value amounts value amounts GBPm GBPm GBPm GBPm 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 Notional Fair Notional value amounts value amounts GBPm GBPm GBPm GBPm 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 Fair Carrying Fair value value value value GBPm GBPm GBPm GBPm 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 GBP4bn 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 1-2 2-5 5+ Total 1 year years years years GBPm GBPm GBPm GBPm GBPm 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 1-2 2-5 5+ Total 1 year years years years GBPm GBPm GBPm GBPm GBPm 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 Gross Net amount Financial Cash Net amounts amounts of financial instruments collateral amount of recognised of recognised assets received financial financial presented assets liabilities in the set off balance in the sheet balance sheet 31 March 2016 GBPm GBPm GBPm GBPm GBPm GBPm 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 Gross Net amount Financial Cash Net amounts amounts of financial instruments collateral amount of recognised of recognised assets received financial financial presented assets liabilities in the set off balance in the sheet balance sheet 31 March 2015 GBPm GBPm GBPm GBPm GBPm GBPm 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 Gross Net amount Financial Cash Net amounts amounts of financial instruments collateral amount of recognised of recognised liabilities paid* financial financial presented liabilities assets in the set off balance
in the sheet balance sheet 31 March 2016 GBPm GBPm GBPm GBPm GBPm GBPm Derivative financial liabilities (1,407) - (1,407) 686 721 - Related amounts not set off in the balance sheet Gross Gross Net amount Financial Cash Net amounts amounts of financial instruments collateral amount of recognised of recognised liabilities paid financial financial presented liabilities assets in the set off balance in the sheet balance sheet 31 March 2015 GBPm GBPm GBPm GBPm GBPm GBPm 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 Level Level 1 2 3 Total GBPm GBPm GBPm GBPm 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 Level Level 1 2 3 Total GBPm GBPm GBPm GBPm 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 31 March 2016 2015 GBP GBP Authorised, issued and partly paid: 2 ordinary shares of GBP1 fully paid up 2 2 49,998 ordinary shares of GBP1 partly paid to GBP0.25 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 31 March 2016 2015 GBPm GBPm Profit before tax - 1 Operating cash flow before movements in working capital - 1 Decrease in receivables 2,849 2,652 Net cash consumed by operating activities 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
The company news service from the London Stock Exchange
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