Spotlight – Red signal for Railtrack

Railtrack finance director Norman Broadhurst will today warn shareholders that the gravy train is coming to a gradual halt, following intervention from the rail regulator which could see earnings tumble.

After enjoying the enviable position of having captive customers, and revenue guaranteed by the government, the future of Railtrack is now under threat. The group, which runs the UK’s track, signalling and stations, will shortly be hit by moves from rail regulator Chris Bolt to overhaul its financing scheme and restructure Railtrack’s return on capital – all of which will hammer the company’s earnings.

Formed from the privatisation of British Rail in 1996, Railtrack has posted large profits – particularly in 1998 – and today announces profits for the year to 31 March 1999. Most of its revenue comes from fees paid by the UK’s 25 regional passenger train companies and freight operators.

At the end of last year, Bolt set out his preliminary conclusions on the financial framework for a periodic review of Railtrack’s access charges, which train operators have to pay to use the network.

The review has allowed the regulator to reassess Railtrack’s financial framework, which was established at privatisation. Bolt has begun to examine the company’s performance and will set operating targets and appropriate track charges for the next five years as he sees fit. Earlier this year he proposed radical plans to recalculate Railtrack’s asset base.

The group’s earnings potential will therefore be hit from two directions, according to analysts. First, the asset base on which Railtrack’s rate of return is centred will be recalculated. Second, Railtrack will be prevented from obtaining a high return on the assets which are used to provide the everyday rail services.

City analysts have predicted that if the changes are given the green light, more than £100m will be eliminated from Railtrack’s bottom-line earnings from 2001. But Railtrack will still be able to boost profits by using its extensive property assets creatively, including its role in the Channel Tunnel rail link and freight transport services.

It is also adamant that it is more than meeting its obligation to invest in the system and plans to keep this going.

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