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Tuesday, 18 December, 2001, 12:44 GMT
Q&A: Railtrack profits

Railtrack Group has announced profits of 292m a little over two months after its core rail division was placed into administration. How? BBC News Online plots a course through Railtrack's financial conundrum.

From apparent bankruptcy to huge profit in 10 weeks? I'm confused.

And you're not the only one. An army of administrators - who charged 1.7m for their first 24 days work - is being employed to sort out the Railtrack mess, and estimates of a six-month completion date are looking increasingly optimistic.

But a key fact to remember is that Railtrack plc - the division which was placed into administration - is only one arm of Railtrack Group, the company listed on the stock market.

So what does the group consist of?

Railtrack Group also has a pensions unit, safety arm and insurance operation, plus property development operations managing those sites not within the core rail portfolio.

The company also secured a concession to take over the running of the Channel Tunnel Rail Link, and has committed to buying stage one of the link for a projected 1.7bn after completion in 2003.

Railtrack plc, the unit in administration, is responsible for operating the existing tracks and signals used by operators, and for infrastructure upgrades such as the West Coast main line modernisation.

So how come trains are still running when Railtrack plc is in such trouble?

One of the roles of the aforementioned administrators is to help keep the division's finances ticking over, while unpicking its links with Railtrack Group, and preparing its assets for takeover at the end of the administration period.

They were last week joined in their work by John Armitt, a much-respected engineer appointed chief executive of Railtrack plc.

Where did all the profits come from?

Analysis of Tuesday's results statement - which applies to the six months to 30 September - shows that revenue from Railtrack's subsidiary operations was broadly the same as for the same period last year.

Where revenue growth was seen was in the plc.

And this was largely thanks to a new regulatory framework, announced in April, which offered Railtrack accelerated state cash, but demanded tougher non-performance penalties, and a commitment to curb dividends to shareholders.

Train delays for which Railtrack admitted responsibility were half those for the previous six months, when services were disrupted by network-wide repairs following the Hatfield crash.

So if Railtrack plc was producing such profits, why was it put into administration?

A four letter word has dogged Railtrack's recent history - debt.

The cost of upgrades after the Hatfield crash, which raised concerns over cracked rails, has proved huge.

And the soaring cost - 7bn compared with an original estimate of 2.3bn - of the West Coast main line upgrade has opened the company to further liabilities.

The government, whose hold over Railtrack plc increased in line with the rising levels of state help, pushed the business into administration after becoming increasingly frustrated with requests for cash.

Tuesday's statement revealed that Railtrack Group's debt - almost all attributable to the plc - had soared further, from 3.36bn in April to 4.55bn at the end of September.

Administration sounds like a mercy killing, then.

Railtrack executives believe not.

They say the rising profits were allowing them not only to service the firm's existing debt, but take on new loans to fund repairs.

"Bigger profits financed greater borrowing which delivered higher investment in the network," group chief executive Steve Marshall said.

So what now?

Tuesday's statement will increase pressure on the government to explain why it undermined a rail infrastructure firm which, apparently, was not the basket case some had envisaged.

But it will also raise hope that whatever takes over the running of Britain's track and signals after Railtrack plc emerges from administration could have a half decent chance of avoiding huge losses.

See also:

18 Dec 01 | Business
Railtrack makes 292m profit
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