Railtrack wins compensation for penalties on late trains

PETER RODGERS

Business Editor

Railtrack has won a compensation package to cover penalty payments imposed by the rail regulator for late-running trains, worth more than pounds 80m a year for the first two years.

First details of the financial impact of the performance regime under which John Swift, the regulator, sets penalties for failure to deliver services promised to train operating companies, will come with the interim results tomorrow.

Without compensation, Railtrack's profits would be much less attractive to investors in the flotation in May, which is expected to raise up to pounds 2bn.

The results will show that the compensation payment of just over pounds 40m in the first half of the 1995-6 financial year - rising to more than pounds 80m in the full year to this March - will cover most of the cost of the penalty.

In the first six months to last September of the company's financial year, the compensationwill be not far short of half the expected interim profits before tax of about pounds 95m. The interim profits are expected to show little change of trend from last year. They will be about half the pounds 189m before tax made in the full year to last March.

The compensation package is expected to be slightly larger in the following year to March 1997, but will then begin to tail off over several years, leaving more of the cost of delays and missed timetables to be borne by the privatised company.

Railtrack argued successfully for a phasing in of the cost of the penalties up to 2001, after which the full performance regime will bite. It insisted in negotiations that without a cushion it would have difficulty financing its pounds 1bn-a-year investment programme.

Furthermore, the Government has agreed that tax losses can be passed from British Rail to Railtrack, as inheritor of the railway infrastructure, which means the tax charge over the next few years will be minimal, and some analysts think there could even be a tax credit this year. This will boost the company's bottom-line earnings.

And on Friday, the rail regulator agreed in principle to allow Railtrack to keep 75 per cent of any profits it makes on its property portfolio.

The greatest pressure to ease the impact of the performance penalties is the effect they would have had on earnings and dividends. The City will want a substantial dividend yield.

Meanwhile, Bob Horton, chairman of Railtrack, said in an interview with the Independent that the company might negotiate with train operators to cut back on weekend maintenance and the accompanying disruption to timetables. This would help to sell more tickets.

Interview, page 17