Railtrack Group PLC Announces Interim Results For Six Months Ended September 30, 1998.

LONDON--(BUSINESS WIRE)--November 5, 1998--Railtrack Group PLC today announced its interim results for the six months ended September 30, 1998.

Highlights

-- 32% increase to 689 million pounds ($1,171 million(a)) in infrastructure investment. This is more than double the amount invested in the same period three years ago and is more than Railtrack achieved in its first full year. Railtrack plans to invest 17 billion pounds ($29 billion) on the railway over the next ten years.

-- Station Regeneration Program spending is up 123% to 145 million pounds ($246 million). 530 stations were completed at September 30; work is underway at 321 stations and the company is on target to complete over half of the total program by the end of this year.

-- Construction of the Channel Tunnel Rail Link began on October 15th. This project represents an enormous opportunity for growth for the Railtrack Group.

-- An improved operating performance with total minutes delay attributed to Railtrack and its contractors falling by 4.5% (broadly equivalent to 7.5% on a per train basis). Railtrack has improved its and its contractors' minutes delay by over 40% in the last three years. Infrastructure delays have reduced from 65% to 45% of total delays over the same time period.

-- Pre-tax profits up by 13% to 224 million pounds ($380 million) (1997 restated: 199 million pounds). 1997 figures have been restated throughout to take account of the new Financial Reporting Standard 12 - 'Provisions, Contingent Liabilities and Contingent Assets.'

-- Revenue for the six months was 1,286 million pounds ($2,185 million) (1997 restated: 1,235 million pounds). For the first time profits from the sale of commercial and development properties of 23 million pounds have been included as revenue.

-- Railtrack stepped up disposals to take advantage of buoyant market conditions. Profits from property disposals (including the 23 million pounds on commercial and development properties) were 36 million pounds (1997: 21 million pounds).

-- Operating costs were 1,045 million pounds ($1,775 million) (1997: 1,042 million pounds). This represents a 4% improvement on an underlying basis excluding depreciation and inflation.

-- There was a negative cash flow in the period of 65 million pounds ($110 million) before short term investments and borrowings, reflecting the increase in the investment program. Net debt increased to 889 million pounds ($1,510 million) from 532 million pounds. Interest was covered seven times by operating profit before commercial and development property sales.

-- Earnings per share for the half year were 42.8p (72.7 cents) per share, compared with 35.4p restated and adjusted earnings per share for the same period last year.

-- Directors declare an interim dividend of 8.7p (14.8 cents) a share - an increase of 10% on the 7.9p paid at last year's interim stage. This will be paid on April 6, 1999 to reduce the Company's liability to ACT.

(a) US dollar equivalents are provided for reader convenience at the September 30, 1998 exchange rate of 1 pound = $1.6989

Sir Robert Horton, Chairman, said:

"We are committed to making rail the transport of choice for the nation. We have made good headway on our 17 billion pounds 10 year investment program, investing 689 million pounds in the first half, and we are on target to spend 1452 million pounds by the end of the financial year."

Gerald Corbett , Chief Executive, said:

"Against a background of growth in traffic and the emergence of new business opportunities, we have continued to deliver improvements in operational performance, further accelerated the investment program, increased efficiency, stepped up our property activities and continued to improve our key safety indicators. Our goal is to work closely with government, our regulators and our train operating customers on our common objectives of delivering a better railway."

Dividend Timetable

Ex dividend date February 8, 1999 Record date

February 12, 1999 Period for calculation of

share dividend reference price February 8-12, 1999 Last date for share dividend election March 5, 1999 Payment date

April 6, 1999

Chairman's Statement

New business opportunities coupled with an acceleration in investment mark the first half of what promises to be another eventful year for Railtrack. Against this background of growth, our core program remains the top priority. We are pursuing a vigorous schedule of improvements in safety and operational performance, facilitating a further growth in traffic and achieving increased efficiency. Shareholders are continuing to benefit from growing returns.

Investment

Our investment program developed further, with a 32% increase in total asset related expenditure to 689 million pounds ($1,171 million) for this period (1997: 520 million pounds), taking us closer to the delivery of our 17 billion pounds ($29 billion) ten-year investment program. This is more than double the amount invested in the same period three years ago and is more than Railtrack achieved in its first full year.

The substantial investment program places a particular onus on us to use our resources wisely. We have instigated a number of initiatives and techniques to reduce unit costs. Value management initiatives and partnerships with our contractors are showing positive results in reducing costs, improving efficiency and identifying priorities. The delivery of the program has now been decentralized to our seven zones which has increased flexibility and speed of delivery.

Key indicators are used to assess the performance of investment projects and we are measuring our methods against those of other leading edge organizations, as well as sharing best practice to ensure that we eliminate waste.

We have seen an acceleration in our program to regenerate nearly all Britain's 2,500 stations, with 530 projects completed at September 30 and contractors on site at 321 more. Works have been planned and authorized for a further 148 stations and 210 have undergone feasibility and design work. 145 million pounds ($246 million) was invested in the period, up from 65 million pounds in the same period last year. This performance makes us confident of meeting our commitment to complete over half of the Station Regeneration Program by the end of this financial year and to complete the entire program, on schedule, in 2001.

Major investment projects completed during the first half included:

-- The 51 million pounds renewal of infrastructure at Manchester Victoria, including state-of-the-art signaling, remodeling of track layout and reconstruction works to five bridge structures;

-- The 33 million pounds EROS project in our London North Eastern Zone to increase signal box efficiency by concentrating activities in fewer upgraded locations;

-- A new sub-surface station at Conway Park costing 14 million pounds;

-- The 8 million pounds refurbishment of overhead line structures on the LTS Rail route, where the project team employed new engineering solutions to reduce the time required to complete the works; and

-- 6.4 million pounds on the rationalization of signaling control in the Dover area, including the closure of four signal boxes, renewal of lineside signaling equipment and associated track layout alterations.

The Channel Tunnel Rail Link

The start of construction of the Channel Tunnel Rail Link (CTRL) in October marked an historic occasion for our industry and represents a major opportunity for the development of the Railtrack Group.

The link will provide the potential for an important source of new revenues for the Group, through track access charges from the operators of Eurostar. These track access charges will be guaranteed by the Government.

CTRL may also provide other revenue streams, including the provision of access to domestic passenger and freight operators.

Phase I of CTRL will be constructed by Union Railway South Limited (URS) a company owned by London & Continental Railways Limited. Railtrack will acquire Phase I on completion, expected to be in 2003, and has an exclusive option, until 2003 to acquire Phase II. Railtrack Group PLC exercises control over URS, appointing the company's board of directors. Consequently, the company will be treated as a subsidiary undertaking and its net assets will be included in the Group's future consolidated accounts.

Performance

Last year we held on to, and slightly bettered, the performance improvements achieved in our first full year since privatization. This year our plan is to improve performance by a further 7.5% on a net train basis. While this target is challenging, we are determined that these improvements will be delivered through the proactive and systematic approach we are now taking to driving down minutes' delay. At the end of the first half we were running level with plan, the achievement of which for the full year is highly dependent on weather in the second half. In the last three years we have reduced delays attributable to Railtrack and its contractors by over 40%.

Through the use of local budgets and area delivery groups we are driving accountability for performance down through the organization. This is making the organization more responsive.

We have analyzed the top causes of delay, the failure rate of assets and components and the relative performance value of different route sections. This enables us to focus our efforts, our contractors' efforts and our investment on areas which will give the greatest return.

We are adopting a more active approach to the management of our maintenance contractors, focusing them on delivering key output measures and tailoring maintenance regimes to ensure assets with the highest performance cost and risk receive more intensive maintenance.

In the first half we made a performance regime profit of 17 million pounds ($29 million), against a reduction in the access charge supplement of 10 million pounds ($17 million). The equivalent figure for the corresponding period last year has been restated to reflect the new Financial Reporting Standard 12 (FRS12) "Provisions, Contingent Liabilities and Contingent Assets". Provisions for severe weather are no longer recognized in the balance sheet. From April 1, 1998 severe weather costs are accounted for as incurred. The restated performance regime profit for the corresponding period in 1997 is 18 million pounds. As in previous years, the half year figure has been based on an estimate of the amounts receivable and payable for the financial year as a whole.

Profits and Dividends

As stated above, the 1997 figures have been restated to reflect FRS12.

Our Group operating profit, before profits on the sale of commercial and development properties, for the six months ended September 30, 1998 increased by 13% to 218 million pounds ($370 million) from the same period last year. After interest of 30 million pounds ($51 million), Group profit before tax rose 13% to 224 million pounds ($380 million).

Earnings per share for the half year were 42.8 pence (72.7>) per share as compared to 35.4 pence per share (excluding the effect of the Windfall Tax) for the same period last year.

We are declaring an interim dividend of 8.7 pence (14.8 cents) per share, to be paid on April 6, 1999. This represents a 10% increase on last year's interim dividend in line with our progressive dividend policy. The deferral of the dividend payment until the next fiscal year will produce a saving in Advanced Corporation Tax of around 10 million pounds ($17 million). The dividend of 8.7p (14.8 cents) includes a 0.10p (0.17 cents) enhancement in recognition of the delayed payment.

Revenue

Our revenue for the period was 1,286 million pounds ($2,185 million) with passenger track access income accounting for 84% of the total. Passenger track access income increased 1% to 1,080 million pounds ($1,835 million) (1997: 1,069 million pounds) principally from the application of the RPI-2% formula. Freight income for the period was up 2% from last year at 82 million pounds ($139 million) (1997: 80 million pounds). Property rental income saw growth of 8% to 66 million pounds ($112 million) (1997: 61 million pounds) reflecting the buoyancy of the property market during the period and the growth in passenger volumes. Other income increased to 35 million pounds ($59 million) (1997: 25 million pounds), largely as a result of additional non-franchised passenger traffic.

We reported at our last year-end that certain commercial and development sites identified for sale had been reclassified to current assets as stock. As a result, 23 million pounds ($39 million) from the sale of such sites is shown both in revenue and operating profit.

Operating Costs

After taking account of inflation, depreciation and one-off costs associated with Year 2000 compliance and our strategic review, an overall efficiency saving of 4% was achieved. Most notably, savings have been made in infrastructure maintenance, with a spend of 345 million pounds ($586 million) (1997: 362 million pounds), representing a real saving (adjusted for inflation) of 8%. Joint industry costs were 101 million pounds ($172 million) (1997: 94 million pounds) - the increase reflecting higher traffic volumes and contractual price increases.

Production and management expenses, after the one-off costs referred to above, rose by 7 million pounds ($12 million). The Asset Maintenance Plan (AMP) charge was 258 million pounds ($438 million) (1997: 265 million pounds). The AMP spend levels for the period have increased to 302 million pounds ($513 million) (1997: 265 million pounds). The cumulative difference between the AMP charge and spend has reduced to 86 million pounds ($146 million) and is still expected to be eliminated by 2001.

Property

Our strategy for exploiting the value of our property portfolio is to focus on those assets where specific rail-linked skills and expertise are required; to optimize the retail and development potential of major stations - we have already embarked on the consultation process on the regeneration of Edinburgh Waverley station; to manage the operational sites to support the growth of rail business, and to pursue property developments directly linked to the railway. The remainder of the portfolio, where we add no distinctive value, we are likely to turn into cash, when appropriate.

We have entered into joint arrangements to develop land at Norwich Riverside (with Gazeley Properties plc) and the next phase of the Broadgate development (with British Land plc). We stepped up our disposal program to take advantage of buoyant market conditions. As a result, we expect that in the current and the next financial year, our income from property will exceed the amount which the Regulator assumed in setting our current access charges. Therefore, the payment of 'clawback' - the profit sharing mechanism established at flotation - will be triggered.

Profits from property disposals in the period were 36 million pounds ($61 million) (1997: 21 million pounds), including 23 million pounds ($39 million) accounted for in revenue. The disposal of our remaining leasehold interests at Broadgate produced a profit of 9 million pounds in the period, with an additional profit of 15 million pounds expected to arise in the next financial year. Other main receipts related to the sale of land at Railroad Heath for a net profit of 21 million pounds and the sale of leasehold interests at Fenchurch Street for a net profit of 2 million pounds.

Taxation

The tax charge for the period was 8 million pounds ($14 million) reflecting an effective tax rate of approximately 4% (1997: 12%). The low effective tax rate reflects the tax allowances available as a result of the Group's substantial capital expenditure and backlog programs and the impact of the ACT savings from last year's scrip dividend and the deferral of the interim dividend.

Cash and Debt

There was a negative cash flow in the period of 65 million pounds ($110 million) before short term investments and borrowings, reflecting the increase in the investment program.

Net debt was 889 million pounds ($1,510 million) at September 30, 1998 (1997: 532 million pounds). Further increases in net debt are expected as a result of the continued acceleration of the Group's investment program.

Interest cover was covered seven times by operating profit before commercial and development property sales.

Since September 30, 1998, Railtrack Group PLC has arranged, and will fully guarantee, three bank facilities totaling 700 million pounds in respect of Phase I of the CTRL project. These facilities will have a minimum term of seven years.

Safety

As an industry, we have again this year set ourselves challenging safety performance targets which are driving new initiatives on risk reduction. In the first half, safety performance in a majority of the objectives was in line with, or better than, target.

Incidents of trespass and vandalism continue to concern the industry. The Annual Report of Her Majesty's Railway Inspectorate (HMRI) for 1996/7 echoed the concern when it quoted vandalism as 'the greatest threat to safety on the railways for the foreseeable future.' This all against the background of the continuing work we are doing with schools and local communities. Initiatives such as 'Scarecrow' - in which staff patrol known blackspots in the school holidays with the British Transport Police - have been rolled out across the country after successful local trials. Following the extensive research which we commissioned last year, we organized a conference in July to highlight the problem of trespass and vandalism and to galvanize the industry's efforts to deal with it.

We welcome the Health & Safety Commission's recent draft Regulation proposing that the Train Protection Warning System be fitted nationwide. As it is an essential element of the train protection strategy which Railtrack set out in 1995, we are heartened by the HSC's endorsement of this development. We also look forward to the progressive replacement of Mark I rolling stock from the network, on which the draft regulation also makes proposals.

In our last full year safety statement, we reported that the Health & Safety Executive (HSE) was reviewing the safety arrangements for the industry. We are now discussing with HSE and others how the industry's good safety record can be improved further.

We have already established a Safety Advisory Board including representatives from train operators, contractors, OPRAF and the trade unions to oversee the work of our Safety & Standards Directorate and have offered to enhance further its independence within the Railtrack Group.

We believe the full separation of Safety & Standards responsibility from the infrastructure controller would create many more problems than it would solve.

Year 2000

As reported in the 1997/98 Annual Report, Railtrack has recognized the risk to its business of the millennium change date and established a dedicated team to manage Year 2000 compliance. Significant progress in identifying and correcting specific risks has already been made. The total costs of the Year 2000 compliance program, including costs incurred to date and work that will be completed after the Year 2000, are currently forecast to be 150 million pounds ($255 million).

Regulatory

We continue to work constructively with our regulators, the Rail Regulator and the Franchising Director. The Regulatory Review - which will establish the level of passenger access charge income we receive from 2001 is already well underway, although the final outcome will not be announced until June 2000.

At the heart of the review is the issue of investment. The traffic is growing. We are beginning to run out of capacity and have identified serious bottlenecks. In order to maintain the progress we have made in regenerating the railway, we need a review which allows us to invest at a sensible and serious pace in developing network capability; a review which encourages us to build on the improvements to date in train performance; a review which enables the pricing of train paths to reflect the underlying economics; and a review which encourages us to take commercial risks and to invest where we and our customers see market growth potential. Management and Organization

In September we announced that Professor Brian Mellitt, our Director, Engineering & Production will be retiring from the board in March 1999, to focus on his role as Chairman of the Railway Forum. Following Professor Mellitt's retirement, Simon Murray, who is joining the Company in November as Director, Major Projects & Investment, will join the board. Chris Leah, who for 5 years was Zone Director with responsibility for our North West Zone, was appointed to the board on October 1, 1998 as Director, Operations. At the same time, David Moss has focused exclusively on representing Railtrack in Europe as Director General of our Brussels office.

Brian Mellitt has made an enormous contribution to the board since the formation of Railtrack and we are delighted that his tremendous knowledge and experience will continue to benefit the industry.

As part of our continued evolution we have, during the first half year, stepped up our recruitment to bring fresh ideas and skills to complement the considerable railway expertise that exists amongst our staff. In particular we have developed three of our headquarters teams - Property, Performance and Strategy & Planning - to ensure that we have a structure and organization which will deliver our objectives.

Outlook

We shall continue to work with Government and other industry partners to fulfil our common objectives: increasing investment in a safe and efficient network, improving performance, increasing freight and passenger traffic, adding capacity and becoming a more customer focused, responsive industry.

Sir Robert Horton Chairman -0- (For tabular results, please contact Taylor Rafferty Associates at 212-889-4350)