Rail operator and network owner Aurizon will not split up its above and below rail businesses, but will separate them into different funding structures.
The ASX-listed rail company detailed the findings of a pair of strategic reviews in its Annual Report on August 12.
The first concerned the vertically-integrated structure of the business, which sees Aurizon own and operate the Central Queensland Coal Network, while also operating a large fleet of bulk and heavy haul locomotives and wagons for mining and agricultural customers around the country.
This integrated above and below rail approach was deemed viable by the Queensland Government in 2010 in the lead up to Aurizon’s initial public offering. Andrew Harding, who has driven significant change since becoming the company’s CEO in late 2016, ordered a fresh review of the vertical integration during FY19.
Despite suggestions a review meant a split was on the cards, for now that review has indicated the company will stay intact.
“The evidence from the review showed the benefits of integration continue to outweigh the benefits of separation at this time,” the company said.
Aurizon won’t keep its structure completely the same, however.
The second review, into optimising the capital structure of the group, proposes a new legal structure facilitating standalone funding structures for both the above rail business and the below rail business.
Aurizon said this option would allow it to establish independent gearing levels for each business, consistent with their different risk profiles. The structure would also allow for around $1.2 billion in extra funding capacity, with debt likely to be added progressively over time, the company said.
Both the above rail and below rail businesses, known as Operations and Network respectively, would target credit ratings of BBB+/Baa1.
The non-Network businesses – Coal, Bulk and Other – which will fall into the Operations structure added $450 million to Aurizon’s EBIT in FY19, above the $390 to $430 million guidance provided in August. This figure benefited from the $20 million recovery of doubtful debt from Queensland Nickel.
Meanwhile Aurizon Network delivered $400 million to the group’s EBIT, which suffered from a ‘one-off regulatory true-up’ of $60 million to account for the Queensland Competition Authority’s UT5 access undertaking for the Central Queensland Coal Network. Since that finding Aurizon has come to terms with its mining customers on a deal it says is fairer for all parties.
That $60 million writedown was the largest single contributor to an overall 12 per cent drop in underlying EBIT, to $829 million in FY19 for Aurizon Group as a whole.
Net profit after tax was down 13 per cent, to $473 million.
Aurizon declared a final dividend of 12.4 cents per share (70 per cent franked), down 5 per cent on the 13.1 cents per share final dividend last year. The total FY19 dividend was 23.8 cents per share, down 12 per cent year on year.
Despite the softer financial numbers, Aurizon reported record volumes for its above rail Coal business, and below rail Network business during the 12-month stretch.
Above rail coal volumes rose 1 per cent, to a record 214.3 million tonnes. Lower volumes in Queensland due to weather-related events, supply chain constraints and industrial action were counteracted by the start of a new contract in New South Wales in January 2019.
Below rail volumes on the Central Queensland Coal Network were a record 232.7 million tonnes.
Aurizon said it expects EBIT to bounce back in FY20, announcing guidance in the range of $880 – $930 million. “This assumes increased EBIT across all business units from volume growth, benefits from operational efficiencies and the impact of the UT5 customer agreement in Network,” the company said.