Break-even a decade away for KiwiRail making up for years of neglect, Quinn says

KiwiRail beat its guidance with a 3.1 percent gain in full-year operating surplus but a net profit is at least a decade away as the railroad continues to spend more than it earns and writes down the value of assets yet to generate enough cash flow.

The state-owned enterprise posted an operating surplus of $108 million in the 12 months ended June 30, from $77.6 million a year earlier. Sales climbed 1.6 percent to $727 million, outpacing a 1.3 percent gain in operating expenses.

The net loss was $174.6 million, compared to a loss of about $2.3 billion a year earlier, when it took an impairment of $2.2 billion as part of its move to split off rail land holdings, leaving an operating company with a realistic target of making an economic return.

Impairments will continue each year until KiwiRail becomes self-sustaining because the carrying value of its assets is assessed annually and must be written down to market value. That includes much of the company's investment in renewing its network, which is greater than what it can generate from its operating surplus. In the latest year, total assets were valued at about $1 billion, down from $4.26 billion in 2012.

"It reflects the reality that you're catching up on years of under-investment," Quinn told BusinessDesk. The Crown as shareholder "has been terrifically supportive but would love us to get there (breakeven) earlier."

KiwiRail's base case projections have spending in 2022 at $310 million and operating earnings at $280 million, which would be the narrowest gap in at least a decade and a trend Quinn calls "a closing wedge."

That would be the year of breakeven but for a one-off investment planned for 2022 to refurbish the ferry Aratere.

The railroad received grant income from central and local government for specific projects of $181.7 million in the latest year, up from $172 million in 2012. In the past four years, capital expenditure on new rolling stock, equipment and network upgrades has exceeded $1.3 billion, excluding investment in the metro networks.

At an operating level, the company has more cause for optimism, especially in its biggest freight operations, says Quinn, whose contract ends this calendar year.

Freight, which accounted for 64 percent of revenue last year, lifted sales by 2 percent to $467 million and is forecast to grow 6 percent in 2014.

Growth in freight revenue was driven by the import-export, or IMEX trade, which rose 8 percent to $132 million. Forestry climbed 9.4 percent to $50 million and domestic freight revenue climbed 5.5 percent to $94.9 million.

But bulk freight fell 7.4 percent to $99.6 million, reflecting a drop in coal carried for financially strapped Solid Energy and a decline in dairy in the wake of a drought affected milk season. The company also faced a threatened strike on the Interislander service, storm disruptions and the ongoing effects of the Christchurch earthquakes.

"New Zealand freight is growing as the economy grows," Quinn said. "On top of that, as we continue to earn our stripes with customers, their confidence grows to recommit to rail." He cites Fonterra's Darfield dairy plant, which is served by a spur line that was agreed when the site was in design phase.

Sales from the Interislander, KiwiRail's second-largest business, were flat at $124 million last year and are forecast to rise 3.2 percent in 2014. Pretax earnings on the ferries rose 26 percent to $19.6 million, meeting budget.

Revenue from the Tranz Metro commuter operations fell 4.6 percent to $43.6 million and Tranz Scenic recorded a 1 percent drop in sales to $20.1 million. It didn't provide earnings figures for those units.

(BusinessDesk)