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Kiwirail plan to 'right-size' balance sheet to take longer

Monday 23rd April 2012

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KiwiRail probably won’t be in a position to restructure its balance sheet this year, a strategy that the state-owned railroad flagged in October could result in a $6 billion writedown of its commercial assets.

“We’ve still got the intent to right-size our balance sheet,” Quinn told BusinessDesk. Technical issues, though, mean the exercise “is less likely to be reflected in this year’s accounts.”

The railroad said at its annual meeting last year it would restructure its balance sheet, putting its $5 billion of rail corridor land into a statutory body that would be classified as a public benefit entity (PBE) while Kiwirail would be the commercial arm, owning the rolling stock, ferry assets, commercial properties and rail infrastructure and be classified as a profit oriented entity (POE).

To achieve a reasonable return, the commercial assets would be written down, possibly by $6 billion to $1 billion, chairman John Spencer said at the October AGM.

The timing of the changes “will depend on how we move through this process to revalue our balance sheet,” Quinn said. A writedown would be taken to ensure “the assets are correctly valued.”

Kiwirail last week put its Hillside workshops in Dunedin up for sale, having awarded contracts to build electric multiple units (EMUs), locomotives and wagons to overseas-based manufacturers. The decision led to accusations that Hillside had been deliberately starved of work before the decision was made to exit the operation.

Quinn said the workshops couldn’t compete with foreign firms.

“EMUs have never been built it New Zealand ever,” he said. “There are firms out there who build them and nothing else. We were not competitive – I know that for a fact.”

Building locomotives at Hillside would have been significantly more expensive – as much as 70 percent more and wagons would also have been costlier to build locally, he said.

Quinn said spending more on building the rolling stock in New Zealand would have amounted to “spending more in one area to make sure this other thing is ok. The risk is you’re leaving it for the next Jim Quinn.”

In February, the railroad said full-year earnings would miss the target in its statement of corporate intent of $139.5 million on an EBITDA basis. Earnings are now expected to be in the range of $105 million to $115 million.

“It’s a tougher market in many areas than when we set our plans but that’s life,” Quinn said. “If we’re not delivering the cash out of our business then we have to adjust our ambitions.”

Kiwirail expects to decide on the future of marginal rail lines in the next few months. They include the northern length of the Napier to Gisborne line, currently closed by landslips, and the North line.

With the Gisborne line, Kiwirail now knows the cost and length of time to make repairs but is still doing its economic forecasts to complete the picture.

Quinn says it is not all doom and gloom. “I think our customers are voting with their investment on rail and their commitment of freight,” he said.


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