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KiwiRail proposes $6 bln writedown of assets, overhaul of capital structure

Friday 28th October 2011

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KiwiRail, the state-owned railroad, has proposed writing down its assets by $6 billion, halving their current value which is too high given the commercial realities of the business.

Under the proposed balance sheet restructure, the business would be split into two entities – a statutory body, NZRC, will hold the rail corridor land currently valued at about $5 billion. KiwiRail would be the commercial arm, owning the rolling stock, ferry assets, commercial properties and rail infrastructure, chairman John Spencer said in a presentation at the annual meeting in Wellington.

“While this process is still a proposal while we work through the technical details it is clear that the current valuation of $13 billion for our assets based on replacement cost is not an appropriate valuation for the business,” Spencer said. “We have recommended to our shareholder that we change the company entity structure and value our assets according to their productive earning value,” he said.

Under the proposal, the value of the railroad’s commercial assets would be slashed to about $1 billion, a writedown of about $6 billion, Spencer said.

Both entities would have a common board though details of the commercial arrangement haven’t been decided. The company has been “working constructively” with government officials over the past 12 months and hopes to have the restructure completed by the start of the 2012 financial year, depending on resolving the legal structure and tax issues.

The restructure means the business will be cash negative for its first five to seven years.

Profit fell 83 percent to $34 million in the railroad’s latest year as it recognised a loss on the transfer of assets to Greater Wellington Regional Council and recorded a decline in government grant income that reflected completion of projects. Operating revenue climbed 2.6 percent to $667.4 million.

It was the first year the company hadn’t received an annual $90 million operating grant from the government. Instead it receives funding for specific projects.

The annual results missed the targets in the KiwiRail’s statement of corporate intent, with operating revenue 2.6 percent below the projected $685 million, while ebitda short by about $20 million. The shortfall reflected disruptions from the Christchurch earthquakes and loss of Pike River Mine volumes.

Chief executive Jim Quinn said the company is working hard to make up the shortfall.

Spencer also defended the decision to buy rolling stock and locomotives from overseas manufacturers rather than use its own engineering workshops.

“We have had to make tough purchasing decisions, but we have a finite amount to spend in many areas to get this business functioning efficiently and safely,” Spencer said.

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