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KiwiRail sees some green shoots in outlook for coal volumes

Friday 28 October 2016 01:08 PM

KiwiRail sees some green shoots in outlook for coal volumes, 'wall of wood'

By Jonathan Underhill

Oct. 28 (BusinessDesk) - KiwiRail's statement of corporate intent projects a drop in revenue for 2017 but chief executive Peter Reidy sees some bright spots for the state-subsidised railway, including the potential pickup in coal volumes and the benefits of increased forest harvesting in some regions.

"This year is going to be quite strong in terms of forestry. Coal has been very flat. But as coal prices come back we're likely to see a bit of volume uptake," Reidy said at KiwiRail's annual meeting in Wellington yesterday.

KiwiRail is currently preparing its annual investment plan and expects to sit down with the Treasury before year-end, with the aim of feeding into next year's budget. The state-owned enterprise, which describes itself as an 'above-the-rail' business, got a two-year funding package in Budget 2015 of $210 million in 2016 and $190 million in 2017. It needs to convince the government of its vital role in New Zealand's transport infrastructure to win additional Crown funding for 'below rail' investment after years of under-investment.

Chief executive Peter Reidy said the proposal wasn't a high priority for the company but "if the government wanted to invest in that then we would have the passion and energy to do that."

The railroad says it has been holding up its end of the bargain, exceeding its statement of corporate intent targets for revenue and operating surplus in the year ended June 30, while stripping out $27 million of costs. The SCI projects weaker revenue growth over the next three years but with an improving operating surplus and operating margin. Shareholder returns and dividends are projected to be zero through until 2019, while the return on equity is expected to deteriorate to -55 percent by 2019.

Reidy says KiwiRail can pretty much pay for itself from operating earnings as an 'above rail' business.

He referred to a new "wall of wood" as forests are harvested near Wairoa after Hawkes Bay Regional Council and central government stepped in with funding support that has been kept confidential to take the railway line to Napier out of mothballs.

Against that, the Interislander business was having to cope with excess capacity on Cook Strait, with little growth in freight volumes but an increase in passengers. "We will look at our models for Cook Strait," Reidy said. He ruled out a return of fast ferries, which had to contend with challenges such as speed restrictions in the Marlborough Sounds.

Among other challenges was the appearance on New Zealand roads of larger-sized trucks, which competed harder for freight, while internally the railroad company was dealing with an ageing workforce, dominated by older men. Among challenges yet to come was the question of driverless trains, which are being readied by miner Rio Tinto and Sydney's metro lines across the Tasman.

Reidy said the decision to reopen the mothballed Napier-to-Wairoa line, which came after negotiations with local authorities and Napier Port, was an example of local interests acting to preserve infrastructure seen as having a community benefit, something KiwiRail is restrained in considering.

A similar strategy may work in Northland, the other region where KiwiRail sees scope for local interests to underwrite unviable lines.

"It was most pleasing in Hawkes Bay," Reidy said. "They can look at the community benefits in a different way than KiwiRail can. We do believe that regional councils have an opportunity."

Reopening the line from Wairoa to Gisborne is less likely, he said.



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