Rail transportation and operation company Aurizon (ASX: AZJ) has announced that earlier plans to sell portions of equity in its railway networks business will not proceed as it looks for alternative ways to reduce cost.
In May it was reviewing its capital structure to balance debt maturity and cost of financing when the proposed equity sale was made public. The new debt plan included $3 billion in the network business, though first only $2.2 billion would be drawn down, changing its gearing to 55%.
The sale was supposed to provide capital that could be used toward the capital management plans and fund potential growth projects. Usually, about half of the company's earnings come from charging competitors to run their transportation on its tracks, but the sale was to be intended for institutional investors to buy into their network.
As it was planning to use more debt, it also wanted to improve its cost of operations with its "drive to 75" initiative, meaning that for every dollar of revenue, it would be earning 25 cents gross. Increased interest payments required savings in other areas, and $230 million in cost reductions were earmarked over the next two years.
Over the past two years, about 1,600 jobs have been cut back, and from here on out $60 million of the $230 million in cost savings will originate from labour costs. The company, previously owned by the government and known as QR National, sees this cost rationalisation as taking care of legacy issues from that time, with the closing down of redundant rail yards and workshops.
Had it proceeded with the equity sale, the projected sale value generated was to be around $1.3 billion. The current economic climate towards coal-related infrastructure is still not as strong as it could be for a widely attractive sale, so the company will remain concentrated on finding cost savings.
Foolish takeaway
The rail company is still transitioning from a publicly owned organisation, and though it has an extensive rail system throughout Queensland, expanding into more states now puts it in competition with other rail companies like Asciano (ASX: AIO). It wants to play an active role in operating rail lines for WA miners, and could use its new debt plan to finance that.
Rail infrastructure can be a good long-term investment because of the monopolistic-like nature of controlling and operating potentially the only rail line that goes through an area — forcing shipping companies and miners to use it to get their goods to ports or urban areas.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
