Little light at end of Tranz Rail tunnel

By CHRIS DANIELS

Tranz Rail executives tried to look confident when releasing their annual results yesterday, but were unable to cast light on looming shadows threatening the company.

These include today's expected announcement of a credit rating downgrade, the ongoing renegotiation of all its bank debt, the sale price of its Wellington Tranz Metro business and the need for new capital, possibly through a rights issue.

The results were no surprise, matching forecasts issued to the financial community in July in a bid to reassure investors that restructuring plans were proceeding well.

Chief executive Michael Beard said the benefits of this restructuring would start to show in the next set of financial results.

Tranz Rail made a bottom-line loss of $122.7 million for the year, compared with a net profit of $5.6 million for the same period the previous year.

Asset writedowns and changes in its accounting treatments took $143.3 million from the operating profit of $23.9 million.

The $116 million in asset writedowns was towards the lower end of the range predicted in July.

Tranz Rail's revenue from moving freight dropped in all categories apart from coal, where it increased by just under $3 million.

Revenue from carrying manufactured goods dropped 30 per cent and forestry 25 per cent.

Analysts had expected yesterday's profit announcement to be close to that signalled to the financial community in July, when it predicted earnings before interest and tax of $26 million. Yesterday's result was $26.8 million.

Tranz Rail's results announcement was made just 24 hours before the reporting deadline for companies with June 30 balance dates.

Beard used the opportunity of presenting the results to the media to take a swing at the company's critics.

He said Tranz Rail had, in the past few weeks, "been subjected a series of hasty, ill-informed judgments about our company".

The judgments, based on self-interest, came from a range of sources, he said.

Some came from "ideologues" who still could not accept the decision made 10 years ago to privatise railways.

Other criticism had come from local body politicians in Wellington, who were trying to get Tranz Rail to sell the Tranz Metro commuter service to them at a cheaper price.

Beard moved on to the "two or three significant customers who are dressing up discussions about price and service as an issue about track ownership and access".

This was a reference to the Rail Freight Action Group, a lobby group of five of its biggest customers which has been calling for open access to the national railway system.

"Our message to them is clear," said Beard. "They are paying 30 per cent to 50 per cent less for our services than they were five years ago. Regardless of track ownership, these prices do not cover the cost of operation."

Discussions with the Government before the election had been very general and had not resumed.

He said the review of Tranz Rail's credit rating by Standard & Poor's could trigger other events, and the company "had plans to cover the various scenarios that may arise".

Tranz Rail's five-year, $250 million debt facility, which is now being renegotiated, was one of the challenges facing the company.

All available measures were being considered by the board, said Beard, including "realignment of its debt facilities both in the short and long term and raising of new equity if appropriate".

Decisions depended on what happened to other parts of the business, including negotiations for the sale of the Tranz Metro business, the need for short-term financial flexibility and whether it would need to provide a letter of credit for the inter-island ferry Aratere.

Standard & Poor's recently put the company on negative credit watch for a possible downgrade of its BBB status. A downgrade would allow the lessor of the Aratere to demand a $115 million letter of credit.

Tranz Rail chief financial officer Wayne Collins raised the possibility of this being unnecessary, saying the ferry owners also had the security of the vessel itself, so asking for a letter of credit from the company would mean it had two forms of security.

He said the rating would be downgraded, though he did not know by how much.

Tranz Rail shares finished the day yesterday at $1.65 each, up 3c. Its shares were selling for as much as $3 each just a few months ago.