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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the full year results for the 2022 financial year. We are based in Brisbane today. Therefore, I acknowledge the traditional custodians of this land, the Turrbal and Jagera people and pay my respects to the elders past, present and future for they hold the memories, the traditions, the culture and hopes of aboriginal Australia. We must always remember that under the ballast, sleepers, rail systems and office buildings where Aurizon does business was and always will be traditional aboriginal land.
I'm joined on the call by George Lippiatt, CFO; Ed McKeiver, Group Executive, Coal; Clay McDonald, Group Executive, Bulk; Pam Bains, Group Executive Network; and Gareth Long, Group Executive Corporate. We will shortly go through the presentation that we lodged with the ASX this morning, which is also available on our website. At the end of the presentation, we will take your questions with the rest of the executive team.
Turning to safety performance. I'm pleased to report a continued improvement in our total recordable injury frequency rate, which encompasses all reportable injuries, including restricted work injuries. We have also seen a significant improvement in rail process safety, down 17% compared to FY '21. This measure records derailments, signals passed at danger and rolling stock collisions, of which a large portion are low consequence yard events. There has been an increase in lost time injuries, but this has been driven by lower severity injuries such as muscle strains. Localized injury prevention initiatives continue to be implemented to address these events.
As noted at the half year results, a fourth measure, potential serious injury and fatality frequency rate,, has been introduced to more accurately represent our business. Whereas RPS is limited to rail operations, SIFRA+p covers all operations, including our expansion into additional parts of the supply chain, such as port terminals. This measure shows the number of events as represented per million hours worked that have the potential to cause or did cause a serious injury or fatality. No serious injuries were recorded in the first half with the measure, therefore, consisting solely of events that have the potential to cause serious injuries.
As we integrate the One Rail Bulk business, our focus on the safety of our newly extended workforce will be a priority. We will take the time to understand the safety management systems before incorporating One Rail within the Aurizon safety performance statistics. In the interim, the existing One Rail targets will be used to hold legacy One Rail and new Aurizon management to account for safety performance. As always, the safety of our people comes first.
Aurizon has not been immune to the prevalence of COVID in the community with a significant increase in the number of employees affected. Having peaked in March this year, we've also seen elevated use of COVID leave in July, aligned with what we are seeing outside of the business. Many protocols that were embedded since mid-2020 remain in place to protect the health of our employees and amid rising numbers in the community. Despite COVID-related challenges, our employees continue to show great discipline in both their health and delivering for our customers, which is reflected in the financial results presented today. Our focus remains on protecting our employees, our customers and the communities in which we operate.
Now moving on to the performance overview. The financial results this year demonstrate how resilient the business is despite lower above rail volumes. Group EBITDA was down 1% with Network and Bulk lower, which was offset by higher Coal EBITDA and other items, including the profit on sale of the Rockhampton workshops. Network's EBITDA decline was due to lower revenue, namely, work and gate fees. Bulk EBITDA declined by $10 million with a combination of lower volumes and one-off costs that I will speak to shortly.
Offsetting this was higher EBITDA for Coal, driven by higher revenue yield and favorable cost management despite a 4% volume reduction. At the group level, asset sales in addition to a favorable movement in some provisions linked to discount rates also positively contributed to the result. Free cash flow from continued operations increased 13% to $664 million, driven by lower cash taxes, the sale of the Rockhampton workshops and receipt of the prior year's take-or-pay. Our final dividend of $0.109 per share has been declared, and this is fully franked. Consistent with the interim dividend, it is based on a payout ratio of 75% of underlying NPAT for the continuing operations. Even at the reduced payout ratio, which supports the acquisition of One Rail, the total dividend of $0.214 still represents a yield of over 5%.
And finally, we completed the One Rail acquisition, and Clay and I traveled to Adelaide last week to welcome our new colleagues to Aurizon. We're excited about the opportunity this business presents in Central Australia as we look to grow our exposure to bulk markets.
Moving to an update of commodity markets. Despite all-time record thermal and coking coal prices achieved during the year, Australian coal export volume was 1% lower than the prior year, with adverse weather and COVID-related labor constraints impacting coal production. Existing energy supply challenges in addition to Russian sanctions have particularly impacted thermal coal, with the Newcastle index now trading at over USD 350 per tonne. The extraordinary increases seen over the past 12 months are, of course, supportive of customer profitability and government royalties and taxes, but this is not expected to benefit volumes in the short term with mine plans set well in advance. However, an extended period of elevated prices supports additional volumes.
On the demand side, crude steel production growth has resumed in EMEA with 123 million tonnes produced in the 12 months to June. A reminder that India draws around 90% of coking coal requirements from the seaborne market and, in turn, Australia supplies about 3/4 of this volume. In the absence of export volume to China, Australia has gained market share in every other major coal import nation negating the impact of the continuing trade ban.
Turning to bulk markets, where record grain export volume is expected for the 2021 to 2022 season, supported by favorable growing conditions. This is, of course, a commodity of increased importance for Aurizon given the start of the CBH contract during the year and the acquisition of One Rail. I will speak more about our grain haulage shortly given the share in our bulk portfolio.
Finally, although noting the recent declines in commodity prices for copper, iron ore, nickel and alumina, the demand outlook for such commodities, in particular in the face of supply security has, translated through to capital expenditure. The total 2021 calendar year result is the highest since 2013, indicating confidence in developing future supply.
Returning to grain. Export volume in FY '22 was over 40 million tonnes, with around half of this volume from Western Australia and South Australia. Aurizon now has significant operations in both of these states as a result of the CBH contract and the One Rail acquisition. As noted in the middle of this slide, the CBH winter harvest resulted in a record 21 million tonnes received across the network. Historically, around 8 million tonnes is hauled by rail per annum, but this will be surpassed in FY 2023 due to the carryover tonnes from the prior harvest and the additional capacity Aurizon has deployed in support of CBH. In the first month of the financial year, we railed almost 900,000 tonnes.
Looking forward, we are seeking to challenge the historical rail road split and put more grain on rail in Western Australia. This commitment is shared by CBH and the state federal governments with an announced $400 million for infrastructure upgrades in the grain growing regions, including new signs, additional storage and upgraded rail lines. This, in addition to haulage in eastern states, means that Aurizon will be the largest grain rail operator in the country. Furthermore, as indicated on the chart, production in Western Australia and South Australia isn't as exposed to fluctuations in volume due to favorable climate and crop yield. We like the fundamentals of grain given the integral link to population and food consumption. Generally 70% of Australian production is exported with Australia holding a trade share of around 10%.
As investors will be aware, there is an increased focus on grain supply given that Russia and Ukraine hold a 30% share of global traded markets. The share of grain in our portfolio is increasing, and this provides cascade opportunities from our coal fleet.
Turning to business unit highlights. Although coal volumes were down 4%, the business unit achieved a moderate EBITDA growth due to positive revenue yield and favorable cost management. Volume growth is expected to return in FY '23 but offset by yield reduction. I'm pleased to announce today that we have secured a long-term haulage agreement with Pembroke Resources for the greenfield Olive Downs metallurgical coal mine. Haulage is expected to begin late in the 2023 calendar year, and it is great to see investment being made in new coal supply.
We also completed during the year a successful transfer of the BMC haulage agreement to new asset owner Stanmore and secured a 5-year extension for Baralaba Coal in the Moura system, which is 80% PCI. It's a strong year for the Coal business even with lower volumes as various transformation programs are delivering real benefits.
Bulk EBITDA declined by $10 million with the two main factors contributing to this result being the lower iron ore volumes with the end of the Mt Gibson contract and lower volumes this year for MRL into aspirants; and secondly, one-off costs of around $10 million, including weather, higher fuel prices, new contract start-ups and the impact from a major customer shutdown.
These two factors offset new customer growth, some of which were not operational for the full financial year, such as CBH, Tronox and additional freighter capacity on the Mount Isa line. Looking forward, the full year contribution of these contracts, in addition to higher Western Australian grain volumes, provides confidence in the growth trajectory returning to Bulk in FY '23. In addition, One Rail will also provide further growth opportunities given the number of early-stage developments in the pipeline. With relatively flat volumes, a $48 million decline in network EBITDA was driven by lower work and gate fees when compared to the prior year. We have now reached agreement with all work customers which brings the fee disputes to a close, and now it will be the regular annual payments for the term of the agreement until 2035.
The QCA published the independent experts annual capacity assessment report in June, which identifies the annual deliverable network capacity of each coal system for the period FY '22 to FY '24. This was the next step in the capacity assessment process, which outlines transitional arrangements and potential capital spend to address deficits. Although no decision has been made, we expect that CapEx required will be less than $100 million.
As George will speak to in more detail shortly, there is a reset of the network WACC next year. Our paper has just been submitted to the QCA, outlining that preliminary WACC is expected to be 8.18%, which will apply from 1 July 2023. This is based on data from June 2022 and is higher than the current 6.3%, mainly due to higher interest rates. Tariffs for FY '24 will be based on this preliminary WACC, and there will be a subsequent adjustment if interest rates move next year. It is important to note that there are a few steps in this process to consider, which is why George will go through this in detail in his presentation.
Turning to other matters. In April, the Federal Court declared Aurizon's capital distribution accounts should be treated as share capital. As a reminder, this issue dates back to the privatization and the Queensland government capital contribution and whether it should be treated as share capital for the purposes of tax law. This was the declaration we were seeking from the court and therefore, any future capital management will not impact dividend franking. The decision was not appealed by the ATO.
As noted earlier, Network settled all disputes with work customers under their respective work deeds with all historical fees now billed to customers accordingly. Finally, the legal proceedings Aurizon commenced against G&W remain on foot, and this matter is currently before the Supreme Court of New South Wales, and we will keep you updated as this progresses.
And finally, before I hand over to George, an update on One Rail. After a long journey, we're happy to have completed the acquisition of One Rail just 10 days ago. We believe this is transformative for our business and provides a platform for future growth in this part of Australia. One Rail allows us to extend our national footprint into South Australia and Northern Territory, deliver step change increases in revenue and volumes in bulk commodity markets and become the long-term lease holder of an integrated supply chain. We will not be retaining the Coal business, and George will provide an update on the divestment process shortly.
The opportunity for Aurizon has always been in bulk assets, which we are integrating into our business today. One Rail was already a strong business with integrated rail operations in Central Australia. However, the growth potential is also significant based on the number of projects and the commodities in this region. I traveled with Clay to Adelaide just after completion, spending two days there. My observations and interactions with employees absolutely confirmed our belief in the potential of this business.
This is a workforce of highly skilled and capable employees who are positive about the change, particularly our desire to grow the business in the bulk space and look beyond coal. The employees and customers like the bulk turnaround story and its track record in securing new contracts and customers in a market that rewards our agility, speed to market and a willingness to invest in future growth. I saw maintenance in facilities that were among the best in class, with an opportunity to lift utilization, deliver greater capacity and enhance capability across the whole of Aurizon.
The transition into the bulk business will be relatively smooth with synergies captured and delivered. The new business not only has strong growth opportunities in South Australia and Northern Territory but also as a key link in our national footprint from West to East in providing a national service offering for our customers.
I will now hand over to George.
Thank you, Andrew, and good morning to those joining us on the call. As Andrew said, these results demonstrate what we've been talking about for many years. Aurizon is a resilient business that can produce strong cash flows in challenging environments.
Turning to the table on this page. And as you can see, underlying EBITDA declined 1% to $1.468 billion. This means that over the last 3 years, EBITDA has been within 1% and comfortably within our guidance range as set. That's despite the last three years, including China import bans, major weather events and COVID disruptions. The change in FY '22 EBITDA was predominantly driven by lower Network revenue. This was partially offset by higher coal earnings as well as the benefits from the Rockhampton workshop sale and favorable movement in provisions due to discount rates.
As you can see in the top row of the table, revenue increased 2% with Coal and Bulk higher. Operating costs increased 5% due mainly to the growth in the Bulk business, including start-up costs. I will go into more detail on each of the business units and their performance in FY '22 shortly.
Staying at a group level, and you can see in the table that depreciation increased 2%. This was mainly reflective of recent capital investments made to support new bulk contracts and future earnings growth. Free cash flow generation continues to be strong despite the slight reduction in EBITDA with free cash flow of $664 million, representing an increase of 13%. This was mainly driven by lower cash tax, which is largely due to the disposal of the interest in Aquila last year, resulting in a lower tax installment rate during the year.
The final dividend of $0.109 per share has been paid based on 75% of underlying NPAT, which is consistent with the interim dividend and consistent with our expectation that we will pay dividends at the lower end of the payout ratio range due to the One Rail acquisition. We are also able to fully frank this dividend.
Moving now to Coal. The result for Coal highlights the benefit of CPI resets in our haulage contracts as well as the focus on cost control. EBITDA increased $8 million or 2% to $541 million. This is despite volumes reducing 4% to 194 million tonnes. Volumes have been impacted this year by a variety of factors, including weather disruptions throughout most of the year, customer-specific production issues, COVID-related disruptions to our own and customer operations and the loss of both Moolarben and New Acland volumes. Despite this, above rail revenue increased 1% to $1.195 billion with improved customer mix and higher CPI favorably impacting contract rates.
Higher fuel prices benefited revenue but this also increased operating costs and is a pass-through under our contracts. This is reflected in how we present the earnings bridge, which is shown net of fuel and access costs given they are largely pass-through. The most pleasing part of this earnings bridge is the green bar, showing a $23 million reduction in operating costs. Specifically, traincrew and maintenance costs were lower, reflecting lower volumes and continued benefits from our transformation programs.
Focus on cost and capital efficiency was also reflected in 15 fewer active locomotives in coal, a large number of which were transferred to bulk. This reduces cost in coal and provides a low capital way to grow our Bulk business. Coal delivered a good result in FY '22, considering it was a challenging volume year. Looking forward to FY '23, as Andrew noted, we expect Coal EBITDA to be lower due to lower rates from some contracts executed a few years ago, which only came into effect from July.
Moving now to Bulk. Bulk EBITDA declined in FY '22. However, we see this year as an aberration given the Bulk team's track record as well as the one-offs during the year and our recent investments to support growth. Revenue in Bulk was 9% higher with new contracts such as CBH and Tronox commencing during the year. Bulk EBITDA decreased $10 million or 7% to $130 million with higher costs offsetting the 9% increase in revenue. The cost increases were due to the new contracts in addition to a $10 million impact from one-off items. This included the direct impact from adverse weather, the temporary shut of a customer site, start-up costs to support new contracts and higher fuel prices.
Although fuel is largely passed through like the Coal business, when prices are rising, there is a lagged impact as the cost resets more frequently than revenue. This will even out over time once fuel prices stabilize. However, there was a temporary impact given the sharp increases in prices during the second half of FY '22.
Lower iron ore volumes and the end of the Queensland livestock contract also negatively impacted the Bulk results during the year. Depreciation increased, which is expected given the investments in growth, noting that 100% of Aurizon's growth CapEx this year was to support the Bulk business. Looking forward to FY '23, and we expect Bulk EBITDA to be higher next year even before considering the contribution from One Rail, with newer contracts reaching their full run rate. One Rail will provide strong bulk earnings growth on top of that.
Moving to Network. Network EBITDA decreased $48 million or 6% to $801 million. This was due to lower revenue with a reduction in GAPE revenue, lower historical work fees and lower MAR only being partly offset by increased construction ion revenue. The $20 million reduction in GAPE revenue was principally due to the reset of the risk-free rate on 1 July 2021. It's important to remember that this is different to the WACC reset process from 1 July 2023, which I will talk in more detail about later. GAPE has a 3-year reset cycle based on the 10-year risk-free rate to determine its maximum capacity revenue and the risk-free rate was lower in 2021 compared to 2018, which flowed through to lower FY '22 revenue.
As Andrew said, it's great to see the end of the work fee dispute. We look forward to annual work fees until 2035, and we've now booked all historical payments, totaling $79 million across FY '21 and '22. As the historical payments booked were less than last year, total work fees were $13 million lower in FY '22.
There was a volume-related under recovery with actual rail tonnes below the regulatory forecast. Partially offsetting that was take-or-pay of $33 million, which was booked in FY '22. However, I note as a reminder that take-or-pay does not cover all of the shortfall. What is left is $39 million, excluding GAPE. This will be recovered through the access tariffs in FY '24 but will also be adjusted by other amounts, including maintenance, rebates and WACC adjustments as detailed on Slide 67. We expect the net result will be a revenue cap or recovery by Aurizon of around $30 million in FY '24.
To further help, we have also provided the usual reconciliation of movements in access revenue in the back of the slides.
Costs did increase this year, primarily related to higher construction revenue and increased maintenance costs, which will be recovered in subsequent years. Operating costs for the year were $22 million lower when compared to the regulatory allowance, which is a benefit Aurizon retains.
Turning to cash flow and CapEx. I do like this chart on the left. We first showed it at our Investor Day last year. And when we add FY '22 figures, it further demonstrates the resilience of the company's cash flows despite volume fluctuations. As Andrew said at the outset, free cash flow was up 13%, which we are happy about. This chart on the left highlights all cash flow, including discontinued businesses. That includes the sale of Acacia Ridge in FY '21. Even so, you can see how steady free cash flow has been, something we like to show to debt and equity investors.
CapEx finished up at $532 million this year, slightly below the guidance range with $95 million of growth CapEx to drive future bulk earnings. Sustaining or nongrowth CapEx came in under our expectations due to weather delaying some network track work as well as efficiencies and temporary delays in some of our locomotive overhaul programs.
Looking forward, we expect FY '23 nongrowth CapEx to be in the range of $500 million to $550 million, which also includes an assumption for One Rail Bulk. Like in FY '22, we will provide an update to this range, including growth at the interim results once we have a better view of some prospective bulk growth contracts and associated investments. Long-term expectations for non-growth CapEx is aligned with this new range of $500 million to $550 million, inclusive of One Rail Bulk.
Turning to funding. The year ended 30 June was quiet in advance of the completion of One Rail with average debt maturity reducing by a year and no change to the Aurizon funding mix. The long-term funding strategy remains unchanged, that is to ensure we access multiple pools of capital and lengthen debt maturity to align it with Aurizon's long-duration assets. Before we do that, we had to complete the acquisition of One Rail, which was achieved on 29 July. As a reminder, the transaction was 100% debt funded with $500 million of debt placed against East Coast Rail and the balance of funding through new Aurizon acquisition facilities and utilization of existing facilities. These new facilities were well supported with 8 banks participating in the East Coast Rail syndication and 15 banks in the Aurizon operations syndication.
Importantly, this has been done while maintaining existing credit ratings, with rating thresholds reduced by Moody's and S&P in recognition of the quality and diversification of One Rail earnings.
Looking at some of the metrics on the page, I note the lower weighted average cost of drawn debt at 3.4%, which was due to the benefit of having a higher fixed portion of network debt in FY '22. This will continue next year ahead of the WACC reset on 30 June '23; meaning, we expect cost of debt for FY '23 to be 4% or lower.
Many investors are asking about inflation and interest rates and the impact this could have on Aurizon. So we thought it was easier to talk through these items together on one page. Starting with inflation, and as we've seen recently in Australia, it's risen to 6% for the year to June '22. For Aurizon, inflation flows through differently in our respective businesses.
For our above rail businesses, Coal and Bulk, we have revenue protections in place through quarterly or annual CPI escalation in our customer contracts, and I note One Rail has very similar contract mechanisms. There are, though, two sides to every coin, and the main risk is inflation driving wage escalation.
For Network, the regulation is designed to deliver the owner, in this case, Aurizon, with a real rate of return. To do this, there are a variety of inflation true-up mechanisms. For historical inflation, the regulated asset base is rolled forward at an assumed rate of inflation and at the reset point on 1 July, there is a true-up where actual inflation differs from the estimate at the start of UT5. For forward inflation, this is reset alongside the WACC for the FY '24 to '27 period with a higher inflation assumption reducing regulatory depreciation.
Turning now to interest rates and a reminder that our network debt is largely fixed this year, which protects interest costs, win rates are increasing. Rates are floating beyond FY '23 in order to match revenue with interest expense. For operations, debt will initially be floating given the recent completion of One Rail, but this is to be termed out over time with longer duration capital markets debt.
Finally, on this page, we thought it worthwhile to talk about the network WACC reset. When we settled the commercial deal with customers for UT5, it was designed for a reset in 2023 and for this reset to be simple and mechanical, with adjustments to certain market parameters such as the risk-free rate and the debt risk premium. There is actually an interim step in this process, and the numbers you see here are from a submission to the QCA in July based on market parameters from June 2022. This is called the preliminary WACC reset and will be used to determine tariffs through FY '24.
You can see that the increase in both the risk-free rate and the market risk premium takes the WACC from its current 6.3% to more than 8%. The final reset will occur in June '23 and be reflected in tariffs from FY '25. The difference between the final and preliminary WACC resets will then be reflected in a revenue cap adjustment in FY '26. As you can see from this page, Aurizon has protections from rising inflation and interest rates. To underline that point, based on our preliminary WACC reset and current inflation assumptions, we would expect the maximum allowable revenue for network to increase in FY '24 to $1.05 billion, an increase of around $80 million from FY '23.
And before handing back to Andrew, I will spend some time on One Rail and the dual track divestment process for East Coast Rail.
With the One Rail transaction complete on 29 July, our focus turns to divestment of East Coast Rail and integration of the Bulk business. On the topic of Bulk integration, I'll start by confirming that we're realizing synergies with around $4 million of the expected $7 million to $10 million of expected synergies already locked in from day 1.
In terms of transaction costs, I note we incurred $14 million of this in FY '22, and it represents the statutory adjustment shown below the line in these results. The remainder of the acquisition and borrowing costs will be borne in FY '23, with the single largest acquisition cost item being an expected stamp duty payment. I know some investors and analysts have asked about the purchase price allocation between One Rail bulk and coal. To complete this formerly involves an independent valuer ascribing values to contract assets, intangibles and property, plant and equipment at a site level within the two parts of the business. With only 10 days since completion and some of the sites being in regional locations, the required physical asset inspections haven't been completed yet by the independent valuers. We expect it to be finalized in coming months.
As announced previously, we are subject to an undertaking with the ACCC that requires divestment of East Coast Rail within this financial year. This can be done either through a trade sale or demerger, and we will choose whichever creates the most shareholder value.
In terms of the demerger process, we have appointed independent experts to prepare their relevant reports. And as we will show on the following page, we are well progressed with appointing the Board and management team. In parallel with demerger preparations, we've been pleased with the level of engagement from trade sale buyers and are expecting nonbinding offers in September. Ultimately, we aim to make a decision on which divestment pathway to pursue in the second quarter of this financial year.
Turning now to some further detail on ECR. As I've said previously, ECR, or East Coast Rail, is a business which generates strong free cash flows and is underwritten by a long-term, high take-or-pay contract with a parent company guarantee from its major customer. I can also say that the business continues to perform well in the face of weather disruptions, that recent coal prices underscore the demand for the product ECR hauls, and we've made good progress in the establishment of the stand-alone company.
Firstly, on performance and a reminder on the right that the business generated close to $140 million of EBITDA last calendar year. But those results do not include the benefit from two items. Firstly, an additional consist that began operating in Queensland in June; and secondly, the annual CPI increase in contracted rates, which is more than 4% from 1 July and based on the CPI figures to March '22. The CPI reset process for ECR is similar to Aurizon, although it was an annual reset, meaning, the most recent June quarter CPI will be reflected in the annual reset to occur on 1 July next year.
In terms of the business update. We've already secured $350 million of stand-alone insurance coverage for ECR, and the Board and management team is close to finalized. We've appointed an independent Chairman, Greg Martin, who was previously CEO of AGL and has had a number of nonexecutive director roles in recent years, including at Iluka. John Fullerton is another nonexecutive director appointment and was previously on the Board of One Rail and the former CEO of ARTC. There remains one more Board member to appoint, but we are happy with the rail, resources and listed company expertise we've secured through Greg and John's appointments. As well as the pre-existing role held by John McArthur, the key positions of CFO and COO have also been filled with external appointments, as you can see in the chart on the left.
Turning to the ECR capital structure. ECR has $500 million of amortizing bank debt and investment grade rating of BBB-, which has been publicly confirmed by S&P and is available on the S&P website. This rating underscores the stability of East Coast Rail's cash flows, which was also reflected in 8 banks participating in ECR's debt syndication. Attention now turns to U.S. private placement markets with an eye to term out some of that $500 million debt to set ECR up in a way that no refinancing is required. Any further refinancing is then upside to the capital structure we've put in place.
Lastly on ECR, I can confirm that no distribution will be paid from ECR during Aurizon's ownership. Instead, the cash generated will predominantly be used to reduce ECR's debt, thereby increasing equity value on divestment assuming a constant enterprise value.
Finally, I'll say in closing that FY '22 saw Aurizon deliver stable earnings and free cash flows consistent with what our investors have come to expect from us. Thank you, and I'll now hand back to Andrew.
Thanks, George. Turning now to the financial outlook for the 2023 financial year. Our EBITDA guidance range is $1.47 billion to $1.55 billion, which includes the impact from wet weather in July and also includes 11 months EBITDA contribution from One Rail Bulk. Group sustaining CapEx guidance is $500 million to $550 million, with growth CapEx expectations dependent on contracting outcomes, as George noted. We have listed our key assumptions by business unit.
For Coal, volume is expected to increase but revenue and EBITDA to be lower due to a reduction in revenue yield. For Bulk, revenue and EBITDA growth from increased volumes and services and the inclusion of One Rail Bulk. For Network, a flat EBITDA, assuming volumes align to regulatory forecast, with higher FY '23 MAR, offset by nonrecurrence of historical work fees.
As per our normal practice, we do not assume any material disruptions to commodity supply chains such as extreme or prolonged weather or COVID-19. Note also that this guidance excludes East Coast Rail.
In conclusion, we always like to end with a reminder of Aurizon's focus on value creation. We've spoken of many of these in the past, and we hope you agree that Aurizon does not sit still and is constantly striving to improve.
I want to leave you with the message I started with. Aurizon is a strong and resilient business able to withstand variable markets. We are well protected from fluctuations and can generate good cash flow under many conditions. The future opportunity from One Rail excites us as there are a lot of potential developments in this region as we transition towards more bulk commodities. We look forward to continuing the journey for Aurizon and creating value for shareholders. I now welcome your questions.
[Operator Instructions] Your first question comes from Jakob Cakarnis with Jarden Australia.
I might just start with the One Rail business, if I can, please. Appreciate that it's been a shorter time that you've owned the asset. But just focusing on One Rail Bulk. I think originally, you had said to us that you're expecting around $100 million of contribution in the first 12 months of ownership. Obviously, now that's going to be 11 months. George gave us a good update on the synergies. Can you just let us know about that $10 million of EBITDA that was planned for growth? Has there been any progress on this growth aspect? And just wondering whether or not there's any growth CapEx that's going to be attached to those earnings, please.
Okay. George, I might get you to go through that, please.
The short answer, Jakob, is there's no growth CapEx to generate that first $10 million of EBITDA growth. We're expecting growth beyond the $100 million, though, and depending on where that comes from, there may be growth CapEx. But we'll know more about that over the next 6 to 12 months. Not sure if Clay wants to add anything.
No, I don't think so, George. I think, as you mentioned, we've only spent the first week there. And what we see is kind of what we found in due diligence. So the opportunity for growth, both brownfield and greenfield, we'll be pursuing in the next 11 months.
Okay. Just while I've got you, Clay. The performance of that Bulk business in the second half, obviously, some challenging conditions. You guys did call out that there were some shorter-term disruptions. Is the second half performance something that we run rate into FY '23? Or are you expecting that things pick up as things like CBH and some of the other contracts get towards run rate? Just give us some quantification of what might change half-on-half heading into the first half of '23, please.
Yes. Well, I'd certainly hope that we don't run rate it into the first half and then even into the full year next year. But if we look through the numbers a little bit, it's pleasing to see the 9% growth in revenue, first of all, and that was driven by those new contracts, as mentioned before, CBH and Tronox and some good performance in our Rio Tinto rail services business lifting that revenue line. But that growth offset by the softer volumes across the majority of our coal customers and, in particular, iron ore, export bauxite. And as we mentioned, we lost the livestock contract in Queensland.
You kind of -- if you look at it, the impacts and interruptions that negatively affected our ability to deliver with the same that had kind of the impact on our core customers' ability to produce. And so yes, it was a really challenging year operationally, particularly in the second half. The North Coast line and South West lines were down for 5 weeks in February due to flooding. Mount Isa alone out for 14 days, then followed by major customers had planned closures for 45 days. And then New South Wales, we had the floods impacting railing and shipping and WA, one of the worst winters on record.
So what we can -- sort of how I kind of summarize that, we had the impacts of the start-up costs, which we've -- that are well kind of publicized resources, people investment to set up CBH and Tronox, offset by the revenue in those businesses, but we like the positive signs in top line growth going forward into H1 this year and through the full financial year.
Just one final one for Andrew and maybe George. Obviously, you guys have highlighted well how you might benefit from some of the CPI read-throughs. I'm just wondering on the staffing and employment cost side of things, are you guys seeing elevated levels of staffing turnover or labor tightness? Just noting, obviously, you guys did lock in your EBAs, I think, in the last 12 months. I'm just wondering if there's some potential impacts that you might have from absenteeism or staff turnover.
Okay. That -- there's quite a bit of complexity to the answer to that question anyway. So I mean, there's different levels of tightness and different levels of impact. So West Australia and -- is tight from a labor point of view. It's tight across many sectors. It's tight in rail. Rail across the whole country has been improving from a business point of view, which is lifting the number of people required in the rail sector. So you're seeing just general tightness across -- in many of the states.
There has been, since the borders domestically opened and we learned to live with COVID, a larger -- much larger number of people or employees going off on sick leave. So that's had an impact. We've seen that in our own business and to a great extent, in our customers' businesses as well. So you've got to -- there's a number of -- and then the -- actually, not in rail, but in the resources sector, you're seeing a general shortage of labor available, notwithstanding the COVID impact. So labor shortage of people is playing a pretty big role.
As far as enterprise agreement negotiations, we are in negotiations with -- in a number of those enterprise agreements. It's still early days and it's too -- it wouldn't be right of me to comment at this stage.
Your next question comes from Matt Ryan with Barrenjoey.
I just had a question on the operating cost increase within the Bulk division as well. Just hoping if you can talk about what actually happens when you see these weather events or customers go through the planned servicing. Are you sort of, I guess, suggesting that your cost base was probably a little bit more fixed over that period? And also, if you could just talk about, specific to bulk operating costs, what sort of inflation that you're seeing around that cost base at the moment.
George, I might just get you to talk just generally about what you see from a cost management issue when you get a weather-related event or COVID-related event.
Sure. I mean, if you break down the cost base, Matt, majority of it is wages and maintenance, and it's hard to turn those off on in short notice. Certainly, when you get a weather event or COVID disruption, so that's why we say that there were one-off costs because the revenue line was impacted by those events, but the cost line wasn't.
In terms of the second part of your question, you have to remind me what that was.
Just the general cost inflation. I mean, I guess, where we're going with this is it looks like you had a $25 million sequential increase in your operating costs, second half versus first half. Appreciate there were some new contracts. I think CBH might have sort of fallen into the first half, though. So just sort of trying to, I guess, quantify the increase in the cost base against the number of $10 million that you sort of called out.
I'll get George to talk about that in a second. Just a little bit more on costs associated with things like COVID and weather, particularly COVID. We provide our employees with COVID-19 leave amount so that they can actually look after their health and, in fact, the rest of the workplace.
When somebody goes off, and this applies across all the business units, when somebody takes a COVID leave and because of its -- because it's a spike that's occurring a lot in common rather than just general issues like flu or something like that, you then need to make up that labor generally with a lot of people working over time. So not only are you providing leave to employees but you're making up, from a cost point of view, with a lot of overtime to keep services running.
If indeed, or from an offsetting point, a contributing point of view, your customers are able to continue to put -- to give product to you to haul because in some occasions, it doesn't work that neatly because they have to -- they are suffering from COVID-related issues themselves.
George, do you want to just talk about generally [ inflation ]?
Yes, I would. Although I think what you're seeing in the raw numbers is the mismatch of revenue to cost in the Bulk business. And so let's draw that out with a few examples.
CBH and Tronox didn't rail for the full year, but we were certainly incurring full year run rate cost base in the second half of the year for both of those contracts. On the other side of the coin, we lost the Queensland livestock contract, so we didn't have revenue flowing but it takes time to remove those costs from the cost base, and we had lower iron ore volumes which, again, you had installed capacity for those iron ore volumes and you didn't have the revenue to match it. So I think what you're seeing in the bulk numbers, Matt, is more about the matching of the revenue and cost line, which we also see as temporary as well as those one-off cost items that Clay detailed.
That's helpful. And just a quick one on East Coast Rail. So the decision not to take a dividend, was that a sort of regulatory condition or just sort of a commercial decision that you've made?
George, do you want to cover that one?
I'd say, Matt, it's, firstly, a commercial decision, but it's a commitment that we've given to the ACCC and also now to our shareholders. We think it fits well with holding that business separate.
Your next question comes from Anthony Longo with JPMorgan.
Just an additional question on bulk, so still looking of those costs again. Just wanted to get more of a sense as to what that competitive landscape does look like. So in the sense of we have spoken about the mismatch between the costs coming in and the revenue coming through, how competitive is it? And is it -- I guess I'm trying to get the answer or get the sense as to how aggressively are you bidding for work as you still get to that $100 million EBIT target ex One Rail.
Clay, I think this is a question for you to answer.
Yes, thanks. I would say in response -- and I might add a little bit more to George and Andrew's comments before about costs there, too, in a second. But yields are tightening in some areas, and there's no doubt that being cost competitive remains fundamental to our customers. However, what we're seeing is due to domestic and external factors, many customers are moving beyond just pure cost. So as Andrew said, yes, they seek delivery assurance, co-investment resilience in supply chains.
The other thing we're seeing is factors are also changing in our environment: the lack of capacity in some transport modes, fuel price driving sort of potentially road to rail, resource location, the distances to resource and ESG impacts are providing opportunity [ for us ]. So it's a competitive market. That's why we look at options on expanding our supply chain services, integrated supply chain. We look at strategic assets, where we place them, where we put investment in, how they connect and enable export supply chains.
But at the back of that, I've got to show George and Andrew that every investment we make and every contract that we have is hitting WACC. And if it isn't hitting WACC, we've got a pathway to WACC, and so that's a requirement.
I just want to go back to a comment George and Andrew made around costs. And something that's particular to bulk and we've highlighted this before, but it's worth reminding you is that there is a little bit more risk in our revenue profile on take-or-pay, and our equipment is more bespoke than coal. So that is when a particular customer sits down, that equipment is not that -- often not as fungible as coal, and we can't sort of redeploy it into other opportunities. A good one is IPL with acid and particular equipment to support phosphate moving -- the transport of phosphate. We can't necessarily go and deploy that somewhere else. And so that's the risk you have in the bulk market compared to some of the other markets. And that's why that some of that cost, when those products are not moving or the market is softer, they appear on that cost line.
That's great. No, really, really helpful. Second one for me. Just with respect to some of the other items that have been flagged in this result. So I think the benefits of discount rates and also the sale of Rockhampton looks like there was almost a $40 million delta year-on-year. Are you able to provide a bit more granularity as to what the makeup of those two items and then to what extent you did benefit from discount rate?
George, do you want to talk a little bit about -- give him some more color on those items?
Absolutely. It's about $30 million, $35 million, Anthony. So about half of Rockhampton, about half of the change in discount rates impacting provisions. The way to look at that, I think I've said before that we expect our other cost bucket to be between $30 million and $40 million on a long-term basis. It was only $5 million this year. So if you back out that $30 million, that puts you within that $30 million to $40 million range that I've said before to expect.
That's perfect. And last one, so I just noticed that the CapEx for this year was lower than your guidance and you have given guidance for FY '23. I just want to get a sense as to how much of the CapEx has effectively been deferred into '23. So was it work that probably would have happened, but has just been pushed to '23 just given weather impacts and labor and the like?
Yes. Look, we did definitely -- some of the wet weather did impact our ability to do CapEx works. For example, to get weather on the Central Queensland coal network, you can't access the track -- the road beside the track to actually get to do some of the work. So there's definitely been some pushback for those reasons or deferral.
Another aspect is just the ability to get some equipment. Like we have a reasonable sizable fleet of light vehicles, for example, and smaller trucks to help with the repair of track and that sort of thing. Just getting those vehicles has proved problematic through the year. And so you're seeing a slippage in that regard as well.
George, I don't know if there's anything to add.
Yes. We came in $8 million below the bottom end of our CapEx guidance range. If you take the midpoint of our CapEx guidance around, you're about $25 million under. Majority of that would be Network. You've seen Network CapEx during the year of $276 million. We'd expect that to push towards $300 million going forward.
Your next question comes from Anthony Moulder with Jefferies.
If I can start back in Bulk. Apologies, but I'm just looking at this $10 million delta from fiscal '22. If I look into the guidance you've given, you've given growth in the underlying Bulk business. Is it fair to assume that that's on the $140 million? Or is it on the easier comp of the $130 million reported?
No, it will definitely be growth on the $140 million.
Okay. So that's useful. And you talked to a timing benefit on fuel. I noticed that your fuel and energy cost across the entire business were up 33% in the full year. What is the lag that you have in Bulk because it seems a lot quicker, a lot more mechanical through Coal.
George, do you want to take that one?
Yes. It's a good observation, Anthony. Yes, generally, Bulk has about a 3-month reset cycle. So your costs obviously escalate pretty regularly, but your revenue only resets on a 3-month basis. Coal tends to be more month-to-month. And so if you're looking at that $10 million of one-off costs, about 1/3 of that at least was fuel.
Network, obviously, I hadn't appreciated that you had an interim figure of this [ 1.18% ] that then forms the basis for the fiscal '24 tariff. Are you hedging debt now, now that you've got an interim determination for what the tariffs will be for fiscal '24?
No, not yet, Anthony. So we're hedged for '23. About 3/4 of our Network debt through to 30 June '23 is hedged or fixed. We're floating beyond 30 June '23. The reason being, while the preliminary WACC is set for '24, there will be a rev cap adjustment in '26. So while there's a bit of a timing impact, we still think the right approach is to remain unhedged until we get closer to that final WACC reset.
Yes. Okay. And lastly on Coal, there was a mix benefit that you received in fiscal '22. It sounds like most of that's unwinding in '23. How big a benefit was that to the coal earnings in '22, please?
Ed, do you want to talk about that?
Yes. Can you just restate the question? Did you say mix benefit?
Yes, it seemed like there was a mix benefit that went through fiscal '22 in Coal. And I'm just wondering, it sounds that's going to unwind. I guess that's depending on what customers were receiving most of the volumes relative to earnings but...
Yes, thanks for the question. Sorry. clarification. Mix benefit may not unwind. I mean we had -- we benefited -- revenue quality in FY '22 benefited from a number of things, CPI and some mix, as you mentioned. I expect the mix to continue as we see some longer haul lengths playing through. But it is very dependent on the actual shipments, and we're still seeing demand volatility. So it's difficult to predict in advance what the mix benefit's going to be.
Anthony, it's probably worth pointing out that part of the challenge in predicting that is to predict which one of your customers will produce at which particular rate given what they say they're going to do and what they actually do in reality. So there's an uncontrollable part of it for us in actually picking that and sometimes an unpredictable part. We tend to be conservative and we just say things will sort of go back to the average and that an organization that's underperformed in one period will overperform in the following period. But that's not always the case depending on the time frame you look at, but often the case.
Sure. And then just trying to unpick as to what's the thinking behind that weaker earnings performance for Coal for '23. Is it some of the reset contracts being repriced from '23? Is it that mix benefit? Sounds like it could be a part of that, but just trying to unpick as to the genesis or the thinking behind.
No, that's exactly it, Anthony. Sorry. Thank you for the question. That's exactly it. It's the reset of -- really, the last major reset of our contracts, ones that were set in the early teens. And as that flows through and just commences in July, beyond that, of course, we've only got 6% of the contract book now contestable in the next 3 years. So that's the messaging around the moderate increase volumes and softer EBITDA.
Your next question comes Andre Fromyhr from Man with UBS.
My first question, I think staying on a similar topic around the contracts in coal. To what extent when you reprice contracts these days are you trading off the decision of whether or not you need to invest more capital into things like fleet or facilities versus the ability to sort of price for an appropriate return on existing fleet?
Ed, do you want to take that?
Yes, and thank you for the question. Yes, look, we look at every deal on a stand-alone basis. I mean we look at -- we've got the hurdle rates we need to achieve for the adequate returns. So really, we prefer, wherever we can release in capacity, which we've had a really good track record of doing in the last couple of years, but we can release capacity to put it into a new contract tool, it absolutely makes our pricing more favorable without the capital outlay. And so we -- and we typically with such a scale business with more than 50% of the volume in the haulage volumes, we can typically -- as one contract rolls off, we can technically redeploy fleet. So -- and we're seeing some of that. With the cessation of the Moolarben contract, the New Acland contractors were seeing some of that fleet go to other coal customers and some of that fleet being cascaded to bulk.
And is that the way that Olive Downs was provided?
Yes. We're looking -- yes, that's right. Some of the work we've been doing on precision over recent years. We have the capacity released in that particular case. So we're able to apply that rolling stock into the haul, meet the customers' expectations. And it's not all about prices. We've spoken about before. It's also about terms and service and the right level of risk sharing.
Okay. My next question is probably for George on cost of funding. So you flagged that the existing debt, which is predominantly Network linked, is hedged for the next financial year, which according to the presser is around 3.4%. But then you flagged, obviously, new debt coming in for the One Rail deal takes the group effective cost of funding to 4% or lower. So am I right in doing a bit of like a weighted average maths to imply what the effective cost of funding is on the new debt that you brought in?
It's a combination, Andre, of weighted average cost of the new debt and a bit of our view of terming that debt out. Obviously, when you -- when we draw down the debt, it's bank debt, it's shorter term. We've fixed the margins back 9 months ago when we did the deal. What we then try and work out is what we're going to pay when we term it out in capital markets, which is our plan to do it, and that's our track record, which generally you see higher margins because you're getting longer-term debt capital.
So you said you fixed the margins at the time that you announced the deal. So does that mean that there's still like a repricing risk associated with what the market cost of debt are once you start substituting those existing bank facilities into capital markets debt, for example?
Yes, although that bank debt has fairly long term, so between two and five years. But then, yes, when you term it out in capital markets, that's a new deal, and you're striking new margin at that point in time.
The other thing to remember about the bank debt is while you fix the margin, you don't fix the base rate, and that has gone up. To come back to your original question, that's what we look at when we form a view as to what the likely cost of debt will be for 2023, which, as I said, circa 4%, which is a bit lower than what we paid in terms of weighted average cost of debt in FY '21.
Right. And the fact that you've sort of reiterated today the accretion estimate of the overall deal still being 10% despite the fact that, obviously, base rates have moved in the last 9 months, is that just a -- is that more of a comment about how the maths stacked up at the time? Or is it still true and there was some conservatism baked in? Or how should we think about sort of those market dynamics?
Yes, it's a combination of all of that. So on the negative side, base rates have moved and cost of debt will be higher. On the positive side, all of the One Rail contracts have inflation resets, whether that's the Bulk business or the East Coast Rail business. And so that gives us a benefit. And then we've also seen higher volumes flowing through, particularly in the Queensland side of East Coast Rail, which gives us an offsetting benefit. So you weigh up those two things, and we're still sitting here saying that over the next 4-year period, it will be 10% EPS accretive when you assume a demerger. And therefore, the EPS benefits of East Coast Rail flow through to Aurizon shareholders.
Great. And then just final thought on that one. Are you still -- obviously gone 75 payout ratio again today. Is that still the plan that under a demerger scenario, that's like a two-year reduction in the payout ratio, would result to sort of where it was before, closer to 100 after that? And are you still looking at potentially a hybrid form of funding under that scenario?
Do you want me to answer that, Andrew?
Yes.
Yes, no change to the time line. So we're still now expecting another two periods. So call it, one full year from this point at that lower payout ratio. That assumes demerger. And the other thing I'd say about a hybrid is, yes, it's still in our thinking. It will be, though, a product of where we land with the East Coast Rail process and trade sale versus demerger.
Your next question comes from Justin Barratt with CLSA.
Can I just first ask just again running back to One Rail Bulk. That term, that $10 million of one-off costs, were they largely incurred in the second half of the financial year?
Yes, the majority of them were. Just to clarify, Justin, they weren't in relation to One Rail Bulk. They were in relation to the existing Bulk business.
Sorry. Apologies. Yes, the acquisition Bulk business. And then when you announced the acquisition of One Rail Bulk, you alluded to the potential for you to increase your longer-term bulk EBIT targets, and they are yet to be announced. So I was just wondering if there was a reason for that.
We've owned the business now for 10 days. So our view of the long-term growth potential of it hasn't changed, and we certainly expect to meet or exceed that 2030 target that we spoke about at our Investor Day 12 months ago.
Fantastic. And then the final one for me. The Network capacity assessment CapEx that you alluded to being less than $100 million, is that included in your FY '23 sustaining CapEx guidance?
No, it's not.
Your next question comes from Sam Seow with Citi.
Maybe just a question on coal. I guess, the last couple of years, you've been guiding to higher utilization rates. And I guess, looking forward, again, you've got contracted volume coming down a bit higher volume guidance. Could you guys talk to the drivers of this and if they're structural?
Ed, do you want to cover those?
Yes. Thank you, Sam. So not structural, no. And noting contract utilization was up 1% in the year. I think I've got to contextualize my comments by just explaining how extraordinary FY '22 was for us. I mean we've had unprecedented levels of demand volatility. We had impacts from weather and COVID and other things that -- and customer production and shipping issues. So it's really a challenging year. So when we forecast an uplift in contract utilization, we do that with the best of Intel based on what our customers are telling us.
In terms of the outlook, our customers are telling us for next year, there's a range of views and some of them have calendar year financial reports and some have half year. But on balance, our customers telling us a 0 to a 5 -- somewhere between a 0 and a 5% uplift in volumes, which is what we're setting up to run the business on.
And then it also kind of appears there's less surge kind of volume correlation as the commodity price than has been in the past. Is taking change as a system impacting this at all? Or is it just purely mine plan's not allowing it?
So it would be -- it's very easy to see when you look at the -- I assume you're talking the Coal business. There's no product on the ground that waiting to be railed by anybody. So it's very much a position of customer production not being where you would expect it to be based on the price. And that's because it takes some time to respond from a mine planning point of view and then the enaction of those mine plans.
The only times where you get a fairly quick turnaround is if you've actually got product sitting available. And that's just not -- or you're lucky enough to have some easy to mine territory. None of that's been the case on this occasion across the industry. And I think you -- eventually, prices will drive response and it's that -- it's just that it can't be in the short term because the material is not there.
Great. And then just lastly, on that ICAR spend, let's say, circa $100 million. Should we be expecting, I guess, higher volume run rates, I guess, all things equal or better cost? I mean, I know you had to spend it, but should we be expecting a return on that? Or how should that kind of come about?
Pam, do you want to talk about that?
Yes, no problem. Thank you for the question. The best way to think about it would be capital that would go into the RAB. So you would get a normal RAB return.
Your next question comes from Rob Koh with Morgan Stanley.
Can I -- question? Can you give us an update on redundancy expense in the half? I think at the first half, you had $4 million.
Okay. Rob, I'll get George to cover that.
It was about $13 million for the year, Rob. So pretty consistent with FY '21. And we expect it to be in that sort of $10 million to $20 million range going forward.
Yes. Okay. And then I guess, two interrelated questions because of the funding of the One Rail deal is a little bit contingent on East Coast Rail. I appreciate that. Can you talk to your philosophy of hedging the debt for the acquisition? And also what your capacity for future growth CapEx is under the debt deal?
So in terms of our philosophy, look, it's difficult to hedge debt until you're certain that the transaction is going to proceed. So it's floating at this point in time. Clearly, we've got long-duration assets that we've acquired, and we'll look to term out that debt and also our hedging book consistent with those long-duration assets. So we will look to enter into interest rate hedging. I think what we're trying to do, like most companies, is trying to work out whether now is the right time to do that or whether we should do that in, say, 6 to 12 months.
That philosophy is also informed by the fact that interest rates going up is partly driven by inflation. And as I said before, we do have inflation protections in our contracts, including the contracts that we've acquired. So our revenue line is escalating at inflation. And so I think we can afford to be a bit steady before we look to hedge that book out.
Okay. Great. That's clear. And then yes, capacity for growth CapEx from here?
I think the large part of that question, Rob, will depend on where we land with trade sale versus demerger. Obviously, if we trade sale the business, that's a significant amount of capital that comes back that we can use to fund growth CapEx.
The other thing I'd say around growth CapEx is that you also need to look at the earnings that, that CapEx is going to drive because, clearly, if your earnings are going up, then that's more headroom under your FFO to debt metrics. But what we're seeing when we look at our forward plan is we're comfortably within our ratings thresholds when we look at FY '24 and beyond. Hopefully, that gives you some color.
Your next question comes from Nicholas Daish with RBC.
This is Owen Birrell here. Is my line that's open?
Yes.
Wonderful. Just a couple of questions just on the Bulk business again. I'm just trying to get a better feel for how the portfolio structure has evolved through the last half given that we've had the iron ore and the Queensland grain contract come off, and we've had CBH and Tronox come on. If I -- just looking at the simple EBITDA margins, it looks like it's -- sort of the margin has fallen down to about sort of 16%. And then if we had the $10 million of one-offs back on, it's circa 19%. Just wondering if that's where the portfolio itself should be sitting, ex One Rail, at the moment. Or if not, where should that underlying portfolio be sort of sitting at?
George, I might get you just talk about long-term EBITDA margins. And then, Clay, you can come in on the back end of that.
Sure. So we've always seen EBIT margin sustainably about 15% to 20%. Convert that to an EBITDA margin in Bulk and it's sort of 20% to 25%. So you're right, Owen. In FY '22, it's at the lower end of that range. We see it both sitting within that range going forward. The important thing to note is that One Rail has higher EBITDA margins because it's both below and above rail. So it's more in line with 30%, 35% EBITDA margin. So when you bring that in, I think you'll see the weighted average EBITDA margin for our Bulk business increase into the mid to high 20% range. Hopefully, that gives you a sense.
And Clay, did you want to say about portfolio makeup or anything like that? Any thoughts there or...
Well, I guess only reiterating that the Bulk business has got tighter margins than the Coal business. Traditionally, we've said that in the past. As far as portfolio mix goes, you can see an increase in exposure to grain, and that's -- our intention is to diversify our portfolio further to try and reduce our commodity exposure. So that's playing out with the CBH growing contract and growing exposure in Southeast Queensland increasing and of course, increased volumes in New South Wales. So yes, there's a shift. There's a bit more agricultural in there, and we'll see that continue to shift and diversify with the acquisition of One Rail.
That's great. And just one final question just on the Bulk. Just to confirm that, excluding One Rail, you're assuming that in your guidance for next year that the underlying Bulk business is actually growing. Is that correct, excluding One Rail Bulk?
Yes. Well...
The answer to that is yes. Yes. And we've kind of articulated to you the impacts and the challenging year we've had operationally. And we look forward to going back into growth, both in the first half and the second half, full year next year. Absolutely.
Okay. I'm just trying to quantify the decline that's going to be netted out in the Coal business.
Your next question comes from Cameron McDonald with E&P.
Just a couple of questions from me on One Rail to start with. What's the contract book for One Rail actually look like? And when do those contracts come up? And can you confirm my understanding that the Viterra grain contract is currently up for tender?
Clay, do you want to talk about as much as you are able to?
Yes. I mean it's a pretty diverse portfolio. I think we've shown you that, iron ore, grain, rare earths, a number of other sort of future-facing commodities. It does have the Viterra contract in it. And so I'm not exactly sure when that comes up, but it certainly didn't appear on my radar in the first week we were there. What we did see was great opportunity to increase grain haulage in that area. And if you combine it with our CBH, that's up to 50%, as we showed you on the slide, 50% of Australia's export grain task being moved in two states by bulk. But happy to take that on those, I can get back to you on that Viterra contract when we come back on the hookup later on.
Okay. And the other question relates to the announced closure of Mount Isa. What's the -- my understanding is that, that contract for coal haulage runs out to 2026, and they've announced the closure of the mine from '28. So what's the thinking behind -- or strategic thinking behind what you're going to do for that two-year period, given that it's sort of 25% of the Hunter Valley coal haulage operations? And does that provide you an opportunity to reprice it up for that two-year period, given that it's sort of spot tonnage or -- just talk through that thinking, please.
Ed, I might ask you to talk through the thinking behind coal volumes and moving the fungibility of the various...
In Mount Isa?
Yes.
In relation to Mount -- yes, yes. Thank you for the question. It's -- look, we're not -- we're accustomed, I guess, to these kinds of things happening into mine life and coal and one contract rolling off and another one coming on. It is -- of course, we're very proud of the service to Mount Isa. It was one of -- they were our foundation customer in the Hunter Valley, and we're disappointed to see the current plan.
It is some way off. And between then and now, there are some contestable volumes in the Hunter Valley held by our competitors that we're turning our attention to. And of course, we also have the ability to -- and beyond the Hunter Valley into other coal or other standard gauge hauls in coal in New South Wales.
And so we'll continue to manage the book. We'll look through to, I guess, the fungibility, as Andrew said, for other hauls. And then, of course, we also have the cascade capability to bulk, which is something we've demonstrated we can do quite quickly as we've done in the last 12 months as we've seen Moolarben roll off with 5 locomotives going to the Bulk business to support Clay's growth.
Your next question comes from Ian Myles with Macquarie.
Quick one on the Network side. You talk about a flat outlook for FY '23. You sort of look at your revenue waterfall plus $70 million, where we can lose circa 30, which sort of suggests about a $40 million improvement. What's increasing the cost that you -- or what other revenues are being lost to sort of have that flat outlook?
Pam, do you want to answer the question?
Yes. Ian, it might be one I'll come back to you this afternoon, if that's okay.
Sure. The other one is you talk about...
George might cover the question, sorry.
Yes. I think one of the things you got to remember in is in the March chart, if that's the one you're looking at on Page 66, is some of those are nonrepeats from prior years. So I think we'll come back to you this afternoon with a detailed breakdown of that.
Sure. And whilst I have you there, George, you talk about your provision increase. And just want to clarify, is all of that in other? Because your provisions increased by circa about -- or sorry, rephrase it, your provisions came down by about $30 million in the period. And I was just wondering, is that all sort of from repricing through, not just the land provision, but also your workers' provisions? And where did they come through?
Yes, workers' comp leave and land rehab. You've got to remember with land rehab, it's not just a product of discount rates. It's also where you sell a site, you might release the land rehabilitation provision. So there was also that flowing through. You will see some of the leave provisions come through in the BUs because that's where they're held rather than other.
Okay. So there's been a general improvement out there. And then just on Bulk. Is it right to compare the Bulk's EBIT outcome? I think it's Page 40 of your annual report, that you've got a target of $164 million that missed by sort of 20%. And I'm just sort of intrigued. You talk about contracts which are coming to an end, the livestock contract, the non-exporting of bauxite. And I was just wondering what the revenue and EBIT impact of those contracts, which aren't going to be repeated next year but still have a full period to -- or half a period come through in next year's earnings.
Clay, do you want to give much of an answer as you can on that?
Yes, I think -- and what we'll see is the livestock and export bauxite have played through mostly in H1 -- or H2, sorry, already. And livestock, particularly, was not heavily orientated towards kind of H1. It started later in the year. So I don't think you'll see a material impact from that. It was 3 million tonnes of export bauxite that we moved for Alcoa in WA. And again, I think that's played through mainly in the second half. So it won't have much of an impact in the first half as it ended.
Okay. And if you -- I know you're talking about growth and I'm not sure you'll answer, but if you think about FY '21 Bulk's performance, do you think your Bulk business can actually exceed that high watermark? Or are we still catching up to FY '21 when we go into FY '23?
Listen, I would say, and the targets we've got for this year indicate how confident we are around the growth of Bulk and where it's positioned. And some of this will come through absolutely in FY '23, but some of it we're putting the building blocks in place for FY '24 and beyond. And so do we like the resource profile in Australia and where it's positioned? Absolutely. The minerals and metals side, copper, iron ore, lithium, the demand for those on the agricultural side, the demand for more protein and phosphate to grow those crops, we're confident in all those. We're confident we understand that, yes, there's a ratio of [ corner ] sometimes 6 up to 10:1 inputs to outputs for supply chains. We're looking to export commodities out of Australia in support of that global transition to clean energy.
So all the tailwinds are there, and we're confident that we're putting those building blocks for growth in place. So FY '22 was really challenging with all those impacts on each of the corridors and each of the regions. And unless we see a repeat of that, we'll see the growth come through.
And where you'll see it, mate, is you'll see it, we're just at the start of what we're going to achieve with CBH. We really like that counterparty. The more we get acquainted with them, the more we understand their strategy in growing that grain market, the more encouraged we get. And if you think about -- they've had 10 consists operating in the past. We've had 12. We've got another one there ready to go that hasn't even delivered a tonne in [indiscernible], yet that will be deployed in the first half of this financial year.
So we're really encouraged by that. And then if you apply that sort of rise in D&A from the CQC on how you then enhance supply chain performance, optimize above and below, we see that each of those consists will deliver more in H1 and going into H2 again this financial year than it did in the last half of last financial year. So there's some immediate opportunities there and some longer-term opportunities. A long answer, but I'm very confident.
Yes. So clear whether you can actually beat your high watermark and whether you're confident to beat that high watermark of '21.
So long answer to say a very quick yes.
Your next question comes from Scott Ryall with Rimor Equity Research.
Hopefully mine will be fairly quick, given you've been quite transparent and thorough in your presentation. George, I wonder -- just I want to clarify just your answer to a question earlier, that the debt cost that you're expecting in fiscal '23 going up to 4% is primarily due to the cost of the One Rail debt coming in.
Yes.
Yes. Okay. Great. And could you just give us a sense on whether you think the debt market has changed much in the last 6 to 12 months. Given you haven't been able to do, as you said, much of your changes or activity in the capital markets, how do you see that it's changed over the last 6 to 12 months? I get -- and base rates going up and all that sort of stuff, I get that. You've been quite transparent again on that on Page 18. So I'm more talking about access gearing ratios, those sorts of things.
Yes. I mean, my view on that, Scott, is it hasn't changed markedly. The reason it was quiet during '22 is we were focused on One Rail and then had a 9-month period between signing and completion. And so we needed to get certainty on that before we enact any debt capital markets term out. We also didn't have anything to do on the network side because we have quite a long maturity profile and worked hard in '21 to do that. I guess, more generally, what I'd point to is the fact that we could bring together 8 banks to fund East Coast Rail is a good sign that there's certainly appetite out there for coal-related haulage businesses.
And as I said in my speech, I was really pleased with having an increase to the banks participating in the Aurizon operations syndicate. So I haven't seen anything to suggest there's been a trend that it's going to be harder to access debt capital markets for our business.
Okay. Great answer. And then just to roll into the East Coast Rail process here. Am I correct that you've actually started the trade sale process now? You put on the bottom of Page 19 that you got around 10 acquirers who have signed CAs and you're receiving nonbinding bids in September '22. So I'm imagining you're live on that. Is that a fair comment?
Yes, absolutely.
And have you noticed in terms of -- I guess the ESG headwinds are always -- the big thing that's been an issue -- an increasing issue over the last couple of years. Have you noticed any change in that for potential equity bidders? You've commented on the debt side but -- and I guess I'm wondering in the sense of the style of acquirers that you're looking to engage with on this front.
Scott, just before George -- because George is running the process. I'll then make a comment if he wants to. What I've noticed is the last time we sold part of our business out of Aurizon was the grinding business, which is rail services. And this time around we're selling the East Coast Rail business. What I was struck with was the quite a lot larger pool of interested groups turning up to the actual start of the process. Now I'm not -- we've got to wait until we get through the process before I draw too long a bow on that, but it is remarkable to me how many more organizations have turned up at the very start.
George, did you want to make any shorter comments?
Yes. I mean, Scott, if you go back 10 months ago when we made the decision to take on the task of divesting East Coast Rail, the fundamentals of the business haven't changed in that 10 months. It's got high cash flows. It's got a strong take-or-pay contract. And it's backed by a parent company guarantee from Glencore. I think what has changed though in the last 6 months is the macro environment. We're seeing that in thermal coal prices. People are having a reminder of the essential role that thermal coal plays in Asian markets, but people are also putting more of a premium on businesses, which are generating real earnings and have CPI protections in their revenue contracts, and East Coast Rail fits that mold. I would just reiterate, though, what Andrew said is while we're pleased with the number of parties who have expressed interest, it's very early days. So we'll find out more in a couple of months.
Okay. Good. And then I just wanted to ask Clay a follow up on One Rail, and it's -- I mean, I'm going to seem like a broken record, but since you bought this 10 months ago, just today, you've seen quite a large potential acquisition in your corridor. So I just wonder if anything has changed in terms of the -- in terms of where you think the opportunity set comes from in that business, particularly up the middle of Australia, where you actually own the track as well.
You're referring to the BHP announcement this morning?
Yes, yes, yes. BHP, yes. OZ, yes.
On the one point, absolutely encouraging that Tier 1s are looking at Tier 2 or other opportunities to get into commodities other than iron ore and coal, and that is not feedback that is unusual. We're getting that feedback from other Tier 1s. Maybe they're not into the development of those mines. But when those mines are being developed, they become a target or a potential target. So that just confirms the demand and the positive outlook for those types of commodities.
Do you see the mix of where you're looking for opportunities over a 5- to 10-year time frame has changed? Has your thinking changed in the last 9 months? And I only keep asking this question because a hell of a lot's changed in the last 9 months. So it's just -- it's interesting to get a feel of where you think the opportunity set is now versus back then.
Well, I'm more confident that we need the types of commodities that are there, and I'm more confident that we need to provide a pathway to get those commodities out, and that's what we're good at. And maybe when we're getting there and we've looked at it, the thinking that Aurizon takes to these sort of opportunities is different to the thinking that One Rail had. And Andrew might comment on that in a second, but we think about it from a supply chain perspective in providing export opportunities. One Rail just thought about a little bit different around the rail asset fundamentally. Andrew?
Look, so what I'd say, Scott, is there's a couple of points, actually, I'd make. It doesn't surprise me -- if you think about it from a real estate point of view, it's kind of moving into an up-and-coming development area where it's not that sort of like nice place to live before you get this. Like our office is in Fortitude Valley. Not that many years ago, Fortitude Valley wasn't a great place to be. Now it's a great place to be. You want to be in early, and that's what we've managed to do.
And whatever happens with the news today, however that turns out, what that does point to is what Clay was saying, is there is a strong -- there was a -- we viewed it as a strong likelihood. There's a strong tailwind that's -- and I spoke about that when we announced the transaction signed, nothing, if not more confident about the background for the transaction.
Look, having only spent a couple of days with the One Rail Bulk business, it's very clear to me, and we suspected it when we were involved in the transaction, that the business's focus was on growing its coal business. I'm talking about the prior One Rail owned business before Aurizon steps in. And they did that quite well, and they're very proud of it, and they should be. The reality is you can -- you only focus -- you don't focus on everything, so they didn't focus on growing the bulk business, and that's what we want to do. And in that -- in this environment, that's exactly what it will be extremely rewarding for us.
So going down there for a couple of days last week, it was very clear talking to everyone from the train driver through to the deployment teams and to management that our intention is based on what we thought was the position in front of us is exactly the right thing to be doing at this stage.
Your next question comes from Nathan Lead with Morgans.
First question for me. It seems to me that the cost of building pretty much anything has gone up a lot. So could you just maybe just chat through like how much the cost of new rolling stock has increased maybe on a per loco per wagon, et cetera basis? And whether that sort of outlook has been factored into your CapEx guidance? And then also whether your customers in your pricing negotiations are actually starting to sort of realize that and reflect that in the sort of pricing you can get?
Okay. Nathan, so I would say, generally speaking, we're seeing inflation coming through in a number of areas, including, as you say, rolling stock. I don't think it's wise for me to give you a specific number because that's probably useful to other people that we compete against, but it is definitely there. And as far as do we take that into account when we forecast our CapEx, yes, our CapEx is based on operational planning environment, which goes out for a decade, and we take all factors like inflation into account when we actually set that forward plan. So it directly rolls back into CapEx expectations.
As far as do we see customers talking to us and understanding inflation, I think every negotiation starts by trying to belittle the amount of inflation that a supplier has actually seen. But the reality is the marketplace determines where you actually -- from a competition point of view, where you actually arrive in an outcome. So all of the suppliers to a particular contract that are bidding are experiencing a general level of inflation that will ultimately flow through to the contract outcome.
I'm not sure, Ed, if there's anything specifically. I know you're not negotiating that many contracts at the moment, but anything you'd add from a coal point of view?
All I'd add is a large focus of our maintenance expenditure is actually capital and its overhauls and renewals. So we're not so much in the business of buying new fleet. At the moment, as I said earlier, we're releasing fleet for growth. So -- and many of the -- much of the work we've got, for example, 6,000 wagons to overhaul our entire Central Queensland Coal we got in before the pandemic hit. We built a facility, and we're 2 years into a 6-year program. So we've got the costs nailed and the bills of materials and so on.
So that's -- the other thing I'd say is that, as we mentioned earlier, the Coal business' earnings are quite resilient. And in relation to CPI escalations in our contracts, obviously, take-or-pay protections are now the pass-through of things that are not controllable like fuel costs. And so we really -- I'm less concerned about -- we have mechanisms, I should say, that allow us to manage inflation. And so I'm not particularly concerned about the cost -- the rising cost of maintenance.
Thanks, Ed. I thought I'd just give you one other -- an example from one of the business units. If we ask the other two business units, we get roughly the same sorts of answers. So I don't think I'll bore everybody with repeating that.
Yes, sure. Second question I've got is on the Bulk business. I mean we've obviously heard Clay talking just before about how he's not allowed to invest any capital unless he's getting a WACC sort of or better than WACC return on it. Could you talk through just how much capital you've actually put into that business now? I mean when we think about the port acquisitions, the CapEx, the cascaded rolling stock, et cetera, what's your general estimate of how much capital you've actually put in that business?
George, I might get you to respond to Nathan's question.
Yes. I mean if you went back, Nathan, and looked prior to FY '19, that business was starved of capital. And so there wasn't much that was going in prior to that. If you look at the last two years, in terms of sustaining CapEx, it's been combined, about $75 million, but importantly, the growth CapEx has been about $140 million. And each dollar of that $140 million, as Clay mentioned, needs to get a requisite return. Now that starts by understanding the contract terms and the particular customer and commodity that we're servicing to then understand the risk profile. We're very happy with the returns that we've gotten on each of the contracts we've recently signed.
So the $140 million there, is that pure cash spend? Or is that rolling stock has been -- include rolling stock as being cascaded out of Ed's business into Clay's?
No, that's cash spend. That's growth CapEx. And then if you look at cascaded fleet, to give you a bit of a data point in the last 12 months, have been around about 10, 11 locomotives that have been cascaded. Now about half of that standard gauge, half of that narrow gauge and so pretty low values on our balance sheet. And so it can be pretty productive in Bulk, whereas it wasn't being utilized in Coal.
Okay. Great. And maybe just one for Pam's business. Obviously, with the reset coming middle of next year and the higher CPI flowing through at the moment, just to confirm. I mean you've got there in the presentation pack about -- has an impact on regulatory depreciation. But ultimately, that means a higher CPI means higher asset-based growth, but lower earnings actually coming through or lower revenue coming through during that period. Am I reading that correct?
Yes. It will take a couple of years for it to flow through because obviously you've got the sort of timing differences, and the RAB reset doesn't take place until 1st of July '23. So yes, you've got the RAB uplift, which will uplift your revenue, but you've got the depreciation offsetting that as well.
Your next question is a follow up from Rob Koh with Morgan Stanley.
You've been very generous with time. Just wanted to ask an ESG question, if I can. You've got a scope 1 and 2 intensity reduction target of 10% by 2030, which is to be commended. Does that include the One Rail business going forward?
So that target was set before the One Rail business was acquired. We will go about understanding the impact of One Rail on the business and make the appropriate future statements about that.
There are no further questions at this time. I'll now hand back to Andrew Harding for closing remarks.
Look, thank you all for taking the time to discuss the business results with us for the year. I'll finish where I started with reminding you that Aurizon is a strong and resilient business, and it's able -- demonstrated that it's able to withstand variable market conditions. You can see we're well protected from fluctuations and can generate good cash flow under many conditions and underline that the future opportunity for One Rail excites as there's a lot of potential developments. Thank you very much.