Aurizon Operations Ltd.

The stable outlook on AUO reflects its dominant market share in the above-rail coal business and our expectation that management will maintain a reasonably well-capitalized group with a 'bbb+' group credit profile. The outlook also reflects the inherent flexibility available in moderating distribution to the parent and management's target of maintaining FFO to debt above 50% at the AUO level. Given that the group's credit profile caps the rating on the company, we could lower the rating on AUO if the group were to materially increase leverage on a consolidated basis (such as FFO to debt of below 25%), indicating a higher risk appetite. AUO's stand-alone credit profile could come under pressure if its FFO to debt were to drop

...Aurizon Operations Ltd. (AUO) has an established position in the above-rail haulage markets, but a narrow product and customer base. With a strong market share in Queensland and presence in New South Wales, AUO hauls over 250 million tons a year. However, after the group's exit from the intermodal business and cessation of two iron ore haulage contracts, the business is highly exposed to coal haulage. Somewhat mitigating this risk is continuing demand for high-quality Australian coal and the presence of a higher proportion of take-or-pay charges (capacity-like charges), reducing the impact on revenue due to variations in haulage volumes. AUO's minimum leverage supports its stand-alone credit profile. We believe that AUO will increase debt progressively to reach a target funds from operations (FFO)-to-debt ratio of over 50%. The currently low leverage levels provide the company with some flexibility to manage its capital structure and increase leverage over the next two to three years. We...

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