Aurizon Operations Ltd.

The stable outlook on AUO reflects the company's 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 AUO's flexibility in moderating distribution to the parent, and management's target of maintaining the FFO-to-debt ratio above 50% at the AUO level. Given that the group's credit profile caps the rating on AUO, we could lower the rating on AUO if the group were to materially increase leverage on a consolidated basis (such that the FFO-to-debt ratio is less than 25%), indicating a higher risk appetite. AUO's stand-alone credit profile could come under pressure if its FFO-to-debt ratio were to drop below

...Aurizon Operations Ltd. (AUO)'s established position in the above-rail haulage markets will continue to support its credit quality, despite the company's narrow product and customer base. AUO hauls over 200 million tons of coal a year and has a strong market share in Queensland and presence in New South Wales. The business is also supported by some diversification in revenues from nonvolume-linked bulk service contracts, including leasing of rolling stock and crew, and the recent expansion into non-container port service. Geopolitical tensions between Australia and China will temper AUO's coal haulage volumes. We expect the company's coal volumes to decline to 200-210 million tonnes per annum (mtpa) over the next one to two years due to the challenging trade environment. Continued demand for high-quality Australian coal from other Asian countries and a higher proportion of take-or-pay charges (capacity-like charges) reduce the effect on revenue due to variations in haulage volumes. AUO's...

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