Good morning, welcome to the first half results for the 2022 financial year. We're 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 the CFO, George Lippiatt and the rest of the group executive team. 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. Turning to safety performance.
A 1% unfavorable movement was recorded for total recordable injury frequency rate, or TRIFR, during the half. Lost time injuries declined by 7% and generally consist of lower severity injuries such as muscle strains. Localized injury prevention initiatives continue to be implemented to help prevent these events. This year, the potential serious injury and fatality frequency rate was introduced to more accurately represent our business as it grows beyond rail. This measure shows the number of events as represented per million hours worked that had the potential to cause or did cause a serious injury or fatality. After review of the recorded events last year, we've re-categorized 23 incidents, resulting in a restatement of the outcomes as seen on the slide.
We've recorded significant improvement in this half with 1.78 incidents per million hours worked, compared to the restated results of 4.41 in FY 2022. The result was primarily driven by fewer serious motor vehicle and rail incidents. These numbers exclude Bulk Central as we transition processes and systems from the acquired business to group reporting over the remainder of the financial year. What I can say is that Bulk Central TRIFR recorded a 5% improvement in the half compared to the prior year. In addition, Bulk Central did not report any events that were considered an actual SIF event.
As many on the call will be aware, on the 29th of January between Rockhampton and Gladstone, a third-party freight train derailed and an Aurizon Coal train on the adjacent track subsequently made contact with debris that had fallen across the track. Thankfully, there were no injuries, there was significant amount of damage to the rail line and associated infrastructure. Rail services on the Blackwater corridor were subsequently suspended for 13 days and reopened over the weekend on Saturday night. To provide some context of the scale of the incident, the scope of recovery works included replacing 2 km of rail, inserting more than 2,000 new concrete sleepers, laying down 2,000 tons of ballast, replacing 12 electrical masts, and replacing one and a half kilometers of overhead wire.
I'm proud of the round-the-clock work by the Network team in bringing the Blackwater system back online after this significant incident. Around a quarter of Network volume travels across this part of the Blackwater corridor, with the extended outage therefore impacting volumes in the second half for both Network and Coal. This has been factored into our guidance, which I will turn to later in the presentation. As always, our focus remains on protecting our employees, our customers, and the communities in which we operate. Before going into the results, I want to share achievements we've made in delivering our strategic objectives as outlined at the 2021 Investor Day. You will remember that the objectives for the Network and Coal business units are to maintain and enhance safety, productivity and capital resilience, with a focus on invested capital and free cash flow.
These cash generative businesses can then support the deployment of capital for attractive opportunities presenting to the Bulk business. Faced with challenging operating conditions in the half, I'm very proud of the achievements made in building long-term returns for shareholders. The first items on this slide relate to the Coal and Network businesses. First, a reminder that in the face of higher inflation and interest rates, the preliminary WACC of 8.18% will apply from Network, for Network from 1 July this year and has been approved by QCA. The final WACC reset to apply from July 24th through to the end of UT5 will be based on market parameters as at June this year. Second, since December 2021, we've had enterprise agreements secured that cover 70% of the EA workforce.
These have been successfully negotiated in a period of record low employment and 30-year high inflation. The weighted average wage increase in year one across these EAs is slightly over 4%. Third, TrainGuard technology was deployed on initial trains and about 500 km of track infrastructure in Blackwater in December. Installation on the remaining consists in the corridor will take place in the second half, with the Goonyella system to follow. This next-generation technology is designed to support driver decision-making relating to speed control and signals through continuous supervision of a train journey. It is the first use of such technology on heavy haul fleets in Australia. TrainGuard is also a pathway to reducing separation time between trains and also expanding our driver-only operations in Central Queensland. It promises to be a real game changer, both in terms of safety and productivity.
Turning to our objective to grow Bulk. First, after a long journey, the acquisition of One Rail completed last July. We believe this is transformative for our business and provides a platform for future growth. There is a significant pipeline of projects in this region and the opportunities in leveraging the below rail infrastructure with connections to ports and the East-West line. Although we always knew of the high quality of the business we were acquiring, what we have seen since completion gives me further confidence in the future. Last week, the ACCC approved the sale of East Coast Rail, sold at a strong price through a trade sale. The sale is now unconditional and closure is due to take place later this month, with the proceeds initially used to reduce group debt.
Second, Aurizon's commodity exposure is changing at a group level, given the scale of non-Coal opportunities presenting to the business. In addition to the contribution of Bulk Central, we have also seen a greater range of commodities and services within the Bulk business unit. Grain now contributes around 15% of Bulk revenue, with record railings in the half, including a record one million tons of rail for CBH in December. When combined with our services in Bulk Central and East Coast, we are the largest grain rail operator in the country. Third, outside of grain, we've signed new contracts and extensions across all regions Bulk operates. These include a five-year contract extension with OZ Minerals for the haulage of copper in South Australia and the Northern Territory. A four-year contract with Centrex for road, rail and stevedoring of phosphate rock in North Queensland.
A five-year contract with Aeris Resources for road, rail, and stevedoring for base metals in New South Wales. Capital investment for truck upgrades and 10-year contract extension with GRA for gypsum in South Australia. Fourth, in response to both the current and projected future opportunities, we've invested in supply chain solutions over the past three years. This includes port assets such as APS Townsville and Newcastle, Bulk trucking in support of rail services and of course, rolling stock. This investment is increasing with CapEx of AUD 130 million in the half. There is more to come to support the significant opportunities that are presenting to the business. Finally, our Bulk team has over 200 potential opportunities in the pipeline, worth more than an estimated AUD 1.5 billion in annual revenue.
These opportunities are across all regions where Aurizon operates and cover up commodities such as copper, nickel, iron ore, rare earths, vanadium, lithium and fertilizer. As I mentioned, these achievements have been made in the face of very challenging operating environment and underscore our unwavering commitment to delivering on our business and growth strategy at Aurizon. Turning to the results. Wet weather has played a significant part in the results this half, with above-rail Coal volumes down 8% and Network volumes down 2%. This was the major contributor to underlying EBITDA being down 7% to AUD 673 million. Bulk benefited from higher grain volumes in Western Australia in addition to the inclusion of One Rail, now referred to as Bulk Central, from July.
This acquisition was a significant milestone for Aurizon as we have now expanded our operations into this part of Australia, which is exposed to many future facing commodities. Lower EBITDA and the One Rail acquisition has impacted ROIC this year. This will improve in the future as earnings continue to grow. Free cash flow from continuing operations and excluding the One Rail acquisition decreased by 76%, driven by higher CapEx supporting Bulk growth and increase in tax payments and adverse working capital movements. George will spend some time going through the detail of the cash flow in a moment. This includes the impact from the acceleration of our investment in the growth of Bulk. I will shortly present more information regarding the many opportunities available to the Bulk business which is driving the capacity investment.
You can see the early results of the Bulk investment, which has increased its share of revenue to 44% of the group, excluding Network. I know that some have been expecting an increase in the payout ratio with the successful sale of East Coast Rail. The interim dividend declared of AUD 0.07 maintains the payout ratio at 75%, which we believe is appropriate given the investment cycle we are currently in. In periods of low growth opportunities, we are very happy to pay dividends at the top end of the range and conduct buybacks where appropriate. At this stage, with many growth opportunities in front of us, we've adjusted dividends accordingly. There will be an opportunity again in the future to consider increasing dividends once the growth cycle completes. Moving to an update on commodity markets.
Compared to the 10-year average, double the amount of rainfall was recorded in the key Coal producing regions of Central Queensland and Hunter Valley. Although individual months of significant rainfall can be seen with some regularity in historical records, the continued occurrence of such results has been the cause of the disruption in the half. This hasn't impacted Coal supply by our customers port availability and at times the ability for Aurizon to operate services. Near all major Coal producers have recorded lower production and/or reduced guidance and Australian Coal export volume reduced by 11% in the half. Significant rainfall has continued into January in Central Queensland, resulting in the closure of the Coal export terminals of Abbot Point, Hay Point and Dalrymple Bay for up to eight days, impacting the Goonyella and Newlands systems.
This has been a very difficult operating environment for the Coal Network and Bulk businesses on the East Coast, resulting in lower volumes. Turning to the other side of Australia, it is pleasing to see the run of record grain production continuing in Western Australia, with a further record projected for the 2023 season at 42 million tons. Aurizon is the major rail operator for grain in the state with a long-term contract with CBH. Putting aside the supply challenges faced in Australia, there's a very strong demand environment for Coal. Coal power generation is expected to have risen to a record in 2022, driven by India, China and also European nations who have returned to the reliable source of energy to power their economies. India, Australia's largest trading partner for metallurgical Coal, achieved record crude steel production in 2022.
After a two-year break, it was pleasing to see vessels sailing to China in January, loaded with Australian Coal. Although Australian Coal producers were able to find alternative buyers for Coal in the absence of China, having another participant in seaborne trade is a positive development. As a result of strong energy and steel demand, global Coal demand is expected to have surpassed eight billion tons last year, an all-time record. The IEA has projected demand to remain at this record level at least through the end of their short-term projection in 2025. Supported by continued elevated Coal prices, our recovery in Coal volumes is projected for the year ahead and we have the capacity to respond. Our long-term view of Coal demand remains unchanged. Almost three-quarters of global steel production draws upon metallurgical Coal.
Steel-intensive growth in India is expected to be the largest driver of seaborne trade demand. Despite already being the world's second-largest steel producer, India is considered to be at the early stage of development. For thermal Coal, it is recognized that global consumption will reduce in the decades ahead. However, the demand for Australian Coal is dependent on the seaborne trade market that is dominated by Asian demand. Against an expected retirement age of 40 years, the average age of Coal-fired generation capacity in Asia is just 14 years. As I noted earlier, the quality of the One Rail business, now referred to as Bulk Central, has exceeded our expectations. This applies to the people, assets, and opportunities in the Central Australian corridor, particularly with links to ports in both Northern Territory and South Australia.
The operational performance and projected synergies are tracking as expected, and it is great to already see contract activity so soon after the acquisition with OZ Minerals, CMIC and GRA. This level of contract activity in Bulk Central is representative of what we are seeing across all Bulk regions. In response to the high number of opportunities, investment is being made in capacity, including rolling stock, track and port terminals. As I noted earlier, the Bulk business development team is assessing a potential pipeline of around 200 opportunities. Clearly, not all opportunities will progress through to production, but it indicates the strength of demand.
We've shown the map on this slide a number of times in the past. I won't go into detail about the specific mining projects. What I will point out is the alignment of Aurizon's presence with the opportunities, primarily in and around the key miner-mineral provinces of North West Queensland and Central New South Wales. Key Western Australian regions of the Goldfields, Mid West, Esperance and into the Southwest and port assets at Townsville, Newcastle, Gladstone and Darwin. The acquisition of One Rail provides the opportunity to further expand our service offering in containerized freight. This infrastructure connects to the Port of Darwin, enabling a national capability in this growing market. This could expand beyond our existing Adelaide to Darwin and Brisbane to North Queensland services.
In response to accelerating containerized freight trends, there is a growing use of rail globally to improve our supply chains for both speed and reliability. Examples of this can be seen in North America and Europe. Over the past 40 years, containerized trade has grown more than any other form of seaborne trade, with an annual growth rate of over 8%. This is not about Aurizon getting back into full service intermodal as some in the market are claiming. Our previous intermodal business was not optimal because it involved a full end-to-end service, including warehousing, a significant trucking fleet, last mile delivery, and managing more than 600 customers. This was, and is still, not a business suited to Aurizon's capability. Aurizon's core competency is safely transporting Bulk product efficiently, which includes containerized freight. On that, I will hand over to George.
Thank you, Andrew. Good morning to those joining us on the call. As Andrew said, these results are characterized by two major themes. First, adverse weather on the East Coast of Australia, which has impacted volumes and revenue across all business units. Second, a ramp up of investment to underpin our strategy of growing Bulk earnings, as underscored by the One Rail acquisition and further investments in rolling stock, port equipment, and track infrastructure. Turning to the table on this page, which excludes the earnings from the East Coast Rail part of One Rail, given it's treated as discontinued. As you can see, underlying EBITDA declined 7% to AUD 673 million. The change in first half EBITDA was predominantly driven by Coal and Network volumes being down 8% and 2% respectively.
The declines in Coal and Network EBITDA were partially offset by Bulk being up AUD 25 million, driven by the five months of earnings from One Rail or Bulk Central as we now call it. As you can see in the top row of the table, revenue increased 12% with Bulk and Network higher. Operating costs increased 30% due to the acquired One Rail business and increases in fuel and energy costs. Given fuel, energy, and access costs are largely a pass-through and the One Rail acquisition is a recent addition, I find it useful to look at operating costs excluding those items to get a sense for how the underlying business is managing cost inflation pressures.
Adjusting for those items highlights that operating costs only increased 7%, with the main driver being co-cost uplifts to bring on new capacity in Bulk in Western Australia and the eastern states. I'll go into more detail on each of the business units and their performance shortly, including showing how each performed when we exclude fuel, energy, and access pass-throughs. Staying at a group level, you can see in the table that depreciation increased 12%. This reflects recent investments in equipment to support Bulk earnings and the integration of the acquired One Rail business. The One Rail depreciation is driven by the provisional purchase price accounting, which we have finalized and included in our accounts.
It shows that the AUD 1.45 billion purchase price of the One Rail Bulk business comprises AUD 200 million of rolling stock assets and AUD 1.2 billion of track infrastructure, which is to be depreciated based on distinct asset lives, but generally over the remaining 30-year concession period. Unlike prior periods, free cash flow was materially lower for the half. As well as the reduction in EBITDA, this reflects higher capital investments as well as a number of one-off or timing impacts, such as a higher tax installment rate and the prior period included in cash tax benefit from the Aquila disposal in FY 2021. I will cover free cash flow in more detail on a later slide.
The final dividend of AUD 0.07 per share has been declared based on approximately 75% of underlying NPAT, which is consistent with the last two dividends and will be fully franked. A successful trade sale of East Coast Rail provides additional balance sheet flexibility, the 75% payout ratio is prudent given the current capital investment cycle we are in. These investments will support earnings growth, the execution of our Bulk growth strategy, and long-term shareholder value. Moving now to Coal. The result for Coal highlights the volume impact of prolonged wet weather and the ongoing focus on cost control. This is best explained by stepping through the EBITDA bridge on the right, as it excludes both the revenue and cost impact of fuel and access costs, which are largely a pass-through.
EBITDA at the far right of the bridge was AUD 230 million for the half, a decrease of 20% against the prior period. The first and largest impact was from volumes, which accounted for AUD 47 million or 84% of the EBITDA reduction. As Andrew said, we witnessed extraordinary levels of rainfall, and it occurred over a prolonged period of time, meaning that our Coal customers found it difficult to recover their operations at a time of labor shortfalls in most markets. The second red bar on the bridge is net revenue yield and was AUD 6 million unfavorable against the prior period. This represents the contract rate reduction and end of two contracts, which we flagged previously, partially offset by the benefit from higher CPI flowing through in quarterly contract resets.
The last bar I'll touch on is operating costs, which increased AUD 4 million against the prior period when fuel and access costs are excluded. This increase represents a 1% uplift, which is a good result in a higher inflationary environment. We've also taken significant steps during the half, which provide operating cost certainty in future periods, including the commencement of TrainGuard as well as the agreement of Coal Queensland EAs at 4%-5% for year one and inflation for years two to four. This was a great outcome, particularly given agreement was reached without any industrial action. It was a challenging first half for Coal. We are expecting a similar Coal EBITDA in the second half before an expected recovery in FY 2024 as volumes increase and the benefits from CPI contract resets flow through. Moving to Bulk.
Bulk EBITDA increased in the half to AUD 100 million, an uplift of AUD 25 million or 33%. This reflects the first five months of the new Bulk Central business, partially offset by lower earnings on the East Coast. Revenue in Bulk was 51% higher or 21% when One Rail is excluded. In terms of operating costs, this was AUD 421 million or 57% higher. Similar to Coal, when excluding fuel and access costs, which are largely a pass-through, operating costs were up AUD 120 million, mainly reflecting the new Bulk Central business. When One Rail costs as well as pass-through energy, fuel, and access costs are excluded, operating costs were up 18% on the prior corresponding period.
This reflects the build of capacity in the Bulk business in anticipation of higher grain, minerals, and containerized freight volumes in coming periods. As I highlighted earlier, while the West and Central Australia operations of Bulk delivered to expectations, East Coast earnings were lower. This was due to wet weather causing track outages, several derailments, and customer-specific issues which impacted Bulk EBITDA by approximately AUD 10 million during the first half. Looking forward, we expect higher Bulk EBITDA in the second half before further earnings step-ups in FY 2024 and 2025, driven by the One Rail acquisition and new equipment being deployed. Moving to Network. Network EBITDA decreased AUD 17 million or 4% to AUD 363 million for the first half.
This was driven mainly by lower access revenue shown on the bridge as a negative AUD 11 million movement against the prior period due to a 2% reduction in volumes. Other revenue was AUD 5 million higher as a result of external construction works, which is offset by the AUD 5 million increase in other operating costs shown on the bridge. Energy and fuel is shown separately on the bridge as an AUD 6 million negative impact against the prior period. While energy and fuel costs are a pass through to Network customers, this AUD 6 million reflects higher electric connection costs, which are recovered as part of the EC tariff. The important item to note in Network is how lower volumes are dealt with under the regulatory arrangements.
To illustrate this point, our FY 2023 guidance, which Andrew will cover, assumes a volume related under recovery of approximately AUD 100 million excluding GAAP. Of that AUD 100 million, we are currently expecting take or pay to trigger in one of the four CQCN systems, and that Network will book approximately AUD 60 million of take or pay in the second half of FY 2023. The remaining AUD 40 million would then be part of the usual true up in two years' time and be reflected in the FY 2025 revenue cap. Turning to free cash flow. We've dedicated a single slide to this topic because there are a number of one-offs and timing related drivers behind the decline in free cash flow. Free cash flow, excluding growth CapEx was AUD 95 million for the half, which is down AUD 300 million.
Working left to right, the first item shown is one I spoke to earlier, which is the AUD 54 million reduction in group EBITDA for the half. The second item is working capital, which was AUD 122 million unfavorable. Of particular note are two items we've called out. First, Network electric charge revenue of AUD 37 million, which we've accrued in the first half, but from a cash perspective, won't be collected until the second half. Second, Network take or pay, which is booked within the financial year but not collected from a cash perspective until the following year. As FY 2021 take or pay was AUD 55 million higher than FY 2022, this resulted in a corresponding adverse movement in working capital for this half.
As I said before, we are expecting higher take or pay in FY 2023, which will benefit cash flow in the first half of FY 2024. The third bar across is sustaining CapEx, which increased from a cash perspective during the half by AUD 25 million. The next item across on the bridge is an adverse cash tax movement of AUD 76 million against the prior period. That prior period included the one-off cash tax benefit from the Aquila sale, and we've seen higher tax installment rates for FY 2023. This should drive a favorable cash tax result in FY 2024 as the installment rate is reset lower and the benefits from temporary full expensing flow through. Interest costs were also higher by AUD 26 million, reflecting higher rates and additional debt to fund the One Rail acquisition and Bulk equipment purchases. This then arrives at AUD 95 million.
The last item we've shown is growth CapEx from a cash perspective, which was a AUD 135 million cash outflow in the half. This reflects the proactive choices we've made to invest in rolling stock, port equipment and track infrastructure to support our Bulk growth strategy. As you can tell from the nature of the items in this bridge, we are expecting free cash flow to improve in the second half of FY 2023 and to increase further into FY 2024. We would expect free cash flow in FY 2024 to be more consistent with levels we have seen in the previous three years. Turning to CapEx. CapEx for the first half was AUD 403 million, with AUD 130 million of that for growth CapEx, which is slightly different to cash CapEx I just mentioned.
In terms of sustaining or non-growth CapEx, it increased AUD 60 million to AUD 273 million in H1. There are two drivers of this increase. First, as we flagged in the prior results, sustaining CapEx for FY 2022 came in under expectations as some Network track work was delayed and pushed into FY 2023. That's consistent with the increase we've seen in the first half when Network CapEx was up AUD 22 million. Second, we've expanded the footprint of our Bulk business with the inclusion of Bulk Central and several port terminal operations. That's resulted in an AUD 28 million sustaining CapEx increase in Bulk during the half. Despite this increase, we are still expecting FY 2023 sustaining CapEx to remain in the range of AUD 500 million-AUD 550 million.
Turning now to growth CapEx, and we thought it useful to provide a view of the last five years on the left and on the right to show the current view of capital associated with Bulk growth. What's noticeable in the chart on the left is the transition we've seen from a historic focus on Coal and Network CapEx to one now focused on CapEx, supporting the various Bulk mineral sands, grain, copper and containerized freight opportunities in front of us. We expect growth CapEx for FY 2023 of around AUD 210 million as shown in the middle of this page. While on the right, we provide an aggregate view of the FY 2021-2025 Bulk capital, which totals AUD 430 million with about AUD 200 million of that spent so far.
This includes AUD 320 million in fungible standard gauge locomotives, wagons and containers that can be deployed across the country to meet the Bulk earnings pipeline Andrew mentioned earlier. AUD 60 million in port equipment with the majority to expand our operational footprint by utilizing the concession we acquired as part of One Rail within the Port of Darwin. AUD 30 million in freehold land acquired at the Port of Newcastle to develop an input supply chain for the New South Wales Minerals Province. AUD 20 million to support a track upgrade for our gypsum contract, which we've extended for a further 10 years. We expect these investments to deliver returns of greater than 10%, although I note there is further upside beyond this, particularly in South Australia and Northern Territory, should volumes of grain, minerals and containerized freight accelerate.
The last item I'd note on CapEx is that this slide reinforces why the trade sale of East Coast Rail was the preferred outcome. The AUD 435 million of cash proceeds we now expect is AUD 10 million higher than the AUD 425 million we flagged in our December announcement. That's due to completion timing being pushed back to February and the cash generated by ECR being for Aurizon's benefit. These cash proceeds will initially reduce debt and can then be utilized to invest it in equipment which will accelerate the earnings growth of the part of One Rail we wanted to keep and where we see significant growth opportunities. As has been the case for the past year, many investors are asking about inflation and interest rates and the impact this could have on Aurizon.
This is a topic we actively monitor and manage and so we thought it was worthwhile discussing it on one page. Starting with inflation, as we've seen recently in Australia, it's risen to almost 8% in the December quarter. 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. There are, though, two sides to every coin, and the main risk is inflation driving wage escalation. Pleasingly, with the recent Queensland Coal and staff EAs being voted up, we have renewed 70% of EAs in the past 12 months, with the most recent agreements being 4%-5% wage uplifts in year one and years two to four being tied to CPI with a cap and floor.
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. At the reset point on July 1, 2023, there is a true-up where actual inflation differs from the estimate at the start of UT5. This will result in the FY 2024 RAB being increased to AUD 5.9 billion, an increase of 5%. This means Network will see the benefit of higher inflation, not until FY 2024. For forward inflation, this is reset alongside the WACC for the FY 2024-2027 period with a higher inflation assumption reducing regulatory depreciation.
Also on this page, we thought it worthwhile to talk about the Network WACC reset as this is where higher interest rates are reflected. 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 for the preliminary WACC reset, the WACC that is used to determine tariffs for FY 2024. 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 8.18%. The final reset will occur in June 2023 and be reflected in tariffs from FY 2025.
The difference between the final and preliminary WACC resets will then be reflected in a revenue cap adjustment in 2026. As you can see from this page, Aurizon has protections from rising inflation and interest rates. To underline that point, based on the RAB and WACC reset as well as the prior year adjustment of revenue cap, we expect maximum allowable revenue for Network to increase in FY 2024 to AUD 1.06 billion, an increase of AUD 95 million from FY 2023. This is highlighted in the chart on the bottom right of this page. Before handing back to Andrew, I will spend some time on a funding update. It's been a successful period in terms of funding activity, and I'll start by talking about East Coast Rail.
As highlighted when we announced the trade sale in December, the debt package we secured will be novated across the new owners. This includes the amortizing bank debt in place at Aurizon's acquisition as well as the AUD 340 million 10-year U.S. private placement we successfully issued post-acquisition. This USPP issuance was a key event that enabled Aurizon to extract value from the trade sale and I think demonstrates the ongoing demand from capital markets for a business such as East Coast Rail, noting that it is majority thermal Coal exposed and rated BBB-, which is two notches below the respective Aurizon ratings. This bodes well for Aurizon's future debt capital market raisings.
Our treasury teams have also been busy on the core Aurizon debt profile with a refinancing of approximately AUD 1 billion of Network bank debt facilities across three, four and five-year tenors and issuance of AUD 70 million of new 10 and 12-year private placements of the existing Network program in December. Both of these recent funding outcomes are shown in green on the chart on the bottom right of this slide. 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. Looking at some of the metrics on the page, I note the weighted average cost of drawn debt at 4%, which is consistent with what I foreshadowed at full-year results in August and reflects a high fixed portion of Network debt.
We also saw group gearing increase to 55% during the half, a reflection of the debt utilized for the One Rail acquisition. Importantly, we will see this figure reduced to around 52% post-completion of the East Coast Rail trade sale. This trade sale, combined with holding the dividend at a payout ratio of 75%, means that issuance of a hybrid in FY 2023 is no longer intended. Finally, I'll say in closing that while this half has been impacted by weather, we continue to deliver on our strategy. Cost control and inflation-linked earnings in Coal and Network and investments across the supply chain to meet the demand from containerized freight customers and the expected uplift in Australian Bulk commodity exports. Thank you, and I'll now hand back to Andrew.
Thanks, George. Our EBITDA guidance range has been lowered to AUD 1.42 billion-AUD 1.47 billion, with the 4% reduction primarily driven by prolonged wet weather and the impact of the third-party Blackwater incident I spoke of earlier. Network has take-or-pay and revenue cap mechanisms in place in periods of low volumes, the above-rail business does not hold the equivalent level of protection. Group non-growth CapEx is unchanged at AUD 500 million-AUD 550 million. With more certainty on growth opportunities, our growth CapEx guidance is AUD 210 million. We have listed our key assumptions by business unit. For Coal, lower EBITDA is expected due to volumes now expected to be lower compared to the prior year, in addition to the previously advised revenue yield reduction.
Bulk, revenue and EBITDA growth is expected from increased volumes and services and inclusion of Bulk Central. For Network, lower EBITDA driven by lower volumes is now expected to be below regulatory forecast, with revenue under recovery of around AUD 100 million and take-or-pay of AUD 60 million booked in the second half. The net under recovery of around AUD 40 million is to be included in the revenue cap mechanism in FY 2025. As per our normal practice, we do not assume any further disruptions to commodity supply chains such as major derailments or extreme prolonged wet weather. Later this year, we will be hosting an Investor Day, which will focus on Bulk Central and the bring forward of opportunities presenting to the Bulk business unit. With that, we will take your questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question is from Andre Fromyhr with UBS. Please go ahead.
Thanks. Good morning. Just thought I'd start with, probably asking George, you called out sort of two major themes across what's driving earnings, in the period just gone being weather and growth investment in Bulk. Can you help us size some of these things? Firstly, are you able to tell us just how much you saw specifically from the One Rail business, for the five months that it contributed in the half? I'm also interested in, when you add it all up, what you think the impact to EBITDA was from weather.
Got it, Andre. To tackle the first part, which was Bulk Central. Bulk Central, it delivered to our expectations, which, as you would've seen from our prior presentations, we're expecting AUD 100 million EBITDA over the first 12 months. It though was only 5 months contribution in our first half, and there is a ramp-up profile as we get to full run rate on synergies and some growth projects. Bulk Central hit expectations. Bulk West, the Western Australia business hit expectations. It was Bulk East that was both below our expectations and below the prior year. That's what impacted Bulk during the year. In terms of weather more broadly, I'll break that out. The first thing to note is the wet weather and its volume impact on Network. Network had a volume under recovery of AUD 50 million in the first half.
We don't book take or pay in the first half. If that first half under recovery of AUD 50 million repeats in the second half, which is what our guidance assumes, you'd have a AUD 100 million under recovery. Take or pay would then recover some of that. We're assuming AUD 60 million, although there's a number of things that can move that number. That then means there's a AUD 40 million catch up or true up in two years' time. Remember, Network always recovers its maximum allowable revenue. It's just a question of whether it recovers it in the year we're in or in two years' time. If you then go to Bulk, I called out Bulk's significant items on the East Coast being weather, derailments and some customer production issues which were weather driven. That was about AUD 10 million impact.
You have Coal, which we showed on the bridge in my presentation, about a AUD 45 million-AUD 50 million impact from volumes that was largely driven by weather. I know I've given you a lot of detail there, but hopefully that answers your question.
Yes. Thanks. Just one more if that's okay. specifically on the pricing environment in Coal. I take your point. You've split out the dollar impact of that, once you strip out things like pass-through of fuel. Maybe more broadly, you could help us with the outlook for Coal pricing. Are you having these conversations with customers about contract resets that also includes commitments around capital? I understand in general Aurizon seeking to not spend growth CapEx into the Coal business, but are there customers that are asking for new fleets and better reliability in order to support prices going forward?
Andre, I think, it's Andrew. I think I might get Ed to talk more about the customer discussions and whatever he wants to.
Yeah. Thank you, Andrew. Thank you, Andre. Over the last few years, we've seen the market for Coal haulage services stabilize, I'd say. As George outlined, part of the revenue yield reduction this year is due to the rate reset in one of our medium-sized contracts. There are no further material resets, but the market does remain dynamic and competitive. We find that while rates are important, customers are valuing things like volume, and origin/destination flexibility, shared risk positions, delivery incentives. It depends on the customer. We're prepared to invest capital where there are the returns meet our hurdles and in the period, the first half, there's just been little opportunity to do that.
Okay. Thank you.
Your next question comes from Justin Barratt with CLSA. Please go ahead.
Hi, team. Thanks very much for your time today. Look, really appreciate the color on your free cash flow, and your growth CapEx expectations sort of over the next couple of years. George, you made the comment that you expect FY 2024 free cash flow to return to previous levels, prior to FY 2023, I guess. I just wanted to understand. Is that before your growth CapEx expectations?
It would be after growth CapEx expectations. To give you a bit of color on that, Justin, and if you look at some of the one-offs and timing impacts, obviously we'll see EBITDA recover in the second half and EC in the second half. When you look through to FY 2024, we'll expect a cash tax benefit from temporary full expensing and installments rates being reset lower. That's a big driver. We'll also see EBITDA uplift. What I'd point you towards there is the Network MFAR bridge I touched on in my presentation, so an AUD 95 million uplift in Network MFAR, but also Coal and Bulk as we see CPI flow through and volumes recover. You'll also, don't forget, get the take or pay recovery from a cash perspective in FY 2024.
We book it in this financial year, but from a cash perspective in the next financial year. Hopefully that helps you with how the one-off and timing related items impacted us negatively in 2023, but will flow through as favorables in 2024.
Yeah. Fantastic. That's very clear and very helpful. Thank you. Look, I know it's early stages in terms of the second half of 2023, but I just wanted to ask you or if you'd be willing to share what you've seen in terms of Coal rail volumes to start off this second half ex the Blackwater derailment.
I might get Ed to talk about that.
Thank you, Justin. From a volume perspective, well, we plan to have a better second half. It won't be record-breaking, but customers are telling us they expect their orders to hold up. At a portfolio level, I expect volumes will be up from first half, aligned with the second half of 2022, the previous half. There's always factors outside our control, the bad weather, the third party derailment we've talked about, but we are factoring that in.
Fantastic. Thanks, Ed. Thanks, team.
Your next question comes from Anthony Moulder with Jefferies. Please go ahead.
Good morning, all. If I can start back in Bulk, please. There was a lot of factors in that Bulk first half 2023 results, but I wanted to understand, because the cost growth was significant, how much in that cost growth related to future periods, how much investment are you making for future growth in Bulk, please?
Clay, I might get you to give some color on that.
I might start with reiterating just sort of what happened, Anthony. I'll throw to George on that investment. As outlined by Andrew and George, you know, there's sort of three different stories in Bulk in the first half. You had the integration of One Rail, which we're pleased about and operating as we said, in line with our business case. We had strong performance for most customers and most commodities over in the west, offset by the impact in the east, weather, derailments. We had a particular customer that we'd installed a lot of capacity for that didn't rail for the full six months, which had quite a significant impact. That's kind of the view on the half. George , I might throw you on the second part.
Yeah, Anthony, I think you need to look at the revenue and cost line in Bulk because there are a number of moving parts in the first half and as you look forward to the second half. I find it most useful to think about it in the context of EBIT margins or EBITDA margins. From an EBIT margin perspective, historically, we've been at 15%-20%. You saw in this half it reduced to 9%. That's a product of those one-offs and investments that Clay mentioned. Also you've got higher fuel revenue, which is a pass-through, so it increases your revenue line, but it doesn't increase your EBIT line. You also have higher depreciation coming through from the investments we've made. When we look forward, we're still targeting that 15% EBIT margin in Bulk across the business. Hopefully that helps.
All right. Cool. Yeah, that's helpful. Thank you. You also talk about this investment cycle. Obviously we're seeing that in the second half in the CapEx profile, but you talk about related to the payout ratio for dividends. Do we take from that this will last well beyond 2023?
George, I might just get you to talk about the few years.
That's one of the reasons, Anthony, we try to give transparency as to what we see as the CapEx investment cycle in that slide I touched on. You'll note that it looks out to FY 2025, AUD 430 million. We see this CapEx investment cycle lasting 2023 and 2024 and then 2025 it tailing off. One thing that may happen is opportunities may come forward before we expect them to. At this point, what we're saying is it's 2023 and 2024.
Thank you. That profile is associated with your expectations or are you getting close to signing customers that'll be used for that investment?
Yeah, go George.
It's a combination, Anthony. If you break down the capital, I mean, we mentioned AUD 20 million of track upgrades. That's supported by a 10-year contract in South Australia. We've got AUD 20 million of containers that are to support a number of customers that we have contracted recently, including the Centrex contract Andrew touched on. The port equipment is obviously expanding what we do for a lot of existing rail customers. The rolling stock capital is more about the forward pipeline, and we expect to sign customer contracts over the coming six to 12 months.
Very good. Thank you. Lastly, if I could on Coal with Ed. We used to talk about take or pay customers. Obviously, that's less of a focus, but it was that take or pay protection that gave a lot of protection to your Coal earnings. Where is that now at? Are customers still signing with any form of take or pay, or is it purely, here's the rates, we cut to rail, but there's no downside from a lower level of contract utilization?
Yeah. Thanks, Anthony. Consistent with previous results releases, we're still seeing capacity charges in the 50%-60% range. Yes, customers do principally seek capacity charge protection or certainty of service from us. Actually they have an incentive to make sure that the capacity is in place.
Very good. Thank you.
Your next question comes from Sam Seow with Citi. Please go ahead.
Good morning, guys. Thanks for taking my question. Just on the free cash flow, I think previously you've talked about AUD 500 million-AUD 650 million. Is that still relevant or similar, I guess, to the dividend as you think about, you know, the next couple of years of reinvestment that could potentially slower?
George, do you want to take that?
Yeah. Our expectations haven't changed from what we mentioned at that investment day 18 months ago.
Okay. Too easy. Maybe just following on from an earlier question, trying to unpack that Bulk Central contribution. Is there any seasonality in the business and maybe some color around what you mean by ramp up, given, I guess, the business was largely operating when you took over?
Clay, do you want to talk about that?
Yeah. There is some mild seasonality with, as you'd see in most of containerized freight or the intermodal side of the business. There's some seasonality in that. Generally these are consistent production mines consistent production facilities. Unless there's weather impacts, not a lot of seasonality on the Bulk commodity side.
Just to add to that, Sam, in terms of the ramp up, what we're referring to there is in terms of synergies and some growth volumes. You might remember that AUD 80 million was the historical EBITDAR of that business, and we see it stepping up. There were two drivers of that step up. First was synergies, which we said is AUD 7 million-AUD 10 million. Of those synergies, the first part is corporate related. They're cash flowing. They were cash flowing very early on. The other part is operational. For example, replacing hauls where you've got, you know, three or four times the number of locomotives that there could be on that haul. They take longer to execute, so they'll really ramp up in the second half. You also have some growth volumes which we've always flagged would come through in the second half of the financial year.
Got it. Got it. Just quickly on revenue yield, I guess in Coal, you've obviously combined that with the contract rolls. Just on an underlying basis, can you give us maybe an idea of what the CPI rollover was, and did that cover kind of the operational cost increases?
Yeah. George, I'll get you to cover that.
Yeah. You can actually work that out if you go back to our full-year results and look at what our expectations were for EBITDAR. If I remind you, we were expecting EBITDAR to be lower but volumes to be up. That was clearly meaning that the EBITDAR reduction we were expecting in the year was gonna be driven by yield reductions. What we've actually seen is volumes being below our expectations. When you back that out, the revenue yield reductions almost exactly offset CPI, albeit there's a wedge of that AUD 6 million, which I discussed in my presentation.
Too easy. Thanks for the color, guys. Appreciate it.
Your next question comes from Jakob Cakarnis with Jarden Australia. Please go ahead.
Morning, Andrew. Morning, George. George, I'm just trying to tie together some of the commentary that you've given. You've said that that One Rail Bulk business, Bulk Central, is on track per internal modeling. You suggested there that it was AUD 80 million. I think the last update that we got was calendar 2021, so we're a little bit behind for that business. On the period of ownership, five months, it'd be about a AUD 33 million EBIT contribution. Can you just confirm that there were no synergies during the half? If that is the case, I know that you've identified AUD 10 million of EBITDA headwinds from poor weather, but it still leaves a third of the EBITDA decline, that underlying Bulk business year-on-year unspecified. Can you just dig into that into a little bit of detail and then how that recovers into the second half, please?
Let's start with Bulk Central. EBITDA pretty similar to what you've described there. You take that AUD 80 million divided by 12, that gives you your run rate for that first five months. There were some synergies in that first five months. Those synergies will step up in the second half. If you then go to the other impacts that we've seen, I called out AUD 10 million from weather derailments and customer production issues. There was also another similar number, call it about AUD 10 million, that was early costs that we've brought on to support growth that will come through in future periods.
Okay. Just to follow on to that then, I guess, George, some of the problems that you were seeing for your customers in the fourth quarter of 2022, can you just confirm that they've been resolved and that that's kind of run right now as we get into the second half of 2023?
I might get Clay to confirm that.
That particular customer on that's had the impact in New South Wales, we expect that to come online, and be at full raw in the second half of H2.
Sure. The issue that you had in the fourth quarter of fiscal 2022, I think it was in Bulk West, has that now gone back to normal? Is that contract fully restored? Is that customer back up and running permanently?
In Bulk West? I'm not.
No, the Bulk West you might be referring to was CBH grain run rates. We're now run rating at an expectation for CBH. The customer production issues we were talking about in the fourth quarter of FY 2022, there was one in the Mount Isa corridor that was a shut that's now been restored, and the other one was a ramp-up issue. That ramp-up issue is still a ramp-up issue and has been slowed by further flooding in the Broken Hill region.
Just to add, just the, just to make sure it's not that there's no Bulk West misinterpretation. The CBH contract performance for CBH is setting records, and you can see that published in external documentation for the interest of farmers in Western Australia. There should not be any sort of uncertainty about that. It's going very well.
Cool. One final one for me, both for Andrew and George. Just for the Bulk business, for the capital investments that are going in there, are you considering them on an incremental return on invested capital that's going there or it's versus group hurdles?
George, do you wanna take the easy question?
Group hurdles is the short answer to that.
Thanks, guys.
Your next question comes from Paul Butler with Credit Suisse. Please go ahead.
Good morning. Thanks for taking my question. I just wanted to ask first about the restatement of the safety metrics for last year. What is the explanation for that?
Yeah. Look, the SIFR measure, looking at significant incidents, was designed to actually replace a previous set of metrics which didn't cover the entire business. We introduced them, we ran them through the year, we formalized them this year. As part of the formalization process from a good governance point of view, we had experts go back and look at all the classifications of the prior incidents to make sure that we were comparing like for like. In that process, we found that in the prior year, we were reporting some things as significant that didn't meet the hurdle, and we had to remove those.
Okay. Just to clarify, if you were restating it on the previous basis, would you also be showing this decline in incidences that you've shown for the half?
Yeah. It's still a major improvement. It's just that it's less of a major improvement, as it's still significant. It's that we've actually done that restatement. It is a definitely strong improvement.
Okay. Thanks. A question for George. You said just a moment ago that you're targeting a 15% EBIT margin in the Bulk segment. Do you sort of think about that as being a sort of a minimum target or is that a stretch target?
No, I don't think it's a stretch. We were at 15% and above a year or two ago, I don't think it's a stretch.
Okay. Clay, I think you said the one customer you've been having the issue with in New South Wales will be back to full raw in the second half. Will we have a full contribution for the half or is it gonna be first half next year before we get the full contribution?
No, I would say it's the last quarter of the half. It's, that operation's still standing up after prolonged weather impact. It'll be the last quarter of that, of H2.
Okay. Just one other question. The D&A in Bulk is the change in that sort of pretty much all just driven by the One Rail consolidation?
Some changes from other investment that you've put into other parts of the Bulk segment.
It's a combination, Paul, but 80%-90% of it's driven by One Rail, and the rest is driven by the investments in new equipment.
Okay, great. Thanks very much.
Next question comes from Ian Myles with Macquarie. Please go ahead.
Good morning, guys. Just at a broader macro level, you showed us the EBA agreements being 4%-5%. Inflation's probably running a little bit, still running a little bit ahead of those numbers. Can we actually expect a broader margin improvement into the second half and into FY 2024 as a result, that you're doing better on inflation than the cost, labor costs?
Yes. George, you wanna add anything to yes?
No. Yes, absolutely, we do, Ian. In Coal and Bulk, Network will more be driven in FY 2024 by that MaaS step-up that I described earlier.
Okay. In terms of maybe give us a little bit, I have to say, Andrew, I got a little bit more confused about intermodal, where you're defining what a box is and the element. I'm just trying to understand what your value add is in that of carrying a box versus doing a full intermodal service.
The reality is when we look at what we call containerized freight, which is containerized freight, and the differentiation from intermodal is the business is vastly more complex, and you're in extensive use of labor and the management of a whole larger group of customers. In a sense you're actually competing with some of your own major customers, which is what we got into from an intermodal point of view. Containerized freight is simply what we do very well and have done for a long time. You can see examples of that in Aurizon before the One Rail acquisition with the haul on the hook and pull activity on.
Yep.
East Coast line. You can see that it is a containerized freight activity that happens through Central Australia. It's just a much smaller part of the actual intermodal, full stream intermodal activity. We've, as I said, hopefully you got the message when I used the word not, we're not getting back into intermodal, but we do see because we operate in containerized freight some possibilities in the future.
Okay. You talk about AUD 1.5 billion of revenue opportunities or 200 opportunities. What does that translate into CapEx, and how much of that CapEx is already spoken for within the AUD 400 million that you're looking forward over the next two to three years?
I might get Clay to talk a little bit about the pipeline a little bit more extensively, then I'll get George to talk a bit more about the CapEx.
Yeah, I guess. Thanks, Ian. When we look at that pipeline, Andrew mentioned the 200, 250 opportunities value of AUD 1.5 billion in revenue, we kind of distill that down, and we think it's around AUD 300 million in EBITDA. Then you take a sort of another slice at it and your assessment out to sort of 2028, we think the higher likelihood number looks around AUD 600 million in revenue and about AUD 150 million in EBITDA. What's exciting about a lot of those opportunities is where they're located, adjacent to our Network and our strategically located land and locations, and that nine of them are in excess of AUD 50 million each. We've got some of that capital and some of that infrastructure already in place.
I might throw to George, whether he's considered further down post 2028 on where we wanna spend money and how we wanna address those markets.
Yeah, I might answer that this way, Ian. We are spending capital or investing ahead of customer contracts. That's what we're flagging today, we're doing that for two reasons. The first is we're seeing customers wanting to ramp up the provision of our services quicker. We're seeing the benefits of bringing on some of this equipment earlier because you get, for example, the temporary full expensing benefit from a tax perspective. What we're really conscious of is not getting out beyond our skis. What I'd say to you is the CapEx that I've outlined, that AUD 430 million, when you look back a year and forward a couple of years, represents less than 20% of that pipeline.
I don't expect Clay to convert 100% of that pipeline, and I think he'd be doing a great job to convert more than 50% of it. That should give you a sense for how we've sized the capital to the pipeline.
Okay. That's, that's really good. The only other issue is in Coal, are you actually losing still a little bit of market share in the, in the corridors or is it because, like in Queensland, you know, volumes are down sort of four million tons for the year and the system's only down three million? I'm just wondering if there's something specific occurring.
Ed, do you wanna address that?
There's nothing specific occurring, Ian. It's more a matter of the particular customers that are down. We still, our average share for the half was 66% for CQCN and 26% for the Hunter Valley, which is consistent with the long-term average.
Just probably I'd add something that might help as well, is if you look at where particularly strong growth has happened is with the Newlands corridor, and there's a new rail haul around mining operator that set up there.
Yep.
With some bane. That's, that will, have an impact on the metrics. Also if you look, our market share is different between the Goonyella and the Blackwater. If you have a big impact.
Yeah.
On the Blackwater with, you know, a third party operator taking out, your production for two weeks, that has an impact as well.
Yeah, look, that, that's great. I just wanted to check, that's all. Okay, that's great. Thank you very much, guys.
Your next question comes from Owen Birrell with RBC. Please go ahead.
Good morning, guys. I'm gonna just drill down into the contribution from grain in the period. I know you sort of highlight the fact that you're the largest grain hauler, and I think there was a chart there which suggested it was about 20% of Bulk revenues. I'm wondering if you can give me a sense of what the earnings contribution was for grain in aggregate across the business.
Well, I'll talk about grain and then George, if you wanna answer that question on contribution. First of all, you know, we've got back into grain in a heavy way. When we think about it, we're focused on the most resilient regions and our ability to scale up in a cost-effective way. What does that mean? We like WA and we like South Australia, and when we scale up in New South Wales, we've been working with Ed and his team on how we can get synergies there and also converting Coal wagons into grain wagons, which has been, you know, had safety and payload improvements. Strategically, we like the momentum that we've that is starting to come through in the grain market.
What I mean by that is, for many years there hasn't been a lot of, or modest investment into improving grain supply chains, particularly infrastructure. As you would read, as I read, there's a lot of momentum in from governments, from exporters and from traders in driving improved performance and lower costs for the grain supply chain overall. You know, the best example of that is the AUD 400 million investment in the Western Australian supply chain. We're pretty excited by that market. We're excited by the fact we delivered 12.5 billion tons last calendar year, which is a record on rail, and we continue to perform very well for CBH. I'll throw to George on the investment side and the earnings side.
Yeah. Ian, I'll answer it this way. Owen, I'll answer it this way. We have two or three major grain customers, so we're not gonna get in the habit of giving you EBITDA or EBIT by that segment. What I will say is we've given you revenue percentage, which is about 20%, as you said, of total revenue and EBIT contribution is broadly consistent with that 15% that I mentioned before for the Western Australia and South Australian parts of grain. Where we tend to get a better EBIT contribution because we have a lower capital base in grain is on the East Coast. Unfortunately, that's where we saw weather disruptions in the half. Hopefully that gives you a sense of the answer without giving you specifics that would upset our customers.
Yeah. No, that's good. I was just wondering, AB has upgraded their guidance for the South Australian markets and WA markets by circa 30% since the last upgrade in December. Clearly you've seen that coming through. Should we be expecting the margins you're delivering in those business to step up further from where we are at the moment? It sounds like we're at very peak conditions at the moment.
My answer to that is first of all, on the South Australian market, there is strong demand in South Australia. We've been asked to try and find another consist to put in down there and to haul grain, and so visibly trying to find that because, as you just mentioned, there's high volumes across the nation. They want an additional consist down there. In fact, there's a real government push to move more grain from road to rail in certain regions in South Australia, which we're pretty excited about, and we're working with governments and others and customers to try and facilitate that.
On yields and margins, I'll probably go back to my statement about modest investment in the infrastructure so that the whole idea of us first setting up the CBH and the eastern states grain contracts was to, first of all, ramp and then stabilize and then look for yield and productivity improvements. We're working particularly in Western Australia on, okay, how can you get longer trains? How can you get them loaded quicker? How can you get them unloaded quicker? Both volume and yield improvements are expected as that infrastructure improves.
Okay. Just one final question. Just, I guess, following on from Paul's question before about the NTA in Bulks. Just wondering whether that AUD 53 million NTA number that we've got for the half is the run rate we should expect going forward or were there any one-offs in there that are not gonna repeat in the second half in the Bulks NTA number?
No, it'll broadly repeat, Owen. The one thing I'd note is you'll have a full six months of the One Rail depreciation flowing through, whereas you only had five months in the first half numbers.
Okay. Look, just one final question for you, George. On the debt, I noticed the average interest rate stepping up, you know, 3.4% up to 4% for this half. You've got AUD 1 billion worth of debt to be refinanced over the next 12 and a bit months. Just wondering, if you were to refinance that at today's rates, what would your average interest cost move to?
Yeah, it's not so much when we refinance, it's more about our hedging book.
Okay.
In Network we're largely hedged through until 1 July 2023, which is when the WACC reset occurs. We do that to try and match the WACC reset with the cost of debt reset. What I would say is it's more about our hedging book rather than refinancing. The other thing I'd say on refinancing is we actually did a major refinancing in January for Network.
We refinanced about AUD 1 billion of debt, and we actually got tighter margins than we had in the prior period. They're two bits of context. I think your broader question, what do you expect the weighted average cost of debt to be going forward? It's about 4% for the first half. I'd expect it to be marginally higher in the second half. Beyond that, I'm not gonna try and predict because when you predict interest rates, you get in a bit of difficulty.
Yeah, no problem. That's great. Thank you very much, guys.
Your next question comes from Cameron McDonald with Evans and Partners. Please go ahead.
Hello. Good morning, guys. Just two questions on Bulk, if I can, and just the amount of capacity that you've actually got. You've talked about the AUD 10 million of operating cost investment and the AUD 430 million worth of CapEx. How much capacity for growth does Bulk actually have? How much are you investing for? How much could that investment actually support in terms of either tonnage or revenue versus, you know, what you acquired with One Rail? How much of that investment in CapEx is actually being spent on the asset you bought for, you know, AUD 1.8 billion?
George, I might get you to answer that.
A lot of questions within that, Cameron. I think the way I'd answer that is to take you back to our Investor Day 18 months ago, and we said that we have an EBIT target for Bulk of AUD 250 million-AUD 300 million. When I look at the investment in One Rail and these CapEx investments we've flagged today, that is aimed at getting us to that target. Should we make further investments beyond that, then we'll relook at that target. The reason I answer the question that way is there's not a clean tonnage capacity number we can give you because each of the investments are unique. Port equipment, for example, doesn't necessarily drive a tonnage outcome, which translates to an EBIT outcome, and that's because you get generally better margins at the port end than the rail end.
The way I'd answer that question is to say the One Rail investment with this AUD 430 million that we flagged is consistent with that EBIT target.
Right. Where is that AUD 400? Presumably, most of that is being spent supporting the One Rail acquisition, though.
It's a combination, Cameron. Again, if I break it down, you've got that AUD 20 million of track upgrades which are-.
Yep.
in One Rail.
Yep.
You've got that AUD 20 million of containers, which is in rolling stock, which is not One Rail. That's more Queensland-based, as well as some containers in other parts of the country, but not so much South Australia, Northern Territory. You've got AUD 60 million of port equipment. The majority of that is targeted at Darwin Port, which is an add-on to our One Rail investment, but also an investment, in Gladstone Port. You've got the rolling stock, and I said that's standard gauge locomotives and wagons. We see the majority of the pipeline opportunity being in South Australia or Northern Territory, but deliberately those investments are standard gauge and fungible, so they can meet opportunities as they come up in Western Australia, South Australia, Northern Territory, New South Wales or Victoria.
Yeah. Okay. Great. Thank you. Just going back to the debt issue, you previously flagged that you may have to consider a hybrid as part of your funding mix. Where are you in that decision and consideration giving this, given the sale of East Coast Rail versus the in specie alternative?
Yeah. We're now at a point, Cameron, where we don't intend to issue a hybrid.
Great. Thank you very much. That's all from me.
Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.
Hi. Thank you very much. Hopefully I'm gonna take too long. I've the slide 17 on CapEx was really helpful. Thank you. I just had my first questions on that. The chart itself shows the sustaining CapEx to AUD 500 million-AUD 550 million. Can you just talk to what are the opportunities potentially to squeeze that even further in order to fund your growth aspirations? The second part of the question on that one is an IRR of minimum 10%, I mean, we all know they can be shifted quite dramatically by your terminal asset value assumptions. I'm wondering if you can talk to it in the context of return on invested capital, which is a metric you report and get long-term incentives based on.
Can you talk to what, how long it takes, if you like to, get up to where the company thresholds are and preferably where it becomes accretive to current return on invested capital, please?
Okay, Scott, look, I might handle the first one, and then I'll get part of the whole package of questions, and I'll get George to handle the second part. Look, squeezing sustaining CapEx below that range is an unlikely and difficult task. If you think about what we've been doing for a number of years is we've pretty much been holding our sustaining CapEx around about a number that approaches AUD 500 million. Sometimes for big weather events or that Network doesn't quite actually manage to get all its work done, but that's kind of broadly the number that we've seen as works for the business. I'd also say. That's a little bit about thinking about historically.
The prediction of sustaining CapEx in this business is, I'm gonna say no, it's reliable and reasonably easily easier to do in that you can figure out your wear rates for rail. You can figure out, you know, life cycle replacements for engines and bogies and the like. When you build that up, it's not hard to get a picture like that. The other thing I'd say is that for a number of years, we've been talking about some larger scale electrical infrastructure replacement in the Network business. You know, we're working our way through that situation.
Those are things like, and I'm not an electrical engineer, but things like transformers, which have probably a 20 or 25- year life cycle that you actually need to get on and actually figure out how that replacement takes effect. What I'm hoping to do by painting that picture to you is actually say that squeezing that number is pretty unlikely.
Uh-huh. George.
Yeah. I guess on the first question, the AUD 500 million-AUD 550 million, I just reiterate Andrew's point, which is the majority of that is Network sustaining CapEx, which is an annual discussion with our customers, and it gets recovered by the regulated asset base. There's about AUD 200 million annually of above-rail, Coal and Bulk CapEx. As Andrew said, we do look for opportunities to optimize that, but I think the biggest optimization lever we've got on our capital base in rolling stock is looking at how we shift over time locomotives to where there's the best long-term demand. We've done that over the last two years, Scott. If you look at active locomotives in Coal, it's reduced by 15 over the last year and a half, and those locomotives have gone to Bulk as a capital light way to grow the Bulk business.
I come to your question on the AUD 430 million, I understand your question is around ROIC and therefore EBIT, I'd expect us to get to that ROIC hurdle, which we publicize around 10% within the two to four-year period. It's gonna be longer when you're looking at how do you get freehold land at Port of Newcastle to contribute to EBIT, it's gonna be shorter when it comes to that track upgrade in South Australia or some of the containers and other standard gauge rolling stock. two to four years to hit that ROIC hurdle is what I would give you as a guide.
Okay, great. That's very helpful. The last question I had is on TrainGuard, which Andrew mentioned in his initial comments. You started rolling that out in Blackwater, and I think if I read the more detail on that, you're gonna complete the rollout in Blackwater this financial year, and then Goonyella comes next, but there's not a timeline associated with that. I was wondering if you could just step through and give us an update on when you see the implementation of that and how long. What's the duration of time that has to lapse once it's implemented before actually taking other steps associated with the or that are enabled by that technology, please?
Thanks. A nice way of asking the question. I'll get Ed to answer.
We're really pleased with the progress on the TrainGuard project. Thanks, Scott. We, as you probably know, we went live in December, and we expect to have the fleet switched on sometime by the fourth quarter. Consultation with the workforce is going really well. We had a risk workshops have been held, and we've got our workforce behind us. If everything goes to plan, we should be seeing us really live with TrainGuard at the start of the new financial year in Blackwater and about 18 months or less than that live in Goonyella. That's the plan. In relation to the, I think you're alluding to the, we're looking forward to the safety benefits of the technology.
There's, you know, our, it's shown to reduce potentially 95% plus of signals passed at danger events. That's really exciting. It's one of the reasons the employees are behind it. In relation to productivity benefits, I presume you're talking to the driver only. That's still the subject to consultation with our workforce. There's a little bit of water to flow before we take that step. As I said, our workforce is excited about the technology. They're with us. They're all trained, and they're looking forward to going live in, you know, at the end of the fourth quarter.
Great. Great. Thank you. That's all I have.
Your next question comes from Rob Koh with Morgan Stanley. Please go ahead.
Good morning. Can I maybe ask a question on the Network side, seeing as we haven't heard from Ms. B ains? Just on the true ups that come through, do they also benefit the true ups for like FY 2025? Do they benefit from the higher WACC as well?
Yes. It will be the WACC that's applicable at the point in. Oh, sorry. Are you talking about the revenue cap adjustments?
Yes.
Yes. They will have the WACC that's applicable at that point in time.
Okay. Oh, actually, that's not a benefit then if they're getting NPV, or is it a benefit? Sorry, I'm confused.
Sorry. The WACC is adjusted for time, the time it takes to recover, so it will be the higher WACC.
Okay. All right. That's clear. Thank you. Thank you very much. Maybe a question for Mr. McKeiver. The Coal volumes to China could be expected to recover, but your customers were very successful in diverting Coal to other markets. Do we expect the diverted volumes to redivert back to China? Or could we actually see some growth in Coal volumes, just maybe collection of feedback from your customers?
Yeah, certainly. Thanks for the question, Rob. Well, a couple of things. I think the re-reemergence of China as an export destination for Coal, Australian Coal is certainly going to keep the demand side pressure up. You know, when I think about our steps through into next year, we're really well positioned with the capacity. Our contract volume is flat at 230 million tons this year, 230 million tons next year. We've got a BD pipeline. I think the question really goes. The heart of the question goes to the sort of Coal flows, seaborne traded Coal flows, particularly thermal. You know, that's really a question for our customers and their long-term contracts.
I think initially China will emerge as a spot buyer, and probably late to the party for this year's contract negotiations. I think the demand side will stay strong for long and, you know, and the supply side constraints will relieve in 2024 as, you know, as the Office of the Chief Economist forecasts, you know, with the exports returning to the high tide mark of about 386 million tons for FY 2024.
Okay, thank you very much. Maybe one last question, given that there was also some questions about predictability of sustaining CapEx and how you can keep the efficiency rates going there. Do you, in your sustaining CapEx budgeting include amounts for like climate adaptation?
The, the answer is yes. There's actually a number of categories of spend in that area. George, do you wanna talk about some of this?
Yeah. The main one, Rob, is our AUD 50 million future fleet fund. This is investment that we're projecting over the next five to seven years, pre 2030, to look at other technology, be it battery electric locomotives, battery electric tenders, or hydrogen electric tenders. Those are all programs of work we're looking at actively, looking at building prototypes. The reason behind that and the timing is that a lot of our fleet renewal is in the 2030s. We wanna make sure that we're spending the money now to know which technology is best for each haul, because it does differ by commodity and by distance traveled. We are looking at that actively at the moment.
We also spend in the Network business, some or direct some funding towards the resilience of the Network, under, you know, adverse weather events. We've been doing that actually for some time. In addition to that, we spend some money associated with understanding future as much as you can, understanding future impacts of predicted climate change on the various rail corridors.
Okay, great. Thank you very much. Much appreciated.
Your next question comes from Nathan Lead, Morgans. Please go ahead.
Thanks for your presentation today, team. three quick ones from me. first up, just in terms of your debt capacity within your target credit ratings for the two different borrower groups, could you maybe sort of just talk through where you're seeing that post the East Coast Rail sale?
Sure.
Yeah, I can, Nathan. We will, in 2024, be at our metrics. At group level, we'll have a bit more headroom in Network than Operations, then we'll get more headroom through 2025. The reason I answer that question that way, so I'll link it back to an earlier question we got around our capital investment cycle and dividends, that's very deliberate, the plan and approach we've taken. We wanna maintain our BBB+ rating across Network and Operations. That will mean that we're likely to be at the lower end of our payout ratio for that period of time, so 2023, 2024.
Okay. Makes sense. another one, I suppose this one's for Ed, but I'm just seeing here in the data, lower locomotives now in the fleet and quite a step down in the amount of wagons. If you could just maybe just talk us through what's driving that and, you know, will there be a sustainable sort of cost increase coming from that?
I'm not yet sure, Nathan. Thank you. I mean, as we mentioned earlier, as George mentioned, the cascade of some of the locomotives to the Bulk business has been at the fringes of our business. What we're seeing is a capacity release of equipment as we focus on our transformation agenda. Where we were able to in the case of half of those locomotives, that's a consequence of the cessation of the contracts that we talked about in the presentation, the business in Southeast Queensland and the, I know you previously asked a question about Moolarben in the Hunter Valley in previous seasons. Where we've got that, where we've had those contracts roll over, where we've transformed and released capacity, that's where we cascade. We still carry the capacity to service our contract book.
How much is cascaded across to the Bulk on top of the AUD 410 you're going to be spending in investment?
Well, as George said, over the last eight months, there's been 15 locomotives. In the last 12 months, there's been about nine of them. That reduces to nine. In the last six months, we've done about four in this half, in the last half. It's as we adapt, again, as we release capacity, you know, as we can work together, as Clay said, we've recently doing a baton exchange for a grain train service into Port Kembla. Working together with the capacity to work.
Got it. The bits I'm trying to work out here is you've got the AUD 410 of investment going into Bulk. You've also put another 15 locos coming across. What's the all-up effective investment into Bulk now?
Those 15 locomotives, Nathan, were very low in terms of capital on the balance sheet. They were quite old locomotives, so they're almost a rounding error compared with the AUD 430 million and the investment in One Rail.
Okay. All right. Just a final one from me. I suppose if I'm just scanning through your account, note four, you actually say there's a AUD 75 million impairment on East Coast Rail. Does that mean that you guys actually valued it at AUD 400, sorry, AUD 510, sold at AUD 435?
George, you were expecting that question.
Yes. The way the accounting treatment works, Nathan, is we valued it on an EV basis of AUD 950. We sold it at less than that. The important thing to remember from an accounting perspective is because the business was held for sale, it actually didn't depreciate it or amortize it at all over the seven-month period we held it for. The key number I look at is the AUD 45 million net loss, which is that AUD 70 million-odd you mentioned, less the net profit after tax that we could benefit all over the seven-month period.
Yep. Okay. Thank you.
Your next question comes from Paul Butler with Credit Suisse. Please go ahead.
Hi, again. Thanks for taking a follow-up question. Just quickly on the growth opportunity that you flagged, I think 200 opportunities, AUD 1.5 billion of revenue potential. Can you give us some color on that? Are they all sort of new projects or is some of it where there's an existing service provider? How much of it relates to the capability that you've acquired with Bulk Central?
Majority are new. Some are brownfield operations that we would be targeting and the top kind of commodities are copper and nickel, iron ore, rare earths and mineral sands, phosphate and lithium. If you look at our Network footprint that we showed in the map, Paul, you'll see that we're ideally located to access those commodities. No, it's predominantly new and green growth, some brownfield and some market share.
What time periods could these be realized over? Are we talking a couple of years or longer term?
Our assessment in that number is out to 2028, but obviously if it's brownfield or market share, that opportunity exists today.
Great.
Okay.
Thanks very much.
There are no further questions at this time. I'll now hand back to Mr. Harding for closing remarks.
Thank you all for attending the conference call. I reiterate again, you see the impact of the strong and prolonged weather that we saw through the period. Also if you look at the guidance, taking into account a very major derailment as well, that has only just reached reinstatement over the weekend, on Saturday. All that said, though, you can see a very, very strong delivery against our strategic intent over the period. Thank you very much.