Wednesday 18th Jul, 2018

Aurizon angers miners with maintenance cutbacks

Coal wagons Aurizon. Photo: Aurizon
Photo: Aurizon

Miners are unhappy with Aurizon after it said maintenance cutbacks will cut 20 million tonnes of annual capacity on Central Queensland’s coal railways.

The rail operator this week announced a $281.5 million profit in the first half of FY18, up $95.7 million.

But chief executive Andrew Harding was more concerned with a recent determination by the Queensland Competition Authority.

The QCA sets the maximum amount of revenue Aurizon can earn through the operation of the Central Queensland Coal Network, to prevent the operator from taking unfair advantage of its monopoly status when it sells network access to coal exporters.

The latest draft access undertaking, handed down last December, capped the revenue Aurizon can earn from CQCN at $3.9 billion from the start of FY17, to the end of FY21.

That maximum allowable revenue figure – which will take effect retrospectively from July 1, 2017 – is $1 billion lower than the figure Aurizon believes it should be allowed to earn over the five-year stretch, translating to a difference of $200 million a year in revenue.

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Aurizon will make a detailed response to the QCA’s draft by March 12, and a final decision is expected later this year.

But Harding has announced the operator will be forced to pre-empt the QCA’s “extremely disappointing” access deal immediately, by cutting back on maintenance spending, a measure he says will severely impact network capacity.

“Our detailed review has confirmed that the draft decision contains fundamental errors and flawed logic,” Harding said in the company’s half-yearly report.

“Unfortunately, Aurizon cannot wait for the QCA final decision to implement changes given the significant commercial impacts which, under the QCA process, are retrospective to 1 July 2017.”

When the QCA released its draft decision last December, it suggested Aurizon spend less on maintenance than it has in the past.

Aurizon has argued the combined CQCN assets will be worth $1 billion more under the new access undertaking than they were under the previous deal, an increase of 20%. The operator also forecasts there will be a 15% increase in coal moved under the new deal.

“The draft decision reflects a clear approach by the QCA to drive maintenance to the lowest possible cost regardless of the impact on the supply chain and the consequential reduction in volumes,” Harding said.

In the past, Harding said, Aurizon has varied maintenance work times and scope to meet customers’ requirements, allowing trains to pass during the work schedule, thus maximising network capacity.

“Going forward, Aurizon will prioritise lowest-cost maintenance over flexibility (with no trains passing), a process advocated by the QCA and its consultants.

“Flexibility maximises the throughput of coal services for customers, however the QCA’s draft decision states this is an inefficient maintenance practice.”

Harding continued: “This is not a decision we have made lightly given the impacts to Aurizon’s own business and to the Central Queensland coal supply chain, including miners, ports and rail operators and the flow-on effects to regional economies and government royalties.

“However, Aurizon has little choice given the significant financial impact and the retrospectivity of the QCA process.”

Aurizon has already downgraded its above rail coal volume outlook in FY18 to 210-220 million tonnes, from prior guidance of 215-225 million tonnes.

Queensland Resources Council boss Ian Macfarlane slammed Aurizon’s decision, saying the mining sector was “extremely disappointed”.

“By its own estimates, for the sake of $25 million in its maintenance allowance, the decision by Aurizon to move away from a flexible maintenance system to an inflexible system, would cost Queensland 20 million tonnes of coal exports per year,” Macfarlane said.

“This latest announcement shows Aurizon is willing to use its power as the monopoly operator of the network and further highlights why the regulatory process needs to be followed to maintain a level playing field.”

Macfarlane asked Aurizon to take a step back, and to follow the regulatory process through before making any drastic decisions.

But speaking to the press after the half-year results presentation, Harding said he doubted the QCA would change its position in any meaningful way, between its draft decision and a final announcement.

“The draft decision; it’s not a thought bubble. It’s not some guys that get together in a pub, after work, and draw up a way of working on a beer coaster,” he said.

“If you look at the history of the difference between QCA draft decisions, and final decisions, irrespective of submissions made by anyone, the difference is minimal. It’s trivial.

“[The draft decision is] something that’s actually taken many, many months to deliberate on. They’ve spent millions of dollars – I’ve seen the invoices – developing their position. We took them, and we gave them tours of the operation, and explanations in great detail of what’s going on. And the customers make submissions in great detail, also.

“The end result of this vast and expensive deliberation is the draft decision. The draft decision is applied retrospectively. I’m already most of the way through the first year of this decision being impacted, and it costing us a great deal of money. So we have to act very quickly to position ourselves with the draft decision.”

One key figure disputed by Aurizon is the QCA’s calculation of Aurizon’s financial risk in operating the CQCN, defined via the weighted average cost of capital (WACC).

The final WACC figure under the previous undertaking was 7.17%. Aurizon proposed 6.78% for UT5, but the QCA has come back with a draft proposal of just 5.41%.

Aurizon pointed out the QCA’s proposed figure is below the Australian Competition and Consumer Commission’s recent recommendation of 6.3% for the Hunter Valley Coal Network, “an almost identical asset serving Australia’s coal industry, but which Hunter Valley customers have stated has lower risks than the CQCN”.

The proposed WACC is also below the 6.12% granted to government-owned SEQWater by QCA in December 2017, implying, in Aurizon’s words “that Aurizon has almost the lowest risk of any regulated asset in Australia”.

 

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“Aurizon finds it implausible that the QCA could regard the risk profile of the CQCN equivalent to or lower than the risk profiles applied by other regulators to monopoly utilities and gas pipelines where customer and asset stranding risks are significantly lower,” the rail operator argued.

“When compared to decisions of other national regulators the inconsistency becomes even more stark.”

Queensland’s competition authority wasn’t the only one targeted in Aurizon’s half-year presentation: the operator is facing issues with the ACCC’s approval to sell its Acacia Ridge Freight Terminal, south of Brisbane, to competitor Pacific National.

Aurizon announced last year it would shut its Interstate Intermodal business, and sell its Queensland Intermodal business to a pairing of Pacific National and Linfox.

But the Australian Competition and Consumer Commission has delayed its decision on the deal, asking both sides for more information.

Harding said jobs would be lost if the deal falls through.

“If we are not able to gain ACCC approval for the transaction Aurizon will close the Queensland Intermodal business, as we have done with the Interstate business, potentially impacting 350 jobs,” he said.

Aurizon’s 52% net profit growth in the first half was largely aided by the absence of one-off items, which cost it $156 million in the first half of FY17. With one-off items removed, the company’s underlying profit was down 5% year-on-year.

The company handed down a dividend of 14 cents per share, up from 13.6 cents a share a year ago.

It maintained its previous FY18 guidance for EBIT in the range of $900 to $960 million.