Aurizon Holdings Ltd. · ASX:AZJ
Aurizon — Investor Presentation (April 2013)
69 slides from Aurizon's investor presentation, Apr 29, 2013
Slide 1: ASX Market Announcement cover letter
Dominic D Smith Senior Vice President & Company Secretary Aurizon Holdings Limited ABN 14 146 335 622 T +61 7 3019 1976 F +61 7 3019 2188 E CompanySecretary@aurizon.com.au W aurizon.com.au Level 17, 175 Eagle Street Brisbane QLD 4000 GPO Box 456 Brisbane QLD 4001 29 April 2013 ASX Market Announcemen
Slide 2: Analyst Briefing – Aurizon Network's UT4 Submission
Analyst Briefing – Aurizon Network‘s UT4 Submission Mike Carter, Chief Executive Officer – Aurizon Network 29 April 2013 Note: All information in this presentation is based on information available as at Friday 26 April 2013
Slide 3: Important notice
Important notice No Reliance on this document This document was prepared by Aurizon Holdings Limited (ACN 146 335 622) (referred to as ―Aurizon‖ which includes its related bodies corporate). Whilst Aurizon has endeavoured to ensure the accuracy of the information contained in this document at the da
Slide 4: Overview
Overview & 2 AURIZON
Slide 5: Aurizon's Network business
OVERVIEW Aurizon‘s Network business Aurizon Network (Network) controls, manages, operates and maintains the fixed rail infrastructure ―below rail‖ assets on the Central Queensland Coal Network (CQCN) – refer following slide Network also delivers rail infrastructure to the major mines in the Cent
Slide 6: Below rail infrastructure
OVERVIEW Below rail infrastructure Track Traction power Signal Signalling/ Overhead/ Telecoms Power Signal phone Ballast Rail Ballast Structures Sleeper Super-structure Facilities Sub-structure 5
Slide 7: Central Queensland Coal Network (CQCN)
OVERVIEW Central Queensland Coal Network (CQCN) The CQCN comprises four major coal systems serving Queensland‘s Bowen Basin coal region: Newlands, Goonyella, Blackwater and Moura Network has held 99 year leases of the CQCN assets since July 2010. The term of the leases may be extended for rollin
Slide 8: Current regulatory framework for CQCN (UT3)
OVERVIEW Current regulatory framework for CQCN (UT3) The CQCN operates under a stable and well Over recent years, Network has taken a more established regulatory regime. proactive and innovative approach to regulatory matters that focuses on protecting value, The present Network Access Underta
Slide 9: Regulatory approach and methodology to Access Undertaking
OVERVIEW Regulatory approach and methodology to Access Undertaking The QCA takes a three step approach for determining the reference tariffs charged by Network to CQCN users Step 1 Step 2 Step 3 The Regulated Assets Base Standard ‗building block‘ Reference tariffs determined, (RAB) is approved by th
Slide 10: UT4 development
UT4 development 9 9
Slide 11: Aurizon's over-riding UT4 objectives
UT4 DEVELOPMENT Aurizon‘s over-riding UT4 objectives In developing the 2013 Access Undertaking, Aurizon Network has sought Deliver a rail to: Maintain a highly network capable of reliable world fully and efficiently – better promote the long-term class rail network meeting our with safety as the cus
Slide 12: Contents of ~3,000 pages UT4 submission
UT4 DEVELOPMENT Contents of ~3,000 pages UT4 submission CONTENTS OF THE 2013 UNDERTAKING Submissions Volume 1 Overview and Summary Volume 2 The 2013 Undertaking Regulatory Framework Volume 3 Maximum Allowable Revenue & Tariffs Volume 4 Maintenance The 2013 Undertaking Volume 1 The Access Undertaking
Slide 13: Key objectives of Aurizon's UT4 submission
UT4 DEVELOPMENT Key objectives of Aurizon‘s UT4 submission Aurizon Network remains committed to the long term expansion and growth of the CQCN Aurizon needs a realistic rate of return to continue to justify forward investment The undertaking aims to be adaptive to market cycles, while maintain
Slide 14: The UT4 consultation & negotiation framework
UT4 DEVELOPMENT The UT4 consultation & negotiation framework Mar 13 Apr 13 Sep 13 Dec 13 Apr 14 Jun 14 UT4 QCA & Customer QCA Extended QCA 1 Stakeholder 2 Consultation Consideration 3 consultation 4 5 Development Briefing Consideration (commences June) period 4 April 2013 30 April 2013 QCA draft Aur
Slide 15: Post lodgement consultation process
UT4 DEVELOPMENT Post lodgement consultation process Network-led QCA-led Technical 1 2 3 facilitation facilitation analysis Proposed topics: Proposed topics: QCA-led consultation on Capacity planning Reference tariffs WACC-related topics and allocation Ring-fencing with panel of expert Asset
Slide 16: Volume 2: Changes to the Regulatory Framework
Volume 2: Changes to the Regulatory Framework 15 15
Slide 17: A refined Access Undertaking
VOLUME 2: REGULATORY FRAMEWORK A refined Access Undertaking Aurizon Network considers the UT4 proposal to be more workable, flexible, and responsive to customer needs Changes in the market cycle – high commodity prices and strong demand vs. price moderation and cost competitiveness/productivity co
Slide 18: Volumes 3 & 4: Revenue, Tariffs and Maintenance
Volumes 3 & 4: Revenue, Tariffs and Maintenance 17
Slide 19: Maximum Allowable Revenue
VOLUME 3: MAR & REFERENCE TARIFFS Maximum Allowable Revenue MAXIMUM ALLOWABLE REVENUE Building Blocks The return that Aurizon MAR is converted into Reference earns on its regulated 1. RETURN ON CAPITAL Tariffs through the application of a assets is known as the (Weighted Average Cost of Capital
Slide 20: Proposed Reference Tariffs context
VOLUME 3: MAR & REFERENCE TARIFFS Proposed Reference Tariffs context The approved MAR is translated into Average cost s of Queensland coal m ine operat ions Reference Tariffs based on approved volume forecasts The significant growth in coal demand that emerged in the UT2 period (2005-2009) Minin
Slide 21: Proposed mix of MAR sources under UT4
VOLUME 3: MAR & REFERENCE TARIFFS Proposed mix of MAR sources under UT4 BUILDING BLOCKS OF THE MAXIMUM ALLOWABLE REVENUE (MAR) The proposed UT4 WACC is 8.18% (9.96% UT3 WACC) 1. WACC Risk free rate is proposed at the 10-year bond rate (3.15%) vs. 5-year bond rate in UT3 (Return on Capital) 41% (
Slide 22: 1. Return on Capital - WACC
VOLUME 3: MAR & REFERENCE TARIFFS 1. Return on Capital - WACC Background to the regulated rate of return UT3 UT4 FINANCIAL OUTCOMES The WACC is used by the QCA to determine the regulated rate of APPROVED SUBMISSION return. It is the largest building block component within Network‘s Maximum Allowab
Slide 23: WACC – UT3 9.96% vs. proposed UT4 8.18%
VOLUME 3: MAR & REFERENCE TARIFFS WACC – UT3 9.96% vs. proposed UT4 8.18% E.g. Government bond yields Changes driven by remain at historic lows GFC 1.53% 1.78% 0.25% FINANCIAL OUTCOME WACC REVENUE FY14 FY15 FY16 FY17 ESTIMATES $M Opening RAB(1) + Capex(2),(3) 9.96% 5,173 6,328 6,411 6,381 8.68% 8.43
Slide 24: 1. Return on Capital - Capex
VOLUME 3: MAR & REFERENCE TARIFFS 1. Return on Capital - Capex CAPITAL EXPENDITURE METHODOLOGY FINANCIAL OUTCOMES MAJOR CAPEX(1) UT4 COMPONENTS $M Key expansion projects included are WIRP ($910 WIRP1 910 million) the Goonyella Rail Expansion Project supporting HPX3 ($133 million) and Rolleston Ass
Slide 25: 2. Return of Capital (Depreciation)
VOLUME 3: MAR & REFERENCE TARIFFS 2. Return of Capital (Depreciation) FINANCIAL OUTCOMES DEPRECIATION METHODOLOGY DEPRECIATION ESTIMATES FY14 FY15 FY16 FY17 $M Depreciation is a key component of the revenue allowance, providing a return of the capital Network has invested in regulated assets. Weig
Slide 26: 3. Maintenance
VOLUME 4: MAINTENANCE 3. Maintenance MAINTENANCE METHODOLOGY FINANCIAL OUTCOMES FY14 FY15 FY16 FY17 MAINTENANCE ESTIMATES $M Network has developed a maintenance program for UT4 focussed on world class measures of reliability and efficiency Mechanised Maintenance 87 97 100 102 Improved planning i
Slide 27: 4. Operating expenditure
VOLUME 3: MAR & REFERENCE TARIFFS 4. Operating expenditure OPERATIONAL EXPENDITURE UT4 FINANCIAL OUTCOME METHODOLOGY OPERATING EXPENDITURE FY14 FY15 FY16 FY17 REVENUE ESTIMATES $M Key drivers Volumes on the CQCN have continued to grow, as has Train Control, Safe working & the complexity of the ope
Slide 28: 5. Tax
VOLUME 3: MAR & REFERENCE TARIFFS 5. Tax TAX METHODOLOGY FINANCIAL OUTCOMES FY14 FY15 FY16 FY17 An allowance is given for Aurizon Network‘s tax costs TAX ($M) within the building blocks UT4 Submission G = 25% 56 58 69 75 A value is attributed to franking credits (―gamma‖). The impact of gamma is
Slide 29: Financial outcome summary
VOLUME 3: MAR & REFERENCE TARIFFS VOLUME 4: MAINTENANCE Financial outcome summary Total % of BUILDING BLOCKS ($M) FY14 FY15 FY16 FY17 UT4 MAR Return on Capital 423 517 524 522 1,986 41% Depreciation (return of capital) 270 291 346 349 1,256 13% Less Inflation1 -129 -158 -160 -160 -607 Maintenance Co
Slide 30: Volume estimates for UT4 pricing
VOLUME 3: MAR & REFERENCE TARIFFS VOLUME 4: MAINTENANCE Volume estimates for UT4 pricing UT4 volume forecast (million tonnes) Forecast vs. Contracted Volumes for the UT4 period VOLUMES FORECAST FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Blackwater 51.3 51.6 48.5 49.0 Forecast volumes (mtpa) 199.6 222.2
Slide 31: Annual Allowable Revenue expressed as $cost/net tonne
VOLUME 3: MAR & REFERENCE TARIFFS VOLUME 4: MAINTENANCE Annual Allowable Revenue expressed as $cost/net tonne SYSTEM UT4 PRICING EXPECTATIONS AT1 – AT4 ($/NT) Some customers are expecting a drop in tariffs, assuming this will be generated by the large drop in WACC from UT3 to UT4 FY14 FY15 FY16 FY
Slide 32: Transitional tariffs
Commercial VOLUME 3: MAR In Confidence & REFERENCE TARIFFS Transitional tariffs Transitional Tariff DAAU Lodged 5 April 2013 Implications For systems other than GAPE, tariffs will be adjusted for Reference Tariffs for 2014 are fixed for negotiated outcome with industry depending on tonnage the e
Slide 33: Other UT3 issues in progress
OTHER MATTERS Other UT3 issues in progress UT4 includes the drafting of these separate projects, but is mindful that the processes will continue parallel to UT4 Implications Draft Incentive Mechanism Expansion Process Content developed in different projects such as the UT3 Projects, GAPE and AT5 i
Slide 34: Engagement process on the access undertaking
OTHER MATTERS Engagement process on the access undertaking Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 High level customer Public discussion on Network tariffs (10-Apr) briefing sessions 1 Industry workshops UT4 2 QCA workshops 3 WACC review Electric traction pricing (AT5) GAPE tariffs UT3 Aurizon Net
Slide 35: Questions
Questions 34 34
Slide 36: Analyst Briefing – Aurizon Network's UT4 Submission
Analyst Briefing – Aurizon Network‘s UT4 Submission Mike Carter, Chief Executive Officer – Aurizon Network 29 April 2013 Note: All information in this presentation is based on information available as at Friday 26 April 2013
Slide 37: UT4 additional information
UT4 additional information 36
Slide 38: Summary of items that are unchanged under UT4
VOLUME 2 – THE REGULATORY FRAMEWORK Summary of items that are unchanged under UT4 Regulatory Issue UT4 Position Rationale Form of regulation • Form of regulation remains revenue cap • Optimal balance between risk and reward in current environment • Tariff structure unchanged • Simpler structure coul
Slide 39: Summary of key changes in the 2013 Undertaking
VOLUME 2 – THE REGULATORY FRAMEWORK Summary of key changes in the 2013 Undertaking Issue Description Rationale Ringfencing Stronger and clearer obligations in relation to functional, Results in a more robust yet workable regime, which management and employee separation. will give third parties g
Slide 40: Summary of key changes in the 2013 Undertaking (continued)
VOLUME 2 – THE REGULATORY FRAMEWORK Summary of key changes in the 2013 Undertaking (continued) Issue Description Rationale Capacity planning Replacement of the CRIMP with the Network Development Enhances visibility across the supply chain and greater Plan and extension process. involvement in pl
Slide 41: Current pricing framework (UT3)
Current pricing framework (UT3) 40
Slide 42: CQCN Regulatory history
CURRENT FRAMEWORK CQCN Regulatory history CQCN regulatory timeline Rail access regime commenced in 1997 Queensland narrow gauge rail network declared by 1997 • QCA enacted ministerial discretion (under QCA Act) with reference to asset description but excludes above • Rail network declared an ass
Slide 43: Objectives of Access Undertakings
CURRENT FRAMEWORK Objectives of Access Undertakings Purpose of an Undertaking Contents of an undertaking An Access Undertaking is a legally enforceable Negotiating framework (information, timing and instrument which governs how access is to be processes) provided. Pricing (tariffs, limits and
Slide 44: CQCN access regulation overview
CURRENT FRAMEWORK CQCN access regulation overview Access to the CQCN is regulated by a Queensland-based Third Party Access regime established under the Queensland Competition Authority Act 1997 (Qld) (QCA Act) (Queensland Access Regime) and administered by the QCA Third party access supports com
Slide 45: Network regulation stakeholders
CURRENT FRAMEWORK Network regulation stakeholders Key Issues QCA Network will propose some issues for Investors & direct consultation with stakeholders: Analysts, Media & Coal Investment framework Customers Ratings Agencies Access conditions Aurizon Maintenance costs regimes Network Capacity
Slide 46: Functions of the QCA
CURRENT FRAMEWORK Functions of the QCA The QCA has recently appointed a new Members Chairman, Dr Malcolm Roberts, Malcolm Roberts – Chairman effective from 29 January 2013 David Watson – Deputy Chairman Justin Malbon – Member Dr Roberts was formerly Chief Sally Pitkin - Member Executive of Energ
Slide 47: Investment framework under UT3
CURRENT FRAMEWORK Investment framework under UT3 The QCA approved an ‗Investment Framework‘ that governs the process for developing UT3 expansions to the CQCN. Aurizon Network is obliged to fund rail expansions (in addition to renewal capex) up to a value of $300 million Under UT3, Aurizon Netwo
Slide 48: Price regulation - above regulated returns
CURRENT FRAMEWORK Price regulation - above regulated returns Network can earn a return on capital that exceeds the Regulated WACC for providing access to the CQCN All expansions negotiated under regulator approved terms and The main source of such returns is major network expansions that are negot
Slide 49: The Regulated Asset Base (RAB)
CURRENT FRAMEWORK The Regulated Asset Base (RAB) The RAB is approved by the QCA on a Depreciated Optimal Replacement Cost basis DORC The QCA applies the Depreciated Optimised Replacement Cost (―DORC‖) methodology to the valuation of existing assets The DORC methodology determines the RAB through
Slide 50: Historical change in RAB valuation
Historical change in RAB valuation The approved RAB is rolled forward annually with adjustments for CPI escalation, depreciation based on asset life, new capital expenditure and asset disposals 0.4 0.7 4.9 1.9 0.4 0.5 3.3 0.1 0.9 0.2 0.3 2.4 0.2 4.9 2.0 0.3 3.3 2.4 2.0 UT1 opening Capex Rolleston CP
Slide 51: WACC calculation inputs
CURRENT FRAMEWORK WACC calculation inputs The QCA uses the post tax nominal ‗vanilla‘ approach. This means tax is dealt with in the cash flows, not the WACC WACC. The value of gamma therefore impacts the tax Weighted Average Cost of Capital allowance in the MAR. It only has a very minor impact on th
Slide 52: Cost to users – Reference tariffs
CURRENT FRAMEWORK Cost to users – ―Reference tariffs‖ REFERENCE TARIFFS AT1 Incremental maintenance ($/gtk) Under UT3, reference tariffs are determined to recover costs on an individual coal system basis AT2 Incremental capacity ($/train path) Reference tariffs are calculated for each system by
Slide 53: Revenue Protection under UT3
CURRENT FRAMEWORK Revenue Protection under UT3 Calculated first and allows Network to recover revenue shortfalls directly from the access holder TAKE OR PAY (CONTRACTUAL) These agreements result in a charge levied on Aurizon or Pacific National by Aurizon Network, if either customer does not rai
Slide 54: Other key features of Access Undertaking
CURRENT FRAMEWORK Other key features of Access Undertaking The Reference Tariffs approved by the QCA incorporate an allowance for an efficient OPERATING AND level of operating and maintenance expenditure. Accordingly, operating and MAINTENANCE COST RISK maintenance costs exceeding the amount allow
Slide 55: Other matters currently before the QCA
Other matters currently before the QCA 54
Slide 56: Standard User Funding Agreements (SUFA)
OTHER MATTERS Standard User Funding Agreements (SUFA) Background Features of model Under UT3, the QCA required: Tax efficient as user funders receive their access revenue – Aurizon Network to fund each expansion with a capital cost below entitlement and tax depreciation benefits $300m at regulat
Slide 57: SUFA Framework
OTHER MATTERS SUFA Framework The SUFA framework is based on an innovative unit trust model under which the trust (the ―Trust‖) develops the SUFA assets (―Extension Infrastructure‖), which are to be incorporated into the relevant railway system and become owned by the State. The State leases these as
Slide 58: Electrification
OTHER MATTERS Electrification Over several decades, Aurizon Network has made substantial investment in electric traction infrastructure assets. The investment has been consistently endorsed by both customers and the QCA Aurizon Network has undertaken a thorough review of the issue, both in the c
Slide 59: Other
OTHER MATTERS Other Matter Status SRCA Final approval 24 April 2013 Standard Rail Connection Agreement SUFA Lodged 20 Dec 2012 Standard User Funding Agreement Consultation post lodgment is ongoing Consultation commenced March 2013 Extension process UT4 concepts to be included in consultation from Ap
Slide 60: Addendum
Addendum 59
Slide 61: Glossary
Glossary National Competition An independent Commonwealth body established to administer the national competition policy objectives. Its main role was to assess Government performance in implementing the Council Competition Principles Agreement (CPA) and making recommendations regarding competition
Slide 62: Glossary
Glossary Queensland Rail Access Comprises the Queensland Competition Authority Act, the declarations made under that Act Regime (QRAR) and the Aurizon and Aurizon Network Access Undertakings. The QRAR was certified as an effective regime for a period 10 years in January 2011. The certification may b
Slide 63: Glossary
Glossary Judicial Review The only form of legal remedy for regulatory decisions under the QRAR. Under the QRAR a decision made by the regulator which is in error is not appealable unless the regulator has not exercised procedural fairness in making that decision. Procedural fairness follows principl
Slide 64: CQCN—Newlands System
CQCN—Newlands System The Newlands coal system is located in the Northern end of Key statistics(1) the Bowen Basin and connects to the Abbot Point Coal Terminal. FY13 Contracted Tonnages (including 31.4mt GAPE) In December 2011, a link from the Goonyella System, known Coal Mines Serviced (2013)2
Slide 65: CQCN—Goonyella System
CQCN—Goonyella System The Goonyella coal system is located in the central Key statistics(1) Bowen Basin and is the largest coal system in Queensland by tonnage hauled. FY13 Contracted Tonnages 131.1mt It links to the Port of Hay Point, which is one of the Coal Mines Serviced (2013)2 25 world‘s l
Slide 66: CQCN—Blackwater System
CQCN—Blackwater System The Blackwater coal system carries the second highest Key statistics(1) tonnages in Queensland (after the Goonyella system), and transports export coal to the RG Tanna and Barney Point coal terminals in Gladstone. FY13 Contracted Tonnages 71.4mt Domestic coal is transporte
Slide 67: CQCN—Moura System
CQCN—Moura System The Moura coal system is coupled with the Blackwater Key statistics(1) system to service the industrial and rural communities of the Dawson and Callide valleys in central Queensland. FY13 Contracted Tonnages 16mt Coal is transported from mines to domestic customers Coal Mines S
Slide 68: Historical WACC determinations
Historical WACC determinations UT1 UT2 UT3 Date Jul 01-Jun 05 Jul 05-Jun 09 Jul 09-Jun 13 Risk free rate 5.97% 5.21% 5.19% Mkt risk premium 6.00% 6.00% 6.00% Equity beta 0.76 0.90 0.80 Cost of equity (post-tax) 10.53% 10.61% 9.99% Debt margin 1.20% 1.43% 4.75% Cost of debt (pre-tax) 7.17% 6.64% 9.94
Slide 69: Analyst Briefing – Aurizon Network's UT4 Submission
Analyst Briefing – Aurizon Network‘s UT4 Submission Mike Carter, Chief Executive Officer – Aurizon Network 29 April 2013 Note: All information in this presentation is based on information available as at Friday 26 April 2013
Aurizon Holdings — Investor Presentation (April 2013) on 6ix