Freight Rail

Central Queensland fallout critical to resurgent Aurizon

Coal wagons Aurizon. Photo: Aurizon

Rail group Aurizon returned to profit in FY18, but the hotly-disputed terms dictating its operation of the Central Queensland Coal Network remain crucial to future success.

The rail operator and network owner achieved a $560.1 million net profit after tax in FY18. This followed a $37.2 million net loss in FY17, caused by a number of significant one-off impairments.

Revenue was down 1% in FY18 to $3.11 billion, but underlying earnings rose 6% to $940.6 million.

Aurizon Coal’s above-rail volumes increased 7% to 212.4 million tonnes in FY18, thanks to strong Asian demand and the industry’s rebound from the impact of Cyclone Debbie in FY17.

Aurizon’s Bulk business unit reported $32 million in benefits from the first year of its turnaround plan, and a $65 million improvement in underlying EBIT.

Chief executive Andrew Harding said Aurizon’s result came despite “major regulatory challenges,” referring to court action from the ACCC, and the ongoing stoush over Aurizon’s operation of the Central Queensland Coal Network.

Aurizon shifted to a less flexible maintenance regime on the CQCN in February, cutting into capacity.

Miners are furious, but Aurizon says it is being forced to make the cutbacks by a draft decision from the Queensland Competition Authority, which dictates the access undertaking terms which allow Aurizon to operate the CQCN as its monopoly owner.

Aurizon says the QCA’s terms are deeply flawed, and don’t allow Aurizon to make a commercial rate of return on the CQCN without making significant changes to procedures like maintenance.

The Queensland Resources Council, which represents coal miners, has demanded Aurizon wait until the QCA hands down its final decision later this year, before cutting capacity.

But Harding, who used to work for mining giant Rio Tinto, has insisted the QCA is unlikely to vary significantly from its draft decision and – when it is finally enforced – the undertaking will limit Aurizon’s revenue retroactively from the start of FY17, meaning the operator cannot afford to wait.

Harding said on August 13 the maintenance changes have already had a significant impact on volumes on the CQCN.

“We estimate tonnages would have been 7-8 million tonnes higher if Aurizon Network did not have to re-align its maintenance and operating practices (from February 2018) to the Queensland Competition Authority’s flawed UT5 Draft Decision,” Harding said.

The CQCN handled 229.6 million tonnes of coal in FY18, but this could have been closer to 240 million tonnes without the changes.

“Unfortunately for all Queensland coal supply chain stakeholders, this has been a foregone economic opportunity and one that could have been avoided,” Harding said.

“We remain absolutely committed to reach a fairer and commercially appropriate outcome and are continuing efforts through the full range of regulatory, commercial and legal avenues.”

Aurizon has declined to provide a solid outlook for its Network business for FY19 due to the ongoing drama in Central Queensland.

The company said the fallout from the CQCN drama could have as much as a $130 million impact on Aurizon Network’s EBIT.

Aurizon has taken legal action against the QCA, questioning the ability of now former chairman Roy Green to have maintained an “impartial mind” when he was preparing to hand down the draft decision.

Green has moved on from the QCA to now chair the Port of Newcastle, in a move announced less than a week after the QCA’s draft decision was released.

Central Queensland and the Hunter Valley are considered long-term competitors for investment by coal miners, many of whom own operations in both regions. It is therefore Aurizon’s position that by limiting the rail network in Central Queensland, the QCA decision would be good in the long term for the Port of Newcastle.

Aurizon’s case will hit the Supreme Court on October 22.