UT4 Final DecisionInvestor BriefingJune 2016

Alex Kummant – EVP Network

Pam Bains – Aurizon Network CFO

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Important notice

No Reliance on this document

This document was prepared by Aurizon Network Pty Ltd (ABN 78 132 181 116)

(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 date of publication, it may contain information that has not

been independently verified. Aurizon makes no representation or warranty as to

the accuracy, completeness or reliability of any of the information contained in this

document.

Document is a summary only

This document contains information in a summary form only and does not purport

to be complete and is qualified in its entirety by, and should be read in conjunction

with, all of the information which Aurizon files with the Australian Securities

Exchange. Any information or opinions expressed in this document are subject to

change without notice. Aurizon is not under any obligation to update or keep

current the information contained within this document. Information contained in

this document may have changed since its date of publication.

No investment advice

This document is not intended to be, and should not be considered to be,

investment advice by Aurizon nor a recommendation to invest in Aurizon. The

information provided in this document has been prepared for general informational

purposes only without taking into account the recipient’s investment objectives,

financial circumstances, taxation position or particular needs. Each recipient to

whom this document is made available must make its own independent

assessment of Aurizon after making such investigations and taking such advice as

it deems necessary. If the recipient is in any doubts about any of the information

contained in this document, the recipient should obtain independent professional

advice.

No offer of securities

Nothing in this presentation should be construed as a recommendation of or an

offer to sell or a solicitation of an offer to buy or sell securities in Aurizon in any

jurisdiction (including in the United States). This document is not a prospectus and

it has not been reviewed or authorised by any regulatory authority in any

jurisdiction. This document does not constitute an advertisement, invitation or

document which contains an invitation to the public in any jurisdiction to enter into

or offer to enter into an agreement to acquire, dispose of, subscribe for or

underwrite securities in Aurizon.

Forward-looking statements

This document may include forward-looking statements which are not historical

facts. Forward-looking statements are based on the current beliefs, assumptions,

expectations, estimates and projections of Aurizon. These statements are not

guarantees or predictions of future performance, and involve both known and

unknown risks, uncertainties and other factors, many of which are beyond

Aurizon’s control. As a result, actual results or developments may differ materially

from those expressed in the forward-looking statements contained in this

document. Aurizon is not under any obligation to update these forward-looking

statements to reflect events or circumstances that arise after publication. Past

performance is not an indication of future performance.

No liability

To the maximum extent permitted by law in each relevant jurisdiction, Aurizon and

its directors, officers, employees, agents, contractors, advisers and any other

person associated with the preparation of this document, each expressly disclaims

any liability, including without limitation any liability arising from fault or negligence,

for any errors or misstatements in, or omissions from, this document or any direct,

indirect or consequential loss howsoever arising from the use or reliance upon the

whole or any part of this document or otherwise arising in connection with it

Overview

Alex Kummant – EVP Network

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UT4 finalisation

Process

› In light of the current economic climate and in order to provide

certainty for the industry and our shareholders, Aurizon will move

forward with the QCA’s UT4 final decision, notwithstanding our

ultimate intent to pursue the fundamental differences we have

with the decision

› Aurizon is currently engaging directly with the QCA on its Final

Decision to clarify the drafting and underlying revenue positions,

with the aim of delivering a complying Access undertaking by 30

June 2016

› Following consultation with customers, Aurizon is in the process

of negotiating an updated Draft Amending Access Undertaking

(DAAU) in the event that UT4 is not approved by 30 June 2016.

The purpose of the DAAU is to ensure Aurizon has coverage

until 30 September 2016 and will be replaced when UT4 is

approved

› Revenue positions being discussed are in line with the UT4 final

decision

Other matters beyond finalisation

› Post UT4 approval, a range of individual matters needs to be

implemented and managed under UT4. These matters include:

› Standard User Funding Agreement – To be submitted to the

QCA for approval within three months of UT4 (QCA are

proposing to have a further decision document out in mid-

June 2016)

› Condition Based Assessment – No later than six months prior

to the end of the Undertaking

› Aurizon is developing a complete implementation plan that will

outline all requirements under the Access Undertaking

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Final Decision – summary of key outcomes

Maximum Allowable Revenue

(MAR)

› Overall maximum revenue of $3.925 billion over the period of the Undertaking (refer slide 10)

› Weighted Average Cost of Capital (WACC) - 7.17%

True-up recovery process › The Final UT4 Decision highlights a net under recovery of Regulatory Revenue to date (representing

the difference between transitional revenues and the final Allowable revenue)

› Aurizon Network (Aurizon) is working with the QCA to validate the quantum of the under recovery and

the mechanism to recover this revenue on an NPV neutral basis

› For the purposes of this presentation, Aurizon assumes a quantum of $73m net of Revenue Cap

relating to FY2015 revenue to be recovered in FY2017

Wiggins Island Rail Project

(WIRP)

› The QCA has continued to apply a revenue deferral for WIRP customers who are not expected to rail

during the FY2014 - FY2017 regulatory period

› The QCA has recognised the ability for Aurizon to seek QCA approval to reduce the scope of the

revenue deferral as WIRP volumes increase

› The deferral amount is Net Present Value (NPV) neutral

› WIRP revenues remain socialised within the two existing System Allowable Revenues – the

Blackwater and Moura systems

Asset Stranding › The QCA believes each situation should be considered on a case by case basis

› The QCA believes Aurizon is best placed to mitigate stranding risk

› As in UT3, QCA can optimise however under UT4 they must first consider any alternate proposal and

consult with Aurizon

› Optimisation is a last resort and socialisation is an alternative

› Optimisation reversed where conditions improve

› Security under standard access agreement increased to six months (from three months under UT3)

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UT4 operational & contracting processesIssue UT3 UT4

WIRP Pricing and

Deferrals

N/A › WIRP capex partially deferred for pricing purposes. As

railings increase, Aurizon can seek QCA approval to

recover deferred capex escalated at WACC

› Socialisation of WIRP pricing across existing users

Asset Stranding › QCA can optimise where falling demand

would trigger “demand spiral” at regulated

prices

› QCA can still optimise, but:

› The QCA believes each situation should be considered

on a case by case basis and that Aurizon is best placed

to mitigate stranding risk

› QCA must first consider any alternate proposal from

Aurizon and consult

› Optimisation a last resort and socialisation an

alternative

› Optimisation reversed where conditions improve

› QCA can optimise where expert

determines there has been a material

failure to maintain asset

› QCA can still optimise, but:

› The QCA believes each situation should be considered

on a case by case basis and that Aurizon is best placed

to mitigate stranding risk

› QCA must consult with Aurizon

› QCA cannot optimise where Aurizon has a plan to

remediate the asset

› Optimisation reversed where condition improves

› Security under standard access

agreement: three months take or pay

› Security under standard access agreement increased to

six months take or pay slightly reducing Aurizon’s financial

exposure

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UT4 operational & contracting processesIssue UT3 UT4

Expansion Process › Aurizon commitment to fund expansions

under $300m

› No mandatory funding commitment:

› Aurizon can fund at regulated return; or

› Aurizon can fund at above regulated returns with QCA

approval; or

› Users can fund at regulated returns

› Broad investment framework principles › Detailed expansion process and expansion pricing

framework:

› New processes are untested and could create

unforeseen delays and uncertainty for all participants in

the expansion

› Greater obligation on expanding users to take volume

risk (stronger take or pay requirements)

Pricing/Tariffs › QCA must approve contracts where

Aurizon seeks above regulatory returns in

exchange for investment

› Approval of above regulatory return contracts maintained

› Expanded to include any non-standard access

agreements (not just investment related)

› i.e. every non-standard access agreement must be

approved by the QCA, leading to longer timeframes

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Other policy mattersIssue UT3 UT4

Ring fencing › Rigorous regime to prevent discrimination

in favour of related operator and protect

third party access data

› Revised regime with similar effect, but more detailed

reporting and compliance obligations

› Regime allows the use of the Aurizon Group functional

structure through the provision of shared services

› Restrictions that QCA sought to impose on Aurizon

ownership of ports and mines have been removed

Train control and

scheduling

› Broad process to plan and allocate train

paths

› Increased prescription with more information to be

provided, creating additional work with no measurable

benefits

› New obligations to publish previously confidential access

holder data

Network capacity and

capacity allocation

› Six monthly capacity review › Detailed baseline capacity review to be published,

reviewed by independent expert and QCA, to confirm

Aurizon’s ability to deliver contracted capacity

› Obligation to establish and maintain an

access queue

› Aurizon now has less flexibility to re-order the access

queue in favour of longer-term access agreements –

leading to parties signing shorter access agreements and

in turn increasing the risk to Aurizon

UT4 Revenue outcomes

Pam Bains – VP Network Finance

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QCA Final UT4 Decision: MAR

Maximum Allowable Revenue (MAR)

$mFY2014 FY2015 FY2016 FY2017

Total

UT4

Return on capital (WACC)1 346 347 415 420 1,567

Return of capital (Depreciation) 280 290 353 364 1,288

Inflation (154) (73) (144) (145) (515)

Maintenance expenditure 194 208 196 207 805

Operating expenditure 188 192 212 213 806

Tax and Value of imputation credits 25 40 38 41 144

Total (unsmoothed) MAR 879 1,004 1,070 1,100 4,055

UT3 Capex carryover account adjustments (30) (32) (33) (34) (129)

(Adjusted) Total MAR 849 972 1,037 1,066 3,925

1. Includes $12m of working capital allowance

› This is a raw MAR, as published by

the QCA and excludes Revenue

Cap, true-up of prior year revenue

and flood recovery

› Further explanation of the MAR

Building Blocks and adjustments is

provided on slides 27 - 30

› The UT3 capital expenditure

carryover adjustments relate to

revenue differences derived from

approved UT3 capital expenditure

against the UT3 capital indicator

(forecast capital spend). Any

differences are adjusted in the

subsequent regulatory period i.e.

UT4

Source: Table 8, Aurizon Network 2014 Access Undertaking — Volume IV—Maximum Allowable Revenue April 2016

Note:

› Table 8 of Aurizon Network 2014 Access Undertaking — Volume IV—Maximum Allowable Revenue April 2016 effectively overstates

Aurizon’s raw MAR in FY2016 and FY2017 by a total of ~$12m. The QCA deferred revenue relating to WIRP Moura (Cockatoo) by

adjusting System Allowable Revenue but this was not reflected in the published MAR within Table 8

› Tables throughout the presentation may not add due to rounding

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QCA Final UT4 Decision: Volumes

System Volumes FY2014a FY2015a FY2016f FY2017f Total UT4

Blackwater1 65.0 63.7 66.2 67.8 262.7

Goonyella 112.5 119.6 112.1 115.6 459.8

Moura1 12.4 12.3 13.0 12.0 49.7

Newlands 12.0 14.7 10.9 9.0 46.6

GAPE 12.5 15.3 15.3 17.0 60.1

CQCN Total 214.5 225.7 217.4 221.5 879.1

Source: Table 17, Aurizon Network 2014 Access Undertaking — Volume IV - Maximum Allowable Revenue April 2016

WIRP1 0.0 0.9 10.3 14.3 25.5

1. WIRP Volumes are included in the Blackwater and Moura system volumes as applicable

› FY2014 and FY2015 represent actual

volumes railed

› FY2016 and FY2017 volumes are QCA

regulatory forecast volumes not Aurizon

forecast volumes

› Aurizon expects to exceed the FY2016

forecast railings in some systems, which

will result in a net over-recovery. This will

be refunded as part of the revenue cap

process in FY2018

› Volumes represent railings by all Access

Holders

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$m FY2014 FY2015 FY2016 FY2017

QC

A

Fin

al D

ec

isio

n1 Allowable Revenue before adjustments2 777 896 943 988

QCA Revenue Cap in the Final Decision 23 58 14 (26)

FY2014 & FY2015 SAR difference - 23 66 69

Allowable Revenue after adjustments 800 956 1,022 1,030

Total QCA True-up (FY2016 $66m and FY2017 $69m) 135

Pe

r

Au

rizo

n Electric Traction Charge (EC) adjustment via Revenue Cap (14)

FY2015 Revenue items

(subject to QCA Consultation)(0 - 16)

Subtotal 105 - 121

QCA Revenue Cap in the Final Decision (26)

Pe

r

Au

rizo

n FY2015 Revenue Cap difference (6)

Aurizon Network estimate 73 - 89

UT4 Final Decision: Revenue true-up

› The true-up represents the difference

between the Final Decision System

Allowable Revenue (SAR) and the

Transitional SAR for the relevant year

› Aurizon has assumed for this analysis that

the true-up relating to FY2014 and

FY2015 will be applied to tariffs in

FY2017

› The actual timing and quantum of the

true-up has not been confirmed with the

regulator

1. Source: QCA UT4 Final Decision Volume 3 Appendix B – Reference Tariffs & Allowable Revenues

2. Excludes AT1 but includes WIRP smoothing

3. FY2015 difference of $2m is already embedded in FY2016 & FY2017 SARs

For the purposes of this presentation the

amount of $73m has been used to

approximate the true-up adjustment –

Aurizon has made a number of

assumptions and adjustments (totaling a

maximum of -$36m) to calculate this

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Reconciliation of MAR to reported Access Revenue

MAR to reported Access RevenueFY2014

Actual

FY2015

Actual

FY20161

Estimate

FY20171

Estimate

Access Revenue (AT1 to AT5) (ex. GAPE) 794 787 907 918

Approved Adjustments to MAR

Transitional tariff adjustment (70) - - -

Flood Claim recovery from 2013 Event - 12 6 -

WIRP Smoothing3 - - (15) 5

Revenue Cap2 (ex. GAPE and inclusive of capitalised interest) 17 34 8 (32)

UT4 MAR True-up - - - 105

Adjusted MAR (ex. GAPE) 741 833 906 996

Total non-regulated Access Revenue (ex. GAPE)4 5 11 8 15

Total GAPE Revenue (Regulatory + non-regulatory) 205 204 201 191

Total Access Revenue** per Aurizon Statutory Accounts 951 1,048 1,114 1,202

Note: Access Revenue excludes other revenue which primarily consists of Access Facilitation Charges (AFC) paid by customers to Aurizon and other services revenue

1. FY2016 & FY2017 estimates excludes the impact of Take-or-Pay and volume volatility

2. FY2017 Revenue Cap is inclusive of a $6m adjustment to correct the Final Decision published FY2015 Revenue Cap amounts

3. FY2016 & FY2017 WIRP Smoothing reflects the ramp up of Regulatory Revenue in line with the Regulatory Volumes and the removal of revenue attributable to Cockatoo

4. Details of Non-regulated access revenue are on slide 14

Net true-up $73m

**Actual access revenues reported in FY2016 & FY2017 may differ due to actual volumes not aligning to

regulatory system forecast volumes and other adjustments**

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Non-regulated Access Revenue

Non-regulated Access Revenue (ex. GAPE)FY2014

Actual

FY2015

Actual

FY2016

Estimate

FY2017

Estimate

Electric Traction Charge (EC) 50 40 44 52

Rebates (64) (56) (55) (53)

QCA levy 6 7 7 5

Non-Coal Access 13 13 10 10

Other - 8 2 1

Total non-regulated Access Revenue (ex. GAPE) 5 11 8 15

Electric Traction Charge › EC is protected to the extent that it is a cost pass through with a “wash up” of the difference between

Revenue and Cost included in the following fiscal year’s EC rate

Rebates › Rebates reflecting the Return On & Return Of Capital are paid to customers for Mine Specific

Infrastructure which they have funded and are included in the RAB. Any over or under payments of

rebates are trued up in the annual revenue cap process

Non-Coal Access › Relates to passenger and freight services

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Access Revenue Bridge

62

17

105

2632

32

105

FY16

Access

Rev

73

Reg RevFY14

Access

Revenue

951

FY17

Access

Rev

1,114

Flood

Claim

6

Revenue

Cap

8

Reg Rev

6

UT4

True-up

Non Reg

Rev &

GAPE

3

1,202

Flood

Claim

6

Revenue

Cap

Reg RevFY15

Access

Rev

1,048

Non Reg

Rev &

GAPE

6

Flood

Claim

12

Revenue

Cap

Non Reg

Rev &

GAPE

Notes:

› Amounts represent the movement from prior year

› UT4 true-up of $73m has been included in FY2017 for explanatory purposes only.

The timing and quantum are yet to be determined by the QCA

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WIRP regulatory revenue profile

1. Aurizon Network estimate of WIRP Capex deferral

2. Source: Company's respective Annual Reports

$mFY2014

Actual

FY2015

Actual

FY2016

Forecast

FY2017

Forecast

Regulatory volumes (mt) - - 10.4 14.3

Estimated WIRP Capex for pricing ($m) - forecast - - ~640 ~640

Revenue ($m) – forecast (MAR equivalent) - - ~50 ~70

**Aurizon estimate only. There is no “WIRP” revenue separately disclosed

by the QCA as it is within the Blackwater and Moura SAR**

› The QCA has continued to apply a revenue deferral for WIRP customers who

are not expected to rail during the FY2014 - FY2017 regulatory period

› The QCA has recognised the ability for Aurizon Network to seek QCA

approval for a recovery mechanism for the revenue deferral as WIRP volumes

increase

› The deferral amount is Net Present Value (NPV) neutral per the QCA

› The revenue deferral has been achieved through deferring the inclusion of

~$260m1 in WIRP Capex for pricing purposes, which aligns with the non-

railing customers share of the WIRP Capex

› QCA has smoothed FY2016 & FY2017 WIRP Revenues to align with their

volume ramp up profile resulting in ~$10m being moved from FY2016 into

FY2017. In addition, a total of ~$12m was deducted from the Moura SAR for

Cockatoo across FY2016 and FY2017

› WIRP revenues remain socialised within the two existing System Allowable

Revenues – the Blackwater and Moura systems

› The QCA expects all WIRP customers (aside from Baralaba and Rolleston) to

pay the existing Blackwater System tariff

› Baralaba and Rolleston customers will pay a system premium in addition to

the system tariff

Customer MineB/Rail

mtpa

Railing

in UT4

Aquila Eagle Downs 1.6

BandannaSpringsure

Creek4.0

Caledon Cook 4.0

Cockatoo Baralaba 3.0

Northern Energy Colton 0.5

Wesfarmers Curragh 1.5

Yancoal Yarrabee 1.5

Glencore Rolleston 10.9

Net Tonnes2 27.0

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Network RAB, capex & depreciation profile

288 270 265

281

80

FY17f

270

5

FY16f

350

FY15

569

Sustaining $mGrowth $m

› FY2016 and FY2017 forecast capital

expenditure broadly consistent with

QCA Capital Indicator

› Network sustaining capex is

expected to be in the range of $250 -

$300m (4% - 5% of RAB)

220260

290

FY16fFY15 FY17f

Depreciation $m

› Increase reflects conclusion of WIRP

and capitalisation of rail renewals –

includes all WIRP capex (no deferral for

accounting purposes)

› Actual depreciation will depend on timing

and quantum of actual capex incurred

› Ballast under-cutting has also increased

› Long-term to approximate sustaining

capex

3.0

4.6

5.6 5.6

FY17

87%

FY16FY15FY10

Regulated Asset Base (RAB) $Abn

› RAB Roll-forward, indicative (closing

balance) projection based on QCA

Final Decision, April 2016. Excludes

assets operating under an Access

Facilitation Deed (AFD) of $0.4bn and

~$260m WIRP capex

RAB roll forward Capex Accounting depreciation

Summary

Alex Kummant – EVP Network

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› 168mt Mar 2016 YTD volumes in line with record FY2015

› 200mt railed for YTD2016 achieved one day earlier than

when achieved in FY2015

› 91% YTD performance to plan, improvement of 2.7ppts

› Mechanised Fleet upgrade - $180m to modernise the

mechanised fleet resulting in greater than 30%

improvement in track productivity

› 85% system availability – in line with target

› Since FY2013:

› 65% improvement in below rail cancellations

› 41% improvement in below rail delays

› 12% improvement in system closures

BR Cancellation impact (%)

Achievements and outcomes

Operational

Improvements

Achievements

Volumes (Mtpa railed) Cycle Velocity (Km/Hour)

250

200

150

100

50

0

+24%

FY16YTD

168

FY15

226

FY14

215

FY13

18224 242322

0

5

10

15

20

25

+ 10%

FY16YTDFY15FY14FY13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 -65%

FY16YTD

1%

FY15

2%

FY14

2%

FY13

3%

0

2

4

6

8

10

12

11%

FY13

7% 6%

FY14 FY15

6%

FY16YTD

-41%

BR Delay Cycle Impact (%)

34

112

207

0

50

100

150

200

250-84%

FY16YTDFY15FY14N/A

Rail/ Weld defects (count)

Maintenance

& Renewal

Delivery

› Single line working for system closures enabling

concurrent railings on the system whilst maintenance

and renewal works are undertaken on the below rail

infrastructure

Outcomes

0

200

400

600

800

1,000

1,200

1,400

1,152

FY15

-12%

FY13 FY16YTDFY14

1,0181,0251,291

System Closures (hrs)

Technology

Investment

(PACE)

› 31% decrease in closure hours since implementation;

alignment of competing priorities of maintenance,

delivery, cost & capacity

FY2015 represents an all

time volume record

Aurizon remains incentivised to facilitate

above rail operational efficiencies

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UT5 process

› On 11 May 2016, the Queensland Competition Authority (QCA) issued Aurizon Network with an Initial Access Undertaking notice under

section 133 of the QCA Act 1997

› The notice details that Aurizon Network has until 9 September 2016 (120 days) to submit a Draft Access Undertaking to the QCA to

apply for the regulatory period commencing on 1 July 2017

› Aurizon Network believes that the QCA will issue further guidance on how the UT5 process will be completed with information on when

and how decisions will be published through to June 2017

› Aurizon Network is currently engaging with stakeholders (industry groups, operators and producers) to develop a consultation approach

to assist with the development of the contents of this Access Undertaking

› UT5 needs to provide Aurizon Network with an appropriate revenue model that reflects

› Expected continuation of record system volumes

› Changing risk profile – not consistent with QCA assumed utility benchmarks

› Continuation of appropriate maintenance and capex allowances to ensure safety compliance and further improvements in system

efficiency

› Vanilla WACC assumption not adequate to support ongoing investment

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Aurizon’s on-going public engagement

- Increased Customer consultation

- Fair and efficient pricing

- Safe and reliable network

- Ease of access

- Transparent and timely process

- Determination of WACC to reflect Network costs and risks

- Advocating directly with government & QCA Board

- On-going growth and investment in CQCN

CUSTOMER

OPERATORS

REGULATOR

GOVERNMENT

Transitioning to a more

balanced regulatory model

will require engagement

with a broad spectrum of

external stakeholders

Questions & Answers

Additional Information

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Final Decision UT4 vs. UT3 MAR

Maximum Allowable Revenue (MAR) $mUT4

FY14 – FY17

UT3

FY10 – FY13Variance

Mix of UT4

MAR (%)

Mix of UT3

MAR (%)

Return on capital (WACC)1 1,527 1,599 (72) 38% 52%

Return of capital (Depreciation) 1,288 698 590 32% 23%

Inflation (515) (401) (114) (13%) (13%)

Maintenance expenditure 805 647 158 20% 21%

Operating expenditure 806 443 363 20% 14%

Tax and Value of imputation credits 144 95 49 4% 3%

Total (unsmoothed) MAR 4,054 3,081 973 100% 100%

UT3 Capex carryover account adjustments2 (129) - (129)

(Adjusted) Total MAR 3,925 3,081 844

Variance to UT3 Allowance (%) 27%

1. UT3 Vanilla WACC – 9.96%; UT4 Vanilla WACC – 7.17%

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system link serving Queensland’s Bowen Basin coal region:

Newlands, Goonyella, Blackwater and Moura with GAPE the

connecting system link

› 2,670 kilometres network length of which 1,945

kilometres is electrified

› Over 40 operating coal mines serviced(1)

› Aurizon Network's operations are governed by 99 year lease

arrangements with the State of Queensland

› Approximately 71 services per day delivering to six export coal

terminals at three ports

› Open access network with 3 above rail coal operators – Aurizon

Operations, Pacific National and BMA Rail

› It is estimated the value of the regulated Asset Base (RAB) will

be $5.6bn2 as at 30 June 2016

25

Central Queensland Coal Network

(CQCN)

1. Based on Aurizon management estimates as at 30 June 2015

2. Based on QCA’s Final Decision April 2016. Excludes assets operating under an Access Facilitation Deed (AFD) of $0.4bn

Aurizon Network Overview

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History of the Regulatory Framework

Undertaking 4 (UT4)

Undertaking 3 (UT3)

UT4 OverviewCQCN Regulation Overview

› Queensland Competition Authority (QCA) is the economic regulator under the

state access regime

› QCA administers the open access regime which regulates Aurizon Network as

the access provider for rail transport infrastructure in the CQCN

1997 QCA Enacted

2016

2010

Rail Network Declaration 1998

2001 Undertaking 1 (UT1)

2005

2010

2000

1995

2011Access Regime Certified

2016

Rail access regime commencedQueensland’s narrow gauge

rail network declared an

asset under the QCA

Queensland Access Regime

certified under the Trade

Practices Act (TPA) as an

effective access regime for

10yrs2006

CQCN Regulation Evolution

Role of the Queensland Competition Authority

› Socialised Pricing – customers pay their access charges via a five-part tariff

which allocates the Maximum Allowable Revenue

› Reporting – Aurizon Network provides operational reports to customers

highlighting the performance of the system

› Ring Fencing – Aurizon Network has the obligation to keep access-seekers’ and

holders’ information confidential from the wider Aurizon Group which ensures

efficient and competitive contract negotiations in the above-rail haulage market

› Standard Form Access Contract – the QCA approves a standard form access

contract which enables all users to contract on the same basis providing

customers and Aurizon Network contract certainty

UT4 Development and Key Milestones

Undertaking 2 (UT2)

QCA issued UT4 Consolidated Draft Decision

UT4 Implemented

QCA issued its supplementary Draft Decision on WIRP Pricing

QCA Issue draft UT4 Pricing & Policy decision

QCA issue draft UT4 Maximum Allowable Revenue decision

Network submit revised UT4 submission incorporating policy

decisions agreed in collaboration with customers and QCA

Network submits first UT4 submission to QCA

Key Policy Elements

2014

2015

2016

Jun 2016

Dec 2015

Jul 2015

Mar 2015

Sep 2014

Jan-Aug

2014

Apr 2013

QCA issued UT4 Final DecisionApr 2016

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QCA’s approach to regulation

› ‘Building block’ approach adopted to

determine the CQCN’s maximum allowable

revenue

– Capital costs – WACC return on capital,

and depreciation

– Non capital costs – expenses relating to

operating costs, tax and maintenance

› Reference tariffs determined annually, taking

into consideration forecast volumes and

under/over recovery in prior periods

– Future tariffs will be adjusted should

actual volumes differ from forecast

volumes

Step 1 Step 2 Step 3

› RAB is approved by the QCA on a

Depreciated Optimal Replacement Cost

basis

– The approved RAB is rolled forward

annually with adjustments for consumer

price index escalation, depreciation

based on asset life, new QCA approved

capital expenditure proposed and asset

disposals

WACC (Return

on Capital)MaintenanceOpex

Depreciation

(Return of

Capital)

Gamma

adjusted tax1

The QCA takes a three step approach for determining the reference tariffs charged by Aurizon Network to

CQCN users

BUILDING BLOCKS

Aurizon

Network’s

Maximum

Allowable

Revenue (MAR)

1. Tax adjusted for imputation credits

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MAR building block methodology

› The maximum allowable revenue (MAR) is the total

revenue Aurizon Network is permitted to earn each year,

determined in accordance with the 'regulatory asset

base' (RAB) and 'building block methodology' (BBM)

› The building blocks represent efficient costs of providing

access to the CQCN and include a return on investment

commensurate with regulatory and commercial risks

› MAR may be smoothed to mitigate price impacts of

significant capex investment or volume ramp-up, adjust

for capex variations from previous regulatory period

(capital carryover) and adjust for MAR under/over

recovery as part of the UT3 transitional arrangements

RETURN ON CAPITAL(Weighted Average Cost of Capital – WACC)

RETURN OF CAPITAL(Depreciation)

OPEX

TAX

MAINTENANCE

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Take-or-Pay

mechanisms

Revenue cap

mechanism

Socialisation of

counterparty risk

› Primary revenue protection mechanism available to Aurizon Network

› Allows Aurizon Network to recover revenue shortfall directly from access

holder

› Comes into effect in the event take or pay mechanisms do not recover a

revenue shortfall

› Revenue cap mechanisms allow for remaining shortfall to be recovered

two years later through a WACC adjusted tariff

› In the event that revenue collected exceeds the MAR, the revenue cap

mechanism will return the surplus revenue two years later through an

adjusted tariff

› Patronage risk occurs when certain mines are no longer in operation

› Under the QCA regime, Aurizon Network will continue to earn its

aggregate regulated revenue from the remaining mines that continue to

use the system

› Aurizon Network’s regulated revenue is protected through a combination of provisions that

are included in the QCA-approved access agreements

› These mechanisms come into effect when revenue shortfalls occur due to actual tonnage

railed being less than regulatory approved tonnages forecasts

AT2

AT3

AT4

AT5

Reven

ue c

ap

Take-o

r-

Pay

Train Paths

Net Train Kilometres (NTK)

Net Tonnes (NT)

Rev

Cap

Rev

Cap

FY0 FY2

Revenue Cap Adjustment

(received 2 years later)

ToP

Access R

ev

en

ue C

harg

e Y

ear

0

Syste

m A

llo

wab

le R

ev

en

ue (

SA

R)

Year

2

Ad

juste

d S

yste

m A

llo

wab

le R

ev

en

ue Y

ear

2

Syste

m A

llo

wab

le R

ev

en

ue (

SA

R)

Year

0

ToP

Rev

Cap

Revenue protection mechanisms

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Key Regulatory vs. Accounting adjustments

Adjustment item Explanation

Shortfall/(Surplus) of AT1

Forecast vs. Actual

› AT1 Revenue moves inline with volumes and is not protected by Take-or-Pay or Revenue Cap

Take or Pay variations › Take-or-Pay charges are levied on the access holders, with charges based on contracted train service

entitlements set out in the Access Agreements

› Where annual actual volumes railed are less than the regulatory forecast, an annual take or pay mechanism

may become operative. Take or pay is recognised in the year that the contractual railings were not achieved

Revenue Cap variations › The majority of access revenue is subject to a revenue cap mechanism that serves to ensure Aurizon

Network recovers its regulatory system allowable revenue over the regulatory period. A revenue cap event

results in the under or over recovery of regulatory access revenues (net of take or pay) for a financial year

being recognised in the accounting revenues in the second financial year following the event

Electric Traction Charge › Electrical energy charges (EC). EC is protected to the extent that it is a cost pass through with a “wash up”

of the difference between Revenue and Cost included to be incorporated in the following fiscal year’s EC

rate

Rebates › Rebates reflecting the Return On & Return Of Capital are paid to customers for Mine Specific Infrastructure

which they have funded and are included in the RAB. Any over or under payments of rebates are trued up in

the annual revenue cap process

Other revenue › Other revenue comprises revenue from minor operations including access facilitation charges, revenue from

telecommunications and items of a corporate nature (for AFC’s – refer slide 31)

› Other Services - Provision of other services incidental to access including veneering, maintenance and

construction services

Flood recovery › Flood recovery is collected via an increase in the SAR with this adjustment reflected in the reference tariffs

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Access Facilitation Deeds (AFD) summary

› Access Facilitation Deeds are financing arrangements whereby customers fund Mine Specific Infrastructure (“MSI”) that is

owned (i.e. operated, managed & maintained) by Aurizon

› Historically MSI has included spurs, balloon loops and connections. However the preference is to only enter into AFDs where

it is desirable for Aurizon to own infrastructure to be able to control access onto, and ensure safe operation of, the mainline

› The customer agrees to pay Aurizon an access facilitation charge in consideration of Aurizon agreeing to facilitate access to

the infrastructure during the term of the AFD

› The access facilitation charge (AFC) is a charge to recover the cost of the infrastructure to Aurizon

› If the asset is included in the Regulated Asset Base (RAB) then access charges will be rebated to the customer

› Typically there will be a balloon payment for the AFCs over the term of the agreement received 12 or 13 months after

commissioning date

› The asset will be depreciated over the same life as the AFD term

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Network revenue cap adjustments

YearAT2-4

$m

AT5

(electric tariff)

$m

Total

$m

2015 (29.0) 1 (2.7) 1 (31.7) 1

2014 17.9 (9.8)1 8.1

2013 32.8 12.7 45.5

2012 3.2 13.4 16.6

2011 23.2 36.3 59.5

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› Revenue cap is the difference by System between Aurizon’s Total

Actual Revenue (TAR) and System Allowable Revenue (SAR)

and also includes rebates and energy cost variations. This is

collected through a tariff adjustment two years later

› FY2013 Access Tariff AT2-4 includes $11.6m for GAPE

› All Revenue Cap amounts included cost of capital adjustments

aligned to the QCA Final Decision

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Wiggins Island Rail Project (WIRP) facts

› WIRP is a project designed to link mines in the Southern

Bowen Basin with the new Wiggins Island Coal Export

Terminal (WICET) at the Port of Gladstone and will

increase the total capacity of the Moura and Blackwater

systems by 27mtpa (30%). Total estimated spend of

$0.9bn

› The first rail works were commissioned in March 2015,

with the commencement of export coal railings in May

2015

› The remaining rail works were completed and fully

commissioned by December 2015

› Appropriate security in place to mitigate credit exposure

› Prorated amongst the customers based on their respective contracted usage of the WIRP infrastructure by segment

› The WIRP fee is not protected through the regulatory socialisation mechanisms

› As per Aurizon’s ASX disclosures, legal proceedings have been instigated to accelerate the resolution of the WIRP Fee dispute.

Aurizon will keep the market fully informed of all key developments and at this stage will not speculate on what the final value of

the WIRP Fee

WIRP Fee

› WIRP Fee is a non-regulated return for 19.5 years and is

subject to adjustment predicated on Aurizon’s

performance against time and budget

› WIRP fee is not impacted by forecast volumes but there

are adjustments if Aurizon fails to deliver capacity

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GAPE revenue overview

Notes:

› MCR is reduced for any returns made outside of the GAPE system from GAPE Project Capital

› GAPE Revenue also includes regulatory revenue related to Goonyella System Enhancements (GSE) undertaken by

Aurizon but paid for by GAPE customers. This is not subject to above regulatory returns

Opex & Maintenance Costs

(O&M)

Return of Assets

(Depreciation)

Return on Assets

(ROA)

› The return that Aurizon

earns on its GAPE assets

is known as the Maximum

Capacity Revenue (MCR)

› The MCR is made up of

three key building blocks

› O&M are as per the Regulatory approved amounts

› ROA is calculated using a Risk Free Rate (RfR) plus a

fixed margin

› The RfR is reset every 3 years (next reset June 2018,

effective FY2019)

› GAPE Deeds have a 15 year life

› Fee reduces over time as the ROA is based on the non-

inflated GAPE Project Costs written down value

Access

Revenue

Regulatory

Revenue

Monthly

GAPE Fee

Total

GAPE

Revenue

› GAPE Revenue is collected from a combination

of Regulatory and Above Regulatory revenue

› The shortfall between Regulatory revenue

collected and the MCR is collected via a

combination of Monthly Fees (Railed Paths) and

Annual Adjustment (Contract less Railed Paths)

ToP

GAPE

Annual

Adjustment

MCR

Indicative GAPE revenue framework

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Aurizon Network QR DBCT ACTO Gas Brookfield TPI Energex/Ergon~

Regulator QCA FD QCA DD QCA DD ERA FD ERA FD ERA FD AER FD

Decision Date 28 April 2016 8 Oct 2015 22 Apr 2016 30 Jun 2015 18 Sep 2015 18 Sep 2015 29 Oct 2015

Averaging Period 20-day to 31 Oct

2013

20-day to 30 Jun

2013

20-day to 30

October 2015

20-day to 2 April

2015

40-day to 30 June

2015

40-day to 30 June

2015

20-day to 28 July

2015

Term of Risk-free Rate†

4-year 5-year 5-year 5-year 10-year 10-year 10-year

Risk-free Rate 3.21% 2.81% 2.10% 1.96% 2.97% 2.97% 2.96%

MRP 6.5% 6.5% 6.5% 7.6% 7.30% 7.30% 6.5%

Asset Beta^ 0.45 0.45 0.45 0.38 0.73 1.10 0.38

Equity Beta 0.8 0.8 0.87 0.7 0.9 1.3 0.7

Gearing 55% 55% 60% 60% 25% 20% 60%

Cost of Equity 8.41% 8.01% 7.76% 7.28% 9.78% 12.55% 7.51%

Credit Rating BBB+ BBB+ BBB BBB+ BBB+ BBB- BBB+

Debt Margin* 2.94% 3.24% 2.90% 3.21% 2.35% 3.36% 2.05%

Cost of Debt 6.15% 6.05% 5.00% 5.17% 5.32% 6.33% 5.01%

Gamma 0.47 0.47 0.47 0.40 0.40 0.40 0.40

Post-tax Nominal WACC

7.17% 6.93% 6.10% 6.02% 8.67% 11.31% 6.01%

WACC variables across all regulated entities

† The ERA has applied term matching (5-year) for gas industry while used 10-year for rail industry due to requirement in the Railway Code

^ The AER and the ERA equity betas are deleveraged using QCA’s formula to facilitate comparison of asset betas

* Debt margin includes debt transaction costs. The AER allows debt transaction costs in the operating expense rather than in the WACC. The ERA has applied trailing average cost of debt for gas industry while the day approach for rail industry, which explains the large difference between ACTO Gas and Brookfield

~ The AER has applied similar decisions on other regulated energy entities. The AER has been ordered by the Australian Competition Tribunal (ACT) to reconsider cost of debt and gamma decision. However, the AER has applied for judicial review regarding the ACT’s decision

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Example of socialisation in the event of a revenue shortfall

Scenario: A Coal mine on the Goonyella System closes due to insolvency and the mine ceases all railings at 31 December (half

way through the fiscal year) with no future railings to occur. The mine was forecast by the regulator to rail 5mt per annum

Regulatory Forecast Actual Process

Ye

ar

1

Regulatory Volume

Goonyella MAR

Tariff per tonne

110mt

A$350m

A$3.18/t

Volume

Revenue

Shortfall

(vs MAR)

107.5mt

A$342m

A$8m

› The mine closes at the end of 1H having railed 2.5mt, incurring A$8m in Access Charges (12 weeks or A$3.7m protected by security provided by customer)

› Unused capacity for the remainder of the year leads to A$8m shortfall in revenue vs MAR. Recovery can be made through Take-or-Pay agreements with original operator or other users of the network

› Assuming it is not possible to recover revenue through Take-or-Pay agreements the revenue cap system will adjust the MAR in year 3

Ye

ar

2

Regulatory Volume

Goonyella MAR

Tariff per tonne

105mt

A$350m

A$3.33/t

Volume

Revenue

105mt

A$350m

› Regulator adjusts regulatory volume to account for lost

5mt from closed mine

› Goonyella MAR maintained at A$350m, tariffs increased

on all users to achieve MAR on lower volumes

Ye

ar

3

Regulatory Volume

Goonyella MAR

1-off increase to MAR

Year 3 MAR

Tariff per tonne

105mt

A$350m

+A$8

A$358m

A$3.41/t

Volume

Revenue

Surplus

(vs MAR)

105mt

A$358m

A$8m

› 1-off increase to Goonyella MAR to make up for shortfall in

year 1 (assuming no recovery through Take-or-Pay

agreements in year 1)

› Tariffs increased for year 3 to make up year 1 shortfall

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Glossary

Defined Term Definition

Access Facilitation Deed Access Facilitation Deed (AFD) - financing arrangements whereby customers fund Mine Specific Infrastructure (“MSI”) (i.e. prepay

construction cost) that is owned (i.e. operated, managed & maintained) by Aurizon

Access Revenue Amount received for access to the Network infrastructure under the Access Agreement. Access revenue generated from the

regulated rail network, CQCN, is recognised as services are provided, and is calculated on a number of operating parameters,

including the volume hauled and regulator approved tariffs. The tariffs are determined by the total allowable revenue, applied to the

regulatory approved annual volume forecast for each system.

AT Access tariff

CQCN Central Queensland Coal Network

Gamma The average percentage value of imputation credits to equity holders, as attributed by the QCA in the relevant access undertaking

GAPE Goonyella to Abbot Point Expansion

Maintenance costs Maintenance costs includes mechanised ballast undercutting and electric traction maintenance but excludes flood repairs and

derailment repairs

MAR Maximum Allowable Revenue that Aurizon Network Pty Ltd is entitled to earn from the provision of coal carrying train services in the

CQCN

Mt / mtpa Million tonnes / Million tonnes per annum

Operating costs Allowance for Operating costs that Network receives in the Maximum Allowable Revenue and include all costs associated with train

control, planning, infrastructure management and business development. It also includes the corporate overheads for operation of

the business , along with insurance and other operating costs

Optimisation A QCA approved reduction in the value of the regulatory asset base (RAB)

QCA Queensland Competition Authority

RAB Regulated asset base

SUFA Standard User Funding Arrangement - a regulatory mechanism which allows for non Aurizon Network parties to fund

expansions/extensions of the CQCN

ToP Take-or-Pay. Contractual ToP provisions entitles Aurizon Network to recoup a portion of any lost revenue resulting from actual

volumes railed being less than the regulatory approved volume forecast

True-up The Final UT4 Decision highlights a net under recovery of Regulatory Revenue to date, representing the difference between

transitional revenues and the Final Allowable Revenue (refer slide 13)

UT3 Access Undertaking 3 (1 July 2009 - 30 June 2013)

UT4 Access Undertaking 4 (1 July 2013 - 30 June 2017)

WACC Weighted average cost of capital

WIRP Wiggins Island Rail Project

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