27 March Dr Malcolm Roberts Chairman Queensland Competition Authority. Dear Malcolm. DBCT Post 85 Mtpa Expansion Study

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1 27 March 2013 Dr Malcolm Roberts Chairman Queensland Competition Authority Dear Malcolm DBCT Post 85 Mtpa Expansion Study On 23 September 2010, the Queensland Competition Authority (the Authority) approved DBCT s draft access undertaking (AU), the Term of which commenced on 1 January Among other things, the AU included a provision for feasibility study (DBCT Expansion Study) costs necessitated by the Port Services Agreement (PSA) to be included in the regulated asset base (RAB) in accordance with s.5.10(l) and the definition of Review Event (e)(5) of the AU. Between June 2006 and May 2009, DBCTM received Access Applications for additional capacity at DBCT. In April 2007, in accordance with its obligations under the PSA, DBCTM commenced the DBCT Expansion Study to identify options and related capital costs for a terminal expansion initially to 100Mtpa, increasing to 153Mtpa as new applications were received. During a presentation of DBCT expansion options in December 2010, Access Seekers were advised that a new terminal 1 separate from DBCT would best satisfy their capacity requirements, and DBCTM discontinued the DBCT Expansion Study at that time. DBCTM now seeks approval for the DBCT Expansion Study costs of $5,832K (as summarised in Attachment 1) to be added to the RAB. DBCTM advises in relation to the expenditure that: 1. It was prudently incurred in accordance with DBCTM s obligations under the PSA and AU. 2. It falls within the definition of Capital Expenditure, in that it relates to a capacity expansion at DBCT, and it is neither maintenance nor operating expenditure. 3. It has not previously been added to the RAB or otherwise double counted; and 4. It includes an allowance for financing costs & interest during construction (IDC) consistent with existing practice, calculated in accordance with the AU. The ARR/IDC modelling is provided with this application, and is summarised in the supporting information in Attachment 2. It is noted that the approval of the Study expenditure will lead to an increase in ARR and TIC of $556K and $ respectively in the financial year. Please contact us if you have any queries or require more information. Yours sincerely DBCT Management Anthony Timbrell Chief Executive Officer 1 A new entity DPPM commenced a study for a stand alone terminal development at Dudgeon Point, costs for which are not considered eligible for inclusion in the DBCT RAB and which do not form a part of this submission. DBCT Management PO Box 7823, Waterfront Place QLD

2 Attachment 1 : Actual Expenditure on DBCT Post-85 Study Table 1 : DBCT Post-85 Study Costs Group Cost Description Cost Engineering & Design Aurecon Hatch 2,736,512 Owner s Costs Labour 1,033,410 Consultants 144,980 Travel 64,973 Office Expenses 64,979 Total Direct Study Costs 4,044,854 Financing Costs 117,805 Interest During Construction (IDC) 1,669,277 Total Study Costs 5,831,936 DBCT Management 2

3 Attachment 2 : Supporting Material Table of Contents 1 Study Description Reasonableness of costs Modelling... 8 Appendix 1 : PSA Requirements... 9 Appendix 2 : Capacity Requests Appendix 3 : Timeline Appendix 4 : Options Overview Appendix 5 : Deliverables DBCT Management 3

4 1 Study Description The need for a feasibility study DBCTM is obligated under the PSA 2 to accommodate the actual and reasonably anticipated future growth of demand for the use of DBCT by Users and prospective users. Existing and prospective Users must formally notify DBCTM of their future capacity requirements at DBCT, in order to find a place in the queue for allocation of terminal capacity. Those requiring capacity at the terminal submit an Access Application in accordance with the AU stating the required capacity, the source, and the expected period over which the capacity will be required. Thereafter these existing and prospective Users are known as Access Seekers. The peak combined capacity identified in the Access Applications forms the basis of the design of the terminal expansion. A feasibility study is an essential part of any proposed capital expenditure program. The study (or series of studies) is undertaken to identify options which will provide the required expansion capacity with regard to the timing of the mine development, at the lowest capital cost in consideration of whole-of-life terminal costs, safety, operating efficiency, the environment, construction standards, and other requirements of the PSA and other relevant regulations. The DBCT Master Plan identifies the stages of development necessary to provide the additional capacity. Prior to undertaking any expansion at the terminal, the scope of work required to achieve the additional capacity is identified as the preferred option resulting from a feasibility study, which is then submitted to DBCT Holdings for approval for addition to the Master Plan. It is prudent to assess all feasible options prior to selection of the preferred option for the next stage of development. A feasibility study is considered best practice in the industry, and the related cost is very small compared to the cost of the expansion being considered. Therefore, a feasibility study is a prudent and necessary investment in the expansion and development of DBCT to support efficient use of capital in the provision of the required services. The existing terminal DBCT s capacity was expanded to 85Mtpa in three phases as part of the DBCT 7X Project (7X), completed in June The terminal comprises 3 inloading strings, a nominal 2.2 Mt capacity stockyard and 3 outloading strings feeding 3 shiploaders on 4 berths. The terminal and its supply chain operate on a cargo assembly model. A relatively short cargo assembly period provides a high throughput potential within a constrained stockyard footprint. Concept studies for expansion options From April 2007 onwards, during the 7X construction phase, Access Seekers identified increased capacity required to service the projected demand from their customers. The Access Seekers approached DBCTM with details of their capacity requirements, with formal Access Applications. In compliance with the PSA and the AU, DBCTM instigated the Concept Studies component of DBCT Expansion Study to identify various expansion options at DBCT which would provide the required capacity. The work culminated in development of two potential upgrade projects: The 8X upgrade of the existing terminal footprint with an initial 5 Mtpa capacity increment. The 9X upgrade providing a separate new offsite stockyard to take total capacity to 153 Mtpa. 2 PSA clause 11.1(a) Expansion of DBCT. Refer Appendix 1 : PSA Requirements for full excerpt of clause 11 DBCT Management 4

5 Alternative sites were examined for the 9X stockyard including: a) Louisa Creek an adjacent site to the west of the existing stockyard footprint b) Southern Stockyard a site to the south of the existing rail loops c) Dudgeon Point a site northwest of DBCT The overview of the site locations are shown in Appendix 4 : Options Overview. The investigations concluded that the Southern Stockyard and Dudgeon Point developments could be constructed for approximately similar cost within the accuracy of the cost estimates. However, on the basis of qualitative comparisons, the Southern Stockyard was preferred mainly because it offered better integration with the existing terminal and therefore was expected to offer lower operating costs. It also would require less offsite infrastructure to link to existing roads, water and power supplies, and was also less risky from the perspective of gaining environmental approvals. The investigations assumed DBCTM would be granted sole access to the respective sites, and were based on the assumption that the coal chain and terminal operating parameters would remain unchanged, in particular the current cargo assembly model with 7-day assembly time and storage ratio 3 of 2.6%. The Southern Stockyard option was presented to the Access Seekers in July 2009, with a proposal that the Access Seekers directly fund the costs for a detailed study of this option. However the funding proposal was not accepted and in August 2009 further work was suspended. Operational study for increased storage ratios In September 2009, NQBP issued a request for expressions of interest (EOI) for development of the Dudgeon Point site. At the time, it was appropriate to secure this important potential site for the expansion of DBCT in the interests of its Access Seekers, therefore DBCTM prepared an EOI and submitted it in December Subsequently in July 2010, DBCTM was awarded joint preferred proponent status for Dudgeon Point. Concurrently, some Access Seekers expressed interest in further investigating the Dudgeon Point site, with reference to increased storage ratios and dedicated storage, and as a result underwriting for additional expansion study costs was received in April In May 2010, additional funding of $3M was approved by the DBCTM Board, and the Operational Study component of the DBCT Expansion Study commenced in June The Operational Study: Investigated options for changing the operating methodology of the terminal with respect to stockyard volume and stockpile retention time Developed alternative layouts and cost estimates for presentation to the industry Modelled the effects of these operational changes on system capacity. A larger storage ratio could be achieved independent of operating mode (cargo assembly or dedicated storage), and would provide the following potential benefits: Improved buffering at the terminal to compensate for unexpected rail delays Reduced pressure on mine rail load-out stockyards and facilities by reducing stock holding requirements and spreading the rail load-out times over longer periods Reduced pressure on the rail system by moving towards more regular railing 3 Storage ratio = stockyard storage volume as percent of annual throughput. DBCT can store 2.2Mt of coal, and with annual capacity of 85Mtpa the storage ratio is 2.6% DBCT Management 5

6 The Operational Study was completed in October 2010, providing for a multi-user expansion of DBCT into a new stockyard at Dudgeon Point and a supplementary stockyard at Louisa Creek. Both new stockyards would be integrally linked to the existing facility and overall it would operate as a single terminal. Scenarios were developed involving multipliers of 1.0 times to 2.5 times DBCT s existing storage ratio. The overall cost of developing the preferred option was estimated at $5.4B for a total capacity of 153Mtpa, so the cost of the incremental capacity was in the order of $80/Mtpa. Existing Access Holders not requiring the additional capacity noted this would result in a prohibitive increase in the Terminal Infrastructure Charge (TIC) for which they would derive little benefit. Further, a number of Access Holders sought to make the argument to DBCTM that new capacity at DBCT should be priced differentially from existing capacity to protect the competitiveness of access charges for existing Users. These concerns led to significant opposition to a new development at Dudgeon Point being added to the DBCT RAB and thus increasing the access charges for all Users at DBCT in the same manner as 7X. These considerations led DBCTM to believe the proposed development would be unlikely to secure User support satisfying the 60/60 Requirement under s12.5(h) of the Access Undertaking. At this point DBCTM concluded that progressing the Dudgeon Point option as a separate development was in the best interests of existing Access Holders, and gave new Access Seekers a greater level of confidence that the development would proceed in a timely manner. Therefore, in December 2010, DBCTM advised Access Seekers that it would no longer consider this option as an expansion of DBCT. The DBCT Expansion Study was terminated at this point. A new study to assess options for a stand-alone facility at Dudgeon Point was commenced, and in due course a separate entity Dudgeon Point Project Management Pty Ltd (DPPM) was established to progress this development. The costs associated with the DPPM study are not included in this submission. Addition to DBCT RAB The cost incurred in the DBCT Expansion Studies outlined above are reasonable to include in the DBCT RAB because : It was reasonably and prudently incurred in accordance with DBCTM s obligations under the PSA (refer Appendix 1 : PSA Requirements). It was expended on behalf of a majority of Access Holders (which were also a majority of the Access Seekers), on receipt of formal Access Applications for additional capacity for their projected future demand. In accordance with s.5.10(l) of the AU, as the Access Seekers have not funded these study costs, DBCTM now seeks to include these costs in the RAB as part of a Review Event in accordance with the definition of Review Event (e)(5). It does not include costs related to the development of Dudgeon Point as a separate unregulated facility. Those costs were incurred by a separate entity (DPPM). It falls within the definition of Capital Expenditure, in that it relates to a capacity expansion at DBCT, and it is neither maintenance nor operating expenditure. The DBCT Expansion Study related entirely to expansion options for DBCT, and was concluded when the options were outlined to Access Seekers. It has not previously been added to the RAB or otherwise double-counted. It includes an allowance for financing costs & interest during construction (IDC) consistent with existing practice, calculated in accordance with the AU. DBCT Management 6

7 2. Reasonableness of costs Table 1 summarises the costs incurred for the DBCT Expansion Study work. The cost of the DBCTM Owner s Team over the 4 years of the Study duration comprised 25% or $1.03M of the total. In particular this involved a majority of the Project Director s time, as well as support from technical experts and administrative support within the Owner s Team. The Owner s Team s role was to: direct and assess the work performed by Aurecon Hatch analyse the commercial impact to the Access Holders prepare the update to the Master Plan for approval by DBCT Holdings manage interfaces with stakeholders including the terminal operator, Access Seekers, Access Holders, the local community and regulatory bodies as appropriate The majority (68% or $2.74M) of the DBCT Expansion Study expenditure was associated with concept design and options analysis by Aurecon Hatch, which has significant expertise in the area. The team involved in the DBCT Expansion Study work were also involved in 7X and in many other port and terminal projects on the Australian east coast. The requirements were scoped by DBCTM and performed by Aurecon Hatch personnel on a standard hourly rate basis which is typical in the industry and appropriate for this type of work. All invoices were scrutinized by DBCTM to ensure the charges were correctly calculated. The role of Aurecon Hatch was to : provide expertise in assessment of options for the terminal expansion develop plans, general arrangements and high-level engineering appraisals of each option identify relative capital cost, constructability and project duration identify environmental and community impacts The costs were reasonable in context of the scope of the expansion, the duration of the necessary study work, the level of expertise required, and the outcome provided by DBCT Expansion Study. DBCT Management 7

8 3. Modelling The Study costs incurred Financing Costs and Interest During Construction (IDC) which were calculated in accordance with s.12.6 of the AU. These costs are indicated in Table 1. The calculation of financing & IDC costs was cut off at 30 June 2013, assuming they will be added to the RAB at 1 July 2013 in accordance with the Review Event definition. Calculation of ARR The method for calculation of ARR is consistent with existing practice. The modelling was supplied to the Authority as part of the DAAU, and the results of the calculation of the revenue building blocks are summarised in Table 2 below. Table 2: Revenue Building Blocks for DBCT Expansion Study Costs Regulatory Asset Base ($) Opening Asset Value 5,831,936 5,842,747 5,849,919 Indexation 156, , ,363 Nominal Depreciation (146,069) (149,998) (154,033) Closing Asset Value 5,842,747 5,849,919 5,853,249 Building Block Revenues ($) Opening Fixed Asset Value 5,831,936 5,842,747 5,849,919 Working capital 45,674 46,103 46,393 Total Assets 5,877,610 5,888,850 5,896,312 Return on Asset 552, , ,486 Return of Asset (depreciation) 139, , ,958 Indexation (149,674) (149,951) (150,135) Tax Payable 13,286 13,982 14,685 Annual Revenue Requirement 555, , ,994 Reasonableness of Costs The Financing & IDC costs have been calculated using existing methods in accordance with the AU. In consideration of the duration over which expenditure was incurred by DBCTM on behalf of the Access Holders (4 years), the cost is reasonable and DBCTM recommends they be approved for addition to the RAB. DBCT Management 8

9 Appendix 1 : PSA Requirements Clause 11 of the Port Services Agreement defines DBCTM s obligations in respect of expansion at DBCT, and the relevant excerpt has been provided to the QCA for reference. The PSA is a private agreement and has been excluded from the published version of this application. DBCT Management 9

10 Appendix 2 : Capacity Requests Applications for additional capacity in accordance with the DBCT AU were received as follows: Table 3 : Access Applications Queue Access Seeker Application Peak Mtpa 1 26-Jun Aug Jun Feb Jun Oct Sep Nov Jun Jul Aug Aug Aug Feb Apr May May Apr Jul Aug Nov Dec Dec Total access requests Mtpa Financial Year Original conforming Access Applications are available to the Authority on request. DBCT Management 10

11 Appendix 3 : Timeline Activity Summary Apr-07 to Sep-07 Oct-07 to Jun-08 Jul-08 to Oct-08 Nov-08 to Aug-09 Sep-09 to May-10 Jun-10 to Dec-10 Initial concept study to examine expansion options within existing footprint for Master Planning purposes. Study report provided by Connell Hatch but no further work took place as focus remained on completion of 7X. No further work was carried out on expansion studies during this period due to focus on completion of Phase 1 of DBCT 7X Project. Further work done on expansion options within existing footprint to address access requests up to 108Mtpa. All work was halted when access requests exceeded the capacity that could be serviced with existing footprint. Access requests increased progressively to 110Mtpa. Studies to examine options for expansion up to 153Mtpa were undertaken and site options were investigated. Southern Stockyard option was presented to customers in July 2009 and work was halted in August 2009 due to lack of support for direct funding. Dudgeon Point EOI process commenced and underwriting for further study work based on Dudgeon Point sought and received from some customers. Operational study carried out. All customers advised at 14 December 2010 presentation that Dudgeon Point would not proceed as an extension of DBCT. Milestone Summary Apr-07 Sep-07 Feb-08 Mar-08 Aug-08 Oct-08 Nov-08 Jul-09 Aug-09 Dec-09 Apr-10 Initial concept study commissioned for Post 85Mtpa to 100Mtpa Concept study completed and work halted due to receipt of additional access requests Initial funding approved for Post 85Mtpa concept study $1.25M Commence Post 85Mtpa study for expansion up to 108Mtpa All work on 108Mtpa option halted due to receipt of further access requests All Post 85Mtpa work on hold due to funding constraints Additional funding for Post 85Mtpa concept studies approved $0.75M Presentation to customers of 153Mtpa expansion options at Southern Stockyard location and direct funding requirement Customers did not accept funding proposal for 153Mtpa expansion and work was halted Dudgeon Point EOI submitted Underwriting for study costs received from 5 customers for a total of $12.7M May-10 Additional funding approved $3M Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Dec-10 Operational study commenced Joint preferred proponent status awarded for Dudgeon Point Underwriting for study costs received from Anglo bringing total to $23.4M Initial discussions took place with Anglo/Rio on dual user concept Operational study completed Initial advice to Access Seekers that expansion would not proceed as an extension of DBCT DBCT Management 11

12 Appendix 4 : Options Overview Dudgeon Point Option HPCS Louisa Creek Option DBCT Southern Stockyard Option DBCT Management 12

13 Appendix 5 : Deliverables A large volume of documentation was issued to the QCA s consultant for assessment of the scope of work and reasonableness of costs. This is available to stakeholders for review on request, including: Study reports from Aurecon Hatch Presentations to Access Holders/Seekers Layout drawings of options Monthly status reports & meeting minutes Accounting ledger transactions, invoices & detail cost reports Dudgeon Point Expression of Interest DBCT Management 13