ARTC pays first dividend since 2004

 
  narf120 Locomotive Fireman

It's certainly not worth nothing!

Using 1 July 2003 as a starting point (that's the period before the NSW lease started, but it is the period when big contributions started being made) I agree that there's been about $5 billion in grants, equity and debt funding.

But you clearly have a better business now than you did then - first mostly-complete year of the NSW lease there was about $250 million annualised access revenue (excluding CRN). Last financial year that was about $720 million. Not far off three times higher. Depending on what floats your boat, reasonable measurements of underlying profit have risen by perhaps four times.

Undoubtedly some of the money spent will never earn a financial return - hence the ~$2 billion of impairments over that time. That was known ahead of time (though perhaps not the extent). Some of that non-commercial spend can also be considered as the payment for the Hunter Valley part of the network - remember they got that otherwise for nix.

The latest report values the infrastructure on a discounted cash flow basis ("what can we earn from this in future") at about $4.1 billion. If you consider the grants and equity together ($4 billion) plus whatever the company was originally worth (say $0.2 billion from 2003 report) - so $4.2 billion total - that's then bought you a $4.1 billion asset less $0.9 billion loans and bonds - so $3.2 billion total.

You are $1 billion in the red - over ten years that's $100 million a year, which is a factor of five less than $500 million a year.

In terms of regulating these things, I think there is a need for some caution that the cost of regulation doesn't get excessive. I shudder at the amount of time that must be put in by the ACCC, ARTC, operators and customers for each access undertaking review.
donttellmywife

Speaking from experience of undertaking a few regulatory reviews, the costs of undertaking these reviews generally aren't that high - maybe an additional $0.5M per annum. A large majority of the work that is required as part of a price/access review is required as part of everyday business operation and interaction with customers. Examples of this include asset management planning and growth servicing plans to negotiating agreements to provide track access and standards of service to train operators or consultant reports on the weighted average cost of capital the businesss should have.

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  donttellmywife Chief Commissioner

Location: Antofagasta
Speaking from experience of undertaking a few regulatory reviews, the costs of undertaking these reviews generally aren't that high - maybe an additional $0.5M per annum. A large majority of the work that is required as part of a price/access review is required as part of everyday business operation and interaction with customers. Examples of this include asset management planning and growth servicing plans to negotiating agreements to provide track access and standards of service to train operators or consultant reports on the weighted average cost of capital the businesss should have.
narf120

I assume that is the cost for one organisation only.  There isn't a snowballs chance that $0.5 million would cover the costs across all stakeholders involved in these reviews.
  narf120 Locomotive Fireman

I assume that is the cost for one organisation only. There isn't a snowballs chance that $0.5 million would cover the costs across all stakeholders involved in these reviews.
donttellmywife

$0.5M would cover most of the costs per annum. A substantive majority of the stakeholders involved in the review would be already  be employing these people for to undertake these roles for business purposes. A simple example of this, demand forecasters which forecast the number of train are a key inpu to a price review, but are just as important for business operations (eg profit projects, capital planning, ect).
  donttellmywife Chief Commissioner

Location: Antofagasta
$0.5M would cover most of the costs per annum. A substantive majority of the stakeholders involved in the review would be already be employing these people for to undertake these roles for business purposes. A simple example of this, demand forecasters which forecast the number of train are a key inpu to a price review, but are just as important for business operations (eg profit projects, capital planning, ect).
narf120

I'm thinking more of the commercial and legal side of things, rather than production planning.  The current access undertaking for the Hunter took two years to get up!  Aurizon's current undertaking has been under consideration for that sort of period of time too.

I missed that you were talking per year (so that implies the cost for an undertaking with a five year life is $2.5 million?), but still, $0.5 million per year buys you one executive level staff member and their immediate support and on-costs - for one company.  All of the majors (in their group form) have an executive that pretty much just deals with this sort of stuff (though they will deal with rail and port agreements for multiple corridors).  The submissions don't write themselves, and there's often a fair bit of behind the scenes work that informs a submission.  And you still then need to negotiate with the access provider before you actually have an access agreement.

Anyway, it is a necessary evil.
  djf01 Chief Commissioner

Sorry for the delay, I finally got back to picking through all the Company reports' financials of ARTC.  Some interesting numbers ....

See: https://farm8.staticflickr.com/7468/15802545948_bb8f06823d_o.png

  djf01 Chief Commissioner

Now for some amateur analysis:

2000 to 2003 gives a good, but perhaps dated, picture of the Perth-Adelaide-Melbourne route.  Covers costs, makes a modest profit - but it must be said a lot of the infrastructure uprgades (conversion to SG & hence sleeper replacement) occurred in the 1990s.  Very little accounting funny business.

From 2004, with the commencement of the NSW lease, things start to pear shaped.  ARTC starts to get regular grants and capital injections.

The 2006 accounts were all but unintelligible IMHO.  The went through and revalued and re-stated everything, and much of the "income" from that end up in the Opex figure I've got there.  The result was a big (and highly spurious) "profit", and no grant/capital/subsidy the following (election) year.

From 2007 they started accounting "income tax benefit", as if ARTC was ever going to pay tax on it's losses.  They also started bringing to book as an operating expense Impairment (downward revaluation or disposal of assets).  Without some sort of subsidy, net assets went backwards for the first time.

In 2008 (I mistakenly didn't spit out impairment from the accounts) they did big upward revaluations of assets, nearly a $1billion worth, and put that into an asset revaluation reserve.  On the strength of that - despite a (typical) operating loss - ARTC paid $1/4bil in tax the 2009 year.  I don't really know why this happened.  Possibly the gvt was looking for budget savings in the wake of the financial crisis, so raided the ARTC's balance sheet for tax revenue.  Maybe these were genuine GFC related accounting changes.  Hard to know.

With ARTC about to collapse under the weight of it's tax obligations, in 2009 the gvt injected half a bill in fresh equity to make up for the 1/4 of a bill it taxed them Smile.  Some of the 2008 revaluations were reversed.

From 2011 to 2013 ARTC continued to get regular equity injections.

In 2014, no more equity injections.  But also no more impairment.  They also created a profit reserve from retained earnings (sending that negative Smile).

If there are any conclusions to be drawn from this, it's there are lies, damn lies,and accounting standards.  The period under the ALP seems particularly dodgy it must be said.  

(I should note that in most years 50-80mil in financial revenue gets booked as Operational revenue, when it probably shouldn't.  ARTC sits on a lot of cash, as it can take years for it to spend it's special grant money)

If the 2014 accounts are giving a true picture of ARTC - and I really doubt they do - then it's a profitable operation, to the tune of ~$150mil a year.  

As always, the problem with accounting for a highly capital intensive operation like a railway is it has a lot of very long lived assets that need periodic replacement.  How do you properly account for a bridge that would cost $20mil to replace today, but was built in 1936 for 61,456 pounds?  And when you replace an aged piece of infrastructure how much to you expense and how much do you capitalise?  

In the case of 2014 I think they are starting to massage the accounts to produce something that looks like a saleable business.  The token profit is achieved by no longer booking impairment.  This can be done by choosing not to down value assets (you can value them as a group and put the net increase to the balance sheet I think), and not replacing anything until it's reached it's accounting life expired date or disposing of anything below it's book value.  

Looking at the bigger picture, ARTC has received ~2.5bil in equity since 2004, and ~1bil in grants.  It's also increased it's long term debt by ~$1bil.  In effect that's a 4.5bil in subsidy since taking on the NSW lease, less however much real value has been added to ARTC in that time.  I would argue that ARTC's value has increased (to the extent it has) only by the value created from the increased use of the HVN by the coal industry, and not all that much from the way it's spent it's government assistance.
  donttellmywife Chief Commissioner

Location: Antofagasta
Perhaps equally amateurish, but some points that may or may not be taken into account in your figures:

- Accounting and tax treatments changed over that period, meaning that comparison from report to report is sometimes complicated.  You can see this if you look at how the "previous period" figures vary in some reports from the "current period" figures in the report for the previous period.

- There was a dispute about the tax treatment of the grants given to ARTC in 2004-2006 sort of timeframe.  Initially ARTC just counted those as non-taxable income (hence they appear in the net profit figure in those years, in later years I think they treat grants as a finance cash flow).  In 2008/2009 or so the ATO disagreed with that treatment.  ARTC disputed that, but the ATO wins by default, so a large provision for paying company tax on those grants was made (I think that corresponds to the large tax bill in 2009 - there's mention of the dispute in the 2009 report).  The details as to how that was resolved are confidential (see 2010 report), but in 2010 ARTC made a profit but incurred not much tax... which suggests the ATO may not have got its way.  Either way, note that subsequent to that dispute major funding started to be delivered through equity injections rather than by grants.  

- Beyond that little excursion, ARTC doesn't have a tax liability, it has a substantial accumulation of tax losses ($200 million), i.e. when it makes a profit it generally doesn't have to actually transfer cash to the ATO.  Even if it continues making the same sort of profit it made last year, it will be a few more years before ARTC (as ARTC, but not necessarily as part of someone else!) has chewed up those accumulated losses.

- The investment in the north-south interstate was known, ahead of time, to not be a commercial proposition.  The devaluation of the relevant asset,manifesting as an impairment, after the big spend reflects that, though I suspect (perhaps "hope") they weren't quite expecting such a hit.  That valuation is done on the basis of expected cash flows going forward, discounted with time.  If you have a 40 year old bridge that has to be replaced in 10 years time to sustain revenue, then your future cash flows will reflect that, regardless of how the beanies have depreciated the value of the bridge as an isolated asset over the last forty years.

If you were looking at buying ARTC, then the beanies will have their say (I have been involved in numerous expeditions to purge a couple of businesses of this feral pest, but the buggers resurrect like zombies and breed up quickly if you ever leave two of them alone as well), but ultimately the (competent) buyer is going to look first at the cash flow situation.

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