Page 1 of 66

Briefing for Shareholding

Ministers

October 2014

Page 2 of 66

CONTENTS KiwiRail Overview ..................................................................................................... 3

Governance and Executive Leadership .................................................................. 4

Our Values ................................................................................................................. 8

Introduction: A Fresh Look at an Established Asset ............................................ 9

Key Facts ................................................................................................................. 10

The KiwiRail ‘Value Proposition’ ........................................................................... 11

Business Outlook and Strategy ............................................................................. 12

Sustaining a Zero Harm Environment ................................................................... 15 Rail’s Role in the Economy .................................................................................... 21

Current Points of Interest ....................................................................................... 26

Empowering Our People ........................................................................................ 29

The KiwiRail Business and Portfolio Performance .............................................. 31

KiwiRail Freight ....................................................................................................... 33

Interislander ............................................................................................................ 41

Passenger ................................................................................................................ 46

Infrastructure and Engineering ............................................................................. 50

Appendices ............................................................................................................. 55

Page 3 of 66

KIWIRAIL OVERVIEW

Page 4 of 66

GOVERNANCE AND EXECUTIVE LEADERSHIP KiwiRail is a single entity with a portfolio of business activities. Governance is provided by a single board chaired by John Spencer. The company is managed by Peter Reidy and an executive team of seven.

KiwiRail Board

John Spencer, Chairman

John Spencer is a Wellington-based businessman and company director. He is Chairman of KiwiRail Limited, WEL Networks Ltd, Tertiary Education Commission and Raukawa Iwi Developments Ltd. He is a Director of Tower Ltd and Mitre 10 NZ Ltd. He was the Chief Executive of the New Zealand Dairy Group prior to the formation of Fonterra and has held senior management positions in New Zealand and Australia.

Paula Rebstock, Deputy Chair

Paula Rebstock is an Auckland-based economist and company director. She is Chairwoman of the Insurance and Savings Commission, the Work and Income Board and ACC. She is a Director of Synergia, a member of the University of Auckland Business School Advisory Board and the Financial Performance Auditor for Nga Puhi Trust Board. Other roles include the Lead Reviewer for the State Services Commission Performance Improvement Framework and Chair of the New Zealand Police Women’s Advisory Network.

Bob Field, Director

Bob Field is a Manawatu-based businessman and company director. He is an ambassador for Toyota New Zealand after 45 years of international experience in the motor industry, including 25 years as Toyota’s CEO in New Zealand. He has extensive governance experience with a wide range of national organisations involved in tackling such issues as unemployment, business excellence and productivity, road safety and conservation. He is currently Chair of CMD Nominees Ltd and an honorary member of the NZ Initiative. He is also a director and adviser to Emirates Team NZ. (Updated)

Page 5 of 66

John Leuchars, Director

John Leuchars is a professional company director. He was a consulting engineer who held director and managing director positions in international consulting engineering companies for 30 years. These included managing director of Connell Wagner (NZ) Limited (now Aurecon) and of Connell Mott MacDonald, when he was based in London. He has experience in a broad range of industries in a hands on design role or at governance level. John has had governance experience in a number of private and public companies and not for profit organisations. John is currently a director of Genesis Energy Limited, The Wellington Gateway General Partnership Companies Nos.1 and 2 (Transmission Gully motorway) and Milmeq Ltd.

Rebecca Thomas, Director

Rebecca Thomas has more than 25 years’ experience in financial markets in New Zealand and overseas. She has a background in law and business having held roles as both a CEO and Independent Director on UK-based Boards. She is a Director of Mint Asset Management Ltd, Black and White Group Ltd. Rebecca is also an Associate Member of the Foundation Board of the Financial Markets Authority and a Trustee of The Professionelle Foundation.

Kevin Thompson, Director

Kevin Thompson is a Nelson based professional director and civil engineer. He was Chief Executive of Opus International Consultants from 2001 to 2010. He is Deputy Chair of the Environmental Protection Authority and Chair of the Authority’s HSNO Committee. He is an advisory member of the Defence Capability Management Board, a Director of the Australian Road Research Board and a Director of Aquamax Hydroblasting Ltd. He is a Distinguished Fellow and President of the Institution of Professional Engineers New Zealand.

Guy Royal, Director

Guy Royal has a background in private equity with commercial and corporate law for more than 18 years in New Zealand, Hong Kong, Vietnam and the United Kingdom. While in the UK Guy worked for CDC Capital plc, a private equity fund with more than NZ$3 billion in direct investments and lending in various industries internationally. He is Managing Director of Tuia Group, a professional advisory firm with offices in New Zealand, PNG and Samoa.

Page 6 of 66

KiwiRail Executive Team

Peter Reidy, Chief Executive Officer

Peter Reidy was appointed KiwiRail’s Chief Executive Officer on 1 March 2014. He brings to KiwiRail a successful track record of leading and building service and infrastructure-based businesses in the freight, engineering, energy, building products and asset management sectors in Australia, New Zealand, Asia and the United Kingdom.

David Walsh, General Manager, Corporate and Finance

David Walsh has been with KiwiRail for just over five years. He started as the CFO and two years ago expanded the role to include a wider group of corporate functions. David has wide experience through a range of industries including the New Zealand Racing Board, Fonterra, TransAlta and Shell NZ.

Iain Hill, General Manager, Freight

Iain Hill joined KiwiRail from Express Couriers Limited where he was the Group Manager, Transport and Distribution. Iain has experience in managing large road and air-freight networks.

Thomas Davis, General Manager, Interislander

Thomas Davis moved to Interislander from the KiwiRail Network business where he was the Acting CEO. Previously, he had been Chief Financial Officer for ONTRACK, headed the Interislander and been an executive within Tranz Rail.

Page 7 of 66

Dr Deborah Hume, General Manager Passenger and External Relations

Deborah Hume joined KiwiRail from the New Zealand Transport Agency where she had been Wellington, Nelson, Tasman and Marlborough Regional Director. She had previously worked for NZTA’s predecessor, Transit, as well as doing risk management consultancy work and being a principal in a multinational infrastructure company.

Rick van Barneveld, General Manager, Infrastructure & Engineering

Rick van Barneveld leads the infrastructure and engineering arm of the KiwiRail business. He was the Chief Executive of Transit New Zealand prior to joining Evans & Peck and working on a project to plan, design and construct a 215 kilometre railway in Queensland.

Andrew Norton, General Manager Human Resources

Andrew has previously held senior and executive roles with Public Service Association (PSA) NZ, Auckland District Health Board and his most recent role, Executive General Manager Human Resources for Downer in Australia. Andrew brings a combination of Senior Executive level HR capability, an indepth understanding of Industrial Relations in NZ and Australia, strong engagement skills with front line engineering and customer service teams, experience in developing Executive leadership in large organisations.

Dr Bob Stacy, General Manager Zero Harm

Dr Bob Stacy joined KiwiRail as its General Manager, Zero Harm, on 3 March 2014 and is responsible for Health, Safety and Environment. He has extensive senior safety and health leadership experience in Australia including BHP Engineering, BHP Transport, CSR, Downer Group and General Electric. His business experience across the BHP Group covered shipping, mining, rail and road operations and he was responsible for implementing a safety change programme that reduced the frequency of lost time injuries from 27.6 per million man hours to 0.7 per million man hours in six years.

Page 8 of 66

OUR VALUES

Page 9 of 66

INTRODUCTION: A FRESH LOOK AT AN ESTABLISHED ASSET The development of railways has been an unfolding story. It began in the 1860s with the creation of a transport network that became the “universal carrier” before evolving into a niche provider as road and air transport developed. The change has not diminished rail’s relevance. Our customers will attest to that. Ask freight customers who move export goods to ports or carry consumer goods throughout the country. Ask Auckland and Wellington commuters who use rail to avoid congested highways. Or ask overseas visitors who enthuse about the spectacular New Zealand they see from Scenic trains. They will all affirm rail’s importance to their business, their working life or their appreciation of the New Zealand experience. The view of freight customers is reinforced by the Ministry of Transport’s updated National Freight Demand Study, which forecasts continued growth in rail’s most significant traffics. The legacy of the past remains with us. Rail is a huge infrastructure asset as well as being a transport and logistics business. It’s also an institution firmly rooted in public consciousness. The country’s geography, typography, climate and demographics are all challenges to running a commercial railway business. Former Treasury official John Wilson wrote a paper in 2010 paper on what he described as “the privatisation experiment” – the private sector ownership of Railway between 1993 and 2008. In his view, the rail system reverted to public ownership and public funding despite the best endeavours of two commercially aggressive private sector owners. This happened because “although Tranz Rail and Toll faced hard budget constraints, the public, including a significant part of the business community, did not find the consequences of these hard budget constraints acceptable.” The goal set by our shareholder since the railway returned to public ownership, has been to create a business that is financially independent. This was enshrined in the sustainability plan endorsed in 2010. We are now four years into the plan. Highly encouraging growth in freight volumes have not been able to offset the impact of setbacks – mostly beyond KiwiRail’s control – that have undermined the basic premises of the plan. As a result of these realities, we have been re-examining the business as part of the development of a new, 30-year plan. The information we are gathering will deliver a range of options in the coming months for rail’s future. The information in this briefing paper has been developed to help our shareholder understand the nature of the business we have and the issues we are considering as we work to formulate a plan for the next 30 years. John Spencer Chairman

Page 10 of 66

KEY FACTS An important contributor to the New Zealand economy

• The rail network moves more than 17 million tonnes of freight a year; • Approximately 30 percent of New Zealand’s exports travel to port by train; • The freight railway complements state highways. If rail freight traffic were moved to road,

it would add one-and-a-half million more truck trips to highways, several of them already congested;

• Rail freight tonnage grew by 18 percent between 2006-07 and 2012, 4 percent more than road tonnages and 2 percent more than coastal shipping;

• The Ministry of Transport is forecasting strong growth in the traffic that forms the basis of KiwiRail’s freight business;

• KiwiRail employs 4,100 staff and invests more than $1 billion in New Zealand a year. Investment in rail has delivered benefits

• Investment in rail can be extremely cost effective. A modest $13 million spent on passing loops on the line between Hamilton and Tauranga, has doubled the capacity of the line;

• Investment in the track network, rolling stock and ferry capacity has improved service reliability and reduced transit times;

• Before the commissioning of 40 new DL locomotives in the last three years, fleet locomotives were on average 30 years old;

• Upgraded urban rail networks deliver almost 23 million passenger trips a year, the equivalent of an extra thirty thousand daily vehicle journeys on Auckland and Wellington roads;

• Mainline derailments, an indicator of network robustness, reduced to 18 this year, the continuation of a decline from highs of around 60 10 years ago;

• Total harm incidents reduced by 44percent over the last 12 months; • The average distance locomotives travel between failures improved from a failure each

15,000 km to a failure each 45,000 km – an indicator of improving locomotive robustness. The current industry model is not conducive to achieving economic independence

• The scope and scale of today’s KiwiRail business is only marginally changed from that which was privatised in 1993;

• KiwiRail combines the roles of infrastructure manager and transport operator on a network that is one of the more challenging in the world because of terrain, climate and population distribution;

• Two private sector companies struggled to be commercially successful operators of the rail business without making significant service or route cuts;

• Apart from its current role in complementing the highway network and bridging Cook Strait,

the rail network has an “opportunity value”. It exists as an alternative transport network whose value could be enhanced by future developments in fuel costs, climate change or technology advances.

Page 11 of 66

THE KIWIRAIL ‘VALUE PROPOSITION’ Positives

• Rail complements the highway network – one freight train can move as much freight as fifty trucks;

• An efficient rail network reduces future road capital expenditure on road renewals and enables better future transport investment decisions;

• Rail freight consigned to road would add something like one-and-a-half million highway trips a year;

• The scale of the rail business, and recent investment in rolling stock gives the business the flexibility to react quickly to short notice changes in freight traffic i.e. changes in port calls by shipping lines.

• Modest investment in freight rail can deliver disproportionately big benefits; • Freight customers appreciate that infrastructure work and new rolling stock has made the

rail network more reliable and resilient; • Urban passenger rail networks ease highway congestion. Without them, there would be an

extra thirty thousand daily vehicle journeys on Auckland and Wellington roads; • Improving the efficiency of the railway business provides an “option value” for the

New Zealand economy in the event of future economic, social or technological developments.

Challenges

• To be successful, the rail industry needs to be a safer place to work • It will take more time to fix past underinvestment in the rail network; • New Zealand’s topography, climate and small population make it a tough place to run a

railway;

Page 12 of 66

BUSINESS OUTLOOK AND STRATEGY Reinvestment to Rebuild Rail has been an important mode of transport in New Zealand for 150 years. For much of its first 100 years, it was the dominant carrier of both freight and people. The growth of motor vehicle traffic and aviation, followed by deregulation of road transport in the 1980s, changed its role to that of a niche operator fulfilling specialist roles in the movement of bulk freight, urban passenger transport and travel experiences. Lack of investment in both infrastructure and rolling stock in the years that followed deregulation, limited rail’s competitiveness and resulted in a decline in effectiveness and business performance. Re-investment over the last 10 years followed a recognition that rail has an important role to play in the New Zealand economy. Rail’s strength is not in competing with road, but complementing it, or other forms of transport. In significant parts of New Zealand, an under-used rail network runs parallel to a congested highway network. The cost of improving the reliability of the rail network to make it an even more viable option for freight customers, is modest compared with the cost of building new or even repairing existing highways. An example of the benefits to be gained from investment in the freight rail network is the $13 million spent on the East Coast Main Trunk (Hamilton-Tauranga) route. Building passing loops has doubled capacity on a line which carries approximately 40 percent of the traffic in and out of the Port of Tauranga. The early focus of re-investment was on the Auckland and Wellington suburban networks. But investment in the freight network – both infrastructure and rolling stock over the past six years – has enabled rail to increase its share of the freight task by carrying more freight over long distances. Business Plan Expectations Impacted by Unexpected Events After its establishment in 2008, KiwiRail developed a business plan which aspired to make the business financially self-sufficient by 2020. The plan was based on continuing to operate a business which had not fundamentally altered since before rail was privatised in 1993. Its fundamental assumptions were that business targets could be met by generating greater revenue by investing in network infrastructure, rolling stock and ferry capacity and maintaining a connected network. While it has fallen short of revenue targets, through the plan’s first four years, the freight business has grown by more than 20 percent. This is in spite of setbacks which could not have been anticipated when the plan was formulated. These included the Global Financial Crisis, the Christchurch earthquakes, adverse market conditions and climate induced events (droughts, floods and slips). There have been two further setbacks in 2014 – the withdrawal from service of the ferry Aratere for seven months and the discovery of asbestos material in the new DL locomotives. In combination with earlier events, they have led to an appreciation that the original (2010) sustainability plan did not provide sufficient contingency for unexpected events. It also under-estimated the amount of Crown investment that would be needed through the ten years and over-estimated the level of revenue that could be generated to fund investment.

Page 13 of 66

The Development of a Long Term Plan In response to the setbacks of the first four years, the KiwiRail Board has instituted a commercial review of the business under the name, Project 2045. The aim, as the name implies, is to develop a new 30-year plan. The review provides an opportunity to re-examine rail’s role in the New Zealand economy. The 2010 plan took a step in this direction but remained largely consistent with the historical view of rail’s role. One of its major premises was that KiwiRail should continue to operate a “connected network”, ie the major lines that form the backbone of the network, were to remain in operation.

The Review is being conducted in collaboration with Treasury, the Ministry of Transport and the New Zealand Transport Agency. It is examining the economics of each route and developing from the work, a range of future options. From these, the intention is to develop a new model for rail. The challenge to be met is to not only find a model that enables KiwiRail to meet its obligation to operate commercially but as a major infrastructure asset, for the rail network to serve the public interest.

Options are expected to be ready for consideration towards the end of the 2014 calendar year. Back to Basics Approach In addition to Project 2045, we are implementing a “Back to Basics” framework as part of our drive to optimise the business and achieve operational excellence. The framework focuses on five perspectives of the business:

• Sustaining a Zero Harm environment; • Engaging our customers; • Empowering people; • Improving our financial position; • Delivering portfolio performance.

Page 14 of 66

It will be accompanied by a more unified “total KiwiRail” approach which will replace the current business unit “federalism” with a new network partner operating model. The immediate aim is to focus on the strategies and initiatives that will stabilise the business, improve financial performance, restore market and shareholder confidence and improve our safety performance. We have set 10 clear priorities for 2015:

1. Zero Harm: introducing critical risk controls and nation-wide safety systems. We will provide visible leadership for safety and capability for improving safety within the business units;

2. Leadership and culture: creating good succession planning and improving management through the different management tiers;

3. Risk management: standardising learning across the group; 4. Developing an integrated business: simplifying the structure and creating critical

competencies and excellence centres across portfolios; 5. Service reliability: improving on time performance for freight, interisland and passenger

services as well as improving rolling stock reliability; 6. Decision on Cook Strait ships: optimising our Interislander fleet configuration; 7. Asset utilisation: implementing capacity management systems; 8. Cost-efficiency and productivity: understanding our cost base and implementing key

value driving projects; 9. Customer management: getting the product and the price right, improving the yield in our

freight business and securing the Wellington Tranz Metro contract; 10. Stakeholder management: improving our relationships with our stakeholders.

Page 15 of 66

SUSTAINING A ZERO HARM ENVIRONMENT Sustaining a Zero Harm Environment is fundamental to the way KiwiRail runs its business. It encapsulates the way we care for and protect our employees, contractors, customers, visitors to our sites, the communities in which we live and work, the environment around us and the business we operate. Such is the importance of Zero Harm to KiwiRail, a dedicated general manager, reporting directly to the Chief Executive, has been appointed. In FY2014, KiwiRail implemented a plan which involves identifying and reducing critical risks, implementing robust and compliant safety management systems, building Zero Harm capability and developing environmental accountability. To achieve this, our leaders will engage the workforce and maintain operating discipline. Safety performance highlights FY2014 include:

• Total Recordable Injury Frequency rate reduced by 40 percent from the previous year; • Continued reduction in main-line derailments; • Establishment of Critical Risk Networks for tunnels, Signals Passed at Danger (SPADs)

and track occupancy hazards and issues. In FY2015, KiwiRail will work to reduce the level of risk of high potential events and improve its workplace health and safety record. We plan to reduce Total Recordable Injury Frequency rate by at least 30 percent. KiwiRail is committed to doing its utmost to ensure that the welfare of staff and customers is protected and everyone goes home after their shift as fit and healthy as they arrived. The driving principles for FY2015 include:

• Working towards a One-KiwiRail approach to Zero Harm; • Implementing systems and processes that enable us to move beyond compliance; • Providing the tools and knowledge to support our people; • Engaging KiwiRail leadership and unions in the Zero Harm journey.

Page 16 of 66

Background By their nature the rail and ferry industries have a number of hazards that can have significant consequences for people or the environment if they are not properly controlled. The hazardous nature of the business has been recognised at times in the past, most recently in 2000 when the then Minister of Labour, the Hon Margaret Wilson, commissioned a Ministerial Enquiry into occupational safety and health within the business operated at that time by Tranz Rail. The resulting report found that a different standard of safety and health was being applied within Tranz Rail from that applied to most other businesses. Today, KiwiRail’s commitment to the protection and care of our people, the public and the environment is central to creating a sustainable business. Without good safety performance our licence to operate is threatened. While we have addressed key safety issues and have seen an overall improvement in key indicators we continue to have unavoidable incidents within the rail environment. KiwiRail measures safety performance in a number of ways. The two most significant are the lost time injury frequency rate (LTIFR) and total recordable injury frequency rate (TRIFR). But measures of issues such as signaling irregularities (signals passed by trains in contravention of the message being conveyed – at their worst, a SPAD A), train derailments and collisions within freight terminals, are also helpful in building a picture of safety compliance. Safety Performance Our lost time injury frequency rate (LTIFR) has increased slightly from 2013. Our LTIFR for FY2014 is the equivalent of one injury per 16 employees. This puts us at the lower end of safety performance for similar industries in New Zealand and Australia. Our Total Recordable Injury Frequency Rate (TRIFR) has been reduced by 40 percent from the previous year. Although part of this is due to a change in definition of what constitutes a medical treatment injury1. We also still have a long way to go when compared to our international benchmarks. Our objective for this financial year is to reduce this figure by a further 30 percent. Over the past 10 years, the incidence of the more serious form of SPAD has been rising, reflecting the growth of traffic on the network. In the 2006 year there were only 28 SPAD As, recorded. The total has risen to 50 this year. While signal irregularities have been rising, there has been a pleasing decrease in terminal collisions which are often more serious in terms of resulting injuries. Over the last 10 years, collisions peaked at 106 in 2010 and have decreased steadily to 64 in the 2014 year, two less than the previous year. Train derailments continue to decline as both network improvements and new rolling stock have an impact.

1 TRI = LTIs + MTIs. Medical treatment injuries no longer include referrals to a medical practitioner where no treatment is provided.

Page 17 of 66

Our driving principles for FY2015 will continue to be: • To work towards a One-KiwiRail approach to Zero Harm; • To implement systems and processes that allow us to move beyond compliance and

continuously improve; • To provide the tools and knowledge to support our people at the front-end of our

businesses; • To engage KiwiRail Leadership in the Zero Harm journey.

Progress in Group Activities Establishment of Critical Risk Networks (CRN) Effectively managing operational risk is a key business activity. While all of our activities have related risks KiwiRail has recognised that these could be better managed. Critical Risk Networks (CRN) have been formed to activity identify hazards and manage high level risks that result from Signals Past at Danger (SPADs), Tunnel Operations and Work on Track.

Signals Passed at Danger – Category A. A rail movement which exceeds its limit of authority and travels beyond a red signal or notice-board at which it should have stopped, is classified as a Signal Passed at Danger (SPAD A). There were 66 recorded SPAD A occurrences in FY2014, 50 of them involving KiwiRail as the operator and/or employer of the Locomotive Engineer. The creation of the SPAD working group was in response to the increase in SPAD incidence. KiwiRail is working to improve understanding of why they occur, improve in-cab procedures, improve signalling systems and harness emerging technologies.

Track Occupancy A critical risk network has been formed to develop a safety improvement strategy for track occupancy, recognizing the risk of a collision between a train and track maintenance staff. Track Worker Protection has focused on balancing the introduction of new electronic systems with the tightening of rules around when people can be on track. A new system called Eprotect aims to improve safety for Compulsory Stop Protection (CSP) worksites. It uses technology which provides automatic control systems for approaching trains.

Tunnel Safety New occupational safety legislation being enacted places an onus on KiwiRail to consider carefully the risks associated with travel through tunnels, particularly those that are problematic because of

2011-12 2012-13 2013-14

LTIFR 7.6 12.8 13.6 TRIFR 55.5 54.6 32.9 SPAD As 53 71 50 Terminal collisions 76 66 64

Train Derailments 27 20 18

Page 18 of 66

their length, gradient, tunnel geometry, accessibility, isolation, frequency of service or use by particular traffic (such as Otira). Tunnel risk is being addressed through programmes to install fire suppression on locomotives operating on the coal route, substituting petrol with diesel on small plant and improving personal protective equipment (PPE) for gas detection and worker isolation. Environmental Performance KiwiRail’s freight services produce roughly 60 to 80 percent less emissions than a comparable truck trip. Since 2010 the business has seen a constant reduction in the carbon intensity of its freight services with a 4 percent reduction from 2013. Carbon intensity is calculated on the basis of emissions from fuel and electricity consumed divided by the net tonne kilometres of freight carried. This is reflective of better planning and utilisation of freight services as well as the benefits of the 40 DL locomotives starting to be realised. Our main initiative to improve our fuel burn and reduce carbon intensity for our customers is the EnergyMiser project. Implementation has been delayed due to the DL fleet being withdrawn from service in February. Equipment had been installed in the cabs of 32 percent of the planned locomotive fleet by the end of June. In the absence of New Zealand data on transport emissions we compare our performance with data from the UK2. At 31.3 gms per net tonne kilometre (NTK) rail compares very favourably to the truck equivalent at 123.20 gms per NTK. Both of our tourism focused services, Interislander and Scenic trains continue to hold a Silver level endorsement from Qualmark for responsible tourism activities. This acknowledges efforts in energy saving, waste reduction and involvement in community activities. KiwiRail has a number of interfaces with the environment ranging from the construction of the rail network including bridges and culverts to the management of stormwater collected within our sites. We hold 220 resource consents for a range of these activities and other activities covered by the Resource Management Act. These consents are managed through an online database providing an auditable trail of conditions.

2 Department of Environment, Food and Rural Affairs. Greenhouse Gas Conversion Repository. Data compared to is All Heavy Goods Vehicles for 2014.

2011-12 2012-13 2013-14

Carbon intensity (gms CO2-e per NTK) 32.51 32.49 31.13

Energy used (TJ) - 4,194 3,982

Carbon emissions - scope 1 and 2 (tonnes of CO2-e) - 289,915 276,418

Page 19 of 66

Public Safety on the Rail Network Rail is an inherently safe form of transport because it operates in a dedicated, controlled environment – the New Zealand rail network.

Level Crossing Safety The most regular interaction between the public and the railway occurs at level crossings – 1,400 public road and 85 public pedestrian crossings. Only half of the network’s crossings are controlled by electronic devices such as lights and bells and barrier arms. The remainder are commonly controlled by signs which require road users to stop and check that the track is clear. Unfortunately, some road users, either on purpose or through inattention, ignore signage and even electronic signals. The result is between 20 and 30 collisions a year and consequent injury or loss of life. In the 2014 year, 22 vehicle collisions and three pedestrian collisions were reported. This is a slight increase in vehicle collisions on last year’s 20 but a reduction of three on pedestrian collisions. Public awareness programmes and work over the last 10 years to improve safety at those level crossings considered to constitute the greatest risk, have almost halved the number of collisions. In FY2014 seven level crossing upgrades were completed, a figure consistent with past years. But even at an accelerated rate, upgrades will not alter the fact that approximately half of the country’s crossings do not have electronic signals fitted. Level crossing safety awareness programmes are run in conjunction with TrackSAFE, an Australian harm prevention charity. The Chief Executive of KiwiRail chairs the New Zealand TrackSAFE board and sits on the Australian Board. Rail safety campaigns include an August Rail Safety Week and reminders to road users before the summer holiday period to be careful at level crossings.

Tunnel Safety The issue of passenger trains in tunnels first arose in 2013 when it was considered necessary to review safety in the Otira tunnel because of its special nature – in particular its length, gradient and

Page 20 of 66

presence of coal dust. The outcome of that review was that AK class carriages could be the only rolling stock deemed suitable for using the tunnel. KiwiRail then established a Tunnel Working Group to widen the review. Its first task was to rank tunnels according to risk. The result was the identification of seven tunnels on the network with the highest risk profile. They are Otira, Rimutaka, Tunnels 1 and 2 North Island Main Trunk, Kaimai, Mihiwaka and Lyttelton. The principal operators of passenger services on the New Zealand Rail network are KiwiRail itself and heritage railway operators. In June 2014, KiwiRail contacted the Federation of Railway Operators of New Zealand (FRONZ) and major heritage operators and briefed them on the new environment and the work that was in progress. KiwiRail, in consultation with NZTA and WorkSAFE has been working to establish new safety regime for the moment of trains through long tunnels. This issue is dealt with in greater detail in the Appendix Two. Safety Initiatives in FY2015 and Beyond In 2015, significant change to the New Zealand health and safety legislative framework will occur. Shaped in part by this expected change – and to help KiwiRail achieve a Zero Harm environment - the Zero Harm strategy was developed in FY2014. The strategy targets four areas in which we will engage our workforce and build operating discipline into our business:

• Identifying and reducing critical risk; • Implementing compliant systems; • Building Zero Harm capability; • Improving environmental accountability.

The restructure and appointment of key Zero Harm roles will continue into FY2015 with the establishment of Zero Harm leadership positions and regionally located Zero Harm specialists within the KiwiRail business units. To help them implement Zero Harm initiatives, responsibilities and accountabilities, a corporate Zero Harm team will provide key centralized support functions to deliver:

• An integrated Assurance, Risk and Investigation team; • A Safe Working Standards and Business Systems team; • A Zero Harm Support Services team.

Page 21 of 66

RAIL’S ROLE IN THE ECONOMY Over many years, rail has evolved from being the dominant carrier of freight and people to a niche role in both freight and passenger transport. Today, rail contributes to the New Zealand economy in three ways:

• The movement of bulk freight and goods hauled over long distances and shuttles between ports and distribution centres;

• Urban passenger transport in Auckland and Wellington; • Travel experiences on scenic trains and Cook Strait ferries.

KiwiRail’s 900 weekly freight trains are an integral part of the New Zealand economy. They move heavy freight through the country and to and from major ports, complementing and taking pressure off the highway network. Rail freight plays a particularly important role in getting export goods to market. Approximately 30 percent of New Zealand’s exports travel to port by train. The freight railway complements state highways. If rail freight traffic were moved to road, it would add something like one-and-a-half million more truck trips to highways, several of them already congested. The Ministry of Transport, in its 2014 update of the 2006-07 National Freight Demand Study (NFDS), noted the importance to the economy of freight movements. It recognised that the cost-effective and efficient movement of goods bound for export — estimated at 30 percent of total flows — is particularly vital. The updated findings, based on statistics up to and including 2012 are positive about the performance of rail over the six years since the first study was completed. KiwiRail Freight’s FY2014 year can be regarded as out of step with the picture the study paints, but the conclusions it reaches about rail freight’s importance to the economy remain valid. The study found that rail tonnages had risen 18 percent between 2006-07 and 2012, faster than road (4 percent) and coastal shipping (2 percent). These increases reflected growth in volumes of dairy products, logs and retail goods. Looking ahead, the study is forecasting that the overall freight task will grow by almost 60 percent over the next 30 years. It identifies strong growth in the traffic that currently drives the KiwiRail freight business. KiwiRail provides three separate categories of freight services namely domestic, bulk and import/export (IMEX). We move bulk commodities such as coal, fertiliser, steel, aluminum and milk. The NFDS estimates KiwiRail carries 60 percent of all coal measured by volume and 91 percent measured by tonne kilometre. Freight trains carry containerised goods to and from ports. Given the importance of the dairy industry to the New Zealand economy, KiwiRail’s 41 percent share of manufactured dairy products is significant. In Wellington and Auckland, suburban rail networks carry approximately 23 million passengers a year. While the figure is modest compared to the number who travel by vehicle, its importance lies in the fact that without it an extra 18 million vehicle journeys would be added to roads that are

Page 22 of 66

already congested. That translates to approximately 30,000 extra daily vehicle journeys on each of Auckland and Wellington highway networks. Tourism is one of New Zealand’s biggest export earners. The travel experiences provided by KiwiRail’s Scenic trains and Interislander ferries, are significant contributors to the country’s tourism infrastructure. Engaging our Customers Without customers, KiwiRail would not have a business. Building and maintaining relationships with customers is critical to our commercial success. It depends on:

• Providing reliable services that meet customer needs; • Having the infrastructure and mechanical resources to sustain those services; • Engaging and partnering with customers to achieve the best outcome.

Major Business Routes and Traffic KiwiRail operates a 4,000km rail network and three ferries which move passengers and freight across Cook Strait. The traffic using the network separates into the following categories:

Import-Export Freight to and from Major Ports. Export goods such as processed dairy products and meat (mainly in containers) is moved to ports such as Auckland, Tauranga, Napier, Wellington, Lyttelton, Timaru, Port Chalmers and Bluff. Imported goods are carried from sea ports to inland ports and distribution centres, particularly in south Auckland.

Domestic Freight Between Major Centres Consumer goods move south from Auckland to distributions centres in the lower North Island and Christchurch.

Bulk Commodities for Processing or Export Coal, milk, timber and steel are all moved in bulk for either export (coal, timber and steel) or processing (milk and timber).

Freight and Passengers Across Cook Strait The New Zealand freight supply chain is heavily dependent on KiwiRail’s three ferries to move freight, either on commercial vehicles or rail wagons, across Cook Strait. Passengers and their vehicles use the ferries to move between islands or as part of travel experiences.

People in the Auckland and Wellington Metropolitan Areas Between them, the two urban rail network deliver approximately 23 million passenger trips a year

Travel Experiences Scenic passenger trains provide travel experiences between Auckland and Wellington, Christchurch and Greymouth, and Picton and Christchurch.

Page 23 of 66

Major Rail Traffic Flows

Page 24 of 66

New Zealands Rail Network by line Line Profile Traffic Issues North Auckland Links Auckland with the far

north, terminating in the Bay of Islands. Branches to Dargaville and Otira.

Dairy products, some forestry products, general goods and china clay. Traffic mainly North to South.

• Value lies in its potential rather than current traffic.

• Major constraints are tunnels which cannot accommodate 9ft 6in containers and lack of access to Marsden Point.

Auckland Metro Four lines carry commuter traffic, primarily into Auckland city, between Waitakere in the north west and Pukekohe in the south.

11 million commuters a year. Significant growth expected as new electric trains are introduced.

• Competition for access between freight and commuter traffic on South Auckland lines.

• No direct connection between Britomart station and the Western Line. Prohibits “through traffic” at Britomart and places constraints on network’s effectiveness.

Auckland to Tauranga, Waikato -Bay of Plenty

Incorporates the North Island Main Trunk (Auckland-Hamilton), East Coast Main Trunk (Auckland – Mt Maunganui) and forestry lines to Kinleith, Kawerau and Murupara. Construction of three passing loops on ECMT has enabled rail traffic to double on the line.

NZ’s busiest rail freight route. Containerised and bulk goods travel to and from the Ports of Tauranga and Auckland as well as to and from freight consolidation centres such as Westfield and Fonterra’s Crawford Street store.

• Competition for access between freight and commuter traffic between Westfield and Wiri – to be mitigated by building a third line.

• Track, bridge and Kaimai Tunnel work needed on ECMT to increase line resilience and reliability.

Auckland to Christchurch

Incorporates NIMT, Interislander ferries and Main North Line. The Northern Explorer passenger service travels on the NIMT between Auckland and Wellington while the Coastal Pacific travels seasonally between Picton and Christchurch.

Elongated route for mainly domestic traffic. Containerised general and FMCG freight moves predominantly north to south. Route has historically suffered because of limited investment compared to road which makes journey times less competitive.

• Freight trains slowed by commuter traffic in Auckland and to a lesser extent Wellington.

• Track infrastructure and alignment issues increase transit times. A rail trip takes 24 hours compared with 18 for typical road journey.

• Price competition from major shipping lines who take domestic freight to supplement international trade.

Lower North Island

Incorporates Marton-New Plymouth Line, Lower North Island Main Trunk and Palmerston North-Napier line.

Often referred to as the “Milk Route” because of bulk milk movements from Oringi in the Wairarapa to Fonterra’s Whareroa plant near Hawera. Main traffic is bulk milk and processed dairy products north on NIMT or east through Napier. Work on tunnels on MNPL and in Manawatu Gorge have enabled larger containers to pass through.

• Congestion in Palmerston North rail yards would be eased by building a by-pass.

Page 25 of 66

Wellington suburban network

Incorporates North Island Main Trunk (Wellington to Waikanae), Wairarapa Line (Wellington to Masterton), Johnsonville Line and Melling Branch Line.

11.7 million commuters a year use the Wellington network which has benefitted in recent years from both infrastructure and rolling-stock upgrades.

• Parts of overhead wiring network remain to be replaced.

• Bridge replacement work in the Wairarapa scheduled.

• Slope stability work still required to reduce slips during storms.

• Decision to be made on the future of the Capital Connection (Palmerston North-Wellington) commuter train which uses the NIMT.

Wellington to Picton

Three roll-on-roll-off ferries, Aratere, Kaitaki and Arahura, link Wellington and Picton. Ferries complete seven sailings a day.

Ferries carry rail freight, commercial vehicles and passengers and their vehicles. Freight is mainly containerised consumer goods but commercial vehicles move livestock between the two islands.

• Service reliability Aratere’s propulsion shaft issues in November 2013 have highlighted the importance of restoring service reliability for customers.

• At 30 years, the rail-capable Arahura is nearing the end of her working life. Because a rail-capable replacement would be prohibitively expensive, road-bridging options are being considered as part of fleet reconfiguration.

Canterbury-West Coast

Incorporates the Midland Line (Rolleston-Greymouth), Main South Line (Rolleston-Christchurch), Ngakawau-Stillwater Line, and Hokitika Branch Line.

Often referred to as the “Coal Route”. Coal trains move coal loaded at Ngakawau north of Westport to Port of Lyttelton travelling on the Nakawau-Stillwater Line, the Midland Line and the Main South Line between Rolleston & Christchurch. Dairy products are moved on the Hokitika Branch Line from Westland Dairy’s plant to Greymouth and out to Lyttelton. The passenger TranzAlpine service runs daily between Christchurch and Greymouth.

• Rugged terrain and extreme weather test infrastructure resilience.

• Otira Tunnel (8.5km long) constrains capacity on the line

• Out-dated signalling system on Midland Line a capacity constraint.

• Wooden bridges remain to be replaced.

• Deferred maintenance still to be addressed.

South of Christchurch lines

Incorporates the Main South Line, Wairio Industrial Line and the Otago Central Branch Line (to the Fonterra store at Mosgiel).

Heavy volumes of dairy traffic move north from Edendale in Southland to Fonterra stores at Mosgiel, Port Otago and potentially from Clandeboye dairy factory in South Canterbury to Lyttelton. Industrial coal moves north from Ohai-Nightcaps to dairy and other factories. Taieri Gorge Railway run scheduled passenger services on Main South Line north to Palmerston and south to connect with Otago Central Line to Middlemarch.

• Relatively lower traffic volumes in the south make road more competitive.

• Backlog of infrastructure renewal work.

• Mihiwaka tunnel, north of Dunedin, potential hazard for heritage passenger services because of tunnel length and access problems.

Page 26 of 66

CURRENT POINTS OF INTEREST

Napier – Gisborne Rail Line Freight services ceased on the Napier Gisborne Line after the March 2012 washouts near Beach Loop. KiwiRail announced its decision not to reinstate the line after extensive work determined we were unlikely to generate sufficient revenue in the foreseeable future to cover costs. As part of the mothballing decision KiwiRail undertook to work with the Government and regional interests to consider the strategic value of the corridor, including alternative uses and how to best realise that value for the good of the New Zealand economy. Since mothballing the line a number of parties have sought to preserve their position and/or expressed interest in all or part of the corridor for different purposes, including the Gisborne rail yard.

Hawkes Bay Regional Council (HBRC) The HBRC has expressed interest in leasing the line to re-establish freight services between Gisborne and Napier in conjunction with a private operating company, the Napier Gisborne Rail Establishment Group (NGR). The Council approved a potential investment in NGR in its 2014/15 Annual Plan, conditional on a number of factors including:

• the line being returned to a good “fit for purpose” operating condition; • leasing the line and locomotives from KiwiRail on satisfactory terms; • the Council being satisfied that an investment in NGR would cover the Council’s cost of

funding over the long term.

Tourism A number of parties have expressed interest in leasing the line to continue or establish tourism ventures. One grouping would utilise the mothballed rail track:

• Adventure tourism operations

• Heritage or charter operators using heavy rolling stock.

Alternatively, if the rail and sleepers were removed the corridor could be used as a cycle pathway.

Gisborne Iwi Under their 2011 settlement with the Crown, the Rongowhakaata iwi received a conditional “first right of refusal” to purchase at market value the land on which the Gisborne rail yard is currently located, subject to KiwiRail declaring the land “surplus to rail requirements”.

Page 27 of 66

The iwi would like to purchase the rail yards to build permanent housing for a historically significant whare that will be relocated from Te Papa. KiwiRail has entered negotiations to sell the site subject to a number of conditions

Wellington Metro Rail Tender KiwiRail is partnering with Keolis Downer EDI (KD) to tender for the contract to operate the Wellington Regional passenger rail network from 2016.

KD is a joint venture between Keolis and Downer EDI. Keolis is a public transport operator established in 15 countries across four continents and the largest public transport operator in France. Downer EDI is a leading provider of engineering and infrastructure asset management services in Australia and New Zealand.

Both have impressive track records of transitioning into new cities and a strong culture of developing and implementing new rail initiatives including the development and implementation of multi-modal, smartcard ticketing in Australia, UK and Europe.

KiwiRail signed a Memorandum of Understanding with KD on Thursday 2 October agreeing to the joint bid, and an Expression of Interest (EOI) was submitted to Greater Wellington Regional Council on 6 October. Greater Wellington Regional Council will announce the shortlisted bidders and issue a Request for Proposal (RFP) in December.

With customer satisfaction at 92.7 per cent and on time performance at 94.7 per cent and passenger numbers still growing, recent benchmarking shows KiwiRail through Tranz Metro as consistently one of the best performing rail operations in Australasia. KiwiRail and KD will work collaboratively to build on what Tranz Metro has achieved to date and deliver even greater

Page 28 of 66

operating efficiencies, new technologies, and more value for money while maintaining strong customer and stakeholder satisfaction.

Performance Issues with Auckland's New Electric Trains KiwiRail and Auckland Transport are continuing to work together to confirm causes of and resolutions for an intermittent power fault which is affecting the performance of the new Auckland electric trains. It appears the fault is the result of a phenomenon known as resonance over-voltage. Investigations to date indicate it is being triggered by the way the train responds to the natural resonance frequency of the network. Interim solutions have been identified that allow the continued, reliable use of the trains for commercial service, while further work continues to fully define the extent of the issue and the options for resolving the situation.

Page 29 of 66

EMPOWERING OUR PEOPLE

KiwiRail employs approximately 4,100 staff. The average age of staff members is 46 and 85 percent are male. We recognise that to deliver on our targets, we must have an engaged and motivated workforce led by managers with vision and energy and have a clear sense of what targets they need to achieve. We have developed six core values we consider to be critical to achieving engagement and motivation. Our prime value is zero harm and focussing on the importance of safety to the business followed by developing awareness that staff are working for one business, KiwiRail, rather than a collection of individual businesses. Our most visible employee performance indicator is the staff engagement index. It is indicating that our staff are becoming more engaged. From an index of 65 in FY2010 and 67 in FY2012, we moved to 73 in both FY2013 and FY2014.

Page 30 of 66

From FY2015 we are considering a range of approaches to gauge employee engagement in addition to the staff engagement index. This will include greater engagement by front-line supervisors/team leaders and gangers with their staff and feedback from unions. The difficult year the business has experienced in 2014 may have a short-term impact on the way our staff regard KiwiRail but we are confident the drive to embed our core values we have identified along with our Back to Basics framework and greater engagement and support for frontline leaders will, over time, improve engagement levels. A priority over the past year has been to ensure senior managers understand their special responsibility to communicate the KiwiRail values and energise their people. Workplace Relations There are a number of industrial agreements in accordance with which KiwiRail staff work. The most significant is that negotiated with the Rail and Maritime Transport Union (RMTU). During the 2014 year, KiwiRail and the RMTU continued their discussions on the renewal of the collective agreement that establishes remuneration and conditions of work. This collective agreement is in the process of being ratified by the RMTU and we expect to sign the new agreement for a two year term in November 2014.

Page 31 of 66

THE KIWIRAIL BUSINESS AND PORTFOLIO PERFORMANCE Delivering Portfolio Performance KiwiRail’s financial performance is driven by its business units, primarily Freight, Interislander, Passenger and Property.

2013-2014 Business Performance After three years of encouraging growth in the freight business, KiwiRail’s FY2014 performance was impacted by weaker import-export and bulk freight volumes, the need to withdraw the ferry Aratere from service for seven months and the shorter-term loss of the DL locomotives following the discovery of asbestos containing material in coatings around locomotive engineer bays. As a result, revenue was on a par with 2013 but higher costs were responsible for operating earnings being some 28 percent lower. The FY2014 result was disappointing because the year had begun promisingly. The introduction of new and improved rolling stock provided the Freight business with capacity to meet demand created by a growing economy. Freight revenue in the first four months of the year was tracking ahead of plan. By year’s end, while Freight lagged behind plan, it was only slightly ($1.7 million) down on last year. In the circumstances, this was a creditable performance from the business unit that generates the bulk of our income. While the year had its share of disappointments, there were also achievements. Total harm injuries reduced 44 percent from the prior year, derailments dropped to 18, a far cry from the 60 recorded 10 years ago and a reflection of the improving quality of network infrastructure. The Passenger business produced encouraging results from Wellington suburban rail and long distance scenic journey operations. Passenger numbers and customer satisfaction in our Tranz Metro business both increased while profitability improved in Scenic Journeys.

Page 32 of 66

Summary of KiwiRail Group 2013-2014 Financial Performance 2014 2013 % change

Operating Revenue ($m)* 723.6 727.0 (0.5)

Operating Expenses ($m)* (648.3) (618.8) (4.8) Operating Surplus ($m)* 75.3 108.2 (30.4)

Net Operating Surplus ($m) 77.5 108.2 (28.4) Net Profit/Loss after taxation ($m) (248.0) (174.7) (42.0)

Operating Cashflow ($m) 67.1 77.0 (12.9)

Total Assets ($m) 992.7 1,009.6 (1.7) * before major one-off items

Operating Performance

30 June 2014 (NZ$million)

30 June (NZ$million

Percentage change

Freight 462.0 463.7 (0.4%)

Interislander 116.7 124.3 (6.2%)

Tranz Metro 52.6 50.1 4.9%

Scenic Journeys 21.0 20.0 4.8%

Infrastructure 35.2 35.1 0.3%

Property and Corporate 36.1 33.8 6.7%

Total operating revenues 723.6 727.0 (0.5%)

Page 33 of 66

KIWIRAIL FREIGHT Freight is the major KiwiRail business unit revenue earner, earning up to 70 percent of revenue when goods carried by ferry is combined with rail freight. Each week Freight operates approximately 900 services around the country. Commercial and customer service teams are predominantly based in Auckland with representatives at each of its major depots around the country. The Interislander ferry service is an integral part of the national rail network. The three ferries provide important value options in terms of rail and freight capacity across the Cook Strait. Broadly speaking there are three key freight markets, each of these segments is characterised by their own market-unique drivers and circumstances, which in turn determines the applicability of rail as a transport solution. Import and Export (IMEX) Containerised export commodities, such as milk powder, tend to be moved in large quantities and as such they lend themselves to rail. Superior axle load capacities can more efficiently transport large and heavy consignments. In addition, key exporters with large freight footprints often have infrastructure in place that is optimised for Rail to Port journeys. There is plenty of opportunity to develop this market further through greater integration of land transport planning including consolidation of ports and the development of inland ports and hubs. Port rationalisation and the introduction of larger vessels into New Zealand will result in fewer ports serviced and more import/export cargoes hubbed around the country via rail and coastal shipping to connect with these services. Bulk Bulk commodities are well suited to rail where there is an intrinsic ability to carry large consignments and make use of the benefits of scale. KiwiRail already moves almost 70 percent of coal volumes. While coal volumes carried have been affected by low world prices, trials have demonstrated rail’s ability to carry projected increased coal volumes from the West Coast to Lyttelton. Milk is another bulk commodity where movement by rail takes pressure off the highway network. Forestry traffic reduced in the second half of FY2014 largely as a result of high log inventories in China. Maturing forests over the next three to five years should result in a significant uplift in log volumes moving on the rail network. Domestic The domestic market encompasses freight movements where the end product consumption is likely to be inside New Zealand and predominately services the Auckland to Christchurch market. While the majority of this market is of products fit for immediate domestic consumption or use, there is a broad array of other commodities that are transported in this category - grain, steel and gas for example. Rail plays an important role in this market by providing a line haul service from one rail destination to another, at which point freight forwarders carry out further processing for final delivery to end customers. It differs from the Bulk category in that trains tend to cater for multiple customers with

Page 34 of 66

consolidated consignments of freight rather than a dedicated service of one commodity type such as logs. With consolidation in the road transport industry likely, there is significant opportunity to make greater use of rail within this sector.

Business Category Volumes

Business Category Bulk & Forestry IMEX Domestic Other Total

NTKs 1,899,515,116 1,249,015,128 1,343,395,672 38,539,525 4,530,465,441

42% 28% 30% 1%

Business

Category Bulk & Forestry IMEX Domestic Other Total

Net Tonnes 8,543,204 6,279,635 2,372,755 331,745 17,527,339

49% 36% 14% 2%

Volume of Freight carried on the Network

Measure 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 NTK carried

3,991 3,983 4,233 4,233 4,585 4,530 (millions)

Rolling Stock Renewal The age and limited fleet size of both locomotives and wagons has presented a major challenge to growing the freight business. The youngest in the current fleet of locomotives was 20 years old before the commissioning in 2011 of 20 new DL locomotives. Although the fleet of locomotives was refurbished in the early 1980s these are considered underpowered and outmoded by today’s standards. Without new locomotives and wagons opportunities to convert more freight to rail would have been at risk. KiwiRail has 4,820 wagons. About half are container flat wagons, the rest made up of specialised wagons for specific commodities – coal, fertiliser, refrigerated goods and milk. The average age of wagons has been between 25-30 years, and most wagon axle loads are only 14 tonne. Around 70 percent of the container fleet was built to a 1970 design and based on a 14 tonne axle load capacity. Since 1970, container weights have steadily increased and to stay competitive in the modern market, an axle load of at least 18 tonne is needed. A priority for the business has been to add new wagons able to carry heavy loads and maximise capacity of each service.

Page 35 of 66

Over the last four years, almost 900 new wagons designed to carry containers has been added to the wagon fleet. New flat top wagons now comprise roughly a third of the container fleet. In addition, new coal wagons, curtain-sided wagons for serving freight-forwarding customers and log bolsters for carrying logs have been added. Locomotives CLASS TOTAL POWER TRACTION ORIGINAL BUILD DL 40 2700kW 269kN 2010-2013 EF 17 2984kW 256kN 1988 DXR 2 2240kW 262kN 1972-1976 DXB 14 1940kW 262kN 1972-1976 DXC 32 1940kW 262kN 1972-1976

DFB 12 1828kW 240kN 1980 DFT 15 1828kW 175kN 1980 DC 55 1119kW 160kN 1965 DBR 5 709kW 85kN 1965

Wagons TYPE NUMBER AVERAGE AGE AVERAGE AXLE

LOADING [T/axle] Container Flat Wagons Light 1302 37 14

Container Flat Wagons Heavy 1078 6 18

Box/Curtainside Light 555 37 14

Box/Curtainside Heavy 175 14 18

Logs Light 527 40 14

Logs Heavy 24 21 18

Coal 373 17 18

Milk Tanker 66 22 18

Gas Tank 4 32 14

Flat General 121 39 14

Infrastructure 179 30 14T

4 Wheelers 117 41 12

Canopy Light 76 40 14

Canopy Heavy 48 18 18

Reefer CFT 55 38 14

Grain/Fertiliser 27 24 18

LCS 93 39 14

Auto 0 N/A N/A

Page 36 of 66

Workshops KiwiRail maintains rolling stock at railway workshops in the Hutt Valley. Hillside Workshops in Dunedin was sold in late 2012.

Hutt Workshops The Hutt Workshops site has the capability to undertake all aspects of maintenance and refurbishment of railways rolling stock in New Zealand - including heavy maintenance and structural repairs. The site specialises in the refurbishment of mainline and shunt locomotives, metropolitan passenger trains (EMU) and other rail assets. The Hutt Workshops site refurbishes mechanical and electrical components for the New Zealand railways industry. Their work is commissioned by KiwiRail, Greater Wellington Regional Council, and former Auckland Regional Transport Authority (ARTA), now Auckland Transport. Key facts:

• Over 120 employees; • Site established 1929; • 25.5 hectares (63 acres) set in industrial zoned area of Lower Hutt.

Major facilities:

• Production plants – 26700 sqm; • Inventory Store – 5650 sqm (total); • Test track and load testing facilities.

2013/2014 Performance After three years of steady growth, freight revenue during FY2014 held steady at 2013 levels. There were three principal reasons for this pause: reduced volumes of import/export and bulk traffic, the loss of the ferry Aratere for the second half of the year and the discovery of asbestos containing material in the new DL locomotives. A weakening forestry market, a reduction in Fonterra exports, softer coal prices and some shipping schedule changes between the Port of Auckland and Tauranga were the market issues which impacted on revenue. Revenue at $462.0 million was $37.4 million or 7 percent below budget and marginally ($1.7 million) below last year. Operating surplus performance for the freight business at $132.3 million before one-off items, was $23 million below target and slightly ($2.0 million) below last year. Average yield showed an improvement, up from 8.20 (c/NTK) FY2013 to 8.30 (c/NTK). Aratere’s absence from December after a propeller shaft failure impacted on domestic services. Major freight forwarders were forced to make other arrangements to get goods across Cook Strait which included converting to road or moving goods using coastal shipping services. Not only did the ship’s absence reduce revenue but it also affected confidence in KiwiRail’s ability to provide reliable service.

Page 37 of 66

The DL locomotives were withdrawn from service on 28 February as a result of the discovery of asbestos containing material. The second tranche of 20 locomotives had only been introduced into service in August. These issues are reflected in the reduction in freight net tonne kilometres carried, down from 4,585 million FY2013 to 4,530 million FY2014. Despite these issues, the domestic business managed to record revenue growth of 7 percent. The problems associated with Aratere and the DL locomotives arrested what had been a steady improvement in on-time performance of premium freight trains as a result of investment in infrastructure and rolling stock. FY2013 on-time performance had reached 89 percent against a target of 90 percent but dropped back to 84 percent in FY2014. The standard measure of locomotive efficiency, locomotive mean distance between failure (MDBF), a measure of locomotive reliability, also deteriorated slightly from 46,000km FY2013 to 45,000km FY2014 as a result of the removal of the higher performing DLs from service. In September 2013, a further 300 new container wagons were added to the freight fleet, increasing the new container wagon fleet to more than 835 which is approximately a third of the container flat top fleet. Performance Measures Measure 2011-2012 2012-2013 2013-14

Freight premium train (%<30mins) 81% 89% 84%

Freight operating cost/NTK 7.6c 6.8c 6.4c

Freight labour cost/NTK 2.0c 3.1c 3.2c

Financial Performance ($m) 2011-2012 2012-2013 2013-2014

External Revenue ($000) 457.6 463.7 462.0

EBITDA ($000)* 129.1 134.3 132.3

Total Assets($000) 299.3 369.4 341.2

* Excludes major one-off items FY2013 comparatives have been restated where appropriate to reflect FY2014 changes in business and structure.

Page 38 of 66

Asbestos Contamination in the New DL Locomotives Background One of the issues that confronted KiwiRail when it was formed in 2008 was the increasing age of its locomotive fleet. Many were thirty or more years old, the most recent having been commissioned in the 1980s. Earlier on locomotive replacement had established that the best combination of quality and price was to be obtained from sourcing locomotives from China. KiwiRail placed its first order for 20 new locomotives with CNR’s locomotive and rolling-stock plant in Dalian in 2009 and a second order for another 20 some months later. With a pulling power of up to 2000 tonnes and a double-cab configuration, they enabled a single locomotive to do the work of two of the older locomotives on a number of routes. The purchase contract stipulated that the locomotives be fit for purpose and compliant with New Zealand law. The specifications clearly stated that asbestos was not to be used in any part of the locomotives. The DLs, as they were classed, entered service progressively from early 2011.

The Issue In late 2013, locomotives operating in Australia, built by a separate Chinese supplier, were withdrawn from service because of the discovery of asbestos in exhaust systems. KiwiRail sought and obtained further assurance that its DL locomotives did not contain asbestos in lagging around the exhaust system. In early 2014, routine tests detected the presence of asbestos containing material in coatings around locomotive engine bays. In recognition of KiwiRail’s commitment to ensuring the health and safety of staff, the locomotives were withdrawn from service.

The Operational Repercussions Taking 40 locomotives out of a fleet of 190 puts a strain on resources. The DL locomotives had initially been allocated to the Upper North Island traffic routes. But after the commissioning of the second batch of 20, they were being used in other parts of the North Island, including on the North Island Main Trunk and the “milk route” in the lower North Island. When they were withdrawn from service on 28 February, KiwiRail put in place a train plan which included suspending services in Northland and repositioning locomotive horsepower to ensure each service was optimised. Although there was only a minor reduction in overall services, there was a reduction in tonnage capacity which did impact some businesses and supply chains around the country. Northland services were restored in mid-April 2014 when second generation locomotives that showed a lesser level of contamination in tests began filtering back into service. All of the 20 second generation locomotives are expected back in time to meet the freight peaks of the last quarter of the calendar year.

The Response All 40 locomotives were withdrawn on 28 February. Two series of independent tests carried out indicated a very small presence of asbestos fibre in five locomotives but no asbestos dust. The tests also indicated the asbestos identified was contained and could not get into the air to be inhaled. The testing regimes and recommendations were validated, by an internationally-recognised, Australian occupational medicine expert. He confirmed that the risk of any exposure to airborne fibres was low and if any did arise it would be insignificant in relation to both New Zealand and

Page 39 of 66

International workplace exposure standards for respirable Chrysotile fibre. Packing material in the engine bay doors as well as sound-proofing material from the engine bay and cabs of the locomotives were identified as needing to be removed from all of the 40 locomotives. KiwiRail and the Rail and Maritime Transport Union worked collaboratively to manage the issue and ensure the safety of all employees. WorkSAFE New Zealand was also closely involved and indicated it was satisfied with the operating and management procedures developed and that KiwiRail and the RMTU had taken all practicable steps to manage the work-related hazards.

The Outcome CNR accepted full responsibility for removal and associated costs of the asbestos containing material. It is working with an asbestos removal expert and has seconded a team of 15 staff to Hutt workshops to carry out the work. The manufacturer is considered to be genuine in its commitment to rectifying the issue and has provided options by which the impact of the DLs’ loss from service can be recognised. In view of the strength of the relationship established with CNR over a period of five years, KiwiRail has opted for a negotiated settlement on terms which enable the relationship to continue and the rectification of the remaining DLs to be completed. Opportunities and Outlook Freight will continue to be the revenue driver for the KiwiRail business. After a difficult 2014, the Board and management are taking a cautious approach to FY2015. The priority will be to restore customer confidence in rail freight’s capacity to deliver in a timely manner, to grow revenue where possible and to increase revenue yield. The New Zealand domestic economy is currently buoyant but high stocks in China of both dairy products and logs are affecting international demand and may impact on KiwiRail’s import-export and forestry businesses. Business analysts are predicting that demand for both commodities will return when stocks in China diminish. Currently, demand for New Zealand meat products is reviving which could result in higher volumes of processed export meat being railed. We can be optimistic about the prospect of increased traffic to and from the Port of Tauranga as a result of the 10-year agreement among Kotahi, Maersk and Port of Tauranga but the re-introduction of PrimePort Timaru for Fonterra’s South Canterbury output, could reduce traffic on the Main South Line. With no immediate prospect of a lift in world coal prices, we do not expect any significant increase in bulk coal traffic. A mild, wet winter offers the prospect of good spring grass growth and good early bulk milk volumes, but as always, the outcome is unpredictable.

Page 40 of 66

Aratere returned to service in July (2014) and is now performing to expectations. Ensuring a consistent and reliable performance over the peak season is critical to restoring customer confidence in KiwiRail. In the longer term, the prospects for rail freight remain positive. The Ministry of Transport’s updated NFDS is forecasting the overall freight task will grow by almost 60 percent over the next 30 years. It identifies strong continuing growth in the traffic that currently drives the KiwiRail freight business. It predicts Auckland will continue to grow in both population and share of economic activity, but more importantly, as a national distribution centre. The 7 percent increase in domestic revenue in FY2014 is an indicator that investment in new rolling stock and encouraging customers to establish depots on rail land, is paying dividends. Increasing domestic traffic, particularly goods moving from Auckland to the South Island, has been identified as one of KiwiRail’s most promising business opportunities. Twenty year ago, approximately 60 percent of this traffic was carried by rail. Improvements in the highway network and lack of investment in rail resulted in this falling to below 20 percent by 2010.

Page 41 of 66

INTERISLANDER Business Overview The Interislander provides freight and passenger services across Cook Strait on three ferries: Arahura, Aratere and Kaitaki. Arahura and Aratere were purpose-built for New Zealand conditions, containing dedicated rail decks for rail freight. Kaitaki cannot accommodate rail traffic. Increasing capacity on Cook Strait ferries, particularly for rail freight, was identified as a priority in the 2010 business plan. In April 2011, Aratere had a 30-metre extension fitted to her mid-section. The result was a 30 percent increase in freight capacity as well as improved engine capability, a new bow that reduces wake in the Marlborough Sounds and improved passenger capacity. These changes improved Aratere’s capacity to meet crucial time-gates for time-sensitive freight. In November 2013, damage to a propeller shaft resulted in the loss of a propeller and a second withdrawal from service for significant work. This incident is described in greater detail below. Arahura, the second rail-capable ferry is now 30 years old and due for replacement in 2016. The ship is scheduled for a special survey in 2015. Options on whether to proceed with the survey or replace the ship are currently being evaluated. Kaitaki has the greatest capacity for commercial vehicles and passengers. Her lease was renewed for three years in FY2013. Interislander owns the Wellington Departures Terminal building and the majority of land holdings at the terminal. CentrePort owns and maintains the Arrivals Terminal, gangways and link-spans. Port of Marlborough owns and maintains the terminal building, gangways and link at Picton. Fleet Assets Ship Age

(Years) Tonnage Ownership Freight Vol

(lane metres) Passenger Numbers

Crew

Arahura 30 12,735 KiwiRail 756 539 50 Aratere 15 17,816 KiwiRail 1,052 670 39 Kaitaki 18 22,365 Leased 1,150 1,650 60 Stena Alegra* 22,152 Short-term lease * On six-month charter in place of Aratere January – June 2014 Performance The business’ performance FY2014 reflects the absence of Aratere from November 2013 and the steps taken to provide a replacement. Aratere was taken out of service just as the November to February peak season for freight and passengers was gathering momentum. The result was a reduction in Interislander revenue of almost 6 percent on FY2013 to $116.7 million and a reduction in operating surplus of 66 percent to $6.6 million. Acquiring a replacement vessel, the 22,152 tonne Stena Alegra, and getting her to Wellington and into service by early January 2014 was a remarkable achievement.

Page 42 of 66

The fact that Interislander commercial vehicle revenue was $1.7 million higher than FY2013 and almost $2 million higher than FY2012, is a good result and directly related to the speed and efficiency with which Stena Alegra was brought into service. The loss of Aratere’s rail capacity reduced the number of rail wagons carried by just over 3,000. But the greatest impact of Aratere’s absence was on passenger revenue, down $9.2m on FY2013. A hundred thousand fewer passengers and 42,000 fewer passenger vehicles travelled on Interislander ferries during the year. The disruption to services inevitably affected on-time performance. In FY2013, ferries recorded an 82 percent arrival at destination within fifteen minutes of schedule. In FY2014, on-time performance slipped to 66 percent. On-time performance was also affected by shortages of key staff while we operated four ships at times rather than only three. The overall impact of Aratere’s absence for KiwiRail, including revenue loss and the cost of the Stena Alegra charter was approximately $27 million. There has also likely been a longer term impact on Interislander’s earning capacity and reputation with customers which will extend beyond the current financial year. KiwiRail’s other two ferries, Arahura and Kaitaki, both performed creditably during the year and both passed milestones of their own. The second rail-capable ferry, Arahura, celebrated 30 years of service in December 2013 and completed her 50,000th crossing of Cook Strait on 26 June 2014, the equivalent of roughly 4.6 million kilometres. Arahura joined the Interislander fleet in 1983 and has been an outstanding performer over the years. Interislander’s flagship passenger ferry, Kaitaki, spent six weeks in Brisbane during August and September for standard dry-dock work; and also $4.5 million invested in refurbishing the passenger space. The work followed the confirmation in May 2013 of the ship’s charter from Irish Ferries for four years until 2017. Performance Measures Measure 2011-2012 2012-2013 2013-2014

Passenger journeys 755,398 748,724 641,277

Commercial lane metres 1,184,647 1,209,237 1,243,969

On-time performance (%<15 minutes) 75% 82% 66% Labour cost/revenue 30.9% 31% 27%

Financial Performance ($m)

External Revenue 123.9 124.3 116.7

EBITDA 15.5 19.4 6.6

Total Assets 131.6 124.1 128.9

Page 43 of 66

Outlook and Emphasis for 2015 The priority for 2015 is to restore customer confidence in Interislander’s capacity to provide reliable service. Since returning from repairs in Singapore, Aratere has performed reliably however there were initial problems with speed resulting in an inability to maintain a three-sailings-a-day schedule because of marine growth and the size and efficiency of the old propeller. This has now been addressed and the ship is sailing a three sailing timetable. While Arahura has been a remarkable servant for 30 years on Cook Strait, she is scheduled for a special survey in 2015. Options to progress with this work or replace Arahura are being evaluated. The costs associated with acquiring a rail-capable replacement has led to consideration of a road-bridging alternative using a conventional ferry. This option is being investigated by a project team and a decision is pending.

Page 44 of 66

The Aratere Propeller Shaft Failure Background Aratere was built in Spain for Tranz Rail and entered service in 1999. While she experienced operational problems in her earlier years, she later settled into the role of “work-horse” of the fleet. In 2011, the ship’s capacity to handle rail wagons, commercial vehicle and passenger traffic was increased by approximately thirty percent by adding a new mid-section. At the same time, two small (further) engines were added. New propellers were added to improve fuel efficiency. The result when Aratere re-entered service was increased capacity, improved on-time performance, better handling, reduced wake and improved fuel efficiency.

The Issue On Tuesday 5 November, Aratere suffered a mechanical issue with one of the two shafts which drive the ship's propellers. While she was able to return to Wellington (Terminal) the ship was subsequently withdrawn from service. Divers who examined the shafts confirmed that the tail section of the ship’s starboard propeller shaft had broken. The propeller had been lost at sea although it was subsequently recovered. Aratere is fitted with equipment which monitors all mechanical systems, including tail shaft bearing temperatures. These systems provided no warning of imminent failure. The crew were not aware of anything unusual prior to the failure.

The Operational Repercussions Aratere makes three daily return sailings (one more than her sister ferries) and provides approximately 45 percent of Interislander’s fleet capacity. Losing this capacity inevitably impacted on the business, particularly because it occurred at the height of the pre-Christmas freight peak and it severely reduced Interislander’s capacity to move rail wagons because only the smaller Arahura of the two remaining ferries, had a rail deck.

The Response Initially, Aratere freight was re-allocated to the remaining two ships and what could not be carried was re-booked onto Bluebridge vessels. The highest priority was to arrange the charter of a temporary replacement and a dry-dock for Aratere so that repairs could be made. In spite of there being a limited number of roll-on, roll-off vessels able to use the Picton and Wellington berths, Interislander found and chartered Stena Alegra in three weeks and had her in operation in eight weeks. An initial investigation into the failure of the starboard shaft and a risk assessment and inspection of the port shaft was completed. This was done to obtain permission to operate Aratere as a freight only ship to provide capacity at the peak of the season. The repair work on Aratere was carried out at Singapore’s Keppel shipyard in conjunction with a routine two-year, dry-dock that was due. The most significant work included replacing both port and starboard propeller tail shafts and bearings and realigning the shafting system. The original propellers were fitted because new propellers would have taken up to nine months to procure and fit. The pair fitted in 2011 were excluded on the basis that they could have contributed to the November shaft failure.

The Outcome Aratere re-entered service in early July. Initially the ship struggled to maintain three sailings a day. Mechanically and electrically, Aratere ran perfectly but her original, smaller propellers were less effective than the larger propellers they were replacing. Initially, morning sailings from Wellington

Page 45 of 66

were cancelled and Aratere held back for the afternoon freight-critical departures from Wellington. However hull cleaning and ship operating improvements enabled Aratere to resume her normal intensive around-the clock schedule. In spite of the problems experienced, Aratere’s size, rail-deck capacity and purpose-built for Cook Strait characteristics make her an invaluable part of the Interislander fleet.

The Cost The overall impact of Aratere’s absence for KiwiRail, including revenue loss and the cost of the Stena Alegra charter was approximately $27 million. There has also been a longer term impact on Interislander’s earnings capability and reputation with customers which will extend beyond the current financial year.

The Responsibility KiwiRail has put in place a forensic investigation, conducted by national and international maritime experts, to establish why the failure occurred. Their findings have guided the process of repairing Aratere and determining cause and responsibility. The process has not yet reached a conclusion – which is why KiwiRail has been unable to comment publicly. However, we are on record that we will pursue compensation if it emerges that our suppliers or advisors have not met their obligations and we will provide transparency into the cause when our commercial and insurance processes are concluded.

Page 46 of 66

PASSENGER Business Overview KiwiRail Passenger operates urban passenger services in Wellington, operating as Tranz Metro and long-distance passenger services under the Scenic brand. Long distance passenger services include:

• The Northern Explorer: Wellington – Auckland on alternate days; • TranzAlpine: Christchurch – Greymouth, daily throughout the year; • Coastal Pacific: Christchurch – Picton, daily through all but the winter season.

In addition, Scenic runs the Capital Connection, Wellington-Palmerston North commuter service Monday to Friday as well as charter services in association with heritage groups and cruise ship visits. Metro Services Tranz Metro provides urban passenger (commuter) services throughout the Wellington region. They operate between Wellington and Waikanae, the Hutt Valley, the Wairarapa, and Johnsonville in Wellington’s northern hill suburbs. Services are provided under contract to the Greater Wellington Regional Council (GWRC). The contract is currently in the process of being re-tendered with the current contract expiring June 2016. KiwiRail and Keolis Downer have signed a Memorandum of Understanding to undertake a partnership to tender for the Wellington Metro operation. GWRC owns the rolling stock used on the network. Tranz Metro operates more than 2,200 services each week and carried 11.7 million passengers during the 2013-2014 financial year. Wellington is the destination for 90 percent of passengers. Customers contribute 51.7 percent of revenue while Government (27.5 percent) and GWRC (20.8 percent) contribute the remainder. Capital comes via GWRC with the majority of funds coming from central Government. Until early in the 2011-12 financial year Metro relied on ageing Hungarian-built Ganz Mavag and English Electric units to provide services. From mid-2011, new Korean-built Matangi units entered service increasing reliability and improving customer service. Currently 10 percent of services are still provided by Ganz Mavag units but GWRC has determined that the entire fleet will be converted to Matangi units, apart from the locomotive-hauled carriages used on services to the Wairarapa. This is expected to occur by mid-2016. Scenic Journeys - Long Distance Tourism Experiences Cheap airfares and competition from the private motor vehicle have eroded the functional role that rail once played in moving people around the country. The focus for the long-distance passenger business has been on attracting tourists – international and domestic. Long distance passenger train travel in New Zealand is based on creating a travel experience rather than simply getting people from one place to another.

Page 47 of 66

The model for long-distance, tourism experiences, is based on the success of the TranzAlpine service between Christchurch and Greymouth. Scenic Journeys has a fleet of 43 carriages, including 18 South Island-based, big window carriages, eight North Island-based big window carriages, eight Capital Connection carriages and nine charter fleet, small window carriages. In addition, there are three Silver Fern railcars and 11 luggage vans. During the 2013-2014 financial year Scenic Journeys’ trains carried just under 314,500 passengers. Customers contribute 100 percent of operational funding with no Government funding. In 2009 the Government allocated $39.9m to fund 17 new carriages for the Scenic fleet. Capital Connection Service The Capital Connection week-day train between Palmerston North and Wellington is more of a commuter service than a scenic experience. The introduction of regular commuter services to Waikanae in early 2010 undermined its financial viability. KiwiRail agreed to continue running the service until the end of the 2014 year, absorbing it losses and seeking to grow revenue. Despite initiatives to grow patronage, the train has lost popularity steadily over recent years – down from 178,000 passengers a year in FY2011 to 139,000 FY2014. The target of break-even by 2015 appears a distant prospect at this stage. Rail Passenger Services

Service No. of Services

Passengers 2011-2012

Passengers 2012-2013

Passengers 2013-2014

Tranz Metro 11,274,139 11,355,402 11,684,055 Northern Explorer 306 55,059 30,683*1 32,144 Coastal Pacific 416 42,166 37,084*2 34,933 TranzAlpine 715 105,938 99,545 108,380 Capital Connection 483 158,972 145,590 139,022 Long-distance passenger total 1,920 362,135 312,902 314,479

*1 Reflects reduction in services *2 Reflects seasonal layoff 2013-2014 Performance While Passenger is a smaller contributor to the overall business than Freight or Interislander, it produced a pleasing FY2014 improvement in performance. Tranz Metro revenue of $51.7 million was only $1 million short of budget. Revenue generated accrued to Greater Wellington Regional Council as the service owner.

Page 48 of 66

The improvement was achieved as a result of passenger growth of almost three percent on FY2013. The Scenic Journeys’ business, heavily impacted by the Canterbury earthquakes effect on the tourism market, rebounded to earn revenue of $20.9 million that was on a par with plan. The operating surplus loss of $1.3 million was 40 percent ahead of budget. The result reflects the recovery in patronage of the flagship TranzAlpine service and the service reductions in the other two trains which reduced costs. Overall, external revenue was up by almost $10 million. Passenger benefitted by $7 million from a structural change associated with the Mechanical Depot while $1.8 million came from greater Tranz Metro patronage and $1 million from Scenic. Tranz Metro performance continues to reflect the investment in Wellington urban network infrastructure and new electric trains. Passenger numbers have grown steadily – up from 11.1 million in FY2010 to almost 11.7 million this year – as service reliability has improved. In FY2010, 89 percent of trains were reaching destination within five minutes of schedule. For FY2014, on-time performance had risen to 95 percent. Customer satisfaction on the Wellington Metro is independently surveyed at 92.8% (where customers rate the performance as good, very good or excellent) which benchmarks performance to the best achieved in Australasia and the UK. FY2014 was unusual for two strong earthquakes which resulted in services being suspended. In July 2013, services were suspended from Sunday afternoon 21 July until midday Monday 22 July following a 6.5 magnitude earthquake and again from Friday 16 August until the following day as a result of the even larger 6.6 magnitude quake. While the new Matangi electric trains have introduced a new era of comfort and reliability, they were briefly taken out of service on 7 October 2013 while the manufacturer carried out a precautionary check on a locking nut that couples individual units. Scenic Journeys The most significant improvement was in patronage for the internationally-rated TranzAlpine service between Christchurch and Greymouth. Patronage was up 6 percent, still well below pre-earthquake levels, but heading in the right direction. This increase was in spite of the closure of the Otira tunnel as a precautionary safety measure in mid July 2013 and the need to bus passengers around the Otira tunnel. A 40 percent improvement in operating surplus performance was particularly pleasing for a business that has been buffeted by the decline in South Island tourist numbers since the Canterbury earthquakes. Passengers have responded positively to the use of the new AK carriages – operating now on all three long distance service — which have enhanced sight-seeing and comfort. The new carriages were recognised during the year with a Designers Institute of New Zealand Best Design Silver Award. Numbers on the Northern Explorer, which runs between Auckland and Wellington, were up by about 1,500 on FY2013 but the trend on the Picton-Christchurch Coastal Pacific was less encouraging. Approximately two thousand fewer passengers than in FY2013 used the service.

Page 49 of 66

As discussed, the introduction of regular commuter services to Waikanae in early 2010 undermined the financial viability of the Capital Connection service. KiwiRail agreed to continue running the service until the end of the current year, absorbing its losses and seeking to grow revenue. Despite initiatives to grow patronage, the train has lost popularity steadily over recent years – down from 178,000 passengers a year in FY2011 to 139,000 FY2014. Performance Measures Measure 2011-2012 2012-2013 2013-2014 Tranz Metro on-time performance (%<5 mins) 92 94 95

Long-distance operating cost/passenger ($) 54 69 70

Financial Performance ($m)

External revenue 66 70.1 73.6 Operating Surplus -0.6 2.1 3.1 Total assets of Scenic 51.8 43.0 36.0

FY comparatives have been restated where appropriate to reflect FY2014 changes in business unit structure. Outlook During 2015, KiwiRail will bid to secure the Greater Wellington Regional Council contract to provide suburban rail services in the capital. We can expect competition for the contract which makes the focus on improving on-time performance and customer service doubly important. We will also make a decision on whether to bid for the contract to operate suburban train services in Auckland when that contract comes up for renewal in 2016. We expect a decision to be made on the future of the Capital Connection service. Despite initiatives to boost patronage, the competition it receives from the expanded and improved Kapiti Line commuter services make its survival problematic without some form of funding assistance. We will continue with initiatives to boost the number of passengers using Scenic Journeys’ trains. Figures for FY2014 have been encouraging for the TranzAlpine and Northern Explorer services. KiwiRail will be looking at ways to deal with the continuing decline in patronage of the Coastal Pacific service.

Page 50 of 66

INFRASTRUCTURE AND ENGINEERING Business Overview KiwiRail Infrastructure and Engineering is the infrastructure management and maintenance arm of the rail industry, responsible for managing the national rail network. It undertakes a range of activities to maintain the network and provide rail operators with safe and timely access to it. In 2004, operating as ONTRACK, we took responsibility for the rail network on behalf of the Crown and inherited decades of deferred maintenance. Since that time the rate of activity has substantially increased. In addition to the network maintenance work, there is a programme of renewals - replacing assets that have reached the end of their useful life, for example timber bridges. In 2004 there were nearly 2,800 timber piers and 4,700 metres of timber spans in the network with much of this timber being 80 – 130 years old. Since that time the rate of timber pier renewals has quadrupled. The effects of an ageing network can be seen in other areas. Most of the mainline formation was constructed between 50 and 75 years ago and was engineered for lighter axle loads at the time. As axle loads have increased significantly along with tonnage and speeds, much of the formation is now wearing and showing signs of stress. Currently, 200 kilometres of rail (five percent of the network) is approaching the end of its predicted life. In an ideal world, KiwiRail would be renewing 1 percent of rail (40km) a year. Ninety to 100 years is the normal age at which a bridge would be replaced. Twenty three percent of all railway bridges are at least 90 years old. Thirty three percent are 80 years old or more. In addition to maintenance, there are also upgrades to the rail network, introducing totally new assets or replacing existing assets with something better. The rail traffic using a given line dictates the nature of much of this activity. The bulk of the investment has been in catch-up maintenance and renewals. Little work has thus far been done on the freight network that could be considered “step changes”. Major upgrade works over recent years include:

• The rehabilitation and electrification of the Auckland urban network to enable new, modern electric multiple units to be introduced;

• The rehabilitation and upgrade of the Wellington network in advance of the introduction of the Matangi trains;

• Building passing loops on the East Coast Main Trunk route between Hamilton and Tauranga to double train capacity on the country’s busiest freight line;

• Introducing modern signalling equipment in key areas on the network; • A deviation around the Kai Iwi tunnel removing a major impediment to the transport of the

largest containers used extensively for dairy produce from Fonterra’s Whareroa plant in south Taranaki;

• The “day-lighting” of three tunnels at the eastern end of the Manawatu Gorge combined with the earlier lowering of the floors in two long tunnels opened the way for trains on the Palmerston North-Napier Line to also carry the larger hi cube containers;

Page 51 of 66

• Between late 2010 and early 2011, a series of tunnels between Pukerua Bay and Paekakariki were lowered to enable larger containers to pass through and increase train speeds on the section of line;

• Refurbishment of the Wairio industrial line in Southland used for moving coal, principally to dairy factories;

• Refurbishment of the Auckland and Wellington urban networks; • KiwiRail worked with the Northland Regional Council to designate a rail link from the North

Auckland Line to Marsden Point. While designation will secure the route and give landowners certainty there is no date set at this stage for building the link.

Measuring Improvements to Network Infrastructure and Performance Performance Measures 2011-2012 2012-2013 2013-2014 New rail laid (Km) 36 30 24 New sleepers laid (000) 105 101 67 Line de-stressed (Km) 242 155 130 Bridges replaced (m) 524 492 130 Timber piers replaced 77 76 25 Derailments 27 20 18 Level Crossing Upgrades 10 8 7 Financial Performance ($m) External revenue 34.2 35.1 35.2 EBITDA (55.1) (64.7) (79.1) Grants 161.5 181.2 93.4 Total assets*1 3,669.2 298.7 265.3 Infrastructure & Engineering Assets (ex-land) 411.0 298.7 265.3 Land assets*2 3,258.2 0.0 0.0

1* Reduction between 2011-12 and 2012-13 due to $2.45 billion decrease in, and values resulting from, the normal revaluations performed by independent valuers; and a $6.5 billion decrease in all other fixed assets as a result of the decision to restructure our balance sheet’

2* Land assets were not transferred to KiwiRail from NZRC FY2013 comparatives have been restated where appropriate to reflect the FY2014 changes in business unit structure. Urban Rail Projects Auckland Rail Projects There are three main components to the upgrading of Auckland’s commuter rail network:

• Project DART – The $600 million suite of rail infrastructure projects now completed, that has increased the capacity of the network to enable services to operate at roughly 10 minute intervals;

• Electrification of the Auckland passenger rail network – including all lines between Swanson and Papakura ($500 million);

• Rolling stock – Procurement of a new Electric Multiple Unit (EMU) fleet by Auckland Transport.

Page 52 of 66

Project DART • The original goal was to enable six trains an hour on each of the main suburban lines while still

providing for freight movements through the network. • The key elements included the duplication of the Western line, the redevelopment of

Newmarket junction and station, construction of the Manukau Rail link and the rehabilitation of the Onehunga Branch Line.

Electrification of the Rail Network

• Auckland’s commuter rail network has been electrified between Papakura in the south and Swanson in the north at a cost of $500 million.

• The three main elements of work included traction (overhead poles and wires and power supply), signalling, and providing sufficient clearance beneath bridges.

Wellington Region Rail Programme A total of $550 million has been invested to improve the Wellington railway system to provide more reliable passenger services. This has been a joint programme between Greater Wellington Regional Council which owns the Matangi new electric multiple units introduced in late 2010 and KiwiRail Infrastructure & Engineering which has led the upgrade of the existing railway infrastructure to accommodate the new trains and improve the overall reliability of the network. This work has included upgrading the power supply, signals and station infrastructure around the Wellington region. Work was also carried out to increase capacity of the network. All seven tunnels on the Johnsonville line were made larger by lowering their floors. Double tracking and electrification of the North Island Main Trunk was extended to enable regular commuter services to travel to Waikanae. At the entrance to Wellington Railway Station, a third main line was installed to reduce delays at a bottleneck in the system where previously four main lines reduced to two. Work is planned to improve ageing infrastructure on the Wellington network. 2013-2014 Performance Maintenance work continued to focus heavily on the business-critical Auckland to Tauranga route. A particular goal was eliminating timber bridges by the end of FY2015. At this stage, the target looks likely to be met only a couple of months beyond the end of the year. Storm repair work and the second year of a three-year cost reduction programme reduced the extent of work on renewal of basic infrastructure such as track, sleepers, bridges and line de-stressing. This is reflected in the performance measure comparison. However, the commissioning of six new rail maintenance machines at a cost of $12 million, provided a fillip to basic track maintenance. The three new ballast regulators and three new tampers, improve track formation, provide a smoother ride and prolong track life. They replaced equipment that was 30 years old. The rail grinding programme begun in FY2013, completed a full year on the network, moving from the North Island to the South Island. The grinder extends the life-span of track by smoothing and removing defective metal from the rail head. It also has long term cost saving benefits by reducing the amount of track and wheel maintenance needed and reducing fuel consumption.

Page 53 of 66

The grinder, which made its first appearance in October 2012, is operating on the New Zealand network for the first time. Signalling projects were started in the Bay of Plenty and Dunedin areas. During the year, staff made significant steps towards centralising more signal boxes. The majority of these projects will be completed in FY2015 but the Petone Box was centralised in FY2014 while Te Rapa and Taita followed soon after, in the first weeks of FY2015. The major upgrade work was in the area of signalling and improving entry to and exit from major depots. The introduction of Centralised Track Control (CTC) to the section of the Marton-New Plymouth Line between Wanganui and Marton – replacing the Track Warrant system of train control - was completed in time for bulk milk traffic to operate. The foundation for this work had been carried out the year before. Rail yard work was carried out in Palmerston North to improve the flow of traffic both passing through and loading and unloading. Further work was done in South Auckland in preparation for the creation of a third line which will enable freight traffic to operate more independently of the increasing amount of commuter traffic on the Auckland network. This included work associated with the new depot at Wiri which will house Auckland’s new electric commuter trains. Completing the connection on the Midland Line to Fonterra’s new Darfield dairy factory was an important milestone and an indication of the continuing growth of the dairy industry in the South Island. Other projects included re-cabling a section of the Addington to Lyttelton tunnel which had been significantly weakened by the Canterbury earthquakes and replacing sections of fibre on the North Island Main Trunk Line. One of the most significant measures of network robustness is the incidence of derailments. It is pleasing to record the continuing reduction in derailments over time. The FY2014 figure of 18 is in stark contrast to the 60 to 70 that were the norm a decade ago. Improving the quality of asset management has been a priority for a number of years. The final link in the introduction of the new Maximo asset and works management system went live in April 2014, on time and on budget. With similar objectives, a major inventory re-engineering project was launched. So far $2.0 million has been recovered and all aspects of materials handling and management have been improved. Auckland and Wellington Suburban Networks Both Auckland and Wellington suburban networks have benefitted from extensive upgrades over a number of years. In Auckland, the focus has been on electrifying the network for use by the city’s new electric commuter trains. It has involved the installation of 3,500 masts, carrying 560km of 25kv overhead wires across 175km of railway tracks.

Page 54 of 66

The complexity and scale of this project is comparable to recent rail upgrades in some of the world’s largest cities. KiwiRail has installed state-of-the-art signalling technology that will enable greater levels of automation, communications and safety across the network. This includes the implementation of a new train control system that overrides drivers if they are travelling too fast towards red signal lights and advanced, automated signalling equipment that is a world-first for New Zealand and replaces equipment that has not been upgraded for more than fifty years. With infrastructure work substantially completed during FY2014, the project now involves working closely with Auckland Transport and train manufacturer CAF to ensure the smooth introduction of the new trains onto the network. Improvements on the Wellington network have included replacement of ageing overhead wiring and support masts, the introduction of new signaling technology to replace the old Petone Signal Box, the replacement of wooden bridges on the Wairarapa Line and strengthening of the sea wall along the Wellington harbour edge between Petone and Wellington. New overhead electrification hardware is being introduced between Redwood north of Wellington and Muri which is south of Paekakariki. The project is scheduled to be completed in FY2015. Overhead wiring has also been replaced near Woburn and north of Trentham on the Wairarapa Line. Manually-controlled signalling equipment at Petone and Porirua has been replaced with the latest computer-controlled signalling equipment. Generator backed-up power supplies have also been provided. The new technology brings improved reliability and easier maintenance and service. Bridge replacements on the Wairarapa Line are part of a commitment by KiwiRail and Greater Wellington Regional Council to investment in infrastructure on the line. Long term planning has begun to determine a programme for replacement of all remaining timber pier bridges on the Wairarapa Line. Outlook and Emphasis for 2015 The focus during the year will be to continue meeting financial targets and control costs as well as completing a number of projects started in FY2013 and FY2014. Projects include the change from track warrant to CTC in Dunedin, centralisation of signal boxes, re-signalling the forestry route in the Bay of Plenty and starting repairs to the Kaimai tunnel floor. We will also begin work on seven bridges on the North Island Main Trunk Line in the central North Island, work that once complete will be major step towards the complete timber replacement for line. While 10 bridges will remain to be replaced, they are relatively modest structures.

Page 55 of 66

APPENDICES

Page 56 of 66

Appendix 1 - Brief Rail History The New Zealand rail system grew from separate beginnings made by individual provinces or entrepreneurs from the 1860s onwards. Colonial Treasurer and later Premier Sir Julius Vogel made rail a major plank in his programme to develop the colony in 1870. By 1880 New Zealand Railways (NZR) was operating more than 1,900 kilometres of track, and carrying almost three million passengers and 830,000 tonnes of freight a year. The first half of the twentieth century was a ‘golden age’ for rail. By 1953 the network reached its peak at 5,689 kilometres. But advances in air and road transport began to cut into its competitive advantage. In 1936 a system of transport licensing had been introduced to protect rail from competition. Initially road was limited to carrying loads no more than 30 miles but this gradually increased, reaching 150 kilometres in 1977. The NZ Railways was reorganised in 1982 to become a Government-owned corporation with a commercial mandate. Also, the government began deregulation of the transport industry, removing statutory protections for rail against competition by road. In 1980, rail carried approximately 30 percent of all goods, but following deregulation, its market share dropped significantly. In 1990, the operating assets of the NZ Railways Corporation were transferred to a limited liability company under government ownership, New Zealand Rail Ltd. In 1993, the company was sold to a private consortium comprising Wisconsin Central Transportation Corporation and two investment groups. Three years later, the new owners made a public offering of shares in Tranz Rail Holdings, listing the company on the New Zealand Stock Exchange and the NASDAQ market in the United States. The process of deregulation, commercialisation and privatisation resulted in a reduction in the number of employees, from 21,000 in 1982 to 3,757 in 2002. After the sale in 1993, the New Zealand Railways Corporation continued as a residual government body with two principal activities: to manage all known litigation, contingent issues and statutory obligations; and to manage the rail corridor lease with Tranz Rail and the lease of other crown land held for operational rail purposes. During the 1990s, Tranz Rail expanded into new markets, including the movement of bulk milk to dairy processing plants and establishment of New Zealand’s first inland port south of Auckland. The new port, a joint development with the Port of Tauranga, is connected by train with Tauranga and created a significant new line of containerised freight business. In 2003, Toll Holdings Limited, an Australian-based transportation and logistics operator, acquired approximately 85 percent of the shares in Tranz Rail. As a result of Toll’s offer for shares in Tranz Rail becoming unconditional, an agreement between Toll and the Crown was triggered, a key feature of which was the buy-back of track and associated infrastructure by the crown. The Crown undertook to invest $200 million in improving rail infrastructure while Toll undertook to invest $100 million in new rolling stock. In September 2004, ownership and management of the network and its assets was vested in the existing New Zealand Railways Corporation which adopted the trading name ONTRACK. Under the agreement, Toll retained exclusive rights to the network for freight purposes, subject to meeting minimum tonnage levels annually.

Page 57 of 66

In late 2007 and early 2008, the Crown negotiated with Toll Holdings for the purchase of the company’s New Zealand rail and ferry businesses. A purchase was concluded on 30 June 2008 for $665 million and the business re-named KiwiRail. With Government investment of $750 million over three years, KiwiRail embarked on a Strategy in 2010 to create a business within 10 years that would be financially self-sufficient.

Page 58 of 66

Appendix 2 - Heritage Train Operations in Tunnels

Introduction KiwiRail is reviewing the safety aspects of operations in rail tunnels. The review is informed by the findings of the Pike River mine disaster enquiry and the subsequent changes in safety legislation encapsulated in the Health and Safety Reform Bill currently before Parliament. The review covers all tunnel operations, including freight train services, passenger train services, and infrastructure maintenance work. It includes the operation of charter, tourist and heritage passenger operations by both KiwiRail and other operators. The New Zealand rail regulator NZTA has required that KiwiRail lead a review of such passenger operations in tunnels in consultation with other heritage operators. The most significant early impact to emerge is the effect the review might have on heritage rail groups who operate excursions using locomotives and rolling stock that are unlikely to meet higher standards of crash-worthiness or fire resistance. The New Safety and Health Legislation The new legislation is expected to come into effect by 1 April next year (2015). It reinforces the onus on KiwiRail and other rail participants to consider carefully the risks associated with rail operations in tunnels. The legislation imposes a duty on a person under this Act to ensure health and safety (and) requires the person (in this case KiwiRail and other rail participants) —

a) to eliminate risks to health and safety, so far as is reasonably practicable; and

b) if it is not reasonably practicable to eliminate risks to health and safety, to minimise those risks so far as is reasonably practicable

Background The review of safety of rail tunnel operations started in 2013 when it was considered necessary to review safety in the Otira tunnel because of its special nature – in particular its length, gradient and presence of coal dust. One outcome of that review was that AK class carriages would be the only passenger rolling stock considered suitable for conveying passengers in the Otira tunnel.

Page 59 of 66

Subsequently, KiwiRail established a National Rail Tunnel Working Group (NRTWG) to widen the review. The NRTWG conducted a preliminary risk ranking of tunnels to help identify where to focus initial efforts. The result was the identification of eight tunnels on the network with the highest risk profile. They are Otira, Rimutaka, Tunnels 1 and 2 North Island Main Trunk, Britomart, Kaimai, Mihiwaka and Lyttelton (category 1 tunnels). The principal operators of passenger services on the New Zealand Rail network are KiwiRail itself and tourist and heritage railway operators. In June 2014, KiwiRail contacted the Federation of Railway Operators of New Zealand (FRONZ) and major heritage operators and briefed them on the work that was in progress re safety of tunnel operations. Subsequently, major heritage operators attended a workshop arranged by KiwiRail. In an opening presentation, the NZTA provided background to the new environment and made the point that “the status quo is not an option”. KiwiRail has also commissioned work on the regimes that apply to tourist and heritage passenger services passing through tunnels in other countries, particularly Britain and Australia. In brief, the research indicates few restrictions apply elsewhere although it is also clear that New Zealand is unusual in the number, length and narrowness of tunnels on its network. NZTA Expectations The NZTA notes that serious tunnel incidents are not common, but that they are possible, and that the consequences of such an incident have the potential to be catastrophic, particularly if fire is involved. It required that KiwiRail lead a review of tunnel risks and work with tourist and heritage operators to put in place appropriate mitigations for heritage / charter / excursion operations in order to reduce safety risks. It noted that the overall outcome of the review was unclear and that additional requirements, further restrictions, or cessation of some operations were potential outcomes. Progress to Date KiwiRail and tourist/heritage operators have made progress on developing a proposed interim arrangement to manage operations through tunnels until the full review has been

Page 60 of 66

completed, any new standards agreed, and accepted by the NZTA. The proposed interim arrangement is currently being considered by NZTA. In the meantime tourist / heritage operations through category 1 tunnels are being considered on a case by case basis with input from NZTA. The most notable so far has been in relation to Steam Incorporated’s September 14 (2014) Daffodil Express from Wellington to Carterton and return, using the Rimutaka tunnel. It is notable because the train is steam-hauled and the consist includes wooden-framed and clad carriages with minimal crash-worthiness provisions. KiwiRail in its role as access provider applied to NZTA for a safety case variation on the basis that:

1. A satisfactory risk management assessment had been made and risk mitigated by the use of banker diesel locomotives moving the train through the tunnel with the steam engine on “light steam”.

2. A satisfactory emergency management plan based on the deployment of

experienced staff in carriages equipped to meet known contingencies.

3. Supervision of the train by KiwiRail staff. NZTA approved the application subject to a number of additional provisions, one of the most significant being that banker locomotives used to move the train through the tunnel must be fitted with fire suppressant equipment. NZTA has emphasized that approval for individual tourist / heritage operations during the period prior to completion of the review does not set a precedent for the future and that the future regime to be established will be the result of the work carried out as part of the review. Working Towards a New Safety Regime for Tunnel Operations A firm date for agreement on a new regime has not been set but the expectation is that good progress towards an outcome must be demonstrated with a target for completion by the end of 2014. The work carried out in the months to come will influence the regime that is finally put in place. Although the outcome cannot be known at this stage, significant change is inevitable. The constructive input of all organisations involved is the best means to achieve an outcome that is workable for all concerned. Ends

Page 61 of 66

Appendix 3 – Glossary Accident An undesired, unplanned, uncontrolled event that results in harm to people,

damage to property, loss to process or adverse impact to the environment.

ACSO Auckland Commute Services Operator.

ADK/ADB Auckland DMU ex Westrail. Older model (1969).

ADL/ADC Auckland DMU ex Westrail. Newer model (1981-85).

Amicus Toll’s integrated freight accounting train and rolling stock management system.

APL Accident priority list.

Arrival road A track on which trains stop on arrival at a yard.

Average haul The (weighted) average distance freight is carried. It is calculated as net tonne kilometres/net tonnes.

AVI Automatic Vehicle Identification.

Axle load The weight on any one axle (tonnes).

Bogie A twin axle wheelset or “truck”.

Bogie Wagon A rail wagon with twin axle wheel sets.

BRG Board Reference Group.

Bulletin Means a numbered instruction, either typed or hand-written, issued by the INFRASTRUCTURE & ENGINEERING Network Controller (Authorities) or an INFRASTRUCTURE & ENGINEERING Train Controller qualified to issue Bulletins. Exception – Information Bulletins, which include information on daily instructions, special trains and maintenance work, will not be numbered as they apply to the specified day of operation only.

Cabotage The practice of prohibiting foreign vessels from engaging in coastal trade.

Cascading Replacing assets or components and using the items recovered in a less arduous or less important role elsewhere in the system.

CEA Collective Employment Agreement.

CIMW Coupled In Motion Weighbridge.

Clearance gauge The maximum permitted dimensions of the rail vehicle and load.

Consist The set of wagons or carriages which form the train.

Controlled Network

Comprises all track where occupancy and movement by Rail Service Vehicles is under the control of INFRASTRUCTURE & ENGINEERING.

CTC Centralised Traffic Control: remote centralised control of signals and points and therefore train movements.

CWR Continuous welded rail.

DART Developing Auckland’s Rail Transport Network.

DART 1 & 2 Newmarket Redevelopment – relock - control centre.

DART 3 Boston to Avondale.

DART 4 Avondale to Whau Creek.

DART 5 Whau Creek.

DART 6 Whau Creek to Titirangi Road.

DART 6b Titirangi Road area.

DART 7 Titirangi road to Henderson.

DART 8 Henderson to Swanson.

Page 62 of 66

DART 9 Manukau Rail Link.

DART 10 Infrastructure Renewals.

DART 11 Quay Park Junction.

DART 12 Eden Park, bi-directional running.

DART 13 Minor Capacity and Safety - relocks (Wiri, Otahuhu, Papakura) - capacity enhancement - eliminate pinch-points - network wide capacity.

DART 14 Over run protection.

DART 15 Upgrade infrastructure – foots - pedestrian crossings – fencing – platforms - Alcam study.

DART 16 Local control centre – temporary - long term.

DART 17 Distributed stabling.

DART 18 Logistics - modelling software - project management software - frame layer - plant and equipment – tamper.

Daylighted Converted from a tunnel into a cutting.

DEMU Diesel electric multiple unit; a two passenger car set in which one car is diesel electric powered.

Density A measure of the level of operating activity on a particular line (or a group of lines) expressed as millions of gross or net tonne kilometres per route kilometre per year.

Derailment A derailment of a train that has been made up, tested and departed from the originating station.

Destressing Heating and refastening of rail.

DMU Diesel multiple unit; a two passenger car set in which one car is diesel powered.

Drawgear Equipment used to connect wagons together.

E band A private nationwide VHG radio network for trackside communication.

EAP Employee Assistance Programme.

ECMT East Coast Main Trunk line between Hamilton and Kawerau.

EM80 Rail vehicle that automatically records track geometry and notes exceedances.

EMU Electric multiple unit; a two or three passenger car set in which one car is electrically powered.

External Notifiable

Events that are required by law to be notified to one of our regulators.

Flash butt welder Welding machine used to weld lengths of rail together in situ.

FLB Flashing lights and bells.

Formation The earthworks on which the track is laid.

Freight forwarding

Freight forwarding companies contract with the shipper for the complete transport task, but subcontract the line haul, after consolidation where appropriate.

Gauge (track gauge)

The distance between the rails on the railway track (1067mm or 3ft 6in on NZRL, 1435mm or 4ft 8½ in USA).

Gross Tonne Kilometres (GTK)

The sum of the total train weight multiplied by the distance travelled: frequently used to mean GTK trailing.

GTK trailing Gross tonne kilometres excluding the locomotive.

HAB Half arm barriers.

Harmonic filter An electronic filter to recover unwanted frequencies from the power supply.

Page 63 of 66

Heat buckling Distortion of track alignment under high temperature condition, resulting from improper rail installation.

Heritage Charter Services

A “one-off” train service organised for or by rail heritage enthusiasts, and “Heritage Operator” means rail enthusiasts organising and operating such a service.

Hi-Rail Vehicle (HRV)

A road vehicle fitted with retractable rail trolleys such that it can be driven along the track and can also be driven on or off track at level crossings or other suitable places.

Hours worked Hours as calculated from timesheets.

Incident An undesired, unplanned, uncontrolled event, which under different circumstances, could lead to an accident.

Infrastructure Works Controller (IWC)

A person in charge of an infrastructure work area on the National Rail System.

Injury downtime rate

The time lost to injuries as a percentage of total hours worked.

Line haul That part of the transport task that is between terminals (distinguishing from the aggregation and distribution at each end of the journey).

LINZ Land Information New Zealand. Successor to Department of Survey and Land Information (DOSLI). Government Department now disposing of surplus NZRC property.

LIV Light Inspection Vehicle (hi-rail).

Lost time A period in which an employee is unable to work.

Lost time injury An injury which causes an employee to miss at least one shift or results in the employee being away from work for at least one full working day.

LTIFR (Lost Time Injury Frequency Rate)

The total number of Lost Time injuries per million hours worked.

LTNZ Land Transport NZ, the regulator for the rail industry (formerly Land Transport Safety Authority).

Marshalling Arranging wagons in the correct order form making up trains.

Midland Line The East-West rail line between Greymouth and Rolleston (South of Christchurch).

Mobile Track Maintenance Vehicle (MTMV)

Tampers, Regulators, Spot Resleepering Group, Ballast Cleaner, Track Evaluation Car, Self-Propelled Cranes and heavy Hi-Rail Vehicles exceeding an unladen weight of 20 tonne.

MRL Manukau Rail Link.

MTkm Million train kilometres.

N.D.T. Non-destructive testing.

Narrow Gauge Distance between rails of less than 1.435 metres; in the case of the company, a gauge of 1.067 metres

National gangs Special purpose track gangs managed by Engineering HQ eg tamping, welding, spot re-sleepering gangs.

National Rail System

The rail network comprising the Controlled Network an Operator Controlled Territory. It includes all Track unless specifically defined as unavailable for rail activity, owned or managed by INFRASTRUCTURE & ENGINEERING (including private sidings) and all retained track.

National Rail System Standards (NRSS)

Standards adopted by INFRASTRUCTURE & ENGINEERING and all operators using the National Rail System.

Page 64 of 66

Net tonne-kilometres (NTK)

The sum of the tonnes carried multiplied by the distance travelled.

Network Controller

The party who is delegated by INFRASTRUCTURE & ENGINEERING to authorise the occupancy and movement of trains and other Rail Service Vehicles, including notification of special conditions in respect of the whole or part of the Controlled Network. This includes, where the context so requires all Network Control Managers, Train Controllers, Signalbox Controllers and Network Controllers (Authorities).

NIMT North Island Main Truck: the main Auckland – Wellington line.

OCC Log The description of an event in the company’s occurrence management system.

Operator Controlled Territory

Means all track outside the Controlled Network and forming a part of the National Rail system where an operator or other designated party is responsible for the occupancy and movement of Rail Service Vehicles.

PTF Planning Task Force.

Power Van A railcar carrying diesel powered generators to provide lighting and heating or cooling power to a passenger train.

Production gangs Track gangs which carry out (or assist National gangs with) renewal/replacement programmes and major maintenance work. 8 staff, 2 trucks.

Rail lubricator A track mounted device actuated by passing wagons to lubricate rails in order to reduce rail wear.

Railcar A self-propelled carriage. The term is generally only used in Toll to apply to the three Silver Fern railcars (and earlier vehicles since withdrawn).

Regulator A track machine used to ensure an even distribution of ballast.

Renewal The replacement of an asset on a like-for-like basis.

Retained Track Track owned by Toll NZ forming a part of the National Rail System, but specifically excluding any Track forming a part of the Controlled Network.

Revenue tonne kilometre

The weight of freight carried for hire in tonnes multiplied by the distance travelled in kilometres.

RMTU Rail and Maritime Transport Union.

Rolling stock All locomotives, railcars, wagons and carriages.

RoRo Roll on roll off vessel that enables through traffic when boarding and disembarking.

ROPAX Roll on roll off vessel that enables through traffic when boarding and disembarking and also carries passengers.

Route kilometre One kilometre length of rail route, excluding sidings, without adjustment for double track.

RTK Revenue Tonne Kilometres used interchangeably with NTK.

S & I Diagrams Signalling and interlocking diagrams issued by INFRASTRUCTURE & ENGINEERING detailing signalling and interlocking arrangements for each station, and/or segment of the Controlled Network.

Safety Observations

Practical assessments of employees to observe the application of practical skills for the activities specified on their License to Operate.

Siding, Terminal or Depot Controller

A person responsible for the co-ordination of Rail Service Vehicle movements in a designated siding, terminal or depot outside the Controlled Network.

SIFR (Serious Injury Frequency Rate)

1,000,000 divided by the number of hours worked, then multiplied by the number of serious injuries. Injury requiring medical attention, even if no lost time!

Single manning Driver only operation of freight trains.

Page 65 of 66

Single track A rail route with one track, allowing traffic to move in only one direction at a time.

SPAD (Signal Passed at Danger)

Any signal, which has been passed without the correct authority or where the safe working authority has been exceeded.

SPAD A’s A category “A” SPAD is a SPAD where a stop signal indication (and any associated preceding cautionary indications) was displayed correctly, in sufficient time for the train to be stopped safety at the signal. Note that a “Stop Signal” also includes points indicators, notice boards (those requiring a train to stop), and Track Warrant limit over-runs.

Star fault Most serious track geometry exceedance.

Structure gauge The maximum permitted dimensions of the rail vehicle and load.

TAIC Transport Accident Investigation Commission – Crown investigation agency (separate from LTNZ).

Tamper Mechanised rail vehicle which lifts and straightens track.

TQI Track quality index, representing a weighted sum of geometry exceedances.

Train A single unit.

Train kilometres Total train kilometres consist of kilometres travelled by Freight Services, Passenger Services and Infrastructure Services.

Trespasser A person unlawfully on railway property (ie without proper authorisation).

TWACS Track Warrant Control System.

TWC Track Warrant Control.

Unit train Any train which operates in a fixed formation between loading and unloading points, usually carrying bulk commodities such as coal, forestry or grain.

WRRP Wellington Region Rail Programme.

Working Timetable (WTT)

A document incorporating specific general and local operating instructions and/or conditions for the operation of trains on the National Rail System. (Note: Instructions for Operator Controlled Territory and an Operators specific requirement for vehicle operations on the Controlled Network are prescribed in the Rail Operating Code managed by the Operator concerned.)

Wrong side failure

The failure of a signal such that the indication shows “safe to proceed” when this is not necessarily correct.

WSF Signalling wrong side failure.

Page 66 of 66

Appendix 4 - Contact Details Board of Directors Mr John Spencer

Chairman, KiwiRail

KiwiRail Mr Peter Reidy

Chief Executive Officer, KiwiRail

Corporate & Finance Mr David Walsh

General Manager, Corporate & Finance

Freight Mr Iain Hill

General Manager, KiwiRail Freight

Interislander Mr Thomas Davis

General Manager, Interislander

Passenger Dr Deborah Hume

General Manager, Passenger and External Relations

Infrastructure & Engineering

Mr Rick van Barneveld General Manager, Infrastructure & Engineering