TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 2003 CONTENTS

CHAIRMAN’S LETTER 1 MANAGING DIRECTOR’S LETTER 4 REVIEW OF OPERATIONS: RAIL SERVICES GROUP 6 HILLSIDE ENGINEERING GROUP 10 DISTRIBUTION SERVICES GROUP 12 THE INTERISLAND LINE 14 RAIL PASSENGER GROUP 16 HEALTH, SAFETY AND ENVIRONMENT 18 TRANZ RAIL NETWORK MAP 21 FACTS AND FIGURES 22 FINANCIAL SUMMARY 24 BOARD PROFILE 26 FINANCIAL STATEMENTS 27 TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 1 CHAIRMAN’S LETTER

WAYNE WALDEN CHAIRMAN

Tranz Rail concluded the 2003 financial year with an improved financial performance, heads of agreement in place with the Crown on a joint plan for restructuring and developing the New Zealand railway system that included the immediate placement of a secured deposit of $44 million with the Company, and with shareholders considering an offer from Toll Group (NZ) Limited (“Toll”) to take over the Company. It has been an eventful year. The improved performance in the 2003 financial year fell short of the forecast provided to shareholders at the beginning of the year. Operating profit from trading increased from $25.2 million to $40.0 million – against the Company’s rights issue prospectus forecast of $53.1 million. Net loss after tax improved from $122.7 million to $2.6 million. The financial result for the 2003 financial year was largely influenced by adverse changes in the external business environment. Compared with the prospectus forecast, revenue was affected by drought, a strike at a customer’s plant, changes in shipping port calls and increased competition on the Cook Strait. Negative cost factors compared with the prospectus forecast were: lower than expected savings in terminal operations; increased insurance costs mainly from premium increases – a problem confronting most businesses; costs associated with the disposal of certain assets and businesses which did not occur; and increased interest costs arising from unavoidable increases in debt and interest rates as a consequence of the tight liquidity position experienced during the year, and costs of debt refinancing; increased taxation expense due to the recognition of an impairment of tax losses. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 2

These negatives were partially offset by the positive impact of foreign exchange rates on leases and fuel, lower operating costs reflecting lower freight volumes compared with forecast, releases of provisions not required, and higher than anticipated depreciation savings from asset write downs. Surplus asset sales initiated during the year did not eventuate. Negotiations were commenced to sell the Tranz Link Distribution Services Group business, the Tranz Metro Wellington business, Wellington railway station and specialist rolling stock equipment. On 20 June 2003, your Directors decided to suspend the asset sales programme until resolution is achieved in respect of the Crown track network transaction and the offer made to shareholders by Toll. In the 2003 financial year, the Company’s operating cash flow improved by $30.8 million on the previous year’s level. This improvement resulted from better working capital management, increased revenue and reduced operating costs. Total debt was reduced by $24.3 million, mainly as a result of a favourable movement in the NZD/USD exchange rate. Included in the total debt is the secured deposit from the Crown that was received in June 2003. The gearing of the Company also improved with equity at June 2003 being 44.6% of total assets compared to 39.1% at the end of the previous financial year. The Company achieved three major financial restructuring objectives in the course of the year: the negotiation of new bank facilities through to June 2004, the renegotiations of the terms of lease on the ferry Aratere, and a capital raising of $65 million by a 5 for 7 rights issue of new shares at 75 cents a share. The other significant achievement of the year under review was the negotiation of a heads of agreement between the Company and the Crown on a proposal for new arrangements regarding the ownership, operation, maintenance and development of the rail track network. The track and network ownership arrangements proposed in the heads of agreement between the Crown and the Company required shareholders’ consideration and approval before they could be finalised. Details of the proposal were provided to shareholders in the Target Company Statement of 4 August 2003. On signing the heads of agreement, the Crown paid to Tranz Rail a deposit of $44 million in respect of assets to be acquired if the proposal proceeded, and if the proposal does not proceed, that deposit plus interest is to be repaid by the Company on 30 June 2004. Negotiations between the Company and the Crown on the details of new track ownership and operation arrangements were suspended pending the outcome of a takeover bid for the Company from Toll. In developing its bid, Toll has negotiated even more beneficial terms on an exclusive basis for track network ownership arrangements. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 3

The Toll takeover bid is the second such bid to be made for the Company during the year under review. An earlier bid from Rail America was withdrawn before your Directors were able to make a recommendation on it. Toll lodged its bid soon after the Rail America withdrawal, initially offering 75 cents per share, which was subsequently raised to 95 cents per share. Your Directors did not recommend acceptance of this bid for reasons explained in the Target Company Statement of 4 August 2003. Your Directors sought to encourage competing offers for shareholders to consider. On 5 September 2003, Toll increased its offer price to $1.10 per share. In the interim, no superior competing offer had emerged. Also on 5 September 2003, your Directors unanimously recommended that shareholders accept the new Toll offer. Those Directors who currently hold shares in the Company have also indicated that they will accept the Toll offer for their entire shareholdings. The $1.10 offered represents a value for Tranz Rail that is greater than the underlying valuation of the Company set out in the Grant Samuel Report of 25 July 2003 and is at the upper end of the range of between $1.00 and $1.11 per share that Grant Samuel considers would be fair value for the Company as it would be under the terms of the Company’s agreement with the Crown. Your Directors consider that the Toll offer provides greater certainty of value for shareholders. At the date of this Annual Report, Toll had still to achieve acceptance of its offer by 90% of the Company’s shareholders – the threshold it has set for finalisation of its offer. The current closing date for the offer is Friday, 10 October 2003. While shareholders are considering the proposal from Toll, a Tranz Rail business plan is in place to deliver further performance improvement. It should be noted that although profit forecasts provided at the start of the 2003 financial year were not achieved, the result demonstrates an underlying improvement in the Company’s efficiency. In the absence of any material change, an operating profit from trading of $48 million has been forecast for the 2004 financial year on the basis of the current business plan. Finally, I would like to express my thanks to Tranz Rail’s customers, shareholders, management and staff.

WAYNE WALDEN CHAIRMAN TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 4 MANAGING DIRECTOR’S LETTER

MICHAEL BEARD MANAGING DIRECTOR

Tranz Rail demonstrated new operating strengths in the 2003 financial year, even though the improved financial result was below the profit forecast provided to shareholders at the beginning of the year. Drought, industrial disruption in a major customer’s operations, changes in shipping company service patterns, growth in interisland ferry competition, equipment supply delays, protracted asset sales negotiations, tightening liquidity, and a credit rating downgrade all adversely affected our ability to achieve the original 2003 forecast. Our forecast proved to be too optimistic in the face of such a combination of adverse pressures.

Nevertheless, Rail Services Group (“RSG”) continued to develop into a significantly more efficient intermodal operation, securing new freight contracts offering better returns. The newly formed Hillside Engineering Group, which is part of RSG, steadily built its external contracting business. The Tranz Link Distribution Services Group (“DSG”) returned a profit for the first time in its history and is continuing to improve its profitability. The Interisland Line fleet has been reconfigured to give it more operating capacity and flexibility at a lower operating cost. The Rail Passenger Group met the challenge of sustaining service under difficult circumstances. Sprint train freight services were introduced during the year between Auckland, Palmerston North, and Wellington. New 25 foot Hi-Cube containers have been designed and deployed, allowing RSG and DSG to offer customers an intermodal service that is more efficient than Tranz Rail’s major non-bulk, road-bound business competitors. Overall, we ended the year with a much healthier, integrated, multi-modal transport operation, capable of delivering the services sought by freight customers. RSG on time arrivals continued to improve and cargo handling errors have declined. Customer satisfaction has improved dramatically. Three years ago, only 32% of RSG customers surveyed said they would recommend the Company to other potential customers. A survey in 2003 shows that figure has jumped to 78%. New business and major contract renewals are tangible measures of improved performance. During the year, Ravensdown signed a five-year contract with Tranz Rail to move fertiliser from Napier to a variety of destinations. The Company and Genesis Power agreed in principle to move a million tonne and possibly more of imported coal annually from Tauranga to Huntly. New partnerships were formed with the ports of TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 5

Taranaki, Napier, and Otago, and the Port of Tauranga contract for the Metroport operation was extended until 2013. Workplace safety performance was given increased emphasis during the year under review. While more needs to be done to build a safety culture in the Company, significant progress has been achieved. Through a cooperative effort between management, staff and unions, the Company’s lost time injury frequency rate has nearly halved from the level of 8.8 per 200,000-hours-worked in 1999 to a new low of just 5.0 for the 2003 financial year. The severity measure (days lost to injuries per 200,000-man-hours) has dropped from 91 to 40 over the same period – a reduction of 56%. Soon after the close of the 2003 financial year, Tranz Rail achieved a primary level pass in the entry audit for the Accident Compensation Corporation’s Workplace Safety Practice programme – a programme that rewards employers who have systems and processes for managing and improving workplace safety. In 2003, Tranz Rail returned an operating profit from trading and reversed the decline in financial performance over recent years. Capital expenditure is under tight control. We have exited loss-making areas of business. The Aratere lease has been renegotiated on more favourable terms, and adequate banking facilities have been secured for the 2004 financial year. Tranz Rail holds valuable surplus assets that can be realised, and the Company has a business plan in place to achieve further performance improvement in the year ahead. Finally, I want to acknowledge the contribution of all the people who have supported Tranz Rail during what has been a very difficult period. Our employees must be thanked for keeping their focus on performance improvement in a period when the Company has been under intense financial pressure and close public scrutiny. My thanks are also extended to the Company’s customers, suppliers, shareholders and bankers who are all essential to any progress that is achieved by the enterprise.

MICHAEL BEARD MANAGING DIRECTOR TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 6 RAIL SERVICES GROUP

RSG INTERMODAL FREIGHT REVENUE (Excl. DSG) RSG INTERMODAL ON TIME TRAIN PERFORMANCE

75 140 70 130 65 120 60 Percentage $ (MILLIONS) 110 55

100 50 2001 2002 2003 2001 2002 2003

The transformation of the Rail Services Group into offset by increases in export log volumes and rates and a modern rail transport system offering customers there was a better than expected performance in more efficient, integrated, intermodal transport services Northland region volumes as a result of a delay to the has continued under challenging business conditions. transfer of log exports to the new port at Marsden Point, which is not currently served by rail. Rail Services Group (“RSG”) rail freight revenue was $303.6 million, an increase of $1.9 million (0.6%) on Bulk revenue grew year-on-year as a result of coal the previous year. RSG rail freight tonnage grew 3.7% volumes that increased by 14%. Export coal business to 13.9 million tonnes. exceeded 2 million tonnes for the first time. Market RSG revenue was strongly affected by the impact of the share growth in the volume of export steel carried to severe drought on bulk milk volumes (both year on the Port of Tauranga contributed positively to revenue year and against a forecast which was predicting year growth. The impact of the severe drought in the third and on year increases). Rail freight revenues were also fourth quarters was reflected in the dairy and fertiliser affected by strikes in the forest products sector, export freight volumes, and depressed year-on-year changes in port calls by shipping companies, delays in revenue growth and performance against target. the delivery of new higher capacity rail cargo Intermodal freight revenue (including internal revenue containers, and improvements in equipment utilisation from Distribution Services Group) was flat year-on- by the Company’s Distribution Services Group. year, but this masks some promising underlying RSG operational efficiency improved in the 2003 growth trends. The impact of the drought had its most financial year, as demonstrated by: acute impact in this sector. Revenue growth in this sector was largely driven by growth in the time an improvement in on-time performance; sensitive overnight market where freight volume a reduction in cargo-handling errors; increased 20% year-on-year. This is a creditable result export coal tonnage increased – in excess and evidence that our strategy of focusing on of 2 million tonnes was carried in the 2003 financial year; and operational performance and customer service is customer satisfaction with RSG’s operational starting to produce favourable results. There is more performance improving dramatically. work to do. The impending arrival of a new container specifically targeted to this high value market will fuel RAIL OPERATIONS REVENUE further growth in the sector.

Forestry revenues were adversely impacted by a strike Further changes in shipping line port calls depressed at a customer’s production facility. This was partially revenues by reducing average rail haul distances. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 7

A COAL TRAIN MAKING ITS WAY THROUGH A WINTER LANDSCAPE ON THE SOUTH ISLAND’S MIDLAND LINE. EXPORT COAL TONNAGE INCREASED BY 14% IN THE 2003 FINANCIAL YEAR.

Utilisation improvement initiatives introduced by dairy transport and by forwarders in the overnight Distribution Services Group also resulted in fewer domestic market. wagons being required to move a given tonnage. In the New sprint train freight services were introduced short term this has depressed RSG’s revenues in the during the year between Auckland, Palmerston North, domestic sector but it has also released capacity that and Wellington. Support on these services is expected can be used to carry more freight on rail. to grow as customers see the benefit of payload efficiencies offered by the new containers and RAIL OPERATIONS’ EFFICIENCY attractive pricing compared to trucking. RSG’s Intermodal Transformation Project (“ITP”) is Our vision is to provide the freight forwarding market proving highly effective. This new mode of operating with a comprehensive, high quality, line haul service, emphasises the aggregation of full container load reduce the number of large trucks on the state freight at terminals by road, rather than by shunting, highways and enable forwarders to focus on their and the establishment of a network of intermodal core competencies of freight consolidation and value container transfer sites offering lift on/lift off loading added services. and unloading of fixed capacity unit trains on routes between major cities. RAIL BUSINESS DEVELOPMENT ITP has extended rail’s penetration to customers who The improved and sustained operational efficiency of do not have direct access to rail, and has made service RSG is generating new commercial interest in Tranz to customers with lightly used sidings more efficient. Rail’s rail freight services. ITP has reduced the number of rail sidings from 1,250to a core of frequentlyused sidings of around RSG is looking to work with Genesis Power to carry an 250. It has also increased the amount of non-bulk initial 1 million tonne of coal a year from Tauranga to business now handled at a container terminal site the Huntly Power Station. This will ensure the 45,000 rather than being shunted. truck movements required to transport the coal by road will be avoided, benefiting the environment and RSG has developed two versions of 25 foot Hi-Cube local communities. containers that allows rail to offer an intermodal service that is more efficient than its major non-bulk The Port of Tauranga has extended its successful business competitor – trucking. The new containers contract with RSG for its Metroport operation based in can take a 26 tonne payload with two containers to South Auckland until 2013. Metroport is New Zealand’s each flat top wagon and are targeted for use in first inland port and allows the Port of Tauranga to TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 8

STRATFORD BASED LOCOMOTIVE ENGINEER BRENDON JUDD ABOUT TO START HIS SHIFT. THERE IS A TOTAL OF 232 LOCOMOTIVES IN THE RAIL SERVICES GROUP FLEET COVERING A NETWORK OF 3,898 KILOMETRES.

aggregate freight in Auckland away from busy larger container ships to the port. RSG is now running waterfront areas, with RSG transporting it by rail to non-stop trains of 20 wagons each between Napier and meet specific ship calls at the sea port. Wellington via the Wairarapa and trains of 14 wagons each between Napier and Palmerston North, which Port of Tauranga CEO, Jon Mayson, commented that the acts as a hub for cargo going to and from a number of long-term nature of the new contract between the port areas including Wellington, the Manawatu and and rail enables both parties to invest with confidence Wanganui. Train services between Napier and Gisborne in a range of mutually beneficial activities that will were also increased from just one service to three per make the Metroport operation even more efficient. week in a venture to develop new business. The 2003 financial year saw RSG and Port Otago announce a new strategic partnership with the signing In addition to these initiatives, Ravensdown signed a of a heads of agreement to relocate the port’s five-year contract with RSG to move fertiliser from container depot business to RSG’s Strathallan Street Napier to a number of destinations including Gisborne. terminal and the purchase by Port Otago of RSG’s Ravensdown’s Lower North Island Logistics Manager, Dunedin “box company”, a specialised container Russell Eliason, said: maintenance, storage and repair facility, during the “Ravensdown is looking forward to an even closer latter part of the 2003 financial year. Regional relationship with Tranz Rail. They have worked very initiatives under way in Otago include the establishment hard to meet our needs. This contract is evidence of of an alternative port gate at the Strathallan Street site our confidence in the ongoing ability of Tranz Rail to to maximise rail movements and relieve congestion on meet our requirements.” the local highway between Port Chalmers and Dunedin City. The Maersk Shipping Line changing its port of call from Lyttleton to Timaru has resulted in a smaller Announcing the initiatives, Port Otago’s Chief inland port operation, between Christchurch and Executive, Rene Bakx, commented: Timaru, called Primeport. “Tranz Rail has proven they can offer a reliable on The change in international shipping patterns to time service and that is why we are more than happy utilise larger vessels is evidence that the 4100 vessels to do business with them.” will see an increased concentration of major container At the Port of Napier, where more than 95% of the movements at key ports in New Zealand. RSG is traffic through the centre’s rail terminal is container ideally positioned to benefit from this trend towards related, a set of new rail services was introduced larger container vessels with more concentrated during the year to support the introduction of new container movements. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 9

RSG CUSTOMER SATISFACTION SURVEY RSG CARGO HANDLING ERROR DAYS

80 290 70 270 60 250 50 230 40 30 210 20 190 10 170 % YES (CUSTOMERS SURVEYED) % YES (CUSTOMERS 0 (PER MONTH) DELAY DAYS CARGO 150 2000 2003 2001 2002 2003

Would you recommend Tranz Rail to another potential customer? Survey conducted every 3 years

RSG continued to strengthen its focus on customer first major step in a new IT platform known as BART service improvements throughout the year, within (Business Aligned Rail Technology). Once fully the financial constraints applying to the Company operational, BART is expected to cut the Company’s as a whole. operating costs by in excess of $2 million a year. The establishment of the new IT platform is seen as The completion of ITP together with the development one of the most important initiatives undertaken by of the container transfer sites resulted in a rail the Company as it transforms itself into a modern, operation with a new look and feel and improvement in efficient, customer focused rail system. service delivery. BART is being rolled out in four phases with June The completion of the locomotive fleet rationalisation 2004 set as the target date for it to be fully operational. has also led to improved utilisation of assets. BART has been developed in-house and will provide Three years ago, only 32% of RSG’s customers surveyed a better booking system for freight movers, said they would recommend the Company to other bringing greater service reliability and providing an potential customers. In the 2003 survey, that figure has improved interface with customers. Improvements jumped to 78%. Some 80% of those surveyed rated the will include the ability for customers to check in their attitude of staff as being “good” to “very good”. cargo against a booking over the Internet, and Satisfied customers described the Company as: eventually waybills will no longer be required. There will be more accuracy and precision in cargo “more professional and organised than they were a tracking and tracing. couple of years ago”, and noted the “huge improvement at an operational level over the past OUTSOURCING 12months” . 2003 was the first full financial year of operation with Customer focus groups have been held around the our outsourced partners, Alstom (locomotives and country to hear first hand feedback from customers to wagons), Transfield (track and infrastructure) and enable the Company to focus on further areas for Goughs (forklifts). Whilst some difficulties have been improvement. experienced in the transition, there is now a firm foundation for improved asset maintenance and INFORMATION TECHNOLOGY performance through the specialised skills of our The completion of the container booking system partners. This has enabled us to focus on our core enabled accurate tracking of container movements business of freight transportation, the full benefits of throughout the system for the first time. This is the which will only be captured in the years to come. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 10 HILLSIDE ENGINEERING GROUP

During the year, the newly branded Hillside These wagons would be built at Hillside and along Engineering Group (“Hillside”) reorganised its with work on passenger units, provide a firm base operations into three individual units – Hillside workload going forward. Fabrication, Hillside Refurbishment and Hillside The Hillside Casting unit’s quality standards were Casting – each with its own profit objectives. recognised with the 2002 National Casting of the A key development has been the growth of external Year award for a product developed in partnership (non-rail) contracts, which assist in balancing the with Maison Rouge Limited. traditional rail workload with growing site profitability. Revenue of $8.5 million was achieved BUSINESS DEVELOPMENT from external engineering contracts during the year, which is nearly 400% higher than the previous year. New key customers included Designline (bus chassis fabrication) and GRD Macraes (large hopper MAJOR PROJECTS fabrication). Further opportunities have been identified that will permit the use of the site’s The start of the 2003 financial year saw the natural competitive advantages. Examples of such completion of a coal wagon manufacture opportunities include marine vessel construction programme for Solid Energy. 22 CE class wagons and wind turbine tower construction. were constructed, each with a 54 tonne load carrying capacity. The wagons currently support the growth in Solid Energy’s export coal traffic between TRAINING Westport and Lyttleton. Hillside has launched a series of initiatives to Other major projects for the year included the sustain and strengthen the base of skills and completion of a $1.8 million passenger project for experience that is needed to support growth. Auckland Regional Council (“ARC”). Two DBR locomotives and six former Queensland Rail These initiatives include the establishment of a passenger cars were refurbished in a project that site-wide staff development programme, the included the fitting of air-conditioning, new controls introduction of new apprenticeships, accelerating and complete relining of all interior surfaces. the development of existing staff, focusing on nationally recognised qualifications and the use The competency demonstrated on this project of para-professional skills to support the assisted Hillside to secure a more advanced development of project management and 12 former British Rail passenger car rebuild design engineering competencies. More than programme for ARC valued at $9.6 million, which 200 New Zealand Qualifications Authority unit will be completed during the 2004 calendar year. standards were completed by Hillside employees It is anticipated that Hillside will also supply during the year. There are now 11 individual Genesis Power with 33 new coal wagons for use apprentices on site with more to be appointed in in the Tauranga to Huntly import coal route. the 2004 financial year. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 11

STAFF AT HILLSIDE ENGINEERING GROUP IN DUNEDIN POURING CAST IRON TO MAKE BRAKE BLOCKS FOR A LOCOMOTIVE. HILLSIDE ACHIEVED REVENUE OF $8.5 MILLION FROM EXTERNAL ENGINEERING CONTRACTS DURING THE 2003 FINANCIAL YEAR.

HILLSIDE ENGINEERING GROUP STAFF MEMBER WELDING A FRAME FOR A WAGON UNDER CONSTRUCTION. IT IS ANTICIPATED THAT HILLSIDE WILL SUPPLY 33 NEW COAL WAGONS FOR USE ON THE TAURANGA TO HUNTLY IMPORT COAL ROUTE. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 12 DISTRIBUTION SERVICES GROUP

Tranz Link Distribution Services Group set out two (Distribution, Refrigerated and International) within years ago to transform the way it carried out its Tranz Link – are now complete. By integrating the business. The success of this transformation is three business lines, DSG has established a clearly evident in the significant turnaround in its seamless supply chain operation for customers. financial and operational performance over the The journey so far has seen DSG focus on retention past two years. of its existing customer base through improved Distribution Services Group (“DSG”) freight revenue service levels, improved information flow, and the for the 2003 financial year was $163.2 million, a development of robust operational practices. This 2.0% increase on the previous year. DSG’s operating has required the integration of commercial, profit from trading improved by $6.6 million to operational and administrative functions, a move to $1.0million. a variable cost structure, and the development of new Information Technology systems to provide In the 2003 financial year, DSG achieved a 24% greater visibility of operational and financial improvement in gross margin, a 16% improvement information in real time. in line haul asset utilisation, and a 32.7% reduction in its claims/revenue ratio. The advancement of profit centre management has helped each individual manager understand the These improvements were supported by the profitability of their respective operation. A focus development and introduction of a live, accurate, on improved debtor collection by shifting the mobile data management system covering all terms of trade where possible and improved claims consignments moved across the DSG network. ratio have lead to improved financial management DSG’s performance improvement was particularly of the business. satisfying as it was achieved while DSG was also Furthermore DSG has been successful in increasing involved in preparations for possible sale during the the flexibility of its cost structure to respond to last six months of the 2003 financial year. varying levels of business activity and, in particular, seasonal trends. SUPPORTING RAIL As a result, DSG has now established itself in the DSG has a close relationship with Rail Services market place as a leading transport supply chain Group (“RSG”), as a customer for rail line haul provider. The business continues to work with services. A prime focus of the DSG/RSG customers to improve service levels and add value relationship is to shift more freight off road and through timely information flow via new technology, onto rail, particularly for short-haul intra-island together with new supply chain service offerings. general freight and refrigerated product where there The Stage 1 and 2 objectives of improving gross is significant opportunity to capture more volume margin, while reducing direct and indirect costs, from the wider transport market place for rail. have been delivered. The significant improvement seen in DSG’s DSG is implementing Stage 3 of its strategic plan – business during the 2003 financial year is the growth and further improvements in profitability. outcome of a three step strategic plan developed In Stage 3, the emphasis moves to top line revenue when DSG was established as a stand alone growth from new and existing customers, continued operation within Tranz Rail two years ago. improvements in asset utilisation, and further The first two stages of that plan – stabilising the investment in training and education of team business and integrating the three lines of business members in all areas of the business. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 13

DISTRIBUTION SERVICES GROUP ACHIEVED A 16% IMPROVEMENT IN LINE HAUL ASSET UTILISATION IN THE 2003 FINANCIAL YEAR.

The progress achieved to date is attributable to a As part of the business transformation, DSG has firm focus on a “vital few” strategic drivers that re-branded its livery. The new livery is based on are fundamental to the business, namely: ideas generated in a colouring competition among the children of Tranz Link team members. quality of revenue (volume and mix); The new branding reflects Tranz Rail’s New Zealand margin growth; heritage as the country’s oldest transport business. improvements in asset utilisation and line haul Feedback on the new colours from our people, mode selection; customers and public has been very positive. quality and timeliness of operational and financial information required for analysis and In a short time, DSG has established itself as a decision making; and leading operator in supply chain and logistics training and development of the DSG team. services, both domestically in New Zealand and offshore through its international division. ENTERPRISE MANAGEMENT SYSTEM Continued focus on core competencies and key strategic initiatives are the main drivers of The continuing development of DSG Information DSG’s programme to generate revenue growth Technology systems and products has been a and increase margin and profitability in the highlight. Over the last two years, DSG has 2004 financial year. successfully introduced and refined a new enterprise management system offering improved operational Early in 2003, a decision was taken to place data, freight status information and financial DSG on the market. This process was seen visibility to all levels of the organisation in real through to the completion of due diligence and time. The DSG team’s commitment to the new the short listing of two bidders. With the corporate technology tools used to manage its nationwide and takeover activity surrounding Tranz Rail, a international network has been vital to its success. decision was made in June 2003 to suspend the sale process until the ownership of the Company Further investment to expand and develop DSG’s was determined. operational and management systems will deliver additional benefits to customers, staff, and the DSG set out to build a business where everyone Company in the 2004 financial year. pulled together as one, had a shared understanding of the vision and clearly understood their role in the PEOPLE FOCUS team. DSG's success is clearly evident in the significant turnaround in financial and operational DSG has deliberately engaged in a business culture performance over the past two years. Today, DSG is change programme to build a people-focused as much about live, accurate data movement as it is organisation, which places responsibility and about physical freight movement. DSG's mobile accountability at all levels for financial performance systems have given the business a new level of and service excellence. visibility on performance that enables measurement The acceptance of this shift in culture and and management of all processes within the accountability is a true reflection of the quality of network, which increases DSG's agility and growth the people in the business. DSG is investing heavily opportunities, internally and externally. in the ongoing training and professional development of its team members to achieve this objective through the opening of a “first class service” training school. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 14 THE INTERISLAND LINE

The Interisland Line started the year by celebrating commercial vehicle customers. The commercial 40 years of operation and undertaking a major fleet vehicle business has grown and has very specific reconfiguration. needs that could not be met by Aratere and Arahura alone. The service and timetable conflicts between The Interisland Line’s passenger and car revenue in commercial vehicles and passengers have been the 2003 financial year was $72.3 million. 240,000 resolved with the introduction of Purbeck, which vehicles and 1.1 million passengers were carried enables The Interisland Line to offer dedicated by The Interisland Line fleet. capacity for commercial vehicles for the first time. External events that had an impact on revenue With the expiry of The Lynx fast ferry lease, included the increased competition from discounted negotiations for a replacement fast ferry were airfares, reduced volumes due to a decline in initiated and concluded successfully. The Lynx foreign tourists following the international outbreak replacement, Incat 046, is committed exclusively to of the SARS virus, and increased competition on the the passenger market, and will enable The Cook Strait with a new competing vessel from Interisland Line to achieve a better match between January 2003. capacity and demand in the passenger-only sector Improved yield and capacity management enabled of the market. The replacement fast ferry will the effects of such market changes to be minimised. operate year-round, but with a reduced, weekend- only schedule over the winter months. FLEET RECONFIGURATION The overall objective of the fleet reconfiguration has Major vessel renovations were undertaken, a new been to enable The Interisland Line to improve the ship, new structures and new systems were service provided to our customers and significantly introduced in a programme to strengthen The reduce lease costs to maintain financial Interisland Line’s business platform and provide it performance in the interisland market where with the flexibility to succeed in a changing and competition from shipping operators, airlines, other increasingly competitive market. destinations and other options for spending disposable income is intensifying. The Arahura was withdrawn from service for five weeks while the vessel was dry-docked for inspection and maintenance. The spell in dry dock REGULATORY ISSUES provided the opportunity for a refit of Arahura that The Interisland Line’s application to the increased the vessel’s vehicle and freight capacity, Marlborough District Council to raise the speed and updated the ship’s passenger facilities with limit on The Lynx fast ferry service from 18 to 24 new and increased seating, and an improved knots through the Marlborough Sounds was takeaway bar. declined. Despite this setback, and with the threat The arrival of the freight-only ship, Purbeck, in of further speed restrictions to conventional ferries, June 2003 recognises the importance of The Interisland Line is keen to co-operate with TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 15

THE INTERISLAND LINE STARTED THE YEAR BY CELEBRATING 40 YEARS OF OPERATION AND UNDERTAKING A MAJOR FLEET RECONFIGURATION. THE INTERISLAND LINE’S FLEET COMPRISES ARATERE (PICTURED), ARAHURA, PURBECK (FREIGHT ONLY) AND THE LYNX (FAST FERRY).

the council to find a workable solution to the extend its recruitment and training scheme to the commercial and environmental issues involved. deck crew demonstrates a commitment to training, Our objective is to ensure a balance between not only for its own future, but also for the future of efficient transport operation on a route that is a the maritime industry in New Zealand. vital sea-bridge for New Zealand’s road and rail A group of catering attendants from The Lynx also infrastructure – and the maintenance of the high received overseas experience as part of an quality environment of the Marlborough Sounds agreement with UK-based Condor Ferries, who that attracts people to the region. agreed to provide seasonal employment. The The regulatory issues within the Marlborough Sounds seasonal UK ferry service is complementary to and captive port pricing are two of the factors that The Interisland Line’s operation and further continue to make the Clifford Bay South Island ferry employee exchanges are planned. terminal proposal an attractive proposition. The Interisland Line’s strategy is focused on developing competitive advantage by providing CLIFFORD BAY TERMINAL PLANNING superior customer experience. The launch of During the year, ABN AMRO was appointed as The Interisland Line’s new website together with financial adviser to The Interisland Line for the its real-time online booking system provided Clifford Bay project. ABN AMRO has undertaken improved customer flexibility and satisfaction. a full evaluation of the project – including a review In addition, the launch of a strategic alliance with of the business case for Clifford Bay, the cost and New Zealand Post and a rental car company revenue benefits of the project, together with an enabled an improved product mix to be brought to assessment of the construction and engineering our customer base. requirements, and recommended a financial Recent customer satisfaction surveys show that structure for the project. This important 82% of customers rated the overall impression of development proposal is now ready for their journey as ‘good’ or ‘excellent’. consideration by the Tranz Rail Board in the 2004 financial year. Positively Wellington Tourism Chief Executive, Tim Cossar, says:

TRAINING “The Interisland Line is a major industry player While Arahura was in dry dock, a programme of critical to the Wellington region’s success in safety training courses was undertaken by all staff. tourism. We collectively benefit from the Lost Time Injuries fell by 11.4% following this effort. partnerships we forge together, both domestically and internationally, in pursuit of tourism growth.” Other training initiatives included the adoption of a training programme for eight merchant seafarers. The challenge for The Interisland Line in the 2004 A deck officer trainee programme has proved very financial year is to do even better and grow the successful, and The Interisland Line’s decision to business in an increasingly competitive environment. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 16 RAIL PASSENGER GROUP

Rail Passenger Group revenue for the 2003 financial Fleet improvements for Wellington centred on year was $53.2 million. Across the 12-month period, the refurbishment of the final Ganz Mavag unit. passenger numbers remained constant with the prior The entire fleet of 44 two-car sets has now had a year at 12.3 million and fare revenue was up 4.1%. mid-life refurbishment in a project that was jointly funded by Tranz Metro and the Greater Wellington Customer satisfaction with both Wellington and Regional Council. Auckland commuter services was significantly affected by heat restrictions. Value for money To encourage more passengers to use the satisfaction ratings fell 9% for Auckland and Wairarapa services, a new timetable has been 11% for Wellington on levels recorded in the introduced with additional services at peak times to previous year. Staff in both regions worked meet growing customer demand. strenuously to provide the best service possible Other service improvements included better under very testing conditions. security lighting at a number of stations including Porirua, Paraparaumu, Paremata, Wellington and TRANZ METRO WELLINGTON stations on the Wairarapa line. Summer heat caused serious restrictions to New performance-based station cleaning and main- Tranz Metro services in Wellington, including major tenance contracts were also put into place during the disruptions, especially to afternoon peak traffic. year to ensure increased efficiency in this area. Staff worked tirelessly over the remainder of the year to restore passenger numbers and rebuild confidence in the service. TRANZ METRO AUCKLAND To minimise the chance of similar heat restrictions Summer heat also impacted on the Auckland occurring in the future, a programme has started to Tranz Metro operation, but not as severely as in destress the tracks involved. This work will be Wellington. The track destressing in Auckland is completed by summer. well underway and will be completed by summer. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 17

A NEWLY REFURBISHED ADL UNIT PULLS INTO AUCKLAND’S NEW TRANSPORT CENTRE, BRITOMART. FLEET IMPROVEMENT FOR AUCKLAND DURING THE YEAR FOCUSED ON THE REFURBISHMENT OF 10TWO-CAR DIESEL MULTIPLE UNITS IN A PROJECT FUNDED BY AUCKLAND REGIONAL COUNCIL AND MANAGED BY TRANZ RAIL.

Passenger security initiatives included a highly Also, as part of this, Tranz Rail undertook new successful partnership with the Henderson Maori driver training programmes to allow for further Wardens who assist with on-train and station expansion planned in the 2004 financial year. With security on the Auckland west line. the development of Britomart, the increasing passenger numbers continue to put pressure on Fleet improvement for Auckland during the year peak services. focused on the refurbishment of 10 two-car diesel multiple units in a project funded by Auckland Customer satisfaction declined due to service Regional Council and managed by Tranz Rail. The constraints, such as the single track on the project was largely completed by the end of the Auckland west line, a lack of rolling stock, and the 2003 financial year. age of the existing fleet. To address these issues, Government funding is providing long overdue Tranz Rail’s Hillside Engineering Group also carried investment in the rolling stock fleet, and plans are out extensive refurbishment of six former being revisited to double track the western line. Queensland Rail passenger cars before their planned Recent experience indicates that patronage will introduction on Auckland services in July 2003 to continue to increase as service quality boost carrying capacity during peak periods. improvements are achieved. Patronage on Auckland commuter services Tranz Rail’s contract to operate passenger services continued to grow with passenger numbers rising in Auckland expired at the end of June 2003. A new to 2.5 million for the year, up from 2.3 million in contract was agreed with the Auckland Regional the previous year, and fare revenue rising by 7.2%. Council, which will continue for two years or until In preparation for the new transport centre, a new operator is appointed. Britomart, passenger services were extended in June 2003 with more off peak services during the day and further into the evening. In addition, service frequency to Pukekohe was increased. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 18 HEALTH, SAFETY AND ENVIRONMENT

Safety is critical to everything we undertake at The Company also increased its emphasis on Tranz Rail. It is integral to all aspects of our rehabilitation programmes and return to work post- business. A strong focus has been placed on safety injury, with a Health and Injury Prevention Manager initiatives over the year. working closely with managers, supervisors and external case managers to ensure that employees receive the required help to make an early return to COMPANY WIDE INITIATIVES work following an injury. Injury Prevention and Management Tranz Rail plans to continue working closely with Tranz Rail has run an active injury prevention and employees and unions to improve its safety management programme during the year. Our performance over the next year. Significant initiatives have been focused on reducing the progress has been made, but more needs to be highest risks for accidents. A key focus has been on done to achieve a complete ‘safety culture’ across providing our business units with detailed analysis all our operations. The target for the 2004 financial of accidents for their region or area, including year is a further 15% to 20% reduction in the LTIF detailed analysis of operational incidents and near and injury severity rates. misses. This has enabled accident and injury ACC Workplace Safety Management Programme prevention initiatives to be directed towards eliminating or reducing our highest risks. This year, Tranz Rail received a primary pass in the Accident Compensation Commission’s Workplace Tranz Rail’s initiatives in this area have shown Safety Management Programme (“WSMP”). The significant success. Tranz Rail’s Lost Time Injury WSMP was developed by ACC to encourage Frequency (“LTIF”), the number of workplace employers to create and maintain safer workplaces. injuries resulting in a day or more off work, has In return for putting in place systems and processes nearly halved from the 8.8 per 200,000 hours- for managing and improving workplace safety, worked figure recorded in 1999 to a new low of employers receive discounts on their ACC premiums. just 5.0 for the year under review. In the last Tranz Rail was externally audited by ACC to assess year alone, we have obtained a 20% reduction in our compliance with this programme. The auditors these injuries. determined that Tranz Rail was at a high primary The LTIF decline has also been associated with a level in our health and safety systems and decrease in the severity of injuries. The severity management – a level attained by less than 20% of measure (days lost to injuries per 200,000-man- eligible New Zealand employers. Tranz Rail will hours) has dropped from 91 to 40 over this same receive a 10% discount on our ACC premium from period — a reduction of 56%. 1 August 2003 as a result of attaining this level. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 19

TRANZ RAIL HAS SIGNIFICANTLY REDUCED THE NUMBER OF WORKPLACE INJURIES RESULTING IN ONE OR MORE DAYS OFF WORK. HERE, A FORKLIFT DRIVER IS LOADING THE FIRST CONTAINER ONTO A RAKE OF WAGONS AT AUCKLAND’S SOUTHDOWN CONTAINER TERMINAL.

Tranz Rail will now be subject to an ongoing a senior health and safety position (General external audit regime to maintain and improve its Manager, Health, Safety & Environment) and the health and safety performance. We will also be expansion of our health and safety team. working towards entry into the ACC Partnership In the last year, we have taken this commitment Programme, a programme that allows companies further by appointing a series of field-based Health to self-insure all or part of their injury and Safety Manager roles. Health, Safety & management, over the next year. Environment Managers have been appointed in Health, Safety & Environment Action Teams Auckland, Wellington and Christchurch and a Health, Safety & Environment Manager has also Tranz Rail has 29 site based health and safety been appointed for The Interisland Line. These action teams or committees. These teams are made managers are charged with facilitating safety up of employee, union and management improvements in the field by actively engaging with representatives and are designed to be a forum for staff at a grass roots level to ensure we are resolving health and safety issues at a site based adopting safe practises and to ensure that we level. Over the last year, there has been an continuously improve operations. increased focus on these committees as a key forum for highlighting and resolving health and In addition, the Company has worked with our rail safety issues at site level. Each group meets union (The Rail and Maritime Transport Union monthly, and minutes from their meetings are (“RMTU”), to develop a dedicated RMTU health and posted on the Tranz Rail Health Safety & safety role. This has seen the RMTU take a Environment intranet, a site available to all staff leadership role in identifying and managing health and contractors. and safety issues with their members and, where appropriate, raising safety issues with the Company. Over the next year, we will be seeking to expand the role of these committees including providing the These new positions have been positively received representatives with two days of health and safety by our employees and our customers as they have training and encouraging active management of been seen as demonstrating a strong commitment health and safety issues at a site level. by the Company to safety.

Appointment of Health and Safety Staff RAIL SPECIFIC INITIATIVES Since 2000, Tranz Rail has shown an active TELARC Safety Audits commitment to improving our resourcing and management of health and safety within the Tranz Rail’s rail operations operate under a rail Company. This has included the appointment of licence, which is approved by the Land Transport TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 20

SUMMER HEAT SERIOUSLY IMPACTED TRANZ METRO OPERATIONS, BOTH IN WELLINGTON AND AUCKLAND. SIGNIFICANT TRACK DESTRESSING WORK IS WELL UNDERWAY IN BOTH CITIES AND SHOULD BE COMPLETED BY SUMMER.

Safety Authority (“LTSA”), the railways regulator. particularly as ACC figures demonstrate that the Tranz Rail is audited by Telarc each year to rail transport sector has a better safety determine compliance with our rail safety system performance than many less regulated industries, standards and the conditions of our licence from including Tranz Rail’s major direct competitor in the LTSA. the freight transport market, the trucking industry. In the last year, Tranz Rail has worked with the Tranz Rail is supportive of a legislative regime that LTSA to improve the Telarc audit process. We have improves safety. However, we believe this Bill goes moved from an annual audit to a six monthly audit too far. We believe it will impose compliance costs to allow for better coverage of our business and on this business that are not faced by our direct regular review of outstanding issues. We also competitors, making us less competitive. We also extended the audit to include on-site verification of believe that the level of penalties and personal compliance with our safety system. liability in this Bill will be a disincentive to innovation and change and may, in practice, The April 2003 Telarc audit was positive for Tranz negatively impact on safety. Rail and demonstrated that we had made progress in addressing safety recommendations from Tranz Rail will be preparing a detailed submission previous audits. It is our goal over the next year to on the Bill and will be actively lobbying for changes continue to use this audit process as a safety to be made to this legislation. improvement tool. ACKNOWLEDGMENTS RAILWAYS BILL While significant progress was made in improving The Railways Bill was tabled in Parliament near the Tranz Rail’s overall safety performance over the end of the 2003 financial year. Tranz Rail was year, there is scope for further improvement. disappointed that despite extensive efforts over the This is highlighted by the fact that we had two year, we were not actively consulted on this work-related deaths over the year. A locomotive legislation or involved in its drafting. engineer died in Taranaki in a locomotive accident and an Invercargill locomotive engineer died in a The Bill, as tabled, will impose a significantly car accident as he was driving home from a work different safety and regulatory regime on the rail shift. Our deepest sympathies go out to the industry in New Zealand. The rail industry will be families, relatives and friends of these men. asked to meet safety standards that are higher than our competitors in other transport sectors. The rail Tranz Rail has conducted extensive investigations regulator, the LTSA, will also have far greater into both incidents and is actively managing the powers and much more involvement in the direct issues arising from the investigation findings. day to day operations of our business. This higher safety standard for the rail industry is unjustified, TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 21 TRANZ RAIL NETWORK MAP

N Kaitaia Kerikeri Otiria ÷ ÷Whangarei Dargaville Waiotira

÷ Westfield Ω Westfield AUCKLAND µ Westfield Thames ∂ Southdown Southdown Mission Bush » Southdown North Island Rotowaro Huntly Waitoa ÷ Mount Maunganui ÷Hamilton Tauranga µ Mount Maunganui Whakatane Hautapu Kawerau Taneatua ÷ Rotorua Kawerau µ Kinleith North Island Murupara

WELLINGTON Taumarunui Gisborne

it

ra ÷ t New Plymouth PICTON S NORTH ISLAND MAIN TRUNK LINE Cloudy Bay Kapuni Ahuriri

Cook Cook ÷ Blenheim Napier » Ahuriri Hawera Ahuriri

Clifford Bay Hastings

South Island Wanganui Marton Feilding ÷ Bulls Oringi Ω (Electric) Palmerston North » The Interislander and The Lynx Levin Masterton ÷ Picton Nelson WELLINGTON ÷ Blenheim Spring Creek Ω Ngakawau » EMU and Passenger Westport ¬ Hutt

MAIN NORTH LINE Rapahoe

÷ Greymouth Stillwater

Hokitika Freight Branch Otira Ω Linwood µ Addington Passenger and Freight Line Middleton MIDLAND LINE ÷ Freight Only Line CHRISTCHURCH Ω Middleton South Island Rolleston Lyttelton » Middleton Passenger Only Line Middleton Ashburton The Interislander and The Lynx Temuka Major Road Line Haul Route ÷ Timaru ¬ Major Workshops ÷ Principal Marshalling Yard » General Mechanical Depot Queenstown Oamaru Alexandra Ω Locomotive Depot Wagon Depot Te Anau MAIN SOUTH LINE ÷ µ DUNEDIN Ω Container Depot ¬ Hillside ∂ Ohai Container Transfer Site Gore Balclutha 0 50 100 200km ÷ Invercargill Bluff TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 22 FACTS AND FIGURES

Tranz Rail is New Zealand’s leading multimodal freight Rail Services Group’s network and operating fleet transport and distribution company. The Company (excluding laid up locomotives and wagons) as at offers an integrated network of rail, road and sea 30 June 2003 was as follows: freight, and passenger transportation services as well Network as distribution and logistics management services. Route length owned 3,807 kms Over the past few years, the Company has been Route length, not owned but with through an extensive change programme to focus on operating rights 91 kms its core business. The Company’s core business Track gauge 1,067 mm operations are managed through three stand-alone Tunnels (incl. those with operating rights) 149 business units: Rail Services Group, Distribution Bridges (incl. those with operating rights) 2,178 Services Group and The Interisland Line. Electrification 95km at 1.5kV DC 411km at 25kV 50Hz AC RAIL SERVICES GROUP Locomotives Rail Services Group provides freight services over Electric locomotives 14 a national rail network throughout New Zealand. Diesel electric main line locomotives 131 Freight is transported on container trains Shunting locomotives 87 (containerised freight), pack trains (consolidated general freight), bulk trains (coal, logs, milk) and block Total locomotive fleet 232 trains (steel, aggregates, fertiliser). Rail Services Group is also the sole rail freight operator of the Wagons national rail network. ITP: The operation is based on fixed capacity unit trains and Container Flat Tops 2,180 point-to-point scheduled services. It provides shuttle Hi-Cube 86 trains designed specifically for container movements Canopies 128 and other freight, both domestically and Box 394 internationally. It also has a hook-and-tow option for ITP fleet 2,788 those customers with their own equipment. Specialised: Rail Services Group operates through a network of Hopper 248 17 freight terminals throughout the country. Terminal Curtain Siders 92 operations are managed on a regional basis and are Refrigerated 41 supported by satellite sites and industrial sidings in Log 416 each area: Tank 73 No. No. No. Flats 145 Region Terminals Satellite Sidings Bulk fleet 1,015 Sites Other 245

Northern 3 3 66 Total wagon fleet 4,048 Bay of Plenty 3 2 27 Central 5 5 84 Containers 2,646 Northern South Island 3 2 93 Southern South Island 3 3 51

17 15 321 TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 23

DISTRIBUTION SERVICES GROUP Aratere

Distribution Services Group, operating under the 350 Passengers Tranz Link brand, provides distribution, refrigerated 436 Rail wagon lane metres and international freight forwarding services. With a full rail load: Distribution Services Group has the ability to utilise all 140 Cars; or available modes of transport (rail, road, air and sea 400 Truck lane metres freight) to provide a transport solution that will best Crossing time: 3 hours meet the specific needs of its customers. Purbeck Distribution Services Group offers a comprehensive supply chain service offering to its customers, including 50 Passengers door-to-door domestic and international distribution, 435 Truck lane metres road transport, freight handling services, supply chain Crossing time: 4 hours consulting, customs clearance, warehousing and The Lynx logistical support of distribution requirements. 750 Passengers Distribution Services Group has a network of 180 Cars 32 branches strategically located throughout Crossing time: 2 hours 15 minutes New Zealand from Whangarei to Invercargill, including 13 refrigerated branches. Distribution RAIL PASSENGER GROUP Services Group’s commercial truck fleet, including owner-drivers, comprises 330 units. In addition to the three core business units, Tranz Rail Distribution Services Group also includes an currently operates the Tranz Metro urban commuter international freight forwarding operation with rail service in Wellington and urban passenger rail 7 branches across all mainland States in Australia services in Auckland under contract for the Auckland and 3 branches in New Zealand. Regional Council. The Company also owns a 50% equity interest in the long distance rail passenger THE INTERISLAND LINE operation, Tranz Scenic 2001 Limited.

The Interisland Line, operating under The Interislander The Wellington Tranz Metro fleet (excluding and The Lynx brands, provides the principal ferry Tranz Scenic 2001 Limited) comprises 124 suburban services between the North and South Islands to electric units and 15 main line carriages. In addition, passengers, commercial vehicle operators, Rail there are 24 non operational main line carriages in Services Group and Distribution Services Group. “scrap” condition.

The Interisland Line operates two conventional ferries, The Group also operates 38 suburban diesel units in the Arahura and Aratere, one conventional freight only Tranz Metro Auckland fleet, 28 of which are owned by vessel, Purbeck, and one high speed passenger and Auckland Regional Transport Network Limited (ARTNL) vehicle vessel, The Lynx. It also provides a wide range and 10 leased by the Group. of onboard facilities and entertainment on board its vessels. CORPORATE SERVICES GROUP The Interisland Line’s service fleet is as follows: The business units are supported by a Corporate Arahura Services Group, which includes health and safety, 975 Passengers compliance, strategy, investor relations, finance, 436 Rail wagons lane metres treasury, internal audit, IT, human resources and With a full rail load: legal services. 123 Cars; or 85 Cars & 125 Truck lane metres Crossing time: 3 hours TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 24 FINANCIAL SUMMARY

TRANZ RAIL TOTAL TONNES MOVED TRANZ RAIL 2003 REVENUE ANALYSIS

15 INTERMODAL FREIGHT 44%

OTHER REVENUE 5% 14 OTHER FREIGHT 9% 13

12 PASSENGER 21% BULK FREIGHT 21% TONNES (MILLIONS) TONNES

11 1999 2000 2001 2002 2003

TRANZ RAIL ADJUSTED TRADING REVENUE (1) TRANZ RAIL NET PROFIT/(LOSS) AFTER TAXATION

100 620 50 600 0 580 (50) $ (MILLIONS) $ (MILLIONS) 560 (100)

540 (150) 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003

(1) Adjusted revenue excludes gains on the sale of the Auckland rail corridor and the Tranz Scenic business in 2002 and Tranz Scenic revenue prior to its sale in December 2001.

QUARTERLY FINANCIAL INFORMATION

OPERATING DILUTED TRADING PROFIT/(LOSS) NET PROFIT/(LOSS) NET PROFIT/(LOSS) EARNINGS REVENUE FROM TRADING BEFORE TAXATION AFTER TAXATION PER SHARE $000 $000 $000 $000 $ Quarter ended 30 September 2002 137,794 (7,145) (14,132) (14,132) (0.12) 31 December 2002 164,498 18,352 15,997 15,997 0.12 31 March 2003 157,290 19,085 16,934 16,848 0.08 30 June 2003 150,108 9,755 1,835 (21,297) (0.10)

Year ended 30 June 2003 609,690 40,047 20,634 (2,584) (0.02)

Quarter ended 30 September 2001 143,277 1,503 (26,557) (26,557) (0.20) 31 December 2001 159,540 12,908 48,784 48,784 0.38 31 March 2002 151,972 14,047 5,347 777 0.01 30 June 2002 147,036 (3,236) (139,497) (145,709) (1.16)

Year ended 30 June 2002 601,825 25,222 (111,923) (122,705) (0.97)

The Company issued 86,944,455 new ordinary shares in December 2002 in a 5 for 7 rights issue, which had the effect of diluting earnings per share from the second quarter of the 2003 financial year. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 25

2003 2002 2001 2000 1999

FINANCIAL DATA

($ millions unless otherwise specified) Freight revenue 448.0 434.6 463.5 446.0420.3 Passenger revenue 130.7 139.4 143.9 127.1 131.5 Other revenue 31.0 91.9 21.021.4 17.4 Total revenue 609.7 665.9 628.4 594.5 569.2

Operating profit before depreciation – reported 90.0 77.9 96.1 118.5 113.0 Operating profit before depreciation – adjusted (1) 98.1 82.8 103.4 125.8 119.0 Depreciation and goodwill amortisation 50.0 52.7 50.9 47.7 44.4 Operating profit from trading 40.0 25.2 45.2 70.8 68.6 Net interest expense and finance charges 14.9 28.4 23.020.418.5 Taxation expense/(credit) 23.2 10.8 (4.1) 4.1 (57.3) Net (loss)/profit after taxation (2.6) (122.7) 5.6 46.9 70.2

Balance sheet debt (2) 279.7 304.0 276.6 265.2 275.5

Weighted average shares on issue (millions) 168.2 121.2 120.8 120.8 120.8 Earnings per share – basic ($) (0.02) (1.01) 0.05 0.39 0.58 Earnings per share – diluted ($) (0.02) (0.97) 0.04 0.38 0.57 Dividends paid per share (cents) - - 17.017.017.0

CAPITAL EXPENDITURE

($ millions) Track and related structures 22.0 19.2 20.0 17.8 39.4 Rolling stock and equipment 28.2 20.0 24.2 26.7 46.4 Interisland ferry service 4.6 2.01.9 1.3 23.3 Other 5.4 13.3 3.6 3.7 16.3 Total 60.2 54.5 49.7 49.5 125.4

KEY CAPEX STATISTICS

Sleepers installed (thousands) 20 42 42 45 102 Track replaced (km) 10 23 23 17 23 Track destressed (km) 159 57 47 67 109 Locomotives rebuilt 8 2589 Locomotives acquired or built – –––– Wagons rebuilt 5 21 87 64 169 Wagons acquired or built 6 16 404 22 Wagon bogies overhauled 362 320526 429 475

OPERATING DATA

Total employees (average full time equivalents) 2,960 3,757 4,122 4,194 4,521 Freight: Revenue tonnes carried (thousands) 14,822 14,33014,461 14,699 12,900 Revenue tonne kilometres (millions) 3,853 3,766 3,942 4,078 3,671 Passenger trains: Tranz Metro (million passenger trips) 12.3 12.3 12.2 12.1 11.4 Tranz Scenic (thousand passenger trips) (3) – 221 514 466 466

(1) After adjusting for the amortisation of sale and leaseback deferred credits on the rolling stock and Aratere leases, divestment costs, reorganisation costs, feasibility costs written off, asset value adjustments and material gains on asset sales. (2) The accounting treatment of the Aratere lease was reviewed and changed from an operating lease to a finance lease effective 1 July 2001. This change had the effect of increasing reported debt by $94.5 million in the 2002 financial year. (3) Tranz Scenic includes passenger trips to December 2001 when the business was sold to Tranz Scenic 2001 Limited.

All amounts are in NZ$ unless otherwise specified. TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 26 BOARD PROFILE

J WAYNE WALDEN LEIGH R DAVIS

Director of Tranz Rail Holdings Limited, July 2002 Director of Tranz Rail Holdings Limited, July 1993 Chairman of Tranz Rail Holdings Limited, August 2002 Fund manager and investment banker More than 30 years experience in the retail and Director of Jump Capital Limited wholesale sectors Director of Crown Castle Australia Limited Former Group Managing Director of Farmers Deka Director of Brat Capital NV Limited Director of Skellmax Industries Limited Chairman of Maori Television Service Deputy Chairman of Meat New Zealand Director of Mighty River Power Limited Founding Chairman of the Project K Trust youth development programme JOHN J LOUGHLIN

Director of Tranz Rail Holdings Limited, February 2002 Interim Chief Financial Officer of Tranz Rail Holdings Limited MICHAEL J BEARD Former Chief Executive, Director and Finance Managing Director of Tranz Rail Holdings Limited, Manager of Richmond Limited May 2000 Director of Zespri Group Limited Former Director, President and Chief Executive Director of Port of Napier Limited Officer of Australia-New Zealand Direct Line Chairman of Prism Group Holdings Limited (ANZDL) Director of Centralines Limited Chairman of Hawkes Bay Vintners Limited Director of Hawkes Bay Development Agency Chairman of Askerne Estate Winery Limited

ROGER D ARMSTRONG

Director of Tranz Rail Holdings Limited, August 2002 Independent financial analyst THOMAS W RISSMAN Held a number of Analyst, Head of Research and Senior Analyst positions within prominent investment Director of Tranz Rail Holdings Limited, July 1993 banks and institutions Director of Railroad Financial Corporation Media commentator on financial matters Managing Partner of Chicago law firm McLachlan, Rissman and Doll Director of ShopperTrak RCT, Inc Chairman of Poole Beads Holdings Limited (formerly Hallcrest Holdings)

JONATHAN A CIMINO

Director of Tranz Rail Holdings Limited, July 2002 Director of AgriGenesis Biosciences Limited Director of Cimino Partners Limited Director of Genesis Research and Development Corporation Limited Director of Waste Management NZ Limited Member of the NZX Market Surveillance Panel TRANZ RAIL HOLDINGS LIMITED ANNUAL REPORT 27

FINANCIAL STATEMENTS

CONTENTS DIRECTORS’ RESPONSIBILITY STATEMENT 28 GROUP COMPANY DIRECTORS 83 STATEMENT OF FINANCIAL PERFORMANCE 29 INTERESTS REGISTERS DISCLOSURES 84 STATEMENT OF MOVEMENTS IN EQUITY 29 NEW ZEALAND STOCK EXCHANGE (“NZX”) 87 STATEMENT OF FINANCIAL POSITION 30 CREDIT RATING 87 STATEMENT OF CASH FLOWS 31 REMUNERATION OF DIRECTORS STATEMENT OF ACCOUNTING POLICIES 32 AND EMPLOYEES 88 NOTES TO THE FINANCIAL STATEMENTS 38 INFORMATION ABOUT SHAREHOLDERS 89 AUDIT REPORT 76 INFORMATION FOR SHAREHOLDERS 91 CORPORATE GOVERNANCE STATEMENT 78 DIRECTORY 92 TRANZ RAIL HOLDINGS LIMITED 28

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the financial statements and ensuring that they comply with New Zealand generally accepted accounting practice and give a true and fair view of the financial position of the Company and Group as at 30 June 2003 and the results of their operations and cash flows for the year ended on that date.

The Directors consider that the financial statements of the Company and the Group have been prepared using appropriate accounting policies, which have been consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting standards have been followed.

The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Company and the Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993.

The Directors consider that they have taken adequate steps to safeguard the assets of the Company and the Group, and to prevent and detect fraud and other irregularities. Internal control procedures are also considered to be sufficient to provide reasonable assurance as to the integrity and reliability of the financial statements.

The Directors are pleased to present the financial statements of Tranz Rail Holdings Limited for the year ended 30 June 2003.

For and on behalf of the Board of Directors:

Jonathan A Cimino John J Loughlin DIRECTOR DIRECTOR 29 August 2003 TRANZ RAIL HOLDINGS LIMITED 29

STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

TOTAL REVENUE 1 609,690 665,905 557 569

OPERATING PROFIT FROM TRADING 2, 3 40,047 25,222 60 134

Unusual revenues and expenses 4 (3,175) (96,019) – (91,115) Equity accounted loss of associate companies 25 (1,296) (12,707) – –

OPERATING PROFIT/(LOSS)35,576 (83,504) 60 (90,981) Net interest (expense)/revenue and finance charges 5 (14,942) (28,419) 34 (870)

NET PROFIT/(LOSS) BEFORE TAXATION 20,634 (111,923) 94 (91,851) Taxation expense 6 (23,218) (10,782) – –

NET (LOSS)/PROFIT AFTER TAXATION (2,584) (122,705) 94 (91,851)

STATEMENT OF MOVEMENTS IN EQUITY FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

TOTAL RECOGNISED REVENUES AND EXPENSES Net (loss)/profit for the year (2,584) (122,705) 94 (91,851) Foreign currency translation reserve movement 407 53 – –

(2,177) (122,652) 94 (91,851) CONTRIBUTIONS FROM OWNERS Shares issued 18 65,208 1,522 65,208 1,522 Share issue costs pursuant to rights issue 18 (3,500) – (3,500) –

61,708 1,522 61,708 1,522

MOVEMENTS IN EQUITY FOR THE YEAR 59,531 (121,130) 61,802 (90,329) Equity at start of year 343,968 465,098 340,831 431,160

EQUITY AT END OF YEAR 403,499 343,968 402,633 340,831

The accompanying statement of accounting policies and notes form part of and should be read in conjunction with these financial statements. TRANZ RAIL HOLDINGS LIMITED 30

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000 ASSETS Current assets Cash at bank 6,582 3,986 – – Secured deposit 7 924 – – – Accounts receivable 8 71,087 73,218 – – Inventory 9 16,573 21,274 – – Prepayments and other assets 12 10,561 4,823 1,044 475 Investment in associate company 25 1,350 – – – Advances to subsidiary companies – – 253,158 237,816

Total current assets 107,077 103,301 254,202 238,291

Non current assets Secured deposit 7 28,725 – – – Accounts receivable 8 492 435 34 116 Goodwill 10 – – – – Right of way and fixed assets 11 758,101 754,008 – – Prepayments and other assets 12 5,945 15,090 132 577 Deferred taxation 17 177 164 – – Investment in associate companies 25 3,438 6,488 – – Investment in subsidiary companies 25 – – 363,342 363,342

Total non current assets 796,878 776,185 363,508 364,035

TOTAL ASSETS 903,955 879,486 617,710 602,326

LIABILITIES AND EQUITY Current liabilities Accounts payable 13 91,466 115,380 2,014 2,169 Loans 14 85,200 84,647 15,200 73,400 Provisions and other liabilities 15 23,839 35,678 – – Deferred credits 16 12,130 10,807 129 129 Advances from subsidiary companies – – 97,696 85,629

Total current liabilities 212,635 246,512 115,039 161,327

Non current liabilities Loans 14 194,469 219,358 100,000 100,000 Provisions and other liabilities 15 8,698 8,798 – – Deferred credits 16 49,838 54,521 38 168 Deferred taxation 17 34,816 6,329 – –

Total non current liabilities 287,821 289,006 100,038 100,168

Equity Share capital 18 228,396 166,769 228,396 166,769 Foreign currency translation reserve 1,655 1,248 – – Retained earnings 173,448 175,951 174,237 174,062

Total equity 403,499 343,968 402,633 340,831

TOTAL LIABILITIES AND EQUITY 903,955 879,486 617,710 602,326

The accompanying statement of accounting policies and notes form part of and should be read in conjunction with these financial statements. TRANZ RAIL HOLDINGS LIMITED 31

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

CASH FLOWS FROM OPERATING ACTIVITIES Cash was provided from: Receipts from customers 614,283 581,105 557 577 Interest received 570 132 15,818 15,818 Income tax refund 4,570 – – – Cash was applied to: Payments to suppliers and employees (564,069) (553,991) (383) (435) Interest paid (24,467) (26,266) (14,174) (16,903) Income tax paid (3,650) (4,593) – –

Net cash flows from/(used in) operating activities 28 27,237 (3,613) 1,818 (943)

CASH FLOWS FROM INVESTING ACTIVITIES Cash was provided from: Term deposit 7,800 – – – Proceeds from sale of fixed assets and spare parts inventory 4,101 140,563 – – Repayment of redeemable preference shares issued by associate company 25 300 – – – Proceeds from sale of inventory subject to repurchase 9 – 11,800 – – Cash was applied to: Term deposit (7,800) – – – Purchase of fixed assets (60,160) (54,512) – – Secured deposit (33,412) – – – Divestment costs 4 (3,175) (2,145) – –

Net cash flows from/(used in) investing activities (92,346) 95,706 – –

CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from: Contributions from owners 18 65,208 1,522 65,208 1,522 Loan draw downs 137,351 64,966 66,550 64,966 Proceeds from termination of finance lease hedge contracts 19 7,872 – – – Advances from subsidiaries, net – – 12,575 85,268 Cash was applied to: Costs incurred pursuant to rights issue 18 (3,500) – (3,500) – Loan repayments (135,388) (156,084) (124,750) (144,517) Debt financing costs (3,845) – (1,987) – Advances to subsidiaries, net – – (15,914) (6,296)

Net cash flows from/(used in) financing activities 67,698 (89,596) (1,818) 943 NET CASH FLOWS FOR THE YEAR 2,589 2,497 – – Cash at start of year 3,986 1,530 – – Exchange translation of foreign cash balances 7 (41) – –

CASH AT END OF YEAR 6,582 3,986 – –

The accompanying statement of accounting policies and notes form part of and should be read in conjunction with these financial statements. TRANZ RAIL HOLDINGS LIMITED 32

STATEMENT OF ACCOUNTING POLICIES FOR THE YEAR ENDED 30 JUNE 2003

A. BASIS OF PREPARATION rail network as a new Crown enterprise (“Track Co.”). The Tranz Rail Holdings Limited is a company domiciled in Company would be granted access rights to the rail network New Zealand, registered under the Companies Act 1993 and on an exclusive basis until 2070, subject to maintaining 60% listed on the New Zealand Stock Exchange. Tranz Rail of present traffic volumes on each line. The Crown would Holdings Limited is an issuer for the purposes of the also buy other land, property and leases surplus to the Financial Reporting Act 1993 and its financial statements Group’s requirements for approximately $50,000,000, subject comply with that Act. to final valuations. Progressing this transaction with the Crown was put on hold in July 2003 following the revision to Unless otherwise specified, all dollar amounts in these a takeover offer from Toll Group (NZ) Limited (“Toll”). financial statements and accompanying notes are stated in New Zealand dollars. References in these financial On 8 July 2003, the Company received notice of a proposed statements to “A$” are to Australian dollars, and references takeover offer from Toll, which would supersede an earlier to “US$” are to United States dollars. takeover offer dated 23 June 2003. On 26 July 2003, Toll sent shareholders of the Company an offer for the shares in the Financial statements are presented for Tranz Rail Holdings Company. That offer superseded the earlier takeover dated Limited (“Parent” or “the Company”) and its subsidiary and 23 June 2003. The current takeover offer from Toll is subject associate companies (“the Group”). The financial statements to various conditions. Should the takeover offer from Toll have been prepared in accordance with generally accepted become unconditional, then the Crown will enter into a accounting practice (“GAAP”) in New Zealand, and on the replacement heads of agreement with the Company in basis of historical cost. relation to ownership of the national rail network whereby These financial statements have been prepared on a going the Crown will not take shares in the Company, the Crown concern basis. The going concern of the Company is will invest $200,000,000 (over a five year period) into Track dependent upon the negotiation of new finance facilities to Co., the Group will invest $100,000,000 (over a five year replace the existing finance facilities that mature on period) in rolling stock, and the threshold below which the 30 June 2004 (refer Note 14). If the renewal of the finance Group will lose its exclusive access rights on a particular facilities is not successfully completed and as a result the line will increase to 70% of present traffic volumes. The Company was unable to continue in operation for the takeover offer from Toll opened on 26 July 2003 and was due foreseeable future, adjustments would have to be made to to close on 29 August 2003. On 12 August 2003, Toll notified reflect the fact that assets may be realised at amounts the NZX of its intention to extend the takeover offer period other than their current recorded amounts. In addition, to 26 September 2003. provision for additional liabilities may be required along with At the date the financial statements were approved by the changes to classifications of non current assets and non Directors, it is unclear whether either the Company’s current liabilities. proposed transaction with the Crown, the current Toll On 6 June 2003, the Company and the Crown signed a heads takeover offer, or neither of these transactions will proceed. of agreement on a joint plan for restructuring and With any of these potential outcomes, the value of the right developing the New Zealand railway system. The proposal is of way, certain fixed assets and inventory, certain provisions conditional on approval by the Company’s shareholders. and accruals, deferred taxation liability and tax losses Under the terms of the agreement, the Crown would pay available may change substantially or be replaced with a approximately $75,800,000 to acquire a 35% interest in the new track asset representing exclusive right of access. Company in the form of new shares to be issued at a price Also, certain terms within executive employment contracts of 67 cents per share. After the share issue, the Crown may be exercised resulting in severance payments in the would be entitled to elect three of the seven directors on the order of $6,000,000. Because of these uncertainties, Company’s Board of Directors. The Crown would also buy no adjustment has been made in the financial statements back the rail track, associated land lease, yards, terminals for the year ended 30 June 2003 to reflect any of these and control systems from the Group for $1, and operate the potential outcomes. TRANZ RAIL HOLDINGS LIMITED 33

B. NATURE OF OPERATIONS The carrying value of investments in associate companies The Group is the leading multi-modal freight transport and is assessed on an annual basis to ensure that the carrying distribution company in New Zealand. The Group offers an value does not exceed the fair value. integrated national network of rail, road and sea freight GOODWILL ARISING ON CONSOLIDATION transportation services as well as distribution and logistics Goodwill arising on the acquisition of a subsidiary or management services. It operates the only commercial associate represents the excess of the purchase railroad in New Zealand, includes the largest distribution consideration over the fair value of the identifiable net company in the country and operates the primary passenger assets acquired. Goodwill is amortised to the statement of ferry service between the North and South Islands of financial performance on a straight-line basis over the period New Zealand. The Group currently owns and operates during which benefits are expected to be derived, being a commuter rail services in Wellington, and is the operator of period not exceeding 20 years. commuter rail services in Auckland. The Group is looking to divest its rail passenger operations. The carrying value of goodwill is assessed on an annual basis by reviewing the estimated net present value of The Group operates predominantly in the transportation future cash flows to ensure the carrying value does not industry in New Zealand, and has investments in similar exceed the fair value. Australian businesses.

C. SIGNIFICANT ACCOUNTING POLICIES TRANSACTIONS ELIMINATED ON CONSOLIDATION The effects of intra-group transactions are eliminated in 1. Basis of preparing consolidated financial statements preparing the consolidated financial statements. SUBSIDIARY COMPANIES Subsidiary companies are those entities that are controlled, 2. Right of way directly or indirectly, by the Company. The financial The Group leases all right of way land necessary for its statements of subsidiary companies are included in the operations (other than the rail corridor in Auckland) from consolidated financial statements using the purchase New Zealand Railways Corporation (a Government owned method of consolidation. The results of subsidiary enterprise) and the Crown, under a deed of lease (the “Core companies acquired or disposed of during any year are Lease”) with an initial term expiring in 2030, subject to the included in the consolidated statement of financial Group’s right of renewal for an additional 40 years. Rent performance from the date of acquisition or up to the under the lease is $1 per year, and the Group is obligated date of disposal. to pay all expenses associated with the right of way subject to the lease. The Group has access rights over the rail The Company’s investments in subsidiary companies corridor in Auckland that are for the same term as the are stated at the lower of cost or net asset value. The right of way lease. carrying value of investments is assessed on an annual basis to ensure that the carrying value does not exceed Right of way is shown in the financial statements at the fair value. historical cost less accumulated depreciation. The cost of the right of way was based on the allocation of assets upon ASSOCIATE COMPANIES acquisition of Tranz Rail Limited (then named “New Zealand Associate companies are entities in which the Group has Rail Limited”) from the Crown on 7 July 1993. The right of significant influence, but not control, over the operating and way is amortised over a period of 80 years, representing the financial policies. The consolidated financial statements initial 40 year lease period and the right of renewal for an include the Group’s share of the net profit or loss of associate additional 40 years. companies on an equity accounted basis. Investments in associate companies are stated at the Company’s share of 3. Fixed assets the fair value of the net assets at acquisition plus the share Fixed assets are shown in the financial statements at of post-acquisition movements in reserves. historical cost less accumulated depreciation. TRANZ RAIL HOLDINGS LIMITED 34

STATEMENT OF ACCOUNTING POLICIES (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

OWNED ASSETS 4. Depreciation All fixed assets owned by the Group are initially recorded at All fixed assets (except freehold land), including insurance cost and, except for land, depreciated. Initial cost includes spares, are written off or, if applicable written down to their the purchase consideration, or fair value in the case of residual value, over their useful life using the straight-line subsidised assets, and those costs directly attributable to method of depreciation. Depreciation commences from the bringing the asset to the location and condition necessary date the asset enters service. The average depreciable lives for its intended use. These costs include, where applicable, for major categories of fixed assets are as follows: site preparation costs, installation costs, costs of obtaining Buildings 40 years resource consents, all materials used in construction, direct Track and ballast, including renewals 40 years labour on the project, financing costs that are directly Tunnels and bridges 80 years attributable to the project, and an appropriate proportion of Locomotives 23 years variable and fixed overheads. Costs cease to be capitalised Wagons 30 years when substantially all the activities necessary to bring an Ships 20 years asset to the location and condition for its intended use are complete. All feasibility costs are expensed as incurred. 5. Leases OPERATING LEASES THIRD PARTY SUBSIDIES Operating leases are defined as leases under which Third party subsidies towards the costs of assets are substantially all the benefits and risks of ownership of the included within operating revenue. Accordingly, the asset is applicable asset or assets remain with the lessor. recorded in the statement of financial position at its fair value at the date of acquisition. The Group is lessee of certain plant, equipment, land and buildings under operating leases. Expenses relating to SUBSEQUENT EXPENDITURE operating leases are charged against profit on a basis that Subsequent expenditure relating to a specific asset is added is representative of the pattern of benefits expected to be to its gross carrying amount when such expenditure either derived from the leased asset. increases the future economic benefits beyond its existing Additionally, the Group is the sub-lessor of certain plant service potential, or is necessarily incurred to enable future and equipment under an operating lease. Rental income economic benefits to be obtained, and that expenditure applicable to operating leases is taken to revenue as earned. would have been included in the initial cost of the item had the expenditure been incurred at that time. FINANCE LEASES

Locomotive overhauls – expenditures, including inventory, Leases in which the Group assumes substantially all the risks relating to major locomotive overhauls are capitalised as and rewards of ownership are classified as finance leases. fixed assets. Repair and maintenance costs are charged Finance lease payments are apportioned between the to the statement of financial performance as an expense. finance charge and the reduction of the outstanding liability. Track renewals – expenditures, including inventory, The interest expense component of finance lease payments relating to track renewals, ballast, and formation is recognised in the statement of financial performance upgrading are capitalised as fixed assets. Repair and using the effective interest rate method. Assets acquired by maintenance costs are charged to the statement of way of finance lease are included in fixed assets, initially at financial performance as an expense. an amount equal to the present value of the future

IMPAIRMENT minimum lease payments, and are depreciated over the Where fixed assets have been impaired, due to an event or period the Group is expected to benefit from their use. change in circumstances, and the carrying amount exceeds No material finance leases have been entered into as lessor. the recoverable amount, an appropriate write down to recoverable amount is made. The recoverable amount is SALE AND LEASEBACK TRANSACTIONS based on the discounted future cash flows expected to The Group has entered into certain sale and leaseback result from the use of the asset and its ultimate disposal. transactions, which involve the sale of equipment to a third TRANZ RAIL HOLDINGS LIMITED 35

party and the subsequent leasing of that equipment by the Purchased inventory is valued on a weighted average cost Group. The rentals and the sale price are usually basis. Manufactured inventory is valued on a standard cost interdependent as they are negotiated as a package and basis, and includes both fixed and variable manufacturing need not represent fair values. The accounting treatment of overhead costs. Inventory is recorded as the net value on a sale and leaseback transaction depends on the type of hand and under manufacture, less allowance for any lease involved. obsolete items. Reusable materials and scrap are recorded at the lower of cost and net realisable value. If the leaseback is a finance lease, then the transaction is a means whereby the lessor provides finance to the Group 10. Deferred charges with the asset as security. For this reason, it is not Preliminary expenses and establishment costs incurred in appropriate to regard an excess of sale proceeds over the connection with financing facilities are amortised to the carrying amount of assets as a realised profit, but such statement of financial performance on a basis proportionate excess is deferred and amortised over the term of the lease. to the term of the facility to which they relate. If the leaseback is an operating lease, and the rentals and 11. Provisions the sale price are established at fair value, there has in effect been a normal sale transaction and any profit or loss EMPLOYEE ENTITLEMENTS is recognised in the statement of financial performance. Employee benefits include salaries, wages, annual leave and If the sale is below fair market value and the loss is long service leave. compensated by future rentals below market price, or if Provisions for employee entitlements are recognised as a the sale is above fair market value and the profit is liability in respect of benefits earned by employees but not compensated by future rentals in excess of market price, yet received at balance date. The liability for employees’ then the excess or loss on sale is deferred and amortised compensation for future absences is accrued in respect of over the period of the lease. employees’ services already rendered and where the obligation relates to rights which have vested. 6. Recognition of revenue Freight revenue is recognised based on relative transit time Additionally, the Group estimates the liability for leave in each reporting period and includes estimated amounts to be provided at the time an employee qualifies for long relating to movements in progress for which the settlement service leave on an actuarial basis and accrues the process is not complete. estimated future liability.

Passenger revenue is recognised at the date of travel. REORGANISATION PROVISIONS Reorganisation costs are incurred when the Group 7. Accounts receivable materially changes the manner in which its business is Receivables are valued at net realisable value after conducted. A reorganisation provision is recognised as a providing against debts where collection is doubtful. liability when the Directors have approved a detailed and 8. Prepayments formal restructuring plan and the restructuring has either Payments made in respect of services not yet performed at commenced or has been announced publicly. balance date, or where the benefit to the Group accrues Reorganisation provisions are provided for in respect of over more than one financial year, are deferred and redundancy costs, and other direct costs associated with a recognised as assets. These costs are expensed as the formal restructuring plan. Redundancy costs are provided service is performed or as the benefit accrues. for in respect of any employees whose positions have been specifically designated as surplus to the needs of the 9. Inventory valuation Group as part of a formal plan of restructuring. Subject Inventory largely comprises items that are used in to contractual employment terms, employees whose the operation of the rail network and are not held for services with the Group are so terminated pursuant to trading purposes. a restructuring plan are normally entitled to lump-sum TRANZ RAIL HOLDINGS LIMITED 36

STATEMENT OF ACCOUNTING POLICIES (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

severance payments determined by reference to current translated to New Zealand currency at the exchange rates basic rate of pay, length of service and conditions under ruling at the dates of the transactions. which the termination occurs. Costs relating to the ongoing Monetary assets and liabilities in foreign currencies at activities of the Group are not included in the provision. balance date not covered by forward exchange contracts are translated at exchange rates ruling at balance date. All DIVIDEND PROVISION exchange differences arising on the translation of monetary Dividends are recognised in the period that they are assets and liabilities in foreign currencies, whether realised authorised and approved. or unrealised, are recognised in the statement of financial 12. Taxation performance, except as detailed below. Income tax expense is charged against net profit/(loss) If a foreign currency liability is designated as a hedge of a before taxation adjusted for permanent differences between foreign currency non monetary asset (or vice versa), both taxable and accounting income. Deferred tax is calculated the asset and the liability are translated at the closing rate. using the comprehensive basis under the liability method. Exchange differences are taken to the foreign currency This method involves recognising the tax effect of all timing translation reserve except where the exchange difference on differences between accounting and taxable income as a the liability exceeds that of the asset, in which case they are deferred tax liability or asset in the statement of financial taken to the statement of financial performance. position. The future tax benefit or provision for deferred tax is stated at the income tax rates prevailing at balance date. TRANSLATION OF THE FINANCIAL STATEMENTS OF INDEPENDENT

Future income tax benefits attributable to timing differences FOREIGN OPERATIONS The assets and liabilities of the Group’s overseas or income tax losses carried forward are recognised in the operations, being independent foreign operations, are financial statements only where there is virtual certainty translated at the exchange rates ruling at balance date. that the benefit of the timing differences or losses will be The revenues and expenses of these entities are translated realised by the Group in the foreseeable future. Where this at rates approximating the exchange rates ruling at the is not the case, future income tax benefits attributable to dates of the transactions. Exchange differences arising on timing differences or income tax losses are recognised in the translation of independent foreign operations, and the statement of financial performance only to the extent of exchange differences from translating revenues and accumulated net credits from timing differences in the expenses at rates different from the rates at which assets deferred tax liability account. and liabilities are translated, are recognised directly in the Future tax benefits and provisions for deferred tax are not foreign currency translation reserve. offset if they arise in different tax jurisdictions. 15. Derivative financial instruments 13. Contributions to the Government Superannuation Fund The Group uses derivative financial instruments such as Contributions are made into the Government forwards, swaps and options, within predetermined policies Superannuation Fund (the “Fund”) in respect of those Group and limits, in order to reduce its exposure to fluctuations in employees who are members of the Fund at a rate capped foreign currency exchange rates, interest rates and under a sale and purchase agreement with the Crown for commodity prices. Financial instruments purchased with the acquisition of Tranz Rail Limited (the “Acquisition”). the intention of being held until maturity are recorded at Contributions to the Fund are charged as an expense in the original cost which is adjusted for the amortisation of statement of financial performance. The current rate is less premiums and accretion of discounts to maturity. than the capped rate. Derivative financial instruments that are designated as 14. Foreign currency hedges of specific items are recognised on the same basis as Short term transactions covered by forward exchange the underlying hedge items. Where a hedge of an anticipated contracts are translated at exchange rates specified in purchase or sale transaction is undertaken, the exchange those contracts. Other foreign currency transactions are difference on the hedging transaction up to the date of the TRANZ RAIL HOLDINGS LIMITED 37

purchase transaction, and any costs associated with the 18. Use of estimates hedge transaction to that date, are deferred and included in The preparation of financial statements in conformity the measurement of the purchase or sale transaction. with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets Where a derivative financial instrument, which is a hedge of and liabilities at the date of the financial statements and an anticipated transaction, is terminated early but the the reported amounts of revenues and expenses during anticipated transaction is still expected to occur, the the reporting period. Actual results could differ from deferred gain or loss that arose prior to termination those estimates. continues to be deferred and is recognised as part of the transaction when it occurs. If the transaction is no longer D. COMPARATIVES expected to occur, the deferred gain or loss is recognised in Certain comparatives have been reclassified to correspond the statement of financial performance immediately. with the current year presentation. The Group does not engage in speculative transactions or E. CHANGES IN ACCOUNTING POLICIES hold derivative financial instruments for trading purposes. In the 2003 financial year, the Group changed its policy of accounting for its investments in associate companies in 16. Statement of cash flows accordance with FRS-38: Accounting for Investments in The following are the definitions of the terms used in the Associates. The implementation of the new accounting statement of cash flows: policy has not had a material impact on the consolidated cash is cash on hand and current accounts in banks, financial statements in the current period. The Group’s net of bank overdrafts; share of the net profit/(loss) of associates is recognised as a investing activities are those activities relating to the component of operating revenue/(expenses) in the acquisition, holding and disposal of fixed assets and of statement of financial performance. Previously, the Group’s investments, and include the purchase and sale of share of the net profit/(loss) of associates was recognised in interests in other entities; the statement of financial performance following the net financing activities are those activities which result in profit/(loss) after income tax. Comparative figures for the changes in the size and composition of the capital 2002 financial year have been amended in relation to this structure. This includes both equity and debt not falling change in accounting policy. within the definition of cash; and With the exception of the above change in accounting operating activities include all transactions and other policies, uniform accounting policies have been applied events that are not investing or financing activities. throughout the Group on a consistent basis with those of the Cash flows from certain items are disclosed net due to the previous year. nature and amount of the transactions involved. In the 2002 financial year, the Directors reviewed the 17. Earnings per share appropriateness of the application of the Group’s accounting Basic earnings per share is computed by dividing net profit policy in relation to the lease of The Interisland Line vessel, by the weighted average number of ordinary shares Aratere. With effect from 1 July 2001, the Aratere lease was outstanding during each period. accounted for as a finance lease. In prior years, the lease

Diluted earnings per share is computed by dividing net was accounted for as an operating lease. The effect of profit by the weighted average number of ordinary changing the classification of the lease was accounted shares including restricted shares, redeemable restricted for in the 2002 financial year. shares and options to acquire shares. These are treated as ordinary share equivalents using the treasury stock method on the basis that in substance they are equivalent to ordinary shares. TRANZ RAIL HOLDINGS LIMITED 38

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

1. REVENUE Freight revenue: Bulk: – Forestry 47,180 49,078 – – – Coal 40,997 35,358 – – – Milk 10,813 11,796 – – – Other 26,931 27,082 – –

– Total bulk freight revenue 125,921 123,314 – – Intermodal: – Kombi/Domestic 159,590 150,922 – – – Import/Export 110,591 108,560 – –

– Total intermodal freight revenue 270,181 259,482 – – Other freight revenue 51,887 51,804 – –

Total freight revenue 447,989 434,600 – – Passenger revenue 130,651 139,395 – – Other revenue 31,050 91,910 557 569

TOTAL REVENUE 609,690 665,905 557 569 Less unusual revenues: – Gain on sale of Tranz Scenic business 1(i) – (5,775) – – – Gain on sale of Auckland Corridor 1(ii) – (58,305) – –

TRADING REVENUE 609,690 601,825 557 569

Other revenue includes a net gain on sale of fixed assets of $2,000 (2002: $6,570,000 excluding the gain on sale of the Auckland Corridor and gain on sale of Tranz Scenic business). In a previous financial year, the Company announced a Strategic Plan which involved selling non core businesses and assets and rationalising the focus of the Group on the remaining core freight and interisland operations. The following unusual items are included in the statement of financial performance for the year ended 30 June 2002 within other revenue:

(i)Gain on sale of Tranz Scenic business In December 2001, the Group sold its long distance rail passenger business, Tranz Scenic, for $33,000,000, and recognised a gain on the sale of $5,775,000 in the 2002 financial year. The Group recognised only half of the gain on sale of the Tranz Scenic business because it retained a 50% equity interest in the holding and operating company, Tranz Scenic 2001 Limited (refer Note 25). Passenger revenue in the 2002 financial year included $11,534,000 of long distance and inter-urban rail passenger fare revenue in relation to services that were sold to Tranz Scenic 2001 Limited. TRANZ RAIL HOLDINGS LIMITED 39

(ii)Gain on sale of Auckland Corridor In December 2001, the Group partially surrendered the Core Lease and sold certain Auckland network assets to the Crown, principally comprising: the portion of the North Auckland line between Westfield and Swanson; the North Island main trunk line between Pukekohe and Auckland Station, Beach Road; the Onehunga branch; the Newmarket branch; but excluding certain assets retained by the Group.

The lease and infrastructure assets were sold for $81,000,000, and the Group recognised a gain on the sale of $58,305,000 in the 2002 financial year.

Under the terms of the sale, the Group has continued to operate passenger services in the Auckland region under the existing contract with the Auckland Regional Council. The Group also retained responsibility for train control and track infrastructure maintenance, in return for an annual contribution to the Group of $2,850,000 commencing 1 July 2003. The Crown has exercised its option to purchase certain Tranz Metro Auckland commuter trains in connection with that sale. The Crown also has an option to purchase an additional section of track (between Swanson and Helensville) which expires on 13 May 2011. Where applicable, assets subject to option were written down to the option sale value.

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

2. OPERATING PROFIT FROM TRADING TRADING REVENUE 1 609,690 601,825 557 569 OPERATING COSTS 3 Labour and related costs 165,811 190,679 – – Purchased services 102,869 67,730 – – Lease and rental costs 68,581 66,925 – – Contractors costs 63,213 63,234 – – Fuel and traction electricity 52,744 58,556 – – Depreciation and goodwill amortisation 49,998 52,718 – – Casualties and insurance 15,632 10,945 – – Materials and supplies 13,838 25,593 – – Other expenses 36,957 40,223 497 435

OPERATING COSTS 569,643 576,603 497 435

OPERATING PROFIT FROM TRADING 40,047 25,222 60 134 TRANZ RAIL HOLDINGS LIMITED 40

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

3. OPERATING COSTS The following items are included in operating costs: Directors’ fees 355 464 347 430 Fees paid to auditors: – audit 504 275 – – – other services 3(i) 388 603 – – Foreign exchange (gains)/losses 3(ii) (1,669) 1,672 64 – Depreciation 3(iii) 49,998 51,969 – – Goodwill amortisation 10 – 749 – – Bad debts: – written off 906 223 – – – movement in provision 184 489 82 – Amortisation of deferred credits on sale and leaseback of rolling stock (rolling stock lease) (4,875) (4,879) – – Rolling stock lease return payment accrual 1,492 1,590 – – Pension costs 4,204 4,385 – – Donations – 165 – – Sponsorships 1,036 1,505 – –

(i)Fees paid to auditors for non audit services Fees paid to auditors for other services are shown exclusive of $181,000 (2002: nil) for work performed in connection with the rights issue prospectus which has been charged against equity.

(ii)Foreign exchange (gains)/losses Foreign exchange (gains)/losses exclude the unrealised foreign exchange gain on the Aratere finance lease liability , and the amortisation of the deferred gain on the termination of hedge contracts which is included in interest expense (refer Note 5).

(iii)Depreciation Depreciation expense is shown net of the amortisation of the deferred credits on the sale and leaseback of the Aratere of $2,528,000 (2002: $2,528,000). Depreciation expense by class of asset is as follows:

Right of way 866 865 – – Land – – – – Buildings 1,524 1,618 – – Track infrastructure, surfacing and formation, signals and communications equipment 13,884 13,697 – – Rolling stock, ships, plant, equipment, materials and motor vehicles 30,893 32,958 – – Capitalised finance lease assets 2,831 2,831 – – Capital work in progress – – – –

Total depreciation expense 49,998 51,969 – – TRANZ RAIL HOLDINGS LIMITED 41

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 NOTE $000 $000 $000 $000

4. UNUSUAL REVENUES AND EXPENSES Gain on sale of Tranz Scenic business 1 – 5,775 – – Gain on sale of Auckland Corridor 1 – 58,305 – – Asset divestment costs 4(i) (3,175) – – – Reorganisation costs 15 – (45,097) – –

Asset value adjustments: – Write down in value of fixed assets 4(ii) – (61,918) – – – Write down in value of inventory 4(iii) – (17,299) – – – Adjustment to bring Aratere lease on-balance sheet 4(iv) – (16,975) – – – Write down in value of goodwill 4(v) – (11,602) – – – Rolling stock lease return payment accrual 4(vi) – (7,208) – – – Write down in value of investments in subsidiary companies – – – (91,115)

Total asset value adjustments – (115,002) – (91,115)

UNUSUAL REVENUES AND EXPENSES (3,175) (96,019) – (91,115)

(i)Asset divestment costs At 30 June 2003, the Company was subject to a takeover offer by Toll Group (NZ) Limited. One of the conditions of the takeover offer is that the Company does not dispose of any material asset or business. Accordingly, a number of planned asset sales were suspended prior to balance date. This included the potential sale of Distribution Services Group, Tranz Metro Wellington, specialist rail freight equipment, the Wellington Railway Station and the proposed transaction with the Crown.

The Group usually accounts for asset divestment costs in reporting a gain or loss on the sale of an asset. At 30 June 2003, the Group has expensed all costs associated with asset sales that had been suspended at balance date.

(ii)Write down in value of fixed assets In the 2002 financial year, the Directors reviewed the carrying value of fixed assets following a number of operational changes as part of implementing the Strategic Plan, including the outsourcing of engineering functions being track, motive power and wagon maintenance, the introduction of the Intermodal Transformation Project (“ITP”), and a reduction to the ongoing fleet requirements of the Group. As a result, a number of assets were identified as either obsolete or surplus to requirements and a write down in the value of fixed assets of $61,918,000 was recorded at 30 June 2002. This represented the value of certain unrefurbished assets, certain locomotives and wagons that no longer formed part of the Group’s operational requirements, and certain IT expenditure that was closely aligned to the Group’s engineering requirements.

(iii)Write down in value of inventory In the 2002 financial year, the Directors reviewed the carrying value of inventory, which mostly comprised asset spare parts inventory, in view of operational changes as noted above. A significant amount of inventory was sold at the time engineering functions were outsourced which established market prices for specialised asset component parts. The Group retained certain spare parts inventory items that were considered by the outsourced service providers to be surplus to their requirements. Additionally, with the implementation of ITP, certain spare parts inventory was then considered to be surplus to requirements.

The value of inventory affected was written down to residual value, which resulted in a write-off of $17,299,000. TRANZ RAIL HOLDINGS LIMITED 42

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

(iv)Adjustment to bring Aratere lease on-balance sheet In the 2002 financial year, the Directors reviewed the appropriateness of the accounting treatment of its lease of The Interisland Line vessel, Aratere. The Group has guaranteed a residual value of the vessel at the end of the lease and, following the receipt of information on the value of the vessel that was not previously available, the Directors believed that it was appropriate to account for the Aratere lease as a finance lease. In prior years, the lease had been accounted for as an operating lease.

As an operating lease, the vessel and the loan were previously accounted for off-balance sheet. By changing the accounting classification to a finance lease, the Group recognised the vessel within fixed assets and recorded the finance lease liability within non current liabilities. This change in accounting treatment was included in the 2002 financial year’s financial statements with effect from 1 July 2001.

The net effect on the 2002 financial result of changing the classification of the Aratere lease from an operating lease to a finance lease was $23,581,000 comprising:

an adjustment of $16,975,000 to bring the lease on-balance sheet at 1 July 2001, representing the difference between lease and rental costs charged when the lease was accounted for as an operating lease, and the depreciation and interest expense that would have been charged had the lease been accounted for as a finance lease from inception; reduced lease and rental costs of $5,549,000; and increased depreciation and interest expense of $2,647,000 and $9,508,000 respectively.

The deferred gain on the sale and leaseback of the vessel, which was previously netted against lease and rental costs, continues to be amortised over the term of the lease but is now netted against depreciation expense.

(v)Write down in value of goodwill In accordance with the Group’s accounting policy, the Directors completed an impairment review in the 2002 financial year of the value of goodwill recorded in relation to the acquisition of Tranz Link International Pty Limited in 1998. The projected earnings of this business had fallen below the initial expectations when the business was acquired. Expected synergies previously captured in the value of goodwill were considered unlikely to be realised as the Group is no longer pursuing an expansion of its operations into Australia. Therefore, the Directors believed that it was prudent to record the value of Tranz Link International Pty Limited at its net asset value, and the book value of goodwill ($11,602,000) was written off at 30 June 2002 (refer Note 10).

(vi)Rolling stock lease return payment accrual During the 2002 financial year, the Directors reviewed the appropriateness of the accounting treatment of its rolling stock lease (refer Note 20). This review reconfirmed that it is appropriate for the Company to continue to account for the lease as an operating lease. At the end of the lease (19 December 2008), the Company has the option to purchase the leased equipment for US$25,156,000 or to return the equipment to the lessor and make a return payment of US$9,310,000. In prior years, no accrual for the return payment was made since the Company had not decided whether to purchase or return the equipment at the end of the lease. Whilst the Company has still not decided whether to purchase or return the equipment at the end of the lease, the Directors decided to adopt a more conservative treatment in accounting for the lease and accrue the return payment over the term of the lease. Accordingly, an accrual of NZ$7,208,000, which related to prior financial years, was made at 30 June 2002. The accrual for the 2003 and 2002 financial years is included in lease and rental costs.

The balance of the return payment is to be accrued on a straight-line basis over the remaining period of the lease. TRANZ RAIL HOLDINGS LIMITED 43

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

5. NET INTEREST EXPENSE/(REVENUE) AND FINANCE CHARGES Interest expense: – Aratere finance lease 8,557 8,198 – – – Amortisation of deferred gain on termination of hedge contracts (550) – – – – Amortisation of deferred finance lease hedge costs 549 1,310 – –

– Net Aratere finance lease interest expense 8,556 9,508 – – – Unrealised foreign exchange gain on Aratere finance lease (net) (12,833) – – – – Subordinated debt 8,972 8,972 8,972 8,972 – Bank syndicate facilities 6,379 7,297 5,047 7,297 – Capital charge on inventory sold subject to repurchase (refer Note 9) 829 348 – – – Other loans 144 1,418 – –

Total interest expense 12,047 27,543 14,019 16,269 Interest revenue (716) (580) (15,947) (15,947) Debt financing costs 2,584 – 1,121 – Finance cost amortisation 1,027 1,456 773 548

Net interest expense/(revenue) and finance charges 14,942 28,419 (34) 870

Unrealised foreign exchange gain on Aratere lease As part of the bank debt refinancing in December 2002, the Group was required to terminate its hedge of the Aratere lease that was in place for the term of the lease (refer Note 19). The hedge was terminated in November 2002 after which date the finance lease principal (US$55,000,000) has been subject to foreign exchange movements. Also, 50% of the net proceeds of the Company’s December 2002 equity rights issue were placed on deposit as cash collateral for the Aratere lessor (refer Note 7).

The unrealised foreign exchange gain is the net of the unrealised foreign exchange gain on the principal of the finance lease liability, less the unrealised foreign exchange loss of the secured deposit which is held as cash collateral for the Aratere lessor, both denominated in United States currency.

Debt financing costs In accordance with the Group’s accounting policy, preliminary expenses and establishment costs incurred in connection with financing facilities are amortised to the statement of financial performance on a basis proportionate to the term of the facility to which they relate. Costs totalling $1,261,000 (Parent: $866,000) incurred in connection with the Group’s new banking facilities (refer Note 14) were deferred and are being amortised over the term of the new facilities.

In addition, the Group incurred costs in relation to the extension of its banking facilities, which were initially due to expire in October 2002, between October 2002 and December 2002 to allow the issues surrounding the Aratere lease to be resolved. The Group also incurred costs in connection with the renegotiation of the Aratere lease in the current year, and ongoing compliance costs associated with the new facilities. Costs totalling $2,584,000 (Parent: $1,121,000), which do not meet the criteria for expenditure deferral since they do not relate to the establishment of new facilities, have been expensed in the 2003 financial year. TRANZ RAIL HOLDINGS LIMITED 44

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

6. TAXATION EXPENSE Income taxation expense has been calculated as follows: Net profit/(loss) before taxation 20,634 (111,923) 94 (91,851)

Prima facie taxation expense/(credit) at 33% 6,809 (36,935) 31 (30,311) Taxation effect of permanent differences: Equity accounted earnings of associate companies 428 4,194 – – Asset divestment costs 1,048 – – – Capital items (deductible)/assessable for tax (2,536) 10,477 – – Capital gain on sale of assets (159) (21,146) – – Write down in value of investments in subsidiary companies – – – 30,068 Write down in value of goodwill – 3,829 – – Other permanent differences (895) 1,540 – – Prior year losses recognised (6,199) (3,438) – – Taxable income/losses offset against losses/taxable income of other Group companies – – (31) 243

(1,504) (41,479) – – (Over)/under provision in prior year (7,961) 4,593 – – Net tax effect of tax loss impairment 32,683 – – – Net tax effect of tax losses forfeited – 47,668 – –

Taxation expense 23,218 10,782 – –

Comprising: Current taxation (5,256) 4,617 – – Deferred taxation (refer Note 17) 28,474 6,165 – –

23,218 10,782 – –

In the 2003 financial year, the Group recorded an impairment loss in relation to tax losses of $99,040,000; $32,683,000 tax effected, that had previously been recognised and offset against the deferred tax liability. The Directors do not consider that these tax losses meet the criteria for recognition in the financial statements at 30 June 2003 due to the probability of generating sufficient assessable income to enable the tax losses to be utilised within a reasonable timeframe. Accordingly these tax losses, which remain available to the Group, are no longer recognised for financial reporting purposes.

Due to a change in shareholder continuity in the 2002 financial year, the Group forfeited tax losses of $144,448,000; $47,668,000 tax effected, relating to the 1996 to 1999 tax years.

At 30 June 2003, the balance of the imputation credit account for the Group was nil (2002: $4,069,000). At 30 June 2003, the balance of the imputation credit account for the Parent Company was nil (2002: nil). TRANZ RAIL HOLDINGS LIMITED 45

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

7. SECURED DEPOSIT Aratere lease secured deposit 28,725 – – – Other secured deposit 924 – – –

29,649 – – –

Represented by: Current 924 – – – Non current 28,725 – – –

29,649 – – –

Aratere lease secured deposit The Aratere lease conditions in respect of the potential letter of credit requirement associated with the Group’s fall in Standard & Poor’s credit rating below BBB were amended in December 2002. In accordance with that arrangement, the Aratere group shared in the capital proceeds of the Company’s December 2002 equity rights issue on a 50:50 basis with the Group’s banking syndicate, with the funds to be held on deposit as collateral (refer Note 19). At 30 June 2003, US$16,724,000 was held on deposit as cash collateral for the Aratere lease in relation to this arrangement.

Other secured deposit In May 2003, EFTPOS New Zealand Limited (“EFTPOS”) requested the Group to place funds on deposit to provide security to EFTPOS for contingent customer charge backs in relation to services prepaid by the Group’s customers. At 30 June 2003, the cash on deposit was at the agreed maximum level. This arrangement is subject to periodic review.

8. ACCOUNTS RECEIVABLE

Current Trade receivables 62,589 61,696 – – Accrued and other receivables 6,779 10,367 – – Receivables from related parties 3,507 2,841 – – Provision for doubtful receivables (1,788) (1,686) – –

71,087 73,218 – –

Non current Receivables from related parties 458 319 – – Receivables from trustees of employee share ownership plan 116 116 116 116 Provision for doubtful receivables (82) – (82) –

492 435 34 116 TRANZ RAIL HOLDINGS LIMITED 46

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

9. INVENTORY Fuel 646 565 – – Inventory on hand 9,823 8,909 – – Inventory sold subject to repurchase 6,104 11,800 – –

16,573 21,274 – –

Inventory on hand Inventory on hand at 30 June 2003 represents specialist asset spare parts recorded at their residual value, and consumable inventory recorded at cost.

Inventory sold subject to repurchase As part of the outsourcing of motive power and track infrastructure maintenance in the 2002 financial year, inventory with an aggregate value of $11,800,000 was sold to the outsourced service providers. The Group pays a monthly capital charge to the service providers, who have incentives to use or sell the inventory. If the inventory is sold to a third party, any gain or loss on the sale of inventory to third parties is to the benefit or cost of the Group. Additionally, the Group will pay a sales commission for any inventory sold to third parties. Subject to the terms of the service agreements, the service providers will charge the Group at cost for any such inventory used in performing operational services for the Group.

Over periods of up to four years, the Group will progressively repurchase the inventory that has not been used in performing operational services or sold to a third party, at the acquisition cost. Accordingly, the inventory is still recorded as an asset and the proceeds received from the sale of inventory have been deferred and recorded as a liability (refer Note 16). The Group repurchased $632,000 of inventory sold subject to repurchase during the 2003 financial year.

10. GOODWILL Movements in goodwill are summarised as follows: Goodwill at start of year – 13,169 – – Current year amortisation (refer Note 3) – (749) – – Foreign currency translation reserve movements – (818) – – Write down in value of Goodwill (refer Note 4) – (11,602) – –

Goodwill at end of year – – – – TRANZ RAIL HOLDINGS LIMITED 47

GROUP GROUP GROUP GROUP GROUP GROUP 2003 2003 2003 2002 2002 2002 COST ACCUMULATED BOOK COST ACCUMULATED BOOK DEPRECIATION VALUE DEPRECIATION VALUE $000 $000 $000 $000 $000 $000

11. RIGHT OF WAY AND FIXED ASSETS Right of way 69,246 (8,656)60,590 69,246 (7,790) 61,456 Fixed assets: Land 860 – 860 860 – 860 Buildings 53,700 (14,564)39,136 53,143 (13,040) 40,103 Track infrastructure, surfacing and formation, signals and communications equipment 474,370 (126,100)348,270 449,212 (110,192) 339,020 Rolling stock, ships, plant, equipment, materials and motor vehicles 434,039 (219,794)214,245 414,046(201,904) 212,142 Capitalised finance lease assets 105,344 (25,059)80,285 105,344 (19,700) 85,644 Capital work in progress 14,715 – 14,715 14,783 – 14,783

1,152,274 (394,173)758,101 1,106,634 (352,626) 754,008

Under a deed of covenant with the Group’s banking syndicate, the Group is able to dispose of assets with values up to $2,500,000, to a maximum of $10,000,000 in any financial year. Any asset sales in excess of these limits require the prior approval of the banking syndicate. Certain assets are excluded from this requirement.

The Directors consider the book value of land and buildings to approximate their fair market value.

As outlined in the basis of preparation on page 32, the Company has signed a conditional heads of agreement with the Crown and was also subject to a proposed takeover offer from Toll Group (NZ) Limited (“Toll”). Should either of these transactions proceed, then the Company will sell the rail corridor and certain associated property assets to the Crown for the sum of $1 and be granted exclusive access rights to the rail network on an exclusive basis until 2070 (subject to certain conditions). The Crown will assume responsibility for the maintenance and potential upgrade of the track infrastructure.

A transaction in this form could materially affect the asset values recorded against the right of way and track infrastructure, surfacing and formation, signals and communications equipment (collectively referred to as the “track assets”), which could potentially be replaced by a new intangible asset representing the rights and benefits associated with exclusive track access rights and other benefits of a transaction to the Group. The ability of the Group to recognise a new right of access intangible asset is dependent on the determination of the value of future economic benefits and the probability of recovering those benefits.

At the date these financial statements were approved by the Directors, it is unclear whether either the Company’s proposed transaction with the Crown, the current Toll takeover offer, or neither of these transactions will proceed. Consequently, the Directors have been unable to assess any impact of a potential transaction, including its affect on the book value of the track assets as at 30 June 2003 and the value of any new intangible asset. Accordingly, these financial statements do not include any adjustment to the value of the track assets at 30 June 2003. TRANZ RAIL HOLDINGS LIMITED 48

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

12. PREPAYMENTS AND OTHER ASSETS Prepayments 14,328 6,927 31 – Deferred charges 2,178 1,774 1,145 1,052 Deferred finance lease hedge costs – 11,212 – –

16,506 19,913 1,176 1,052

Represented by: Current 10,561 4,823 1,044 475 Non current 5,945 15,090 132 577

16,506 19,913 1,176 1,052

Deferred finance lease hedge costs As at 30 June 2002, all lease payments (denominated in US dollars) of the Aratere finance lease were hedged through forward foreign currency agreements, to provide certainty in NZ dollars. Deferred finance lease hedge costs effectively represented interest rate differentials, which were amortised as a cost of interest over the life of the lease.

As part of the bank debt refinancing in December 2002, the Group was required to terminate its foreign exchange hedge of the Aratere lease that was in place for the term of the lease. With the exception of lease payments in the 2003 and 2004 financial years, all forward exchange contracts were closed. The Group received $7,872,000 in consideration for terminating the hedge contracts. After adjusting for the revaluation of the finance lease liability, accrued interest and deferred finance lease hedge costs, the Group recorded an accounting gain of $7,701,000 which has been deferred and will be amortised over the remaining term of the lease (refer Note 16 and Note 19).

13. ACCOUNTS PAYABLE Trade payables 49,684 68,929 – – Accrued payroll payables 5,431 3,396 – – Rolling stock operating lease payable 5,680 8,690 – – Accrued interest 5,010 6,212 2,014 2,169 Accrued and other payables 25,661 28,153 – –

91,466 115,380 2,014 2,169

Accrued interest at 30 June 2003 includes $2,736,000 (2002: $4,047,000) in relation to the Aratere finance lease (refer Note 19). TRANZ RAIL HOLDINGS LIMITED 49

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

14. LOANS Loans comprise: Cash advances facility 15,200 73,400 15,200 73,400 Debtors purchase facility 26,000 – – – Crown secured deposit 44,000 – – – Bank bill facility – 11,247 – – Finance lease liability – secured (refer Note 19) 94,469 119,358 – – Subordinated debt 100,000 100,000 100,000 100,000

279,669 304,005 115,200 173,400

Loans due for repayment: Within one year 85,200 84,647 15,200 73,400 Later than one year but not later than two years 102,470 – 100,000 – Later than two years but not later than three years 873 100,000 – 100,000 Later than three years but not later than four years 1,432 – – – Later than four years but not later than five years 2,308 – – – More than five years 87,386 119,358 – –

279,669 304,005 115,200 173,400

Represented by: Current 85,200 84,647 15,200 73,400 Non current 194,469 219,358 100,000 100,000

279,669 304,005 115,200 173,400

Financing cost Weighted average financing cost at 30 June 2003 is 8.75% (2002: 7.66%). Interest rates were either:

fixed for the term of the respective loans ($100,000,000 at an average financing cost of 8.97%; (2002: $100,000,000 at an average financing cost of 8.97%)); fixed for the term of the loan subject to a repricing for as long as the Company does not have a Standard and Poor’s BBB credit rating ($94,469,000 at an average financing cost of 8.83% (2002: $119,358,000 at an average financing cost of 7.82%)); or floating ($85,200,000 at an average financing cost of 8.39% (2002: $84,647,000 at an average financing cost of 6.31%)) at a margin above bank bill rates. TRANZ RAIL HOLDINGS LIMITED 50

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

Debt financing In December 2002, the Group concluded the refinancing of its banking facilities (comprising the cash advances and bank bill facilities), together with the finalisation of its agreement with the Aratere lease participants. The new banking facilities (comprising the cash advances and debtor purchase facilities) may be drawn upon for general purposes including working capital and capital expenditures. These facilities are secured by a pro-rata first ranking charge under a general security deed over the assets of the Group. Covenants in relation to these borrowings are contained within a deed of covenant between the Group and the banking syndicate. The initial draw downs under the new facilities were utilised to repay the previous cash advances and bank bill facilities.

Cash advances facility The cash advances facility was established for $57,000,000 on 20 December 2002 and expires on 30 June 2004. Commitment fees are based on 1% per annum of the facility available. The banking institutions that are a part of the facility are Bank of New Zealand, Citibank N.A., The National Bank of New Zealand Limited and Westpac Banking Corporation. Interest is at a margin above bank bill rates. Of the original $57,000,000 facility available, $24,000,000 had been repaid and cancelled by 30 June 2003. $15,200,000 was drawn against the cash advances facility at 30 June 2003, leaving an available facility of $17,800,000. As at 30 June 2002, $73,400,000 was drawn against the cash advances facility comprising $68,400,000 as commercial paper and $5,000,000 as cash advances.

Debtors purchase facility The debtors purchase facility for $26,000,000 was signed on 20 December 2002 and expires on 30 June 2004. Commitment fees are based on 0.75% per annum of the facility available. The banking institutions that are a part of the facility are Bank of New Zealand, Citibank N.A, The National Bank of New Zealand Limited and Westpac Banking Corporation. Interest is at a margin above bank bill rates.

The debtors purchase facility is subject to various covenants contained in a receivables facility deed of covenant between the Group and the banking syndicate. The debtors purchasing facility is secured by a general security deed over certain of the Group’s accounts receivable totalling $26,000,000.

Crown secured deposit The Crown secured deposit of $44,000,000 received in June 2003 is secured by a second ranking general security deed and has a floating interest rate set quarterly at a margin above the bank bill rate. The deposit is repayable on 30 June 2004, unless the Company’s shareholders approve a sale of assets to the Crown as outlined in a heads of agreement executed on 6 June 2003 between the Group and the Crown.

Bank bill facility At 30 June 2002, the Group had an A$10,000,000 bank bill facility, of which A$9,700,000 was drawn down at balance date. The facility was repaid and cancelled in December 2002.

Subordinated debt The subordinated debt is unsecured, carries a fixed interest rate of 8.95% and matures on 15 October 2004.

Bank overdraft facility At 30 June 2002, the Group had a $5,000,000 bank overdraft facility which was unutilised at balance date. The overdraft facility was withdrawn during the 2003 financial year. TRANZ RAIL HOLDINGS LIMITED 51

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

15. PROVISIONS AND OTHER LIABILITIES Annual and long service leave 22,158 23,339 – – Reorganisation provision 1,630 7,878 – – Rolling stock lease return payment 8,698 8,798 – – Other provisions and liabilities 51 4,461 – –

32,537 44,476 – –

Represented by: Current 23,839 35,678 – – Non current 8,698 8,798 – –

32,537 44,476 – –

Annual and long service leave Included within the annual and long service leave liability is $1,029,000 (2002: $2,898,000) that relates to annual leave payable to employees who left the Group as a result of the sale and outsourcing of certain operations during the 2002 financial year, and who are now employed by external organisations. The liability represents those employees’ annual leave entitlement at the date of transfer to the outsourced service provider or new owner of the operations. As those employees take annual leave from their new employer, the Group will reimburse the service provider up to the value of annual leave accrued at the date of transfer.

Reorganisation provision During the 2002 financial year, the Group incurred direct costs of $45,097,000 (including a provision of $7,878,000 at 30 June 2002) as a result of a strategic change to the Group’s operations that commenced in the 2001 financial year. This included employee severance payments, planning and transition costs associated with outsourcing the passenger reservations call centre and engineering functions including motive power, wagon and track infrastructure maintenance, staff relocation and recruitment following the move of the Group’s head office to Auckland in the 2001 financial year, costs associated with the implementation of the Intermodal Transformation Project, transition costs, corporate restructure and other change costs. The provision remaining at 30 June 2003 and 30 June 2002 predominantly related to employee severance payments resulting from specific initiatives underway at balance date.

Severance payments to employees under all redundancy plans fall into three categories: payments made to employees who cease employment with the Group including any payment made as a result of short notice being given, payments made when an employee’s position is made redundant but the employee elects to take up an alternative position at a lower salary, and payments made to employees to compensate for loss of employment conditions.

Movements in the provision are summarised as follows: Reorganisation provision at start of year 7,878 – – – Increase in provision (refer Note 4) – 45,097 – – Costs incurred during the year (6,248) (37,219) – –

Reorganisation provision at end of year 1,630 7,878 – – TRANZ RAIL HOLDINGS LIMITED 52

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

16. DEFERRED CREDITS Rolling stock sale and leaseback 26,723 31,598 – – Aratere sale and leaseback 19,112 21,633 – – Total sale and leaseback deferred credits 45,835 53,231 – – Sale proceeds subject to repurchase of inventory (refer Note 9) 6,104 11,800 – – Deferred gain on termination of hedge contracts (refer Note 19) 7,152 – – – Freight revenue received in advance 2,479 – – – Other deferred credits 398 297 167 297 Deferred credits at end of year 61,968 65,328 167 297

Represented by: Current 12,130 10,807 129 129 Non current 49,838 54,521 38 168 61,968 65,328 167 297

Sale and leaseback deferred credits In December 1996, the Group entered into a sale and leaseback transaction relating to rail rolling stock equipment (refer Note 20) which resulted in a net gain on sale of $59,199,000. In December 1998 the Group entered into a further sale and leaseback transaction relating to a vessel (refer Note 19) which resulted in a net gain on sale of $30,576,000. These gains are being amortised over the 12 year period of the lease to which they relate. For operating leases, amortisation of the deferred gain is credited against lease and rental costs. For finance leases, amortisation of the deferred gain is credited against depreciation expense.

Freight revenue received in advance In May 2003, the Group entered into an agreement with a customer in relation to freight services for a term of ten years. The Group received an upfront payment of $2,500,000, which has been treated as prepaid freight revenue for accounting purposes, and is being amortised over the term of the agreement. Freight revenue received in advance is reimbursable to the customer in the event that the agreement is terminated within the first five years of the agreement. The amount refundable by the Group would be $500,000 for each of the first five years of the contract, if the contract is terminated early.

17. DEFERRED TAXATION

Australia: Deferred taxation asset at start of year 164 – – – Net movement in provision for the year 13 164 – – Deferred taxation asset at end of year 177 164 – –

New Zealand: Deferred taxation liability at start of year 6,329 – – – Net movement in provision for the year 28,487 6,329 – – Deferred taxation liability at end of year 34,816 6,329 – –

Represented by: Deferred tax liability arising from tax effect of timing differences 80,021 74,093 – – Less tax effect of tax losses recognised (45,205) (67,764) – – Net deferred taxation liability at end of year 34,816 6,329 – – TRANZ RAIL HOLDINGS LIMITED 53

The deferred tax recorded for the Group represents the net of all timing differences. The exposure to deferred tax is reduced by the extent of tax losses recognised.

In the 2003 financial year, the Group recorded an impairment loss in relation to tax losses of $99,040,000; $32,683,000 tax effected, that had previously been recognised and offset against the deferred tax liability (refer Note 6). The Directors do not consider that these tax losses meet the criteria for recognition in the financial statements at 30 June 2003 due to the probability of generating sufficient assessable income to enable the tax losses to be utilised within a reasonable timeframe. Accordingly these tax losses, which remain available to the Group, are no longer recognised for financial reporting purposes.

The Group has $236,224,000; $77,954,000 tax effected (2002: $205,346,000; $67,764,000 tax effected) of tax losses available for offset against future taxable income. At 30 June 2003, tax losses of $136,984,000; $45,205,000 tax effected (2002: $205,346,000; $67,764,000 tax effected) were offset against the deferred tax liability leaving tax losses of $99,240,000; $32,749,000 tax effected (2002: nil) that have not been recognised as a future income tax benefit. The ability to carry forward and offset tax losses is subject to shareholder continuity requirements being met according to the Income Tax Act 1994, which requires a minimum shareholder continuity of 49%. In addition, the carry forward of tax losses is subject to confirmation by the Commissioner of Inland Revenue. Should either the Company’s transaction with the Crown or the takeover offer from Toll Group (NZ) Limited proceed, then these tax losses will be forfeited. In addition, a sale of track and associated assets to the Crown is likely to impact the value of the deferred tax liability as certain timing differences may be extinguished and new tax losses may be generated. Due to a change in shareholder continuity during the 2002 financial year, the Group forfeited tax losses of $144,448,000 (tax effect: $47,668,000) relating to the 1996 to 1999 tax years (refer Note 6).

The deferred taxation asset and deferred taxation liability are not offset since they arise in different tax jurisdictions.

GROUP & PARENT GROUP & PARENT 2003 2002 NO. $000 NO. $000 18. SHARE CAPITAL

Ordinary share capital Balance at start of year 121,518,049 166,356 120,794,079 164,827 Issue of new shares pursuant to rights issue 86,944,455 65,208 –– Costs incurred pursuant to rights issue – (3,500) –– Issue of new shares upon exercise of options ––330,042 1,116 Other shares issued, fully paid 1,324,058 – –– Transfer from redeemable restricted and restricted shares upon expiry of restricted period 452,575 – 393,928 413 Balance at end of year 210,239,137 228,064 121,518,049 166,356

Restricted ordinary share capital (fully paid) Balance at start of year 204,189 – –– Issue of new shares (fully paid) 248,386 – 476,417 – Transfer to ordinary share capital upon expiry of restricted period (452,575)– (272,228) – Balance at end of year ––204,189 –

Redeemable restricted share capital (partly paid and unpaid) Balance at start of year 9,201,345 413 8,123,045 420 Issue of new shares (unpaid) ––1,200,000 – Part payment on existing shares issued ––– 406 Redemption of shares (1,604,573)(81) –– Transfer to ordinary shares upon expiry of restriction period ––(121,700) (413) Forfeited shares (26,614)– –– Balance at end of year 7,570,158 332 9,201,345 413 Total issued share capital 217,809,295 228,396 130,923,583 166,769 TRANZ RAIL HOLDINGS LIMITED 54

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

American Depositary Receipts On 31 July 2002, the Company de-registered from The Nasdaq Stock Market (NASDAQ) in the United States of America, and its American Depositary Receipt (“ADR”) programme was cancelled on 2 August 2002. Each ADR represented three ordinary shares in the Company.

Ordinary share capital In December 2002, the Company successfully concluded its raising of $65,208,000 new capital through a renounceable rights issue as part of the financial restructuring necessary to settle the letter of credit requirement in the Aratere lease and to secure its ongoing bank facilities. Under the terms of the issue, qualifying shareholders of the Company on the share register as at 5:00pm on 22 November 2002 were entitled to acquire five new shares for every seven shares they held, at an issue price of $0.75 per share. The offer closed at 5:00pm on 13 December 2002. A total of 86,944,455 new shares were issued on 20 December 2002 in the rights issue.

On 11 December 2002, the Company issued 1,324,058 fully paid ordinary shares. The weighted average issue price of these shares was $1.06. The ordinary shares were issued to certain members of management in consideration of the grantees agreeing not to accept or sell their entitlements (arising in connection with the redeemable restricted shares held by those grantees) in connection with the Company’s December 2002 rights issue.

The following rights attach to the ordinary shares issued by the Company:

the right to one vote on a poll at a meeting of the Company on any resolution, including any resolution to appoint or remove a Director or auditor, alter the Company’s constitution, approve a major transaction, approve an amalgamation, and put the Company into liquidation; the right to an equal share of dividends approved by the Board; and the right to an equal share in the distribution of the surplus assets of the Group.

Restricted ordinary share capital On 11 December 2002, the Company issued 248,386 fully paid restricted ordinary shares under the 1996 Equity Incentive Plan. The weighted average issue price of these shares was $1.06. The restricted ordinary shares were issued in consideration of the grantee agreeing not to accept or sell his entitlements (arising in connection with the redeemable restricted shares held by that grantee) in connection with the Company’s December 2002 rights issue. The restricted ordinary shares were subject to a restricted period that expired in June 2003 and became unrestricted ordinary shares in the capital of the Company.

In August 2001, the Company issued 476,417 fully paid restricted shares under the 1996 Equity Incentive Plan. The weighted average issue price of these shares was $4.45. The restricted shares were issued in consideration for the performance of services by the grantees. The restricted shares were subject to two restricted periods. On 31 December 2001, the first restricted period expired and 238,214 restricted shares became ordinary shares in the capital of the Company. An additional 34,014 restricted shares became ordinary shares during the course of the 2002 financial year in accordance with their terms. The second restricted period expired in August 2002.

Subject to their terms the restricted shares rank in full for all dividends declared by the Company, and rank in all other respects equally with the existing ordinary shares issued by the Company. TRANZ RAIL HOLDINGS LIMITED 55

Redeemable restricted share capital Redeemable restricted share capital at 30 June 2003 comprises:

NO. ON ISSUE PAID UP VALUE ISSUE PRICE EXPIRY DATE $000 $ 773,386– 3.13 30 April (1) 2004 400,000 – 5.50 30 April 2004 (1) 180,000 9 3.21 6 December 2010 2,316,772 120 3.40 6 December 2010 50,000 3 3.72 6 December 2010 1,900,000 98 5.50 6 December 2010 50,000 3 6.00 6 December 2010 1,900,000 99 7.50 6 December 2010

7,570,158 332

(1) Original expiry date of these redeemable restricted shares was 28 June 2012, amended to 30 April 2004 as the grantee is no longer a full time employee of the Group.

In December 2000, the Company issued 8,432,000 unpaid redeemable restricted shares under the 1996 Equity Incentive Plan. The weighted average issue price of these shares was $5.12 which is payable by instalments from the proceeds of net dividends attributable to the shares, or at the election of the grantee after a specified term or event. If the shares are not fully paid by 6 December 2010, then they will be redeemed by the Company. The maximum aggregate amount payable by the Company for redemption of the shares is $80. The redeemable restricted shares are subject to a restricted period during which the grantee must remain a full time employee of the Company or any of its subsidiaries, the grantee is prohibited from transferring the redeemable restricted shares, and the redeemable restricted shares carry no voting rights. Subject to their terms, the redeemable restricted shares rank in full for all dividends declared by the Company, and rank in all other respects equally with the existing ordinary shares issued by the Company. The restricted period expires when the issue price has been fully paid or 6 December 2010.

In June 2002, the Company issued an additional 1,200,000 unpaid redeemable restricted shares under the 1996 Equity Incentive Plan. The weighted average price of these shares was $3.92 which is payable on the same terms as the redeemable restricted shares issued in December 2000. The ability to fully pay the redeemable restricted shares is restricted. The grantee of these redeemable restricted shares is no longer a full time employee of the Group. The redeemable restricted shares will therefore be redeemed by the Company for $10 one year after the grantee ceased to be an employee unless the shares are exercised within this time.

During the 2002 financial year, a grantee of the December 2000 redeemable restricted shares paid the issue price for 121,700 redeemable restricted shares in accordance with their terms and those shares became unrestricted ordinary shares in the capital of the Company.

During the 2003 financial year, 26,614 of the redeemable restricted shares issued in June 2002 were forfeited in accordance with their terms, and 1,604,573 of the December 2000 redeemable restricted shares were redeemed by the Company for $20 in accordance with their terms.

At 30 June 2003, 6,396,772 (2002: 8,001,345) redeemable restricted shares were paid to $0.05 and 1,173,386 (2002: 1,200,000) redeemable restricted shares were unpaid. In July 2003, the terms of the redeemable restricted shares were amended to allow grantees to transfer the redeemable restricted shares to Toll Group (NZ) Limited under the takeover offer for all of the equity securities of the Company. TRANZ RAIL HOLDINGS LIMITED 56

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

GROUP & PARENT GROUP & PARENT 2003 2002 WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE $ NO. $ NO. Share options Options issued to subscribe for ordinary shares: Outstanding options at start of year 5.37 3,587,312 4.92 3,808,484 Options issued –– 7.50 400,000 Options lapsed – pre rights issue 4.97 (105,689) 4.68 (291,130) Options lapsed – post rights issue 6.26 (580,172) –– Options exercised –– 3.38 (330,042)

Outstanding options at end of year 4.94 2,901,451 5.37 3,587,312

Following the Company’s December 2002 equity rights issue, the exercise price of options were reduced by $0.22 per share to reflect the dilution in the share price. The weighted average exercise price of options lapsed after the rights issue, and weighted average exercise price of options as at 30 June 2003 are shown after the adjustment to the exercise price.

At 30 June 2003, 2,665,051 (2002: 3,060,212) options had vested and were exercisable at a weighted average price of $5.07 (2002: $5.56).

The main terms of the options are:

NUMBER ON ISSUE EXERCISE PRICE $ EXPIRY DATE 70,000 5.97 7 May 2006 70,000 6.90 7 May 2006 70,000 7.95 7 May 2006 70,000 9.19 7 May 2006 70,000 10.61 7 May 2006 100,000 7.9620 February 2007 633,055 5.78 19 February 2008 623,396 3.50 23 December 2009 5,000 3.17 2 March 2010 790,000 2.45 8 May 2010 400,000 7.28 28 June 2012

2,901,451

The options have no rights to voting or dividends. TRANZ RAIL HOLDINGS LIMITED 57

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

19. FINANCE LEASE LIABILITY Total minimum lease payments due: Not later than one year 7,135 6,996 – – Later than one year but not later than two years 9,123 7,135 – – Later than two years but not later than five years 23,487 28,972 – – Later than five years 109,320 149,005 – –

149,065 192,108 – – Future lease finance charges (51,860) (79,915) – –

Net finance lease liability 97,205 112,193 – –

Represented by: Finance lease liability – secured (refer Note 14) 94,469 119,358 – – Finance lease accrued interest (refer Note 13) 2,736 4,047 – – Deferred finance lease hedge costs (refer Note 12) – (11,212) – –

97,205 112,193 – –

The lease of The Interisland Line vessel, Aratere, was signed on 18 December 1998, and expires on 18 January 2011. All lease payments are denominated in US currency.

The Aratere lease conditions in respect of the potential letter of credit requirement associated with the Group’s fall in Standard & Poor’s credit rating below BBB were amended in December 2002. The principal commercial terms of that arrangement, which will remain in place for as long as the Company does not have a Standard and Poor’s BBB credit rating, were as follows:

the Aratere group to share in the capital proceeds of the December 2002 equity rights issue and to share in the proceeds from the sale of certain assets on a 50:50 basis with the Group’s banking syndicate, with the funds to be held on deposit as collateral (refer Note 7); the shortfall between the capital value of the lease and the market value of the Aratere is secured by way of a pro-rata first ranking charge under a general security deed over the assets of the Group; one third of the scheduled six monthly lease payments to be placed on deposit every two months and held as collateral for the six monthly lease payment; and a repricing of the lease (less capital reductions) by 125 basis points per annum to reflect the Company’s change in credit rating. This repricing results in increased lease costs of approximately $1,000,000 per annum (the effect of this repricing is not included in the future lease finance charges shown above since it does not form part of the minimum lease payments).

Accordingly, at 30 June 2003, the finance lease liability is secured by the leased asset, Aratere, cash collateral (refer Note 7) and a first ranking general security deed over the assets of the Group. Also, the Parent Company has guaranteed the obligations of its subsidiary company under the lease.

As part of the bank debt refinancing, the Group was required to terminate its foreign exchange hedge of the finance lease liability relating to the Aratere lease that was in place for the term of the lease. With the exception of lease payments in the 2003 and 2004 financial years, all forward exchange contracts were closed. As a result, the finance lease principal (US$55,000,000) is now unhedged and is subject to foreign exchange movements (refer Note 5) and is converted to New Zealand currency at the spot rate at 30 June 2003. TRANZ RAIL HOLDINGS LIMITED 58

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

The Group received $7,872,000 in consideration for terminating the foreign exchange hedge contracts. After adjusting for the revaluation of the finance lease liability, accrued interest and deferred finance lease hedge costs, the Group recorded an accounting gain of $7,701,000 which has been deferred and will be amortised over the remaining term of the lease (refer Note 16).

The average financing cost of the lease at 30 June 2003 was 8.83% (2002: all lease payments were hedged using forward foreign exchange contracts, which fixed the NZ dollar financing cost at an average rate of 7.82% per annum). At 30 June 2003, the stipulated loss value of the vessel was US$58,103,000 (2002: US$57,843,000).

The Group can break the lease early by declaring the vessel obsolete or surplus to requirements and paying the lessor the excess of the stipulated loss value at the time of termination and the sale proceeds, or exercise an early buy-out option on 18 January 2004 (US$58,551,000) or 18 January 2008 (US$55,334,000). Upon expiry of the lease, the Group can exercise its option to purchase the vessel for US$53,534,000, or extend the lease for a further three-year period on equivalent terms and conditions that must be agreed between the Group and the lessor. If neither of these alternatives is exercised, then the vessel will be sold and the Group is required to pay the deficit in net sale proceeds compared with the vessel’s stipulated loss value of US$53,025,000. The minimum lease payments shown above includes the stipulated loss value of US$53,025,000 (NZ$91,077,000) on 18 January 2011.

In June 2003, the Group signed option agreements, exercisable before 30 September 2003, relating to the Aratere finance lease. The options will enable the Group to repay the existing financiers of the Aratere lease on terms that involve reduced break costs and are therefore favourable to the Group. If the options are exercised, the Group will take ownership of the Aratere.

The ability of the Group to exercise the options will depend on obtaining replacement finance for the lease. The finance lease has been disclosed as a non current liability at 30 June 2003 since the options have not been exercised and replacement finance had not been identified at the date these financial statements were approved by the Directors.

20. OPERATING LEASE COMMITMENTS

Rolling stock lease The Group has operating leases in relation to rolling stock equipment that was sold and leased back in December 1996 (refer Note 16). The lease commenced on 20 December 1996 and runs for a period of 12 years. Minimum future lease payments under these leases, stated in United States currency, are as follows:

GROUP GROUP 2003 2002 US$000 US$000 Total minimum lease payments due: Not later than one year 13,125 13,105 Later than one year but not later than two years 13,145 13,125 Later than two years but not later than five years 39,952 39,472 Later than five years 10,279 23,904 76,501 89,606

In December 1996, the Group sold rolling stock by way of a sale and leaseback agreement (referred to as the “rolling stock lease”). The Group sold and leased back 30 locomotives and 579 freight wagons, which represented approximately 15% of the Group’s fleet at the time. The Group received proceeds from the sale of US$93,101,000 (NZ$131,453,000 based on the exchange rate at the time), determined based on a fair market appraisal of the equipment performed by an independent third party, and generated a gain of NZ$59,199,000 (refer Note 16).

The lease is for a period of 12 years and expires on 19 December 2008. The Group pays lease payments denominated in US dollars during the term of the lease. At the end of the lease, the Group can elect to exercise its option to purchase all of the rolling stock for US$25,156,000, an amount that approximates the expected fair value of the equipment at the end of the TRANZ RAIL HOLDINGS LIMITED 59

lease, or to return the equipment to the lessor and make a return payment of US$9,310,000. Included within minimum lease payments in the above table is US$9,310,000 (NZ$15,991,000) (2002: US$9,310,000 (NZ$19,097,000)) in relation to the return payment at the end of the lease, of which NZ$8,698,000 (2002: NZ$8,798,000) has been accrued at balance date. The Group can terminate the lease early in the event of all the assets becoming obsolete or surplus to requirements. The recognition of the return payment is included in lease and rental costs.

Since December 1996, the Group has accounted for the rolling stock lease as an operating lease.

During the 2002 financial year, the Directors reviewed the appropriateness of the accounting treatment of the rolling stock lease. The assessment of whether a lease is an operating or finance lease requires consideration of generally accepted accounting practice and the exercise of judgement. The review reconfirmed that it is appropriate for the Group to account for the rolling stock lease as an operating lease. However, in the case of long term operating leases over major assets, the current accounting treatment will result in a substantial difference in the statement of financial performance (operating profit and interest expense) and statement of financial position (assets and liabilities) if the assets were either funded by way of a finance lease or owned by the Group. Given that the rolling stock lease relates to a significant portion of the rolling stock used in the Group’s rail operations, the Directors have chosen to disclose what the differences in the Group’s operating performance and financial position would be if the lease was accounted for on-balance sheet by separately identifying what would be the principal and interest payments under the lease and the notional asset and debt position in the same manner as a finance lease.

Accordingly, the following analysis is presented to assist in an assessment of the operating performance and financial position of the Group. The following assumptions are inherent in this presentation:

the fixed asset book value is determined using historic cost principles, as if the lease had been accounted for as a finance lease from inception; to facilitate comparison with the operating lease scenario, it is assumed that assets will be returned to the lessor at the end of the lease. Accordingly, the lease return payment is included in the minimum lease payments (and is therefore included in interest expense and finance lease liability), and the assets have been depreciated on a straight-line basis over the period of the lease; depreciation expense is shown net of the deferred gain amortisation; US$ interest is charged on a straight-line basis over the term of the lease, converted to NZ$ based on the actual or anticipated foreign exchange rate on payment date; amounts shown for 2003 and 2002 are the actual amounts that would have been recorded in the Group’s statement of financial performance and statement of financial position had the lease been accounted for as a finance lease from inception; and the forecast for 2004 to 2009 has been prepared using the NZD:USD foreign currency exchange rate as at 30 June 2003 of 0.5822. Future interest expense together with the value of the finance lease liability would vary to those shown due to movements in the underlying foreign exchange rate; the financial impact of exchange movements would be applied to the underlying US$ finance lease liability.

For comparative purposes, the analysis includes the financial impact based on the current accounting treatment as an operating lease. The following assumptions are inherent in this presentation:

lease and rental costs include the accrual of the lease return payment on a straight-line basis over the term of the lease, and is shown net of the deferred gain amortisation; and the forecast for 2004 to 2009 has been prepared using the NZD:USD foreign currency exchange rate as at 30 June 2003 of 0.5822. Future lease and rental costs together with the value of the operating lease accrual will vary to those shown due to movements in the underlying foreign exchange rate; the financial impact of exchange movements would be applied to the underlying US$ operating lease expense in any year. TRANZ RAIL HOLDINGS LIMITED 60

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

STATEMENT OF FINANCIAL PERFORMANCE

LEASE AND DEPRECIATION FOREIGN INTEREST COMPARATIVE COMPARATIVE RENTAL EXPENSE EXCHANGE EXPENSE IMPACT ON IMPACT ON COSTS (GAIN) OPERATING NET PROFIT PROFIT BEFORE TAX $000 $000 $000 $000 $000 $000 2002: Off-balance sheet 18,691 – – – On-balance sheet – 6,075 (32,751) 8,089 12,616 35,688 2003: Off-balance sheet 19,071 – (1,591) – On-balance sheet – 6,075 (17,534) 8,772 11,405 20,167 2004: Off-balance sheet 16,710 – – – On-balance sheet – 6,062 – 8,249 10,648 2,399 2005: Off-balance sheet 16,643 – – – On-balance sheet – 6,075 – 8,205 10,568 2,363 2006: Off-balance sheet 16,617 – – – On-balance sheet – 6,075 – 8,179 10,542 2,363 2007: Off-balance sheet 15,588 – – – On-balance sheet – 6,075 – 8,151 9,513 1,362 2008: Off-balance sheet 16,603 – – – On-balance sheet – 6,062 – 8,142 10,541 2,399 2009 (6 months): Off-balance sheet 7,791 – – – On-balance sheet – 3,179 – 3,815 4,612 797 TRANZ RAIL HOLDINGS LIMITED 61

STATEMENT OF FINANCIAL POSITION

OPERATING FIXED FINANCE LEASE ASSETS LEASE ACCRUAL LIABILITY $000 $000 $000 2002: Off-balance sheet 17,266 – – On-balance sheet – 71,204 121,316 2003: Off-balance sheet 14,218 – – On-balance sheet – 60,249 87,151 2004: Off-balance sheet 13,129 – – On-balance sheet – 49,295 72,709 2005: Off-balance sheet 11,948 – – On-balance sheet – 38,340 58,211 2006: Off-balance sheet 10,726– – On-balance sheet – 27,38643,672 2007: Off-balance sheet 9,520 – – On-balance sheet – 16,431 29,149 2008: Off-balance sheet 7,574 – – On-balance sheet – 5,477 13,849 2009 (6 months): Off-balance sheet – – – On-balance sheet – – –

Other operating lease obligations The Group has operating leases relating to interisland ferries, ferry berths, miscellaneous office equipment, property, computer equipment and vehicles. Minimum future lease payments under these leases are as follows:

GROUP GROUP 2003 2002 $000 $000 Total minimum lease payments due: Not later than one year 17,075 33,744 Later than one year but not later than two years 13,362 10,015 Later than two years but not later than five years 15,729 12,800 Later than five years 8,667 9,116

54,833 65,675

Where lease payments are denominated in foreign currencies, they have been converted to New Zealand currency at the hedge rate (if payments are hedged), otherwise at the exchange rate ruling at balance date. TRANZ RAIL HOLDINGS LIMITED 62

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

21. CAPITAL AND OTHER COMMITMENTS The Group has approximate capital commitments at 30 June 2003 of $1,738,000 (2002: $3,525,000). Included within this amount are commitments to purchase equipment for locomotives and rolling stock at a cost of $120,000 (2002: $821,000), and track equipment of nil (2002: $542,000). The balance represents commitments to ongoing projects, information systems and ferry equipment. In addition, the Group has commitments as a result of agreements entered into with its outsourced service providers which cover both capital and operating expenditure. The Group’s approximate commitments at 30 June 2003 in relation to these contracts were as follows:

GROUP GROUP 2003 2002 $000 $000 Total committed expenditure: Not later than one year 115,113 112,792 Later than one year but not later than two years 97,519 109,025 Later than two years but not later than five years 101,606 162,302 Later than five years 20,045 42,888 334,283 427,007

Infrastructure In December 2001, the Group entered into a $150,000,000 target cost contract with Transfield Services Infrastructure (New Zealand) Limited (“Transfield”) to provide infrastructure services to the Group, comprising electrical, signals, structures, track and traction infrastructure, and certain telecommunication assets. The contract, which is for a term of three years, commenced in March 2002. At the end of the three-year term, the Group may renew the contract or enter into a new, longer term contract with Transfield. Alternatively, the Group may require Transfield to transfer the services and various strategic assets back to the Group or to a new service provider. The Group controls and directs the overall extent of the services through an annual work plan agreed between the Group and the service provider. In addition to the agreed services, the Group has the ability to require Transfield to undertake certain additional work from time to time. Strict service specifications apply to Transfield’s delivery of the services, being the codes, specifications, manuals and other directions that must be adhered to by Transfield. They are based on, and largely comprise, Tranz Rail’s existing Codes of Practice. Services are provided under a target cost-reimbursable contract structure, which are subject to agreed key performance indicators that apply over the duration of the term of the contract.

Motive power and freight equipment In December 2001, the Group entered into a $200,000,000 contract with ALSTOM Transport New Zealand Limited (“Alstom”) to provide locomotive services to the Group, comprising mainline locomotives, shunt locomotives and certain items of maintenance used in relation to those assets. The contract, which is for a term of seven years, commenced in March 2002. In April 2002, the Group entered into a $50,000,000 target cost contract with Alstom to provide freight wagon inspection and maintenance services to the Group. The contract, which is for a term of two-and-a-half years, commenced in April 2002. At the end of each contract’s term, the Group may renew the contract or enter into a new contract with Alstom. Alternatively, the Group may require Alstom to transfer the services and various strategic assets back to the Group or to a new service provider. The Group controls the overall extent of the services provided under the freight equipment contract through an annual work plan. With regard to the motive power contract, a fixed price lump sum contract with set performance criteria is in place to improve the quality of the Group’s fleet. In addition to the agreed services, the Group has the ability to require Alstom to undertake certain additional work from time to time. Strict service specifications apply to Alstom’s delivery of the services, being the codes, specifications, manuals and other directions that must be adhered to by Alstom. They are based on, and largely comprise, Tranz Rail’s existing Codes of Practice. Motive power services are provided under a fixed price, lump sum contract structure. Freight equipment services are provided under a cost-reimbursable contract structure. Both contracts are subject to agreed key performance indicators that apply over the duration of the term of the contract. TRANZ RAIL HOLDINGS LIMITED 63

Forklifts In December 2001, the Group entered into a contract with Gough, Gough & Hamer Limited to supply forklift operations to the Group. The contract, which is for a term of five years, commenced in March 2002. Forklift operation services are provided under an operating lease arrangement, and are subject to agreed key performance indicators that apply over the duration of the term of the contract.

Reservations call centre In October 2001, the Group entered into a contract with TeleTech Limited to supply call centre passenger reservation services to the Group. The contract, which is for a term of five-and-a-half years, commenced in October 2001. Call centre reservation services are provided under a variable pricing arrangement, and are subject to agreed key performance indicators that apply over the duration of the term of the contract.

Telecommunications In July 2002, the Group entered into an outsourcing contract with Telecom New Zealand Limited to provide voice and data services to the Group and to update the telecommunications infrastructure over the term of the contract. The contract, which is for a term of six years, commenced in July 2002.

22. CONTINGENT LIABILITIES As part of the outsourcing of non core operations during the 2002 financial year, approximately 800 staff transferred to, and are now employed by, the outsourced operation’s service providers. The Group remains liable for the potential redundancy or retirement payments of certain former employees in circumstances where the Group agrees to a change in an annual work plan that results in the service provider requiring fewer employees to provide the operational services. In accordance with the terms of certain outsourcing contracts, aggregate bank guarantees of $13,869,000 (2002: $13,928,000) had been issued at 30 June 2003 in favour of the applicable contracts’ service provider, in relation to certain of the Group’s potential obligations under the contracts. Following the sale of the Tranz Scenic business in the 2002 financial year, the Group remains liable for certain redundancy obligations totalling approximately $3,700,000 of the long distance rail passenger operator and associate company, Tranz Scenic 2001 Limited, for a period of five years from the sale of the business. In addition, the Group has entered into a put option agreement with Tranz Scenic 2001 Limited. Under the terms of the agreement, Tranz Scenic 2001 Limited may, in the event that it is in breach of certain financing arrangements, exercise a put option pursuant to which the Group is required to purchase from Tranz Scenic 2001 Limited up to seven locomotives with an aggregate price of up to $4,300,000. The Group has also agreed to provide Tranz Scenic 2001 Limited with up to a further $2,000,000 to enable Tranz Scenic 2001 Limited to undertake a four-carriage rebuild programme, funded by the issue of further redeemable preference shares by Tranz Scenic 2001 Limited (refer Note 25). The Group has issued guarantees in favour of debt financiers of certain owner driver equipment leases totalling $40,000 (2002: $40,000) at 30 June 2003. The expiry of the guarantees range from June 2004 to March 2006. The Group is subject to certain environmental legislation including the Resource Management Act 1991, Marine Pollution Act 1974 and Maritime Transport Act 1994, which contain certain obligations and restrictions in respect of environmental matters associated with the Group’s operations. These Acts contain enforcement provisions which may create both civil and criminal liability. The Group’s leased land includes a number of sites that have been identified as requiring clean up because of events prior to Acquisition, primarily spillage of fuel and other hydrocarbons. These sites have been investigated and have either been remediated to a level acceptable at the date of the remediation or are subject to ongoing monitoring as agreed with the local authority. Sites will be reviewed at each 10 year interval when site resources consents require renewal. The Group is party to various legal proceedings related to business operations, such as property damage claims and employee claims. The Group does not believe that pending or threatened claims of these types, individually or in aggregate, are likely to have any material adverse effect on the Group’s financial position or financial performance.

The Group assesses the likelihood of material liability arising from individual circumstances and makes provision in its financial statements only where it is probable that actual events giving rise to liability will occur and the amount of the liability can be reliably estimated. TRANZ RAIL HOLDINGS LIMITED 64

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

23. STOCK BASED COMPENSATION PLANS

Employee Share Purchase Scheme The Company established its Employee Share Purchase Scheme (the “scheme”) on 26 July 1996. This scheme was open to all permanent full time employees of the Group who met the minimum required duration of service. Invitations to purchase shares were made to all eligible employees at the discretion of the Company. Consideration payable for the shares was determined by the Company but did not exceed the market price at the date the shares were acquired.

The Company advanced or procured the advancement of all monies necessary to purchase the shares under the scheme. Such advances are repayable by way of deductions from employees’ regular remuneration. The terms of such loans are determined by the Company.

Shares allocated under the scheme are held in trust for the employees by the trustees of the scheme during the restrictive period which is the longer of three years or the period of repayment of loans made in connection with the acquisition of the shares. The voting rights attached to shares so held by the trustees are to be executed at the sole discretion of the trustees. The Company has no right to reacquire any of the shares issued to the scheme.

The scheme’s trustees are appointed and removed by the Company.

The first issue of shares pursuant to the scheme was effected on 6 November 1996. 494,400 shares were issued by the Company, all of which were allocated to employees. The shares were issued at a price of $5.97 each, representing a 15% discount from the market price of the Company’s shares on the New Zealand Stock Exchange at 26 September 1996 (the date the price was struck).

In December 2002, the scheme sold its entitlement to purchase additional shares in the Company in connection with the Company’s rights issue in December 2002.

As at 30 June 2003 the scheme held in trust 23,650 shares (2002: 23,650 shares), which represents approximately 0.01% (2002: 0.01%) of total shares on issue. At 30 June 2003 amounts payable to the Company by the scheme for these shares totalled $116,000 (2002: $116,000). During the 2003 financial year, the Company recorded a provision of $82,000 (2002: nil) (refer Note 3 and Note 8) to reflect the book value of the advance at its recoverable amount.

1996 Equity Incentive Plan The 1996 Equity Incentive Plan (the “Plan”) was initially approved by the Company’s shareholders at the Company’s annual meeting on 10 December 1996, and was subsequently re-approved by the Company’s shareholders at the Company’s 1997, 1998, 1999, 2000 and 2001 annual meetings. The Plan allows for the Company to award, at its discretion within specified limits, option rights, appreciation rights and restricted shares to employees. The terms and conditions of such awards are to be determined at the Company’s discretion up to a maximum of 15,000,000 ordinary shares that may be issued under the Plan.

The Directors of the Company were last authorised to issue option rights, appreciation rights and restricted shares to employees pursuant to the Plan at the Company’s 2001 annual meeting on 13 December 2001. Listing Rule 7.3.2(a) of the NZX Listing Rules provides that an issue of equity securities made to employees following authorisation by shareholder resolution must be made within 12 months of that authorisation being given. Therefore, the Directors of the Company are not currently authorised to issue new option rights, appreciation rights and restricted shares to employees pursuant to the Plan.

As at 30 June 2003, previous award issues of nil (2002: 204,189) restricted ordinary shares, 7,570,158 (2002: 9,201,345) redeemable restricted shares and 2,551,451 (2002: 3,187,312) share option rights made pursuant to the Plan were outstanding (refer Note 18). The balance of the outstanding share options granted, 350,000 (2002: 400,000), has been made available outside of the Plan. TRANZ RAIL HOLDINGS LIMITED 65

24. TRANSACTIONS WITH RELATED PARTIES

Group Since December 2001, the Group has incurred costs on behalf of Tranz Scenic 2001 Limited for which it is entitled to reimbursement in accordance with a services agreement and track access agreement entered into between the parties on an arms-length basis. Costs reimbursed by Tranz Scenic 2001 Limited include locomotive and rolling stock maintenance, track access, provision of fuel and sand, supply of certain locomotive services, ticket reservation services, train washing, platform services, office rental, electricity supply and various other services directly related to the operations of Tranz Scenic 2001 Limited. Amounts to be received from Tranz Scenic 2001 Limited of $3,965,000 (2002: $3,075,000) are included within accounts receivable at 30 June 2003, which includes an amount of $458,000 (2002: $319,000) in relation to interest accrued on redeemable preference shares issued by Tranz Scenic 2001 Limited. Tranz Scenic 2001 Limited sells tickets for passenger travel on the Group’s The Interisland Line services, for which the Group pays a sales commission on normal commercial terms. Amounts payable to Tranz Scenic 2001 Limited of $66,000 (2002: $802,000) are included within accounts payable at 30 June 2003.

The Group has entered into a rolling stock sub-lease with Tasrail Pty Limited (“Tasrail”), a subsidiary of Australian Transport Network Limited. No amounts are receivable from Tasrail at 30 June 2003 (2002: $85,000).

McLachlan, Rissman & Doll, a Chicago law firm, received $158,000 (2002: $212,000) for legal services to the Group in connection with various corporate and financing matters. Thomas Rissman, a Director of the Company, is managing partner of McLachlan, Rissman & Doll.

Cimino Partners Limited received $20,000 (2002: nil) for director services in relation to membership of the due diligence committee as part of the December 2002 equity rights issue. Jonathan Cimino, a Director of the Company, is a director and shareholder of Cimino Partners Limited.

Loughlin Viticulture & Consulting Limited received $79,000 (2002: nil) for the services of John Loughlin as interim Chief Financial Officer since April 2003. John Loughlin, a Director of the Company, is a director and shareholder of Loughlin Viticulture & Consulting Limited.

Murray King & Francis Small Consultancy Limited received $114,000 (2002: $502,000) up to 14 August 2002 for consulting services to the Group in connection with various corporate matters. Francis Small, a former Director of the Company until 14 August 2002, is a director and shareholder of Murray King & Francis Small Consultancy Limited.

The Group entered into a rail software application sales and revenue sharing agreement with No. 8 Solutions LLC whereby the Group granted intellectual property licences for marketing the Group’s rail and distribution software outside Australia and New Zealand to No. 8 Solutions LLC. Jeffrey Heisler and Michael Thomas, members of the executive management team, are directors and controlling shareholders of No. 8 Solutions LLC.

Parent The Company provides Tranz Link International Pty Limited (“TLI”) with management services under a management services agreement, which is subject to extensions by agreement between TLI and the Company annually. TLI was charged a management fee of A$190,000 (2002: A$120,000) for the 2003 financial year.

The Company, by entering into a Deed of Guarantee and Indemnity with the banking syndicate, has guaranteed all the indebtedness and obligations of its subsidiary companies, Tranz Rail Limited and Tranz Rail Receivables Limited, to the banking syndicate. The Company has also guaranteed the obligations of its subsidiary company, Tranz Rail Limited, as lessee of The Interisland Line vessel, Aratere (refer Note 19).

No debts with related parties were written off or forgiven during the years covered by these financial statements. TRANZ RAIL HOLDINGS LIMITED 66

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

25. SUBSIDIARY AND ASSOCIATE COMPANIES At 30 June 2003, the significant subsidiary and associate companies of the Group and their activities were as follows:

COUNTRY OF PERCENTAGE NATURE OF INCORPORATION HOLDING ACTIVITIES Tranz Rail Ltd New Zealand 100% Operates a nationwide rail and ferry transportation business Tranz Rail Finance Ltd New Zealand 100% A group finance company National Freight Ltd New Zealand 100% Holding company for foreign investments Clifford Bay Ltd New Zealand 100% Owns/leases land Tranz National Ltd New Zealand 100% Lessor of rolling stock Passenger Rail Ltd New Zealand 100% Investment holding company Tranz Metro Auckland Ltd New Zealand 100% Operator of Tranz Metro Auckland rail passenger services Tranz Link Distribution Ltd New Zealand 100% Mode neutral distribution and supply chain business for general freight Tranz Link Refrigerated Ltd New Zealand 100% Mode neutral distribution and supply chain business for temperature controlled freight Tranz Link International Ltd New Zealand 100% Investment holding company and international freight forwarder ATN Australia Ltd New Zealand 100% Investment holding company Tranz Rail Services Ltd New Zealand 100% Non trading Arasix Shipping Ltd The Bahamas 100% Non trading NZ National Freight B.V. The Netherlands 100% Holding company for foreign investments Tranz Link International Pty Ltd Australia 100% International freight forwarder Tranz Scenic 2001 Ltd New Zealand 50% Operator of long distance rail passenger services Australian Transport Network Ltd Australia 27% Holding company for Australian investments

All of the above companies have a 30 June balance date, except NZ National Freight B.V. which has a 31 December balance date.

GROUP GROUP 2003 2002 $000 $000

Investments in associate companies Equity accounted (loss)/profit of associate companies comprises: Tranz Scenic 2001 Limited (225) 88 Australian Transport Network Limited (1,071) (12,795)

Equity accounted loss of associate companies for the year (1,296) (12,707) TRANZ RAIL HOLDINGS LIMITED 67

Tranz Scenic 2001 Limited In December 2001, the Group sold its long distance rail passenger business, Tranz Scenic, to Tranz Scenic 2001 Limited for $33,000,000. As part of the sale, the Group acquired a 50% interest in the ordinary share capital of Tranz Scenic 2001 Limited, and $6,000,000 in redeemable preference shares (“RPS”) issued by Tranz Scenic 2001 Limited. Since the Group has retained a 50% interest in Tranz Scenic 2001 Limited, only half of the gain on the sale of the Tranz Scenic business has been recognised in the statement of financial performance. The Group has equity accounted for its investment in Tranz Scenic 2001 Limited since December 2001. Accordingly, the Group’s investment in Tranz Scenic 2001 Limited at 30 June 2003 comprises:

GROUP GROUP 2003 2002 $000 $000 Investment in 50% ordinary share capital 5,000 5,000 Investment in RPS 5,700 6,000 Unrealised gain on sale of Tranz Scenic business (5,775) (5,775) Equity accounted (loss)/profit of associate company (137) 88

Net investment in Tranz Scenic 2001 Limited 4,788 5,313

Represented by: Current 1,350 – Non current 3,438 5,313

Net investment in Tranz Scenic 2001 Limited 4,788 5,313

Tranz Scenic 2001 Limited redeemed $300,000 of RPS during the 2003 financial year. A further $1,350,000 of RPS were redeemed by Tranz Scenic 2001 Limited in July 2003 and are therefore disclosed as a current asset at 30 June 2003. The balance of the investment in Tranz Scenic 2001 Limited is included within non current assets at 30 June 2003. If the Group identified a suitable purchaser for this investment, then the investment would be sold. However, in the absence of an identified purchaser at the time of approving the financial statements, the Directors have included the investment within non current assets.

The RPS entitle the Group to a guaranteed dividend equal to 10% of the subscription price. RPS are to be redeemed at the rate of $150,000 per annum, increasing to the rate of $250,000 every three months from 30 September 2005. The RPS do not confer any voting rights on the holder, and do not have any rights to participate in any profits or assets of Tranz Scenic 2001 Limited.

The Group has entered into a management agreement with the other shareholders of Tranz Scenic 2001 Limited for a period of five years (from December 2001 to December 2006), that formalises the day-to-day management of Tranz Scenic 2001 Limited which is to be performed by other shareholders of Tranz Scenic 2001 Limited.

The Group has entered into a put option agreement with Tranz Scenic 2001 Limited. Under the terms of the agreement, Tranz Scenic 2001 Limited may, in the event that it is in breach of certain financing arrangements, exercise a put option pursuant to which the Group is required to purchase from Tranz Scenic 2001 Limited up to seven locomotives with an aggregate price of up to $4,300,000.

The Group has also agreed to provide Tranz Scenic 2001 Limited with up to a further $2,000,000 to enable Tranz Scenic 2001 Limited to undertake a four-carriage rebuild programme, funded by the issue of further redeemable preference shares by Tranz Scenic 2001 Limited. TRANZ RAIL HOLDINGS LIMITED 68

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

Australian Transport Network Limited The Group’s investment in Australian Transport Network Limited (“ATN”) at 30 June 2003 comprises:

GROUP GROUP 2003 2002 $000 $000 Investment in ATN at start of year 1,175 13,597 Equity accounted (loss)/profit for the year (195) 1,091 Write down to market value (876) (13,886)

Net equity accounted loss for the year (1,071) (12,795) Foreign currency translation reserve movements (104) 373

Net investment in ATN – 1,175

Since acquiring a 27% shareholding in ATN in 1997, the Group has equity accounted its share of ATN’s consolidated earnings. At 30 June 2002, it was evident that the Group’s investment in ATN was overstated and the investment was written down to market value based on a conditional sale price of another ATN shareholder. ATN experienced difficult trading conditions during the 2003 financial year and its financial performance deteriorated as a result. The Group has received an updated offer to sell its investment in ATN for no consideration. In view of these matters, the Group’s investment in ATN has been written off at 30 June 2003. The write down in the value of the investment in ATN has been effected in the statement of financial performance through equity accounted loss of associate companies. At 30 June 2003, the ATN Group had unaudited net assets of A$43,351,000 (2002: audited net assets of A$43,531,000) having recorded an unaudited net loss after tax for the year ended 30 June 2003 of A$181,000 (2002: audited net profit after tax of A$3,374,000).

26. FINANCIAL REPORTING FOR SEGMENTS The Group operates a nationwide business predominantly in the transportation industry and has investments in similar Australian businesses. The Group has defined its core operations within three separate business units: Rail Services Group (“RSG”) concentrating on long-haul bulk freight; Distribution Services Group (“DSG”) providing mode-neutral supply chain management; and The Interisland Line (“TIL”) offering passenger and freight transport across Cook Strait. The Group’s financial performance, analysed by business unit, is as follows:

2003 RSG DSG TIL OTHER(1) GROUP $000 $000 $000 $000 $000 Trading revenue (refer Note 1) 336,932 163,231 144,041 (34,514)609,690 Operating costs (326,247)(162,277)(113,554)32,435 (569,643)

Operating profit/(loss) from trading 10,685 954 30,487 (2,079)40,047

2002 RSG DSG TIL OTHER(1) GROUP $000 $000 $000 $000 $000 Trading revenue (refer Note 1) 341,483 162,492 153,910 (56,060) 601,825 Operating costs (345,234) (168,089) (115,890) 52,610 (576,603)

Operating (loss)/profit from trading (3,751) (5,597) 38,020 (3,450) 25,222 (1) Other includes: Rail Passenger Group, which provides urban commuter rail passenger services; Corporate compliance costs; and consolidation eliminations of inter business unit revenues and expenses.

Less than 10% of the Group’s total revenues, operating profit and assets were generated from the Group’s Australian operations, therefore separate geographical segmental financial information has not been presented. TRANZ RAIL HOLDINGS LIMITED 69

27. FINANCIAL INSTRUMENTS

Foreign exchange risk The Group enters into forward exchange contracts and currency options as a means of hedging movements in foreign currencies. Contracts have been entered to fix the New Zealand dollar value of certain imported asset, inventory and fuel oil purchases, insurance premiums, and foreign currency lease payments. The contract amount of forward exchange contracts to buy foreign currencies at 30 June 2003 was $19,514,000 (2002: $206,304,000). The contract amount of currency options to buy foreign currencies at 30 June 2003 was nil (2002: $18,241,000).

During the 2003 financial year, as part of the bank debt refinancing, the Group was required to terminate its foreign exchange hedge of the Aratere lease that was in place for the term of the lease. With the exception of lease payments in the 2003 and 2004 financial years, all forward exchange contracts in relation to the Aratere were closed. As a result, the finance lease liability principal (US$55,000,000) and secured deposit (US$16,724,000) are unhedged and subject to foreign exchange movements.

At 30 June 2003, 94.1% (2002: 99.7%) of forward exchange contracts were denominated in US dollars, nil (2002: 0.3%) in Australian dollars and 5.9% (2002: nil) in Pound Sterling. All contracts, none of which has a maturity date beyond two years (2002: 10 years), were to buy foreign currency.

Credit risk Financial instruments which potentially subject the Group to credit risk consist primarily of accounts receivable and forward exchange contracts. While the Group may be subject to losses up to the contract value of the instruments in the event of non performance by its counterparties, it does not expect such losses to occur. No collateral is required by the Group to support financial instruments subject to credit risk.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers included in the Group’s customer base. The Group places its cash, short term investments and foreign exchange dealings with high credit quality financial institutions.

Interest rate risk Interest rate exposures are managed by balancing the levels of debt held at fixed versus floating interest rates and by entering into interest rate hedge agreements. At 30 June 2003, 69.5% (2002: 72.1%) of all loans, including the finance lease liability, were held on fixed interest rates with the remaining debt at floating rates (refer Note 14).

All operating lease obligations (refer Note 20) are financed based on fixed interest rates. At 30 June 2003 and 30 June 2002, no interest rate hedge agreements were entered into.

Fuel price risk The Group enters into hedging contracts for the purchase of its fuel requirements at fixed prices in United States currency, effectively hedging against volatility in fuel prices. At 30 June 2003, approximately 27% (2002: 32%) of expected rail and ferry diesel fuel usage for the next financial year has been hedged using commodity swaps.

Fair values The carrying amount of bank, accounts receivable, accounts payable and current portion of term loans approximate fair value due to the short maturity of these instruments. Adequate provisions are held in respect of accounts receivable where collection is considered doubtful. TRANZ RAIL HOLDINGS LIMITED 70

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

The carrying amount of the Group’s current loans and secured deposits reflect fair value as the finance rates approximate market rates. Estimated fair values of the Group’s remaining financial instruments at 30 June are as follows:

GROUP GROUP 2003 2002

ASSET/(LIABILITY) ASSET/(LIABILITY) CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE $000 $000 $000 $000 Forward exchange contracts (78)(1,482) 4,675 8,306 Currency options ––201 295 Commodity swaps – (150) – 1,331 Finance lease liability (94,469)(99,799) (119,358) (118,650) Subordinated bonds (100,000)(93,084) (100,000) (103,434)

The following methods and assumptions were used to estimate the fair values for each class of financial instrument:

the fair value of forward exchange contracts has been determined using the closing forward rates at balance date; the fair value of currency options and commodity hedges has been determined by obtaining market prices of these agreements at balance date from the counterparty banks; the fair value of the finance lease liability has been determined based on the stipulated loss value of the vessel under the lease converted to New Zealand currency at the year end spot rate; the fair value of subordinated bonds has been determined by obtaining indicative market prices, exclusive of accrued interest, at balance date. TRANZ RAIL HOLDINGS LIMITED 71

GROUP GROUP PARENT PARENT 2003 2002 2003 2002 $000 $000 $000 $000

28. RECONCILIATION OF NET (LOSS)/PROFIT TO NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES Net (loss)/profit after taxation (2,584) (122,705) 94 (91,851)

Add/(less) items classified as investing or financing activities: Divestment costs 3,175 – – – Debt financing costs 2,584 – 1,121 – Gain on sale of Tranz Scenic business and Auckland Corridor – (64,080) – – Gain on sale of other fixed assets (2) (6,570) – – Other (63) (4,326) 64 –

5,694 (74,976) 1,185 –

Add/(less) non cash items: Unrealised foreign exchange gain on Aratere lease (net) (12,833) – – – Depreciation and goodwill amortisation 49,998 52,718 – – Asset value adjustments – 115,002 – 91,115 Rolling stock lease return payment accrual 1,492 1,590 – – Unrealised foreign exchange gain on rolling stock lease return payment accrual (1,592) – – – Equity accounted loss of associate companies 1,296 12,707 – – Amortisation of deferred credits (5,597) (5,012) (129) (129) Amortisation of deferred charges 1,576 660 773 548

34,340 177,665 644 91,534

Change in assets and liabilities: Decrease/(increase) in accounts receivable 1,932 (8,502) 82 – Decrease/(increase) in inventory (1,079) – – – Decrease/(increase) in prepayments (7,410) 3,170 (31) – Decrease/(increase) in deferred tax asset (13) (164) – – Decrease/(increase) in other non current assets (314) 336 – – Increase/(decrease) in accounts payable and other liabilities (27,128) 9,088 (156) (626) Increase/(decrease) in annual and long service leave (1,200) (1,732) – – Increase/(decrease) in reorganisation provision (6,248) 7,878 – – Increase/(decrease) in deferred credits 2,760 – – – Increase/(decrease) in deferred tax liability 28,487 6,329 – –

(10,213) 16,403 (105) (626)

NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES 27,237 (3,613) 1,818 (943) TRANZ RAIL HOLDINGS LIMITED 72

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

29. NON CASH INVESTING AND FINANCING ACTIVITIES There were no non cash investing and/or financing activities in the 2003 financial year.

In December 2001, the Group sold its long distance rail passenger business, Tranz Scenic, to Tranz Scenic 2001 Limited for $33,000,000. As part of the sale, the Group received cash proceeds of $22,000,000, acquired a 50% ($5,000,000) interest in the ordinary share capital of Tranz Scenic 2001 Limited, and $6,000,000 in redeemable preference shares (“RPS”) issued by Tranz Scenic 2001 Limited. Proceeds received from the sale of the Tranz Scenic business ($22,000,000) were included in the statement of cash flows in the 2002 financial year; the gross investment in Tranz Scenic 2001 Limited ($11,000,000) was excluded from the statement of cash flows.

30. EARNINGS PER SHARE (“EPS”)

GROUP GROUP 2003 2002 BASIC EPS

Numerator – net loss after taxation $000 (2,584) (122,705)

Denominator – ordinary shares (weighted average) NO. 000 168,174 121,178

Basic EPS $ (0.02) (1.01)

DILUTED EPS

Numerator – net loss after taxation $000 (2,584) (122,705) Denominator:

Ordinary shares (weighted average) NO. 000 168,174 121,178 Diluted effect of restricted shares, redeemable

restricted shares and options (weighted average) NO. 000 160 5,115

NO. 000 168,334 126,293

Diluted EPS $ (0.02) (0.97)

The effect of dilutive redeemable restricted shares and options excludes approximately 9,001,000 (2002: 5,061,000) (weighted average) redeemable restricted shares and 3,259,000 (2002: 1,830,000) (weighted average) options, which were anti-dilutive for earnings per share calculations.

31. EVENTS SUBSEQUENT TO BALANCE DATE On 8 July 2003, the Company received notice of a proposed takeover offer from Toll Group (NZ) Limited, that superseded an earlier takeover offer dated 23 June 2003, the details of which are set out in the basis of preparation on page 32.

There have been no other material events subsequent to 30 June 2003. TRANZ RAIL HOLDINGS LIMITED 73

GROUP GROUP ACTUAL PROSPECTUS FORECAST $000 $000

32. 2003 PROSPECTIVE FINANCIAL INFORMATION

STATEMENT OF FINANCIAL PERFORMANCE Total revenue 609,690 624,527

Operating profit from trading 40,047 53,075 Unusual revenues and expenses (3,175) 7,000 Equity accounted (loss)/profit of associate companies (1,296) 578

Operating profit 35,576 60,653 Net interest expense and finance charges (14,942) (26,266)

Net profit before taxation 20,634 34,387 Taxation expense (23,218) –

Net (loss)/profit after taxation (2,584) 34,387

STATEMENT OF MOVEMENTS IN EQUITY Equity at start of year 343,968 343,968 Net (loss)/profit for the year (2,584) 34,387 Foreign currency translation reserve movement 407 (22) Contributions from owners 61,708 62,600

Equity at end of year 403,499 440,933

STATEMENT OF FINANCIAL POSITION Cash at bank 6,582 – Other current assets 100,495 98,169 Right of way and fixed assets 758,101 767,549 Other non current assets 38,777 45,067

Total assets 903,955 910,785 Loans – current 85,200 27,943 Other current liabilities 127,435 158,986 Loans – non current 194,469 214,585 Other non current liabilities 93,352 68,338

Total liabilities 500,456 469,852

Net assets 403,499 440,933

Total equity 403,499 440,933

STATEMENT OF CASH FLOWS Net cash flows from/(used in) operating activities 27,237 79,811 Net cash flows from/(used in) investing activities (92,346) (69,881) Net cash flows from/(used in) financing activities 67,698 (13,916)

Net cash flows for the year 2,589 (3,986) Cash at start of year 3,986 3,986 Exchange translation of foreign cash balances 7 –

Cash at end of year 6,582 – TRANZ RAIL HOLDINGS LIMITED 74

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2003

Prospective financial information contained in the Company’s registered prospectus dated 8 November 2002 and issued in connection with the Company’s December 2002 rights issue (including a memorandum of amendments dated 22 November 2002 prepared in accordance with Section 43 of the Securities Act 1978) has been adjusted to reflect the effect of the change in the accounting policy in relation to the disclosure of equity accounted earnings of associate companies, which is included in operating profit.

Explanation of major variations Total operating revenue for the 2003 financial year was lower than forecast primarily due to the following events:

the agriculture sector was impacted by severe drought weather conditions in the summer period, reducing freight volumes and revenue. This was particularly evident in bulk milk and processed milk products volumes, but also affected other freight volumes including agricultural products, fertiliser and general freight; a strike at the Kinleith forestry mill between March 2003 and June 2003 reduced bulk forestry and forestry by-products volumes and revenue; changes in port calls by shipping lines resulted in a greater than anticipated reduction to the average rail haul length, thereby reducing revenues; increased competition due to the introduction of a new vessel by a competitor in January 2003 to operate on the Cook Strait, and the impact of aggressive pricing from airline competition, reduced passenger volumes and revenue in The Interisland Line’s operations; and a capital subsidy for the refurbishment of Tranz Metro Wellington rail passenger rolling stock did not eventuate.

The delayed introduction of new 25-foot containers also contributed to revenue being below forecast. However, had this initiative been implemented as planned, the forecast revenue growth would most likely not have been achieved as the relevant freight volumes were impacted by the drought. A later than expected introduction of a new sprint train service also resulted in revenue growth being below forecast, and rail passenger revenue was affected by reduced passenger volumes and reduced subsidies as a result of the heat alarm issues during the summer.

These revenue reductions were partly offset by improved forestry revenues (prior to the Kinleith strike) due to strong export demand for logs, changes to port calls by P&O Nedlloyd and their alliance partners with its 4100 foot Panamax class container ships which increased freight volumes, and increased revenue from the refurbishment of rail passenger carriages for the Auckland Regional Council for use by the Tranz Metro Auckland operation.

Total operating costs were lower than forecast. Labour costs in rail freight terminals were above forecast as anticipated headcount reductions were not achieved. Casualty and insurance costs were also higher than forecast due to higher derailment costs and increased insurance premiums. Favourable foreign exchange movements resulted in costs denominated in foreign currencies, primarily fuel and leases, being lower than forecast. Fuel was also impacted by lower than forecast consumption, and depreciation expense was lower than forecast due to asset write-offs in the prior year and the deferral of capital expenditure. Operating expenses were also favourably impacted by the reversal of accruals and provisions from the prior year, such reversals being of a similar level to the previous four financial years, and consistent with generally accepted accounting principles.

The forecast included non operating revenue in relation to the disposal of certain assets which did not occur. The Group incurred asset divestment costs which, following the suspension of asset sales due to the Company being subject to a takeover offer, were charged as an expense. TRANZ RAIL HOLDINGS LIMITED 75

Both associate companies experienced difficult trading conditions which resulted in equity accounted earnings of associate companies below forecast. Tranz Scenic 2001 Limited was affected by increased competition from airlines, and reduced international passengers following a global downturn in international travel due to concerns over the SARS virus. Australian Transport Network Limited (“ATN”) was heavily impacted by drought conditions. The forecast did not include any allowance for the resultant write down in value of the investment in ATN.

Favourable movements in the foreign exchange rate resulted in unrealised foreign exchange gains on the revaluation of the Aratere finance lease liability, partly offset by unrealised foreign exchange losses on the revaluation of the Aratere lease secured deposit. The net unrealised foreign exchange gain reduces net interest expense and finance charges.

A tax expense resulted from the impairment loss in relation to certain tax losses that remain available to the Group and were recognised in the financial statements for forecast purposes. The impairment loss reduced the value of tax losses recognised and offset against the deferred tax liability, which is included in other non current liabilities. This charge was partly offset by a refund of tax paid in a prior year.

Current loans are higher than forecast since additional short term borrowings were required as the cash flows from operations were lower than forecast. The Crown secured deposit is included in current loans. Non current loans are lower than forecast due to foreign exchange movements reducing the New Zealand dollar equivalent of the Aratere finance lease liability which is denominated in United States currency.

The lower than forecast net cash inflow from operating activities resulted from:

the reduction in total operating revenue compared to forecast; non cash items included in the net profit, primarily the unrealised foreign exchange gain on the Aratere lease, and accrual and provision reversals; and an increase in working capital compared to forecast due to initiatives to reduce trade receivables not being achieved to the extent forecast and a reduction in the ageing of trade payables, both partly offset by a tax refund.

The higher than forecast net cash outflow from investing activities resulted from a reclassification of the placement of Aratere funds on deposit, which was included in financing activities in the forecast. Cash flow from investing activities is also impacted by reduced capital expenditure, reduced proceeds from the disposal of fixed assets, divestment costs and the utilisation of funds on deposit.

The net cash flow from financing activities was also affected by increased debt, higher debt financing costs and lower than expected proceeds on the termination of long term finance lease foreign exchange hedge contracts compared to forecast.

Other than the movements above, the Directors do not believe that there have been any major variations from the forecast for the 2003 financial year presented in the rights issue prospectus dated 8 November 2002 (including a memorandum of amendments dated 22 November 2002). TRANZ RAIL HOLDINGS LIMITED 76

AUDIT REPORT

TO THE SHAREHOLDERS OF TRANZ RAIL HOLDINGS LIMITED We have audited the financial statements on pages 29 to 75. The financial statements provide information about the past financial performance and financial position of the Company and Group as at 30 June 2003. This information is stated in accordance with the accounting policies set out on pages 32 to 37.

DIRECTORS’ RESPONSIBILITIES The Directors are responsible for the preparation of financial statements which give a true and fair view of the financial position of the Company and Group as at 30 June 2003 and the results of their operations and cash flows for the year ended on that date.

AUDITORS’ RESPONSIBILITIES It is our responsibility to express an independent opinion on the financial statements presented by the Directors and report our opinion to you.

BASIS OF OPINION An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing:

the significant estimates and judgements made by the Directors in the preparation of the financial statements; whether the accounting policies are appropriate to the Company’s and Group’s circumstances, consistently applied and adequately disclosed.

We conducted our audit in accordance with New Zealand Auditing Standards issued by the Institute of Chartered Accountants of New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Our firm has also provided other services to the Company and certain of its subsidiaries in relation to taxation and general accounting services. Partners and employees of our firm may also deal with the Company and Group on normal terms within the ordinary course of trading activities of the business of the Company and Group. These matters have not impaired our independence as auditors of the Company. The firm has no other relationship with, or interests in, the Company or any of its subsidiaries.

FUNDAMENTAL UNCERTAINTY In forming our unqualified opinion, we have considered the adequacy of the disclosures made in the financial statements concerning both the negotiation of new finance facilities, and the Company’s proposed transaction with the Crown and the current Toll Group (NZ) Limited takeover offer. TRANZ RAIL HOLDINGS LIMITED 77

As stated in the Statement of Accounting Policies the financial statements have been prepared on a going concern basis, the validity of which depends upon the negotiation of finance facilities to replace the existing finance facilities that mature on 30 June 2004. The financial statements do not include any adjustments that would result should the funding not be obtained. Details of the circumstances relating to this fundamental uncertainty are described in the Statement of Accounting Policies and Note 14.

As stated in the Statement of Accounting Policies in the event that either the Company’s proposed transaction with the Crown or the Toll Group (NZ) Limited’s takeover offer proceeds, or whether neither of these transactions proceed, the value of the right of way, certain fixed assets and inventory, certain provisions and accruals, deferred tax liability and tax losses available may change substantially or be replaced with a new track asset representing exclusive right of access. Because of these uncertainties no adjustment has been made in the financial statements to reflect any of these potential outcomes. Details of the circumstances relating to this fundamental uncertainty are described in the Statement of Accounting Policies.

It is not possible at the date of this report to quantify the potential effect of any adjustments that would be required to reflect any of the potential outcomes described above.

UNQUALIFIED OPINION We have obtained all the information and explanations we have required.

In our opinion:

proper accounting records have been kept by the Company as far as appears from our examination of those records; the financial statements on pages 29 to 75: - comply with New Zealand generally accepted accounting practice; - give a true and fair view of the financial position of the Company and Group as at 30 June 2003 and the results of their operations and cash flows for the year ended on that date.

Our audit was completed on 29 August 2003 and our unqualified opinion is expressed as at that date.

Auckland TRANZ RAIL HOLDINGS LIMITED 78

CORPORATE GOVERNANCE STATEMENT

The Board is committed to the highest standards of corporate governance and ethical conduct by all Directors and employees of the Company and its subsidiaries.

CORPORATE GOVERNANCE REVIEW During the year, the Board recognised the need to strengthen the Company’s corporate governance. Under the leadership of the Board’s Chairman, a corporate governance review project was initiated with the assistance of the Company’s external auditors, KPMG.

The goals the Board sought from the review were:

to develop and implement a best practice corporate governance model that focuses on sustainable performance and shareholder value; and to be recognised as a leader in corporate governance best practice.

A focus of the review was on the Company’s communications and relationship development with stakeholders and external agencies. The key deliverable of the project was to implement a new corporate governance model and code of governance, which is customised to the Company and aligned to its business model and strategic objectives. Late in the year the Board decided to postpone work on the review whilst negotiations were underway with the Crown, and the Company was subject to a takeover offer.

This statement gives readers an overview of the Company’s current corporate governance policies, practices and processes adopted and/or followed by the Board.

ROLE OF THE BOARD The Board is accountable to the shareholders for the overall direction and performance of the Company. The Board establishes the Company’s objectives, major strategies for achieving those objectives and the overall policy framework within which the business of the Company is conducted, and monitors management’s performance with respect to those matters. The Board has delegated the day to day management of the Company to the Managing Director.

Each year, management produces a plan and supporting budget for approval by the Board. Financial statements detailing performance against that annual plan are circulated to Directors fortnightly. Financial performance against the plan is reviewed by the Board at each of its regular meetings.

BOARD MEMBERSHIP Under the constitution of the Company, the Board may appoint a person to be a Director. A Director appointed by the Board holds office only until the next annual meeting of the Company but is eligible for re-election at that annual meeting. In addition, one third of the Directors (excluding the Managing Director and Directors appointed by the Board) must retire by rotation at each annual meeting. The Directors to retire are those who have been longest in office since they were last elected or deemed elected. Directors retiring by rotation are eligible for re-election.

Structures and procedures are in place to ensure that the Board can operate independently of executive management. These include the predominance of non-executive Directors who bring independent and special professional expertise to the Board and the appointment of a non-executive Director as Chairman.

The Board can comprise up to ten Directors. As at 30 June 2003, there were seven Directors including the Managing Director. The Board currently comprises five independent non executive Directors (including the Chairman) and two executive Directors (the Managing Director and Interim Chief Financial Officer). In April 2003, John Loughlin assumed the position of Interim Chief Financial Officer. Mr Loughlin remained a Director of the Company, but has temporarily relinquished his responsibilities as Chairman of the Audit and Finance Committee during the period in which he has assumed executive responsibilities. Mr Loughlin is expected to resume full Director responsibilities once his executive responsibilities are fulfilled. TRANZ RAIL HOLDINGS LIMITED 79

The Board normally meets formally monthly and from time to time to deal with specific matters that require attention between scheduled meetings. The Board formally met on 26 occasions during the financial year ended 30 June 2003, and met informally on a number of other occasions. Directors’ attendance at Board meetings during the 2003 financial year were as follows:

BOARD OF DIRECTORS NO. BOARD MEETINGS HELD NO. MEETINGS ATTENDED DURING PERIOD OF DIRECTORSHIP BY DIRECTOR J Wayne Walden (Chairman) 24 23 Robert H Wheeler (former Chairman) 4 4 Michael J Beard 2626 Roger D Armstrong 22 22 Kenneth C Bowell 4 3 Jonathan A Cimino 24 23 Leigh R Davis 2621 John J Loughlin 2626 Thomas F Power, Jr 4 4 David Richwhite 2 – Thomas W Rissman 2620 A Francis Small 4 3

Each member of the Board of Tranz Rail Holdings Limited is also a Director of Tranz Rail Limited which, in conjunction with its subsidiary companies, operates and manages the Tranz Rail businesses.

BOARD COMMITTEES The Board has established a number of committees that focus on specific areas of the Board’s responsibilities. Those committees make recommendations to the Board. Each committee meets from time to time as required. All committees include members of the Board, and meetings of the committees are attended by members of executive management.

Audit and Finance Committee The Audit and Finance Committee oversees all matters concerning internal control, the appropriateness of the Group’s accounting policies and principles, and financial reporting, including reviewing the interim and annual financial statements. It considers whether the accounting methods chosen by management are consistent and comply with generally accepted accounting practice, and financial reporting standards and concepts. The Audit and Finance Committee undertakes periodic reviews of the Company’s capital structure, treasury and investment strategy, including the Company’s capital expenditure programme.

The Audit and Finance Committee reviews and assesses any significant estimates and judgements in financial reports and the processes used by management to monitor and ensure compliance with laws, regulations and other requirements relating to external reporting by the Group of financial and non-financial information.

The Audit and Finance Committee also reviews and assesses internal processes for determining, monitoring and assessing key risk areas. It ensures that the Group has an effective risk management system in place and clear policies and procedures dealing with operational activities, information security, adequacy of insurance, corporate codes of conduct and compliance.

The Audit and Finance Committee is accountable to the Board for addressing the recommendations of the external auditor, directing and monitoring the internal audit function and reviewing the adequacy and quality of the internal and external audit processes. TRANZ RAIL HOLDINGS LIMITED 80

CORPORATE GOVERNANCE STATEMENT (CONTINUED)

The Audit and Finance Committee monitors the relationship with the external auditor and reviews and assesses the independence of the external auditor. It makes recommendations to the Board on the appointment and removal of the external auditor, its terms of engagement, and the scope and quality of audits. The Audit and Finance Committee also reviews and assesses non-audit services provided by the external auditor, with particular consideration given to whether the provision of those services is likely to impair the external auditor’s judgement or independence in respect of the Group.

Members of the Audit and Finance Committee and their attendance at Audit and Finance Committee meetings during the 2003 financial year were as follows:

AUDIT AND FINANCE COMMITTEE NO. MEETINGS HELD DURING NO. MEETINGS PERIOD OF MEMBERSHIP ATTENDED BY DIRECTOR

Jonathan A Cimino (Acting Chairman) 11 10 John J Loughlin (Chairman from 1 July 2002 to 16 April 2003) 14 14 Roger D Armstrong 11 10 Kenneth C Bowell 3 2 Leigh R Davis 3 2 Thomas F Power, Jr 3 3 Thomas W Rissman 14 11 Michael J Beard – 2 J Wayne Walden – 6

The present members of the Audit Committee are Jonathan Cimino (Acting Chairman), Roger Armstrong, John Loughlin and Thomas Rissman.

Compensation Committee The Compensation Committee reviews remuneration policy and practices for the Group, approves the reward levels for executive management, approves incentive programmes and staff option grants, manages shareholding issues (including, approval of Company share acquisitions and disposals under the Group’s insider trading policy) and makes recommendations to the Board in respect of the remuneration of the Directors, including the Managing Director.

Members of the Compensation Committee and their attendance at Compensation Committee meetings during the 2003 financial year were as follows:

COMPENSATION COMMITTEE NO. MEETINGS HELD DURING NO. MEETINGS PERIOD OF MEMBERSHIP ATTENDED BY DIRECTOR J Wayne Walden (Chairman) 4 4 Robert H Wheeler (former Chairman) – – Michael J Beard 4 4 Leigh R Davis 4 4 John J Loughlin 4 4 David M Richwhite – –

The present members of the Compensation Committee are J Wayne Walden (Chairman), Michael Beard, Leigh Davis and John Loughlin. TRANZ RAIL HOLDINGS LIMITED 81

Safety Committee The Safety Committee oversees the Board’s commitment to establish and continually improve the health and safety standards and practices in relation to employees, customers and members of the public. The Safety Committee reviews and assesses the effectiveness of the Group’s health and safety strategy, meets and liaises periodically with management, develops systems for reporting and monitoring compliance with existing policies and implements health and safety improvement programmes. The Safety Committee operates within Tranz Rail Limited.

Members of the Safety Committee and their attendance at Safety Committee meetings during the 2003 financial year were as follows:

SAFETY COMMITTEE NO. MEETINGS HELD DURING NO. MEETINGS PERIOD OF MEMBERSHIP ATTENDED BY DIRECTOR J Wayne Walden (Chairman) 66 Robert H Wheeler (former Chairman) 1 1 Roger D Armstrong 5 5 Michael J Beard 66 David M Richwhite – – A Francis Small 1 1

The present members of the Safety Committee are J Wayne Walden (Chairman), Roger Armstrong and Michael Beard.

Nomination Committee The Nomination Committee reviews the composition of the Board to ensure that the Board has the appropriate mix of expertise and experience. When a vacancy exists or where it is considered that the Board would benefit from the services of a new director with particular skills, the Nomination Committee selects a panel of candidates with the appropriate expertise and experience. The most suitable candidate is then appointed by the Board as a Director. A Director who is appointed by the Board holds office only until the next annual meeting of the Company, and may stand for re-election at that annual meeting.

Members of the Nomination Committee and their attendance at Nomination Committee meetings during the 2003 financial year were as follows:

NOMINATION COMMITTEE NO. MEETINGS HELD DURING NO. MEETINGS PERIOD OF MEMBERSHIP ATTENDED BY DIRECTOR J Wayne Walden (Chairman) – – Robert H Wheeler (former Chairman) 1 1 Michael J Beard 1 1 Jonathan A Cimino – – Leigh R Davis 1 1 Thomas F Power, Jr – –

The present members of the Nomination Committee are J Wayne Walden (Chairman), Michael Beard and Jonathan Cimino.

INSIDER TRADING POLICY As required by law and the Company’s insider trading policy, Directors and employees are prohibited from buying or selling shares in the Company if at any time they are in possession of price sensitive information which is not generally available to the broader market. The Company has developed a Code of Practice for insider trading which provides guidelines and restrictions for Directors and employees regarding trading of securities in the Company. TRANZ RAIL HOLDINGS LIMITED 82

CORPORATE GOVERNANCE STATEMENT (CONTINUED)

CONFLICTS OF INTEREST The Directors must always act in the best interests of the Company. The personal interests of a Director must never be allowed to prevail over the interests of the Company and its shareholders. The Board has a process in place that must be followed by Directors who are faced with a conflict of interest. As part of that process, the Company maintains an ‘Interests Register’ recording the interests of Directors.

RISK MANAGEMENT The Company is committed to the management of risk in a way that protects its assets, earnings and employees. The Company’s overall risk management program is directed and monitored by the Audit and Finance Committee. As part of that risk management program, the Company maintains a comprehensive insurance program. The insurance coverage is reviewed on an ongoing basis by the Audit and Finance Committee to ensure that it is appropriate and consistent with the overall risk management program.

MARKET DISCLOSURE AND COMMUNICATIONS WITH SHAREHOLDERS The Company has a comprehensive market disclosure policy governing the Group’s communications with shareholders. The Company is committed to providing shareholders with comprehensive information about the Group’s business and complying with its obligations to the broader market for continuous disclosure.

Consistent with best practice disclosure and continuous disclosure requirements, all market sensitive data, corporate presentations and financial reports are simultaneously released to the New Zealand Stock Exchange and to the market via press release and posting on the Company’s website.

Information is also communicated to shareholders through the Annual Report and Interim Reports. The Board encourages full participation of shareholders at annual meetings to ensure a high level of accountability and identification with the Group’s strategies and goals. TRANZ RAIL HOLDINGS LIMITED 83

GROUP COMPANY DIRECTORS

TRANZ RAIL HOLDINGS LIMITED The following persons held office as Directors of the Company as at 30 June 2003:

John Wayne Walden (Chairman) – appointed 23 July 2002 Michael John Beard (Managing Director) Roger Dixon Armstrong – appointed 14 August 2002 Jonathan Andrew Cimino – appointed 23 July 2002 Leigh Robert Davis John James Loughlin Thomas William Rissman

The following persons ceased to hold office as Directors of the Company during the 2003 financial year:

David MacKellar Richwhite – resigned 23 July 2002 Kenneth Charles Bowell – resigned 14 August 2002 Thomas Francis Power, Jr – resigned 14 August 2002 Arthur Francis Small – resigned 14 August 2002 Robert Hobert Wheeler – resigned 14 August 2002

The following persons held office as Directors of the Group’s subsidiary companies as at 30 June 2003 or where indicated, ceased to hold office during the year.

TRANZ RAIL LIMITED John Wayne Walden (Chairman) – appointed 23 July 2002 Michael John Beard (Managing Director) Roger Dixon Armstrong – appointed 14 August 2002 Jonathan Andrew Cimino – appointed 23 July 2002 Leigh Robert Davis John James Loughlin Thomas William Rissman David MacKellar Richwhite – resigned 23 July 2002 Kenneth Charles Bowell – resigned 14 August 2002 Thomas Francis Power, Jr – resigned 14 August 2002 Arthur Francis Small – resigned 14 August 2002 Robert Hobert Wheeler – resigned 14 August 2002

OTHER GROUP SUBSIDIARY COMPANIES The following executives held office as Directors of other Group subsidiary companies at 30 June 2003 or where indicated, ceased to hold office during the year:

Michael John Beard John James Loughlin – appointed 16 April 2003 Gregory John Miller – appointed 14 November 2002 Wayne John Collins – resigned 16 April 2003 Gabrielle Anastasia Meech – resigned 21 January 2003

MeesPierson Intertrust (Amsterdam) B.V. is a Director of NZ National Freight B.V., a subsidiary company of the Group registered in The Netherlands.

Other than directors fees paid to MeesPierson Intertrust (Amsterdam) B.V. of EUR4,000 (NZ$8,000), no Director of any subsidiary company within the Group receives directors’ fees or other benefits as a Director. The remuneration of employees acting as Directors of subsidiary companies is disclosed in the relevant bandings for Remuneration of Employees set out on page 89. TRANZ RAIL HOLDINGS LIMITED 84

INTERESTS REGISTERS DISCLOSURES

The following represents the particulars of the entries made in the Company’s and its subsidiaries’ Interests Registers for the year ended 30 June 2003 and, where applicable, the period to 11 September 2003:

DIRECTORS’ DISCLOSURES OF INTERESTS The following general disclosures that a Director is a shareholder, director, officer or trustee of another company or other person and specific disclosures of transactions in which a Director had an interest were made in the Company’s and its subsidiaries’ Interests Registers:

John Wayne Walden Leigh Robert Davis ENTITY RELATIONSHIP ENTITY RELATIONSHIP Agritech Investments Limited Director Brat Capital NV Director/Shareholder Arcos Investments Limited Director Crown Castle Australia Limited Director/Shareholder Covita Limited Director Fay, Richwhite UK Communications Karamata Trusts Trustee Limited Director Maori Television Service Chairman Fay, Richwhite UK Management Meat New Zealand Director Limited Director Meat and Wool Innovation Limited Director Jump Capital Limited Director/Shareholder Mighty River Power Limited Director Skellmax Industries Limited Director Oneriri Station Partner John James Loughlin Principals Apparel Limited Director ENTITY RELATIONSHIP Project K Youth Development Askerne Estate Winery Limited Director/Shareholder Programme Trustee Centralines Limited Director Michael John Beard Food Hawkes Bay Director ENTITY RELATIONSHIP Hawkes Bay Economic Australian Transport Network Development Agency Director Limited Director Hawkes Bay Vintners Limited Director/Shareholder Employee Share Purchase Scheme Trustee Loughlin Viticulture & Tranz Scenic 2001 Limited Director Consulting Limited Director/Shareholder Port of Napier Limited Director Roger Dixon Armstrong ENTITY RELATIONSHIP Prism Group Holdings Limited Chairman/ EstarOnline Limited Director/Shareholder Shareholder/ Finn Limited Director/Shareholder Option holder Tranz Scenic 2001 Limited Director Kenneth Charles Bowell Zespri Group Limited Director ENTITY RELATIONSHIP Australian Transport Network Thomas Francis Power, Jr Limited Director ENTITY RELATIONSHIP Tasrail Pty Limited Director English Welsh & Scottish Tasrail Services Pty Limited Director Railway Holdings Limited Shareholder ShopperTrak RCT, Inc Director/Shareholder Jonathan Andrew Cimino ENTITY RELATIONSHIP Cimino Partners Limited Director/Shareholder Genesis Employee Fund Limited Director Genesis Research and Development Corporation Limited Director/Shareholder New Zealand Exchange Limited NZX Broker/ Shareholder NZX Market Surveillance Panel Member Waste Management NZ Limited Director/ Shareholder TRANZ RAIL HOLDINGS LIMITED 85

David MacKellar Richwhite Arthur Francis Small ENTITY RELATIONSHIP ENTITY RELATIONSHIP Australian Transport Network Antarctica NZ Director Limited Director Australian Transport Network David Lloyd Holdings Limited Chairman Limited Managing Director David Lloyd Investments Limited Director Centre for Advanced Engineering Chairman English Welsh & Scottish Meridian Energy Limited Chairman Railway Holdings Limited Director Murray King & Francis Small Fay, Richwhite & Company Limited Director Consultancy Limited Director/Shareholder Fay, Richwhite Holdings Limited Director/Shareholder Standards Association of Pacific Rail Limited NV Director New Zealand Director Tasrail Pty Limited Director Tasrail Pty Limited Managing Director Tasrail Services Pty Limited Director Tasrail Services Pty Limited Managing Director

Thomas William Rissman Robert Hobert Wheeler ENTITY RELATIONSHIP ENTITY RELATIONSHIP English Welsh & Scottish English Welsh & Scottish Railway Holdings Limited Shareholder Railway Holdings Limited Shareholder McLachlan, Rissman & Doll Managing Partner Poole Beads Holdings Limited Poole Beads Holdings Limited Chairman/ (formerly Hallcrest Holdings) Director/Shareholder (formerly Hallcrest Holdings) Shareholder ShopperTrak RCT, Inc Chairman/Director Railroad Financial Corporation Director/Shareholder ShopperTrak RCT, Inc Director/Shareholder

DIRECTORS’ RELEVANT INTERESTS IN SHARES During the year ended 30 June 2003, the following acquisitions or disposals of relevant interests in the Company’s shares were disclosed by Directors:

NUMBER OF SHARES DATE OF ACQUISITION NAME ACQUIRED/(DISPOSED) CONSIDERATION OR DISPOSITION John Wayne Walden 20,000 $1.30 22 November 2002 80,000 $0.75 20 December 2002 Michael John Beard 248,386 (1) Agreement not to accept 11 December 2002 or sell rights entitlement attached to redeemable restricted shares Roger Dixon Armstrong 25,000 $0.75 20 December 2002 Thomas William Rissman 15,000 $0.75 20 December 2002 (1) Restricted shares

Mr Beard is a trustee for the Employee Share Purchase Scheme, and as at 30 June 2003, Mr Beard had a relevant interest in 23,650 ordinary shares in his capacity as trustee. TRANZ RAIL HOLDINGS LIMITED 86

INTERESTS REGISTERS DISCLOSURES (CONTINUED)

DIRECTORS’ EQUITY SECURITIES HOLDINGS The following sets out the equity securities in which each Director has a “relevant interest” as at 30 June 2003 for the purposes of Listing Rule 10.5.3(c) of the NZX Listing Rules. A “relevant interest” in equity securities is not necessarily the same as a “relevant interest” in shares for the purposes of Section 148 of the Companies Act 1993.

30 JUNE 2003 RELEVANT INTEREST DIRECTOR IN NO. OF SHARES John Wayne Walden 100,000 Michael John Beard 2,503,133 (1) Roger Dixon Armstrong 60,000 Jonathan Andrew Cimino – Leigh Robert Davis 50,000 (2) John James Loughlin – Thomas William Rissman 86,000 (2) (1) Includes redeemable restricted shares and options. (2) Includes options.

USE OF COMPANY INFORMATION There have been no requests pursuant to Section 145 of the Companies Act 1993 from Directors of the Company or its subsidiaries wishing to use or disclose information of the Company or its subsidiaries received in their capacity as a Director or employee which would not otherwise have been available to them.

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE The Company has effected insurance for all Directors and officers of the Company and its subsidiary companies in relation to potential liabilities and costs such Directors and officers may incur for acts or omissions in their capacity as Directors or officers of the Company or its subsidiary companies. TRANZ RAIL HOLDINGS LIMITED 87

NEW ZEALAND STOCK EXCHANGE (“NZX”)

POWERS EXERCISED For the purposes of Listing Rule 10.5.3(g) of the NZX Listing Rules (“Listing Rules”), the following paragraphs set out the details of the powers exercised by the NZX pursuant to Listing Rule 5.4.2:

In July 2002, the NZX Market Surveillance Panel (“the Panel”) received a complaint from a shareholder and the Shareholders’ Association in respect of the Company and its compliance with certain Listing Rules relating to continuous disclosure. In response to those complaints, the Panel referred those complaints to the Securities Commission and commenced an enquiry to determine whether the Company had complied with certain Listing Rules. The Company met with the Panel as part of that inquiry. On 7 February 2003, the Panel released the finding of its investigations. The Panel announced that: – its investigation was instituted following enquiries to the NZX as to whether major shareholders who sold their entire holdings in February and March 2002, prior to a sustained decline in the Company’s share price which commenced on 19 March 2002, may have held “relevant information” not available to the market;

– it had investigated compliance by the Company with Listing Rule 10.1.1 (as it applied prior to the revision of the Listing Rules on 1 December 2002) over the period from early February 2002 to late July 2002;

– the Company had “complied with Listing Rule 10.1.1 except in relation to the manner in its disclosure of the details of the abnormal write-offs for the year ended 30 June 2002”;

– the fact that those write downs were going to be material and would likely have an adverse impact on the Company’s share price was known to the Board of the Company at its meeting on 27 June 2002;

– notwithstanding that there were matters still to be resolved as to the final quantum of the write-downs, the information available to the Board was known with sufficient certainty to have been disclosed immediately following the meeting; and

– that the Company had breached Listing Rule 10.1.1 by disclosing the information only in response to the price enquiry made by the NZX on 4 July 2002.

The Panel announced, however, that it did not intend to take any further action in the matter.

CREDIT RATING

As at 11 September 2003, the Group’s credit rating with Standard and Poor’s was CC (long term) with a positive outlook. The Group’s credit rating with Moody’s Investor Service (“Moodys”) was Caa1 (medium term) on review for a possible upgrade.

As the requirement for a Standard and Poor’s rating under the Aratere leasing agreement was superseded by an agreement with the Aratere parties reached in December 2002, the Company terminated the services of Standard and Poor’s. The rating services of Moodys were terminated during the 2002 financial year. However, both Standard and Poor’s and Moodys have elected to continue to rate the Company based on publicly available information. TRANZ RAIL HOLDINGS LIMITED 88

REMUNERATION OF DIRECTORS AND EMPLOYEES

REMUNERATION OF DIRECTORS Directors or former Directors of the Company received the following remuneration and other benefits during the 2003 financial year:

2003 $000 John Wayne Walden – Chairman (1) 75 Michael John Beard – Managing Director (2) 1,161 Roger Dixon Armstrong (3) 44 Kenneth Charles Bowell (4) 6 Jonathan Andrew Cimino (1, 5) 67 Leigh Robert Davis 50 John James Loughlin (6) 129 Thomas Francis Power, Jr (4) 6 David MacKellar Richwhite (7) 3 Thomas William Rissman(8) 208 Arthur Francis Small (4, 9) 120 Robert Hobert Wheeler (4) 10

1,879

(1) Messrs Walden, and Cimino were appointed Directors of the Company on 23 July 2002. (2) Mr Beard’s remuneration principally includes his salary (in his capacity as an employee of the Group), and the value of 248,386 restricted shares issued during the 2003 financial year under the 1996 Equity Incentive Plan. The value of restricted shares included in remuneration is the weighted average market value of ordinary shares on the date the restricted shares were issued, being $1.06. The restricted shares were subject to a restricted period which, among other restrictions, prohibited Mr Beard from selling the shares. The restricted period expired in June 2003. Further details on the restricted shares are included in Notes 18 and 23 to the financial statements on pages 54 and 64 of this Annual Report. Mr Beard does not receive director’s fees. (3) Mr Armstrong was appointed a Director of the Company on 14 August 2002. (4) Messrs Bowell, Power, Small and Wheeler resigned as Directors of the Company on 14 August 2002. (5) Mr Cimino’s remuneration comprises director’s fees of $47,000, and $20,000 for director services in relation to membership of the due diligence committee as part of the equity rights issue in December 2002. (6) Mr Loughlin’s remuneration comprises director’s fees of $50,000, and $79,000 for other services provided to the Group in his capacity as Interim Chief Financial Officer. (7) Mr Richwhite resigned as a Director of the Company on 23 July 2002. (8) Mr Rissman’s remuneration comprises director’s fees of $50,000, and $158,000 in relation to legal services provided to the Group by McLachlan Rissman & Doll in connection with various corporate and financing matters. (9) Mr Small’s remuneration comprises director’s fees of $6,000, and $114,000 in relation to services provided to the Group by Murray King & Francis Small Consultancy Limited in connection with various corporate matters. TRANZ RAIL HOLDINGS LIMITED 89

REMUNERATION OF EMPLOYEES The value of certain employees’ remuneration includes the value of the ordinary shares issued to those employees in consideration of those employees agreeing not to accept or sell their entitlements in connection with the Company’s December 2002 equity rights issue. Those entitlements arose as a result of those employees’ redeemable restricted shares. The value included as remuneration is the weighted average market value of the Company’s ordinary shares on the date the ordinary shares were issued, being $1.06.

The number of employees or former employees of the Company (not being Directors of the Company) who received remuneration and any other benefits exceeding $100,000 in their capacity as employees during the 2003 financial year are as follows:

NO. ORDINARY NO. ORDINARY 2003 SHARES INCLUDED 2003 SHARES INCLUDED $100,000 – $109,999 29 – $240,000 – $249,999 1 – $110,000 – $119,999 33 – $250,000 – $259,999 2 – $120,000 – $129,999 13 – $260,000 – $269,999 1 – $130,000 – $139,999 13 – $440,000 – $449,999 1 158,486 $140,000 – $149,999 11 – $490,000 – $499,999 1 192,161 $150,000 – $159,999 8 – $600,000 – $609,999 1 241,675 $160,000 – $169,999 6 – $630,000 – $639,999 1 248,386 $170,000 – $179,999 4 – $880,000 – $889,999 1 241,675 $230,000 – $239,999 1 – $920,000 – $929,999 1 241,675

Remuneration information excludes termination payments made in connection with employee severances.

INFORMATION ABOUT SHAREHOLDERS

DISTRIBUTION OF ORDINARY SHARES AND SHAREHOLDERS (AS AT 11 SEPTEMBER 2003)

SIZE OF HOLDING SHAREHOLDERS SHARES NO. % NO. % 1 – 99 41 0.77% 2,177 – 100 – 199 107 2.02% 14,033 0.01% 200 – 499 758 14.29% 256,005 0.12% 500 – 999 717 13.52% 470,115 0.22% 1,000 – 1,999 890 16.78% 1,161,318 0.55% 2,000 – 4,999 1,023 19.29% 3,047,967 1.45% 5,000 – 9,999 738 13.92% 4,746,426 2.26% 10,000 – 49,999 811 15.29% 15,031,170 7.15% 50,000 – 99,999 94 1.77% 5,763,419 2.74% 100,000 – 499,999 861.62% 15,413,0167.33% 500,000 – 999,999 160.30% 11,725,735 5.58% 1,000,000 and over 23 0.43% 152,607,756 72.59%

5,304 100.00% 210,239,137 100.00%

The above information includes ordinary share capital, but excludes redeemable restricted share capital and share options. TRANZ RAIL HOLDINGS LIMITED 90

INFORMATION ABOUT SHAREHOLDERS (CONTINUED)

TWENTY LARGEST REGISTERED SHAREHOLDERS (AS AT 11 SEPTEMBER 2003)

SHAREHOLDER NUMBER OF % OF FULLY PAID ISSUED SHARES CAPITAL Toll Group (NZ) Limited 42,034,153 19.99% ANZ Nominees Limited 21,598,741 10.27% Westpac Banking Corporation – Client Assets No. 2 17,904,727 8.52% National Nominees New Zealand Limited 17,368,997 8.26% Citibank Nominees (New Zealand) Limited 8,934,732 4.25% Leveraged Equities Custodians Limited 6,054,850 2.88% Custody and Investment Nominees Limited 5,227,349 2.49% Royal & Sun Alliance Life and Disability (New Zealand) Limited 4,477,989 2.13% David Lloyd Investments Limited 4,346,004 2.07% AMP Investments Strategic Equity Growth Fund 3,704,627 1.76% AMP Life Limited 3,001,842 1.43% JB Were (NZ) Limited 2,611,200 1.24% LJCB Nominees Pty Limited 2,458,250 1.17% NZGT Nominees Limited – AIF Equity Fund 1,546,372 0.74% The Trustees Executors and Agency Company of New Zealand Limited 1,457,143 0.69% Deutsche Securities New Zealand Limited 1,450,000 0.69% Accident Compensation Corporation 1,436,275 0.68% T.E.A. Custodians Limited – New Zealand Equities Trust 1,292,127 0.61% Peter Hanbury Masfen & Joanna Alison Masfen 1,232,7160.59% Galt Nominees Limited 1,200,000 0.57%

In the above table, the shareholding of New Zealand Central Securities Depositary Limited (“NZCSD”) has been reallocated to the applicable members of NZCSD.

SUBSTANTIAL SECURITY HOLDERS (AS AT 11 SEPTEMBER 2003) According to notices given under the Securities Markets Act 1988, the following persons were substantial security holders in the Company in respect to the number of voting securities set opposite their names:

NO. OF VOTING SECURITIES Toll Group (NZ) Limited 42,034,153 Her Majesty, The Queen in right of New Zealand (pursuant to a voting arrangement over 19.99% of the shares in Tranz Rail Holdings Limited held by Toll Group (NZ) Limited) 42,034,153 AXA Asia Pacific Holdings Limited 17,016,726 Infratil Limited 14,960,266 Morrison & Co Infrastructure Management Limited 14,960,266 Tower Asset Management Limited 10,971,121 Infratil Investments Limited 10,554,552

The total number of voting securities (as defined in the Securities Markets Act 1988) of the Company on issue at 11 September 2003 is 210,239,137. This total excludes redeemable restricted shares and outstanding options to subscribe for ordinary shares. TRANZ RAIL HOLDINGS LIMITED 91

INFORMATION FOR SHAREHOLDERS

SHARE MARKET INFORMATION New Zealand The Company’s ordinary shares are listed on the New Zealand Stock Exchange (“NZX”) and trade under the symbol TRH. The International Security Identification Number issued for TRH by the NZX is NZTRH E0001S4.

NZX Mailing address: Level 9 PO Box 2959 ASB Bank Tower Wellington 2 Hunter Street New Zealand Wellington Tel: 64 4 472-7599 New Zealand Fax: 64 4 473-1470 http://www.nzx.com

Registrar Shareholders should address questions relating to Shareholder and FIN numbers, dividend payments or changes of address or any administrative questions to the Company’s share registrar as follows:

New Zealand Ordinary Share Registrar Mailing address: Computershare Investor Services Limited Private Bag 92119 Level 2, 159 Hurstmere Road Auckland 1020 Takapuna New Zealand Auckland Tel: 64 9 488-8700 New Zealand Fax: 64 9 488-8787 Email: [email protected] United States of America The Company delisted from the National Association of Security Dealers Automated Quotation System National Market (“NASDAQ”) on 31 July 2002. Its American Depositary Receipt (“ADR”) programme terminated on 2 August 2002. Each American Depositary Security represented three ordinary shares in the Company and was listed on NASDAQ under the symbol TNZR. The Cusip Number for TNZR was 894116102. Any enquiries regarding the ADR termination should be directed to our United States ADR Depositary at:

United States ADR Depositary Mailing address: Bank of New York PO Box 11258 ADR Department Church Street Station 101 Barclay Street New York, New York 10286-1258 22nd Floor West United States of America New York, New York 10286Tel: 212 815-2218 United States of America Fax: 212 571-3500 United States call toll free 1 800 524-4458 Email: [email protected]

INVESTOR INQUIRIES Tranz Rail Investor Relations can be contacted as follows: Tel: New Zealand 0800 801-070 ext 96049 or overseas 64 9 270-5049 Email: [email protected] http://www.tranzrail.co.nz

ANNUAL MEETING The 2003 Annual Meeting of the Company will be held in The Spencer on Byron Hotel, 9 – 17 Byron Avenue, Takapuna, Auckland, New Zealand on Friday, 19 December 2003 commencing at 2:00pm. TRANZ RAIL HOLDINGS LIMITED 92

DIRECTORY

BOARD OF DIRECTORS (AS AT 11 SEPTEMBER 2003) J Wayne Walden (Chairman) Auckland, New Zealand Michael J Beard (Managing Director) Auckland, New Zealand Roger D Armstrong Christchurch, New Zealand Jonathan A Cimino Auckland, New Zealand Leigh R Davis Auckland, New Zealand John J Loughlin Havelock North, New Zealand Thomas W Rissman Chicago, Illinois, USA

EXECUTIVE MANAGEMENT (AS AT 11 SEPTEMBER 2003) Michael J Beard Managing Director Garry D Collings General Manager Information Technology Noel A Coom Group General Manager Rail Services C Thomas Davis Group General Manager The Interisland Line Caroline M Haley General Manager The Interisland Line Operations Jeffrey H Heisler Group General Manager Change Management & Human Resources John J Loughlin Interim Chief Financial Officer Lloyd R Major Group General Manager Engineering Gregory J Miller Group General Manager Distribution Services Group William J L Peet Group General Manager Network Infrastructure Michael J Thomas Group General Manager Process & Technology Matthew F Walsh General Counsel

This Annual Report has been prepared in accordance with section 211 of the Companies Act 1993 and is signed on behalf of the Board by:

J Wayne Walden Michael J Beard CHAIRMAN MANAGING DIRECTOR

11 September 2003

Upon request, a copy of this Annual Report will be supplied free of charge. Registered Office Auditors to the Group Tranz Rail Holdings Limited KPMG Tranz Rail Building KPMG Centre Smales Farm 9 Princes Street Corner Northcote & Taharoto Roads Auckland Takapuna New Zealand Auckland Tel: 64 9 367-5800 New Zealand Fax: 64 9 367-5872 Tel: 64 9 270-5000 Solicitors to the Group 0800 801-070 Russell McVeagh Fax: 64 9 270-5384 Vero Centre Email: [email protected] 48 Shortland Street Tranz Rail internet address Auckland http://www.tranzrail.co.nz New Zealand Tel: 64 9 367-8000 Rail Services Group: Fax: 64 9 367-8163 http://www.tranzrailfreight.co.nz

TRANZ RAIL FREIGHT SERVICE CENTRE: Email: [email protected] Tel: 0800 351-351 HILLSIDE ENGINEERING GROUP: http://www.hillsidenz.com

Distribution Services Group: http://www.tranzlink.co.nz

The Interisland Line: http://www.interislandline.co.nz

THE INTERISLAND LINE RESERVATIONS: Call centre Tel: 0800 802-802 Email: [email protected] Internet bookings: http://www.interislandline.co.nz

Tranz Metro: http://www.tranzmetro.co.nz Insight Creative, Auckland TRAZ010/03