half year report and unaudited financial statements for the six months ended 31 December 2011 THE KIWIRAIL BUSINESS

KiwiRail is a State Owned Enterprise and the backbone of ’s integrated transport network. Our vision is to be a world class mover of freight and people by rail and ships, and to be the natural choice for our customers in the markets in which we operate. We have five business units: ▪▪ KiwiRail Freight provides rail freight services and locomotives for passenger services ▪▪ KiwiRail Interislander operates the passenger and freight services ▪▪ KiwiRail Infrastructure and Engineering maintains and improves the rail network and controls the operation of trains on the network – it also operates the workshops which maintain our rolling stock ▪▪ KiwiRail Passenger provides urban passenger services in under contract to the Greater Wellington Regional Council through the TranzMetro team, and the Tranz Scenic team operates the long distance passenger rail services.

>> Operations Whangarei Dargaville Each week, train control operations manage the movement of: ▪▪ 900 freight trains AUCKLAND ▪▪ 52 inter-city passenger trains ▪▪ Approximately 2,200 suburban passenger services in Wellington

▪▪ Approximately 1,490 suburban passenger services in Auckland. Hamilton Tauranga Kawerau In a year, Interislander manages 4,600 sailings carrying: Te Kuiti Kinleith

▪▪ 947,000 passengers Gisborne Taumarunui ▪▪ 59,000 rail wagons New Plymouth ▪▪ 48,000 trucks Stratford Waiouru Napier ▪▪ 224,000 cars. Whanganui Dannevirke >> Assets Palmerston North

▪▪ Approximately 4,100 staff Otaki Masterton ▪▪ 4,000 kms of track Featherston Picton WELLINGTON ▪▪ 1,656 bridges Blenheim Westport ▪▪ 144 tunnels ▪▪ 12,000 culverts Reefton Greymouth Kaikoura ▪▪ Six million sleepers Hokitika ▪▪ 18,000 ha of property managed ▪▪ 169 mainline locomotives ▪▪ 4,600 freight wagons Rolleston CHRISTCHURCH ▪▪ 2 owned and 1 leased ferry Ashburton > Further information Timaru For assistance, publications or information Oamaru concerning KiwiRail please visit our website at www..co.nz or contact: Port Chalmers DUNEDIN KiwiRail Communications Wairio PO Box 593, Wellington , 6140 Invercargill Telephone: 0800 801 070 Bluff Email: [email protected] CONTENTS

Chairman and Chief Executive’s Review 2 Key Financial Information 2 Business Performance 3 Business Improvements 4 Outlook 5 Key Performance Measures 7 Financial Statements 11

KiwiRail - Half year report December 2011 1 CHAIRMAN AND CHIEF EXECUTIVE’S REVIEW

We are pleased to present KiwiRail’s report and unaudited financial statements for the six months ended 31 December 2011. While the first half of this financial year has provided many challenges, as we continue to grow revenue and invest for the future we have still achieved an increase in revenue of almost five percent compared to the same time last year. These challenges have meant a reduction of 12 percent in our overall EBITDA result. Direct comparison to the last half year is difficult as we received John Spencer, Jim Quinn, a revenue boost for Rail Freight and Interislander as a result of Chairman Chief Executive the September 2010 Christchurch earthquake.

KEY FINANCIAL INFORMATION

December 2011 December 2010 Variance Variance Unaudited Unaudited

$m $m $m % Operating Revenue 349.0 332.2 16.8 5.1% Operating Expenses (305.4) (282.7) (22.7) (8.0%) Operating profit before depreciation 43.6 49.5 (5.9) (11.9%) and grant income (‘EBITDA’) Depreciation and amortisation (155.4) (137.7) (17.7) (12.9%) Net finance costs and foreign exchange losses (17.7) (21.6) 3.9 18.1% Taxation (expense)/credit 11.1 (1.7) 12.8 752.9% Net deficit after tax (118.4) (111.5) (6.9) (6.2%) Grant Income 72.7 202.3 (129.6) (64.1%) Net (deficit)/surplus after tax as per financial (45.7) 90.8 (136.5) (150.3%) statements

Some of these challenges include the continued impact Our investment programme to improve our national of the Christchurch earthquakes on the Tranz Scenic network continues. We have invested over $150 million business, the increased costs associated with the in the last six months and the Wellington and Auckland construction and commissioning of the Aratere, and the upgrade projects are largely complete. reduced revenue for Tranz Metro due to the transfer of assets to Greater Wellington Regional Council. There We are now focused on improving performance across have been further impacts on our revenue and costs the entire business over the remainder of this financial due to events causing track damage such as ongoing year and beyond in an effort to try and address this earthquakes and slips, the extra resources needed for shortfall in EBITDA. This focus includes a hard look the Rugby World Cup and the slower than planned commissioning of new freight rolling stock. at our costs and investment priorities. As the current challenging economic environment looks unlikely to Despite these issues and flat economic growth we have achieved an increase in freight revenue of $21.5 million, improve its important we are focused on maintaining a with Import-Export volumes up by 16 percent on the tighter control on our costs to ensure we stay on track to same period last year. financial sustainability.

2 Business Performance

SUMMARY – KIWIRAIL BUSINESS

EBITDA External Revenue December December December December Variance Variance Variance Variance 2011 2010 2011 2010 $m $m $m % $m $m $m %

Freight 63.6 58.7 4.9 8.3% 221.3 199.8 21.5 10.8% Infrastructure (27.6) (31.2) 3.6 11.5% 15.5 12.2 3.3 27.0% Subtotal 36.0 27.5 8.5 30.9% 236.8 212.0 24.8 11.7%

Interislander 4.0 6.0 (2.0) (33.3%) 57.1 55.7 1.4 2.5% Tranz Scenic (2.5) (0.1) (2.4) (2,400.0%) 9.9 11.8 (1.9) (16.1%) Tranz Metro 2.0 5.1 (3.1) (60.8%) 23.7 32.5 (8.8) (27.1%) Mechanical (1.9) 1.4 (3.3) (236.0%) 6.0 4.5 1.5 33.3% Property & Corporate 6.0 9.6 (3.6) (37.5%) 15.5 15.7 (0.2) (1.3%) Total 43.6 49.5 (5.9) (11.9%) 349.0 332.2 16.8 5.1%

As shown above our freight business, including the The rail freight business has continued its growth in all infrastructure it runs on, continues to perform well, with three sectors in which it operates – Bulk, Import-Export freight in particular increasing tonnages and revenue. and Domestic* – and has achieved a revenue result of But the freight result is still short of our Statement of over $220 million for the half year. This revenue increase Corporate Intent (SCI) EBITDA target by 9.5 percent or almost $10 million. This is due to the Aratere is due to both freight business growth and fuel price commissioning delay, slower than planned commissioning recoveries. This result represents over 60 percent of of new rolling stock and less demand for Domestic freight. KiwiRail’s overall revenue.

SUMMARY – KIWIRAIL CORE FREIGHT REVENUE

REVENUE VOLUME December December Volume December December Variance Variance 2011 2010 measure 2011 2010 $m $m % $m $m % Bulk 84.9 77.4 9.7% NTKs1 988.0 968.6 2.0% Domestic 53.6 50.1 7.0% TEU Kms2 60.0 60.2 (0.3%) IMEX 61.2 54.4 12.5% TEU Kms 59.9 51.8 15.6% Total 199.7 181.9 9.8% *IMEX (import, export manufactured goods), Bulk (coal, forestry, liquid milk), Domestic (full container loads transported internally in NZ). 1 NTKs – Net Tonne Kilometres is the measure of freight weight multiplied by distance travelled. 2 TEU Kms – The measure of 20 foot equivalent containers multiplied by the distance travelled.

The Import-Export volume growth of 16 percent is The Bulk business, including forestry, increased primarily due to strong export dairy demand. We were also revenue by $7.5million and volumes by 5.3 percent. tested and responded well to an increase in ship diversions This was again a result of the highly productive dairy to different ports. We expect the growth in this segment of the freight business to continue as we add more rolling season and the continued demand from China for our stock capacity and customers. forestry products.

KiwiRail - Half year report December 2011 3 While Domestic did increase revenue by seven percent replacement ship to help ensure service continuity. over the half year, volumes have remained static. While the cost of this project is still to be finalised we Freight to Christchurch is lower which reflects the spike are disappointed we have exceeded the original budget that followed the September 2010 earthquake and by at least $10 million. Despite this, and following there has also been a flat peak this year. Fuel recovery some initial commissioning challenges, the ship has was the main driver of the revenue increase which of performed well over the summer peak period. course also increased costs. Interislander passenger revenue has increased by During the half year an internal restructure has meant $1.6 million in the last six months and non-rail freight that the freight business has been enhanced to include revenue is in line with budget. Rail freight has been direct management of the maintenance of the KiwiRail impacted by the Aratere delays, but we have already fleet. This is to ensure that this part of the business is seen improvements in this segment now the ship is even more closely aligned with the needs and priorities back in full service. of our customers. The long distance passenger service continues to be Infrastructure and Engineering have delivered a positive impacted by the Christchurch earthquakes and the result with improved EBITDA of $3.6 million from associated reduction in tourism demand with EBITDA the comparable period last year. This is due to lower $2.5 million lower than the same period last year. operational costs with higher levels of capitalisation. We are monitoring the impact of the new passenger The declining and variable workload for our Workshops cars and associated marketing campaign for the Coastal is challenging the viability of this business. Every effort is Pacific service. Customer feedback has been positive. being made to address this issue including a programme Partnership options for the Tranz Scenic services are still to improve productivity and continuing to look for being pursued. further work. Passenger numbers on Wellington’s Tranz Metro The other parts of our business, as detailed below, are services have increased slightly compared to the experiencing different issues that have impacted on previous half year to almost 5.8 million. While slightly their expected revenue results. While some of these less than budgeted, we expect these numbers to issues are outside our control, such as the effect of the continue to slowly increase as the new Matangi trains Christchurch earthquakes on the Tranz Scenic business, continue their commissioning programme. it does mean we have to be proactive in developing Tranz Metro EBITDA changed as a result of the signed mitigation strategies to deal with these. agreement between Greater Wellington Regional While Interislander increased revenue by 2.5 percent Council, Government and KiwiRail during the year in the half year, the reduction in its EBITDA result when a large number of assets were transferred to the was primarily due to the planned increase in costs to Council. Some of the revenue from this contract was replace the Aratere while she was away and also during subsequently transferred to our Infrastructure and commissioning. These costs included the hire of a Engineering business.

Business Improvements

During the first six months of this financial year KiwiRail Auckland, but we still managed to provide the required has reached some major milestones in our strategy to resources when and where they were needed. provide our customers with better service, equipment The extensive upgrades of the Auckland and Wellington and infrastructure. networks are now 98 percent complete after a major To help ensure the continued growth of our freight closure over the Christmas/New Year period. Both these business we have commissioned 20 new diesel projects have been very well managed coming in within electric locomotives, 535 wagons, 260 new intermodal one percent of budget and delivered on time. containers and new log bolsters for 100 wagons. This new equipment has been essential in ensuring we The next major rail project for that region, the Auckland could more effectively service our customers during Electrification Project, is now well underway and on the peak freight season. This increase in business was schedule for completion in 2013 in time for the new further challenged when the strikes affected Ports of commuter trains.

4 In Wellington we have now commenced the eight-year on-time performance for the half year to 91 percent programme of work worth almost $90 million to further and an increase in passenger yield ($/passenger) by improve this vital commuter and freight network. almost seven percent. Another achievement was the The Aratere stretch project has provided KiwiRail with introduction of the new Matangi trains on the Waikanae a much needed 30 percent increase in freight capacity line in August. There are now approximately half of the and a 100 percent increase for passenger traffic. Matangi fleet in service in the Wellington network, with The benefit of this improvement is already being felt, the full fleet scheduled to be in operation this year. particularly in the freight business, with full trains able The Tranz Scenic business successfully launched new to be loaded, saving time and money. carriages on the renamed service in While the agreement with Greater Wellington Regional 2011. These carriages, constructed at KiwiRail’s Hillside Council has had an impact on Tranz Metro’s revenue Workshops, represent a large improvement for our rail earnings, it has enabled this business to focus more tourism business and they have been very well received on improving services. This has resulted in improved by customers.

Community and Safety

KiwiRail has continued its commitment to improving Interislander’s Arahura and Kaitaki . Staff are now rail safety awareness and management both for staff analysing the data in an effort to find ways to reduce and the greater community. fuel consumption. The instances of level crossing collisions continued its Interislander and Tranz Scenic formally received their downward trend in the first half of this financial year. Qualmark Enviro endorsements during the half year. In total there were five level crossing collisions up to With a silver and bronze endorsement respectively, December 31, 2011, which is 50 percent less than the both businesses have developed action plans to previous period. progress towards the next level of endorsement. KiwiRail, in conjunction with the Chris Cairns And as part of our focus on alternative fuels we are Foundation, has been running education and continuing to use a biodiesel blend in the generators of awareness programmes to increase the awareness of the passenger services. The extended trial motorists and pedestrians about the dangers of the rail has been progressing well and so far the business has corridor. We are pleased that these ongoing campaigns not experienced any issues with the use of biodiesel. seem to be making a real improvement in reducing the KiwiRail uses a number of performance indicators to number of collisions. measure workplace health and safety, with the most Progress has also been made with our efforts to important being Lost Time Injury Frequency Rate (LTIFR) and Medical Treatment Injury Frequency Rate (MTIFR). implement more sustainable business practices. While both figures have remained relatively static Last year, GPS units were installed in our road vehicles when compared to the previous period, they are still in a subsequently successful pilot to provide greater above the SCI targets. In particular the LTIFR of 6.2 is visibility of fuel consumption and vehicle utilisation. well above the target of 4.4. We are in the process of By the end of December, 50 percent of the vehicles recruiting a General Manager of People and Safety with operated by our Infrastructure and Engineering one of the madates of this new position to undertake a business had GPS units installed with the remainder of detailed review of health and safety practices to assess the rollout scheduled for completion this year. where further improvements need to be made and Fuel monitoring technology is now installed on both assist us in our commitment to Zero Harm.

KiwiRail - Half year report December 2011 5 Outlook

We expect our operating revenue result to remain in the entire business to ensure they are as tight and line with SCI targets for the remainder of this financial efficient as possible. year. But we expect our EBITDA result to be in the Further areas of focus for improvement or change will $105-$115 million range, compared to our SCI target of be bringing more control over costs and improving $139.5 million. the productivity of the Workshops in the face of their This reforecast is due to the expected continued soft declining workload, making a final decision on the demand in the Christchurch tourism market affecting minor lines review, reshaping the Overlander service our Tranz Scenic and Interislander businesses. We also to minimise its costs, working towards finalising a expect less growth in the Domestic freight market as partnership agreement for the Tranz Scenic business, the economy remains soft. and continuing to challenge Interislander’s business Last year we announced a review of the company’s model and how it contributes to the overall business. asset valuation system and structure. We have We will also continue to ensure we improve our yields consulted with our shareholder who is supportive where they are currently not sustainable and undertake of this proposal. We are still working through the regular review of major contracts. final details and expect completion at the end of this We would like to thank our customers for their ongoing financial year. support and our team for their dedication in delivering The main focus for the rest of the year is to hold the changes required in KiwiRail. We have a long way to the business tight and gain the full benefit from last go as we continue with our strategy to improve service year’s investments in infrastructure and rolling capability with a stronger and more modern network, and stock improvements. the commissioning of new assets that are fit for purpose, We will be reviewing our corporate support costs across but we are encouraged by our underlying revenue growth.

John Spencer Jim Quinn Chairman Chief Executive

6 KEY PERFORMANCE MEASURES

The key performance measures are those outlined in the Statement of Corporate Intent (SCI).

Half Year Actual Half Year Target Full Year SCI Target Financial Metrics Total External Revenue 349.0 355.9 737.0 EBITDA 43.6 59.2 139.5 NPAT before grant income (118.4) (97.2) (178.8) TAP Capital Expenditure 213.2 240.5 411.1 Metro Project Capital Expenditure1 51.8 180.0 327.1 Metro Renewals Capital Expenditure 7.2 10.6 21.3

Key Sales Metric Freight NTK (m) 2,222 2,341 4,601 Freight Average Yield (c/NTK) 8.1 7.9 8.3

Key Investment Outcomes Rolling Stock Replacement Wagons (no. of new units) - - - Locomotives (no. of new units)2 14 - 20

Network Renewals New Sleepers Laid (000s) 54 56 124 New Rail Laid 17 15 50 Lines De-stressed 141 125 250 Bridges replaced (m) 362 428 716 Timber Piers Replaced 51 57 105 Culverts Replaced 27 35 100 Level Crossing Upgrades 8 8 8

Customer Service Performance Freight - Premium Train (%<30min)3 76% 90% 90% Metro (%<5 min) 91% 90% 90% Scenic (%<15 min) 78% 80% 80% Interislander (%<15 min)4 67% 90% 90%

Productivity Measures Total Labour Cost as % of Revenue 41% 42% 42% Freight Opex to Revenue ratio 72% 68% 69% Interislander Opex to revenue ratio 95% 93% 85%

Health and Safety LITFR (per million manhours)5 6.2 4.4 4.4 MTIFR (per million manhours)5 46.1 42.0 42.0

Staff Engagement Engagement 69 79 79

1 Metro Project capital expenditure was $128.2m lower than the half year target due to the transfer of the EMU project to Auckland Transport and delays in the other metro projects. 2 The 14 locomotives brought into service in the period are the remainder of the FY11 order. The SCI target is the second order of 20 locomotives. 3 Premium Freight Train on time performance is 14 percent below the half year target. This has been significantly impacted by delays in the commissioning of the new locomotives and delays in bringing the Aratere back into service. 4 Interislander on time performance is 23 percent below target for the period due to various operational issues during the reintroduction of the Aratere. 5 Lost time and medical time injury frequency rates are both significantly ahead of target for the period. Several initiatives are underway to reduce injury rates including increased training.

KiwiRail - Half year report December 2011 7 KEY PERFORMANCE MEASURES

The key performance measures are those outlined in the Statement of Corporate Intent (SCI).

Half Year Half Year Full Year SCI Actual Target Target Business Unit Summary $m $m $m (a) External Revenue Freight 221.3 222.8 452.0 Interislander 57.1 57.5 130.1 Tranz Scenic 9.9 13.4 28.9 Tranz Metro 23.7 24.2 47.1 Mechanical 6.0 8.8 19.8 Network 15.5 13.4 26.8 Property and Corporate 15.5 15.8 32.3 Total 349.0 355.9 737.0

(b) EBITDA Freight 63.6 73.1 152.3 Interislander 4.0 5.5 24.5 Tranz Scenic (2.5) 1.4 4.2 Tranz Metro 2.0 2.2 4.4 Mechanical (1.9) 0.8 0.4 Network (27.6) (29.3) (58.0) Property and Corporate 6.0 5.5 11.7 Total 43.6 59.2 139.5

(c) TAP Capital Expenditure Freight 65.9 89.2 121.9 Interislander 28.4 25.1 30.1 Tranz Scenic 8.0 17.5 20.8 Tranz Metro - - - Mechanical 1.0 2.1 3.6 Network 97.1 92.6 207.1 Property and Corporate 12.9 14.0 27.6 Total 213.3 240.5 411.1

8 KEY PERFORMANCE MEASURES

The key performance measures are those outlined in the Statement of Corporate Intent (SCI).

Half Year Half Year Full Year SCI Actual Target Target Ratio of Shareholder's Funds to Total Assets Shareholder's Funds to Total Assets 93.9% 93.3% 93.1%

The Crown's Investment in KiwiRail ($m) Total Shareholder's Funds (TSF) 12,856 12,869 13,051 Average Shareholder's Funds (ASF) 12,747 12,754 12,830

Financial Performance Measures for SOE Portfolio Crown Investment in KiwiRail Total Shareholder's Return TBC TBC TBC Dividend Yield nil nil nil Dividend Payout nil nil nil Return on Equity (1.0%) (0.8%) (1.4%) Return on Equity Adjusted for IFRS fair valuation movements (5.5%) (4.2%) (7.2%) and asset revaluations Profitability/Efficiency Measures Return on Capital Employed (4.0%) (3.0%) (5.0%) Operating Margin 12.5% 16.2% 18.9% Leverage/Solvency Measures Gearing Ratio (net) 0.03 0.04 0.04 Interest Cover 2.74 3.63 4.40 Solvency (current assets/current liabilities)1 1.40 0.72 0.81

1 Current DMO debt due has been excluded from current liabilities as this debt is due to be rolled-over during the coming year.

The performance ratios above are not typical of the SOE Government portfolio. Much of this is to do with the soft financial base of the business compounded by the valuation approach adopted in the balance sheet. We are working constructively with the shareholder to agree a more appropriate balance sheet structure going forward.

KiwiRail - Half year report December 2011 9 FINANCIAL STATEMENTS For the six months ended 31 December 2011

Statement of Financial Performance 11 Statement of Comprehensive Income 12 Statement of Financial Position 13 Statement of Changes in Equity 14 Statement of Cash Flows 15 Statement of Accounting Policies 16 Notes to the Financial Statements 18 NEW ZEALAND RAILWAYS CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE For the six months ended 31 December 2011

6 months 6 months Year ended ended Dec ended Dec Note June 2011 2011 2010 (Audited) (Unaudited) (Unaudited)

$m $m $m

Operating revenues 2 349.0 332.2 667.4

Operating expenses 3 (305.4) (282.7) (567.1)

Operating surplus before depreciation, amortisation and 43.6 49.5 100.3 grant income

Grant income 4 72.7 202.3 344.6

Loss on transfer of assets to GWRC - - (107.6)

Gain on transfer of EMU FX contracts to Auckland 5 42.8 - - Council Group

Cumulative foreign exchange loss on EMU FX contracts 5 (40.2) - -

Depreciation and amortisation expense 7e (155.4) (137.7) (283.1)

Net (deficit)/surplus after depreciation and grant income (36.5) 114.1 54.2

Foreign exchange and commodity net gains and losses 5.0 (7.3) (15.9)

Finance income 6 0.8 1.7 4.4

Finance costs 6 (26.1) (16.0) (36.6)

Net (deficit)/surplus before taxation (56.8) 92.5 6.1

Taxation (expense)/credit 11.1 (1.7) 27.9

Net (deficit)/surplus after taxation (45.7) 90.8 34.0

The accompanying notes form part of these financial statements

KiwiRail - Half year report December 2011 11 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF COMPREHENSIVE INCOME For the six months ended 31 December 2011

6 months 6 months Year ended ended Dec ended Dec Note June 2011 2011 2010 (Audited) (Unaudited) (Unaudited)

$m $m $m

Net (deficit)/surplus after taxation (45.7) 90.8 34.0

Other comprehensive income

Release of revaluation on asset disposals - - (1.8)

Net gains/(losses) from cash flow hedges 18.8 (36.5) (63.3)

Transfers to asset carrying value from cash flow 7c 4.4 - - hedge reserve

Transfer of EMU FX contracts to Auckland Council Group 5 40.2 - -

Total comprehensive income/(loss) 17.7 54.3 (31.1)

The accompanying notes form part of these financial statements

12 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF FINANCIAL POSITION As at 31 December 2011

Note 31 Dec 2011 31 Dec 2010 30 June 2011 (Unaudited) (Unaudited) (Audited) $m $m $m Current assets Cash and cash equivalents 7d 75.8 207.9 81.1 Trade and other receivables 118.1 132.5 115.5 Inventories 87.3 75.4 73.4 Financial assets 1.8 2.0 1.2 283.0 417.8 271.2 Non-current assets Property, plant and equipment 13,398.1 13,178.4 13,284.3 Intangible assets 13.2 10.6 14.6 Financial assets 0.1 - - Trade and other receivables - 4.0 - 13,411.4 13,193.0 13,298.9 Total Assets 13,694.4 13,610.8 13,570.1

Current liabilities Trade and other liabilities 181.7 189.4 198.1 Financial liabilities 332.6 57.8 329.1 Income taxes payable - 3.1 - Provisions 14.4 6.6 12.7 528.7 256.9 539.9 Non-current liabilities Trade and other liabilities 35.5 37.5 35.5 Financial liabilities 225.1 503.3 292.2 Provisions - 2.7 4.0 Deferred taxation 49.1 86.7 60.2 309.7 630.2 391.9 Total Liabilities 838.4 887.1 931.8 Net Assets 12,856.0 12,723.7 12,638.3

Equity Equity capital 7d 996.9 796.9 796.9 Retained earnings 1,406.1 1,337.3 1,364.2 Asset revaluation reserve 10,452.9 10,626.0 10,540.5 Cash flow hedge reserve 0.1 (36.5) (63.3) Total Equity 12,856.0 12,723.7 12,638.3

John Spencer Paula Rebstock Chair Deputy Chair 24 February 2012 24 February 2012

The accompanying notes form part of these financial statements

KiwiRail - Half year report December 2011 13 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF CHANGES IN EQUITY For the six months ended 31 December 2011

Asset Cash Flow Equity Retained Note Valuation Hedge Total Capital Earnings Reserve Reserve

$m $m $m $m $m

As at 1 July 2010 (Audited) 546.9 1,170.7 10,701.8 - 12,419.4

Net surplus for the period - 90.8 - - 90.8

Other comprehensive income Release of revaluation reserve to - 75.8 (75.8) - - retained earnings

Losses from cash flow hedges - - - (36.5) (36.5)

Total comprehensive income - 166.6 (75.8) (36.5) 54.3

Transactions with Owners Capital Injection 7d 250.0 - - - 250.0

As at 31 December 2010 (Unaudited) 796.9 1,337.3 10,626.0 (36.5) 12,723.7

Net (deficit)/surplus for the period - (56.8) - - (56.8)

Other comprehensive income Release of revaluation reserve to - 76.2 (76.2) - - retained earnings

Release of revaluation reserve on transfer of - 7.5 (7.5) - - Metro assets to GWRC

Release of revaluation reserve on disposal of - - (1.8) - (1.8) other assets

Losses from cash flow hedges - - - (26.8) (26.8)

Total comprehensive income - 26.9 (85.5) (26.8) (85.4)

As at 30 June 2011 (Audited) 796.9 1,364.2 10,540.5 (63.3) 12,638.3

Net surplus for the period - (45.7) - - (45.7)

Other comprehensive income Release of revaluation reserve to - 87.6 (87.6) - - retained earnings

Net gains from cash flow hedges - - - 18.8 18.8

Transfers to asset carrying value from cash - - - 4.4 4.4 flow hedge reserve

Transfer of EMU FX contracts to 5 - - - 40.2 40.2 Auckland Council Group

Total comprehensive income - 41.9 (87.9) 63.4 17.7

Transactions with Owners Capital Injection 7d 200.0 - - - 200.0

As at 31 December 2011 (Unaudited) 996.9 1,406.1 10,452.9 0.1 12,856.0

The accompanying notes form part of these financial statements

14 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF CASH FLOWS For the six months ended 31 December 2011

6 months ended 6 months ended Year ended Note Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Cash flows from operating activities Proceeds from: Receipts from customers 357.6 306.7 657.6 Interest received 0.8 1.7 4.3 Operating grant - 4.2 - Proceeds utilised for: Payments to suppliers and employees (344.3) (304.0) (585.4) Interest expense (27.1) (15.1) (28.9) Income tax paid - - - Net cash from operating activities 10 (13.0) (6.5) 47.6

Cash flows from investing activities Proceeds from: Sale of property, plant and equipment 6.3 - 14.4 Capital grant receipts 72.7 204.2 344.6 Proceeds utilised for: Purchase of property, plant and equipment (268.6) (290.7) (653.2) Purchase of intangibles (1.5) - (7.4) Net cash used in investing activities (191.1) (86.5) (301.6)

Cash flows from financing activities Proceeds from: Long term borrowings - 55.0 90.8 Crown capital injection 7d 200.0 250.0 250.0 Proceeds utilised for: Repayment of finance lease liability - (35.9) (36.0) Repayment of borrowings (1.2) (0.2) (1.7) Net cash from financing activities 198.8 268.9 303.1

Net increase/(decrease) in cash and equivalents (5.3) 175.9 49.1

Cash and cash equivalents at the beginning of 81.1 32.0 32.0 the period

Cash and cash equivalents at the end of the period 7d 75.8 207.9 81.1

The accompanying notes form part of these financial statements

KiwiRail - Half year report December 2011 15 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF ACCOUNTING POLICIES For the six months ended 31 December 2011

>> REPORTING ENTITY New Zealand Railways Corporation is a statutory corporation established pursuant to the New Zealand Railways Corporations Act 1981 and is included within the First Schedule of the State Owned Enterprises Act 1986. “The Group” comprises the New Zealand Railways Corporation and its subsidiaries and associate companies. The Group is domiciled in New Zealand. The Group is designated as a Public Benefit Entity. The primary objective of the Group is to establish, maintain and operate, or otherwise arrange for, safe and efficient rail, road and ferry freight and passenger transport services within New Zealand in such a way that revenue exceeds costs, including interest and depreciation; and to provide for a return on capital as specified by the Minister of Finance from time to time. The interim financial statements of the Group are for the six months ended 31 December 2011 and were authorised by the Board for issue on 24 February 2011.

>> BASIS OF PREPARATION Statement of compliance The interim financial statements comply with the New Zealand Railways Corporations Act 1981, the State-Owned Enterprises Act of 1986 and New Zealand equivalents to International Financial Reporting Standards, New Zealand Generally Accepted Accounting Practice and other applicable financial reporting standards as appropriate for public benefit entities. These unaudited, condensed Interim Financial Statements comply with NZ IAS-34 Interim Financial Statements. Changes in accounting policies There have been no material changes in accounting policies. All policies have been applied on a basis consistent with those used in previous periods. Where necessary certain comparative information has been reclassified for consistency with the current period. The interim report should be read in conjunction with the annual report for the year ended 30 June 2011.

>> DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Group uses derivative financial instruments within predetermined policies and limits in order to manage its exposure to fluctuations in foreign exchange, commodity and interest rate risks. The Group does not engage in speculative transactions or hold derivative financial instruments for trading purposes. To manage this exposure the Group uses the following derivative financial instruments: ▪▪ Foreign exchange forward contracts and options ▪▪ Interest rate swaps ▪▪ Fuel commodity hedges Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into (the trade date). Any transaction costs are expensed immediately. The derivative financial instruments are subsequently re-measured to fair value. The method of recognising the resulting gain or loss depends on whether the derivative financial instrument is designated as a hedging instrument, and, the nature of the item being hedged. Gains and losses, and movements in fair values of derivative financial instruments not in hedging relationships are recognised in the Statement of Financial Performance as follows: ▪▪ Foreign exchange forward contracts and options excluding contracts relating to fuel purchases– as part of ‘Foreign exchange net gains and losses’ ▪▪ Interest rate swaps – as part of ‘Net finance costs’ ▪▪ Fuel related foreign exchange forward contracts, fuel commodity hedges and copper commodity hedges – as part of ‘Operating expenses’

16 NEW ZEALAND RAILWAYS CORPORATION STATEMENT OF ACCOUNTING POLICIES FOR SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

The risk management objectives and strategy for undertaking various hedge transactions is covered by the Group Treasury Policy. The Group documents, at the inception of the transaction, the hedging relationship between hedging financial instruments and the hedged items. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in the hedging transaction are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair value of derivative financial instruments is classified as a non-current asset or liability when maturity of the hedged item exceeds 12 months. It is classified as a current asset or liability when the maturity of the hedged item is less than 12 months. Cash flow hedges Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised directly in the cash flow hedge reserve within equity to the extent that the hedges are deemed effective. To the extent that the hedges are ineffective for accounting, changes in fair value are recognised in the Statement of Financial Performance in Foreign exchange and commodity net gains and losses. If a derivative financial instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation of the hedge relationship is revoked or changed, then hedge accounting is discontinued. The cumulative gain or loss previously recorded in the cash flow hedge reserve remains there until the forecast transaction occurs. If the underlying hedged transaction is no longer expected to occur, the cumulative, unrealised gain or loss recognised in the cash flow hedge reserve with respect to the derivative instrument is recognised immediately in the Statement of Financial Performance. Where the hedge relationship continues throughout its designated term, the amount in the cash flow hedge reserve is transferred to the carrying value of the asset when it is recognised.

>> NEW STANDARDS ADOPTED The Group has adopted the following new and amended NZ IFRSs as of 1 July 2011: ▪▪ IFRIC 13 Customer Loyalty Programmes (amended 2010) is effective for reporting periods beginning on or after 1 January 2011. The revised standard clarifies that the fair value of award credits takes into account the amounts of discounts or incentives that otherwise would be offered to customers that have not earned the award credits. This change has not had a material impact of the consolidated financial results of the Group as award programmes are a relatively small part of the business of the Group. ▪▪ NZIAS 24 Related Party Disclosures (revised 2009) is effective for reporting periods beginning on or after 1 January 2011. The revised standard requires further disclosures of transactions with related parties. The additional disclosures do not have any impact on the consolidated financial results of the Group and are not required for these interim financial statements. >> NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED The following standards and amendments were available for early adoption but have not been applied by the Group in the preparation of these financial statements: ▪▪ NZIFRS 9 Financial Instruments (revised 2010) is the first standard issued as part of a wider project to replace NZIAS 39 and is effective for reporting periods beginning on or after 1 January 2013. The revised standard amends measurement categories for financial assets. It is not expected to have any impact on the consolidated financial results of the Group.

KiwiRail - Half year report December 2011 17 NEW ZEALAND RAILWAYS CORPORATION NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2011

1. TOTAL INCOME 6 months ended 6 months ended Year ended Note Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Revenue 2 349.0 332.2 667.4 Grant income 4 72.7 202.3 344.6 Total income 421.7 534.5 1,012.0

2. REVENUE 6 months ended 6 months ended Year ended Note Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Freight 7a 221.3 199.8 396.7 Mechanical 6.0 4.5 9.0 Interislander 57.1 55.7 122.9 Tranz Metro 7a 23.7 32.5 65.5 Tranz Scenic 9.9 11.8 21.5 Property and Corporate 15.5 15.7 31.8 Network 15.5 12.2 20.0 Total revenue 349.0 332.2 667.4

3. OPERATING EXPENSES 6 months ended 6 months ended Year ended Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Salaries and wages 122.1 112.3 249.8 Defined contribution plan employer contributions 4.4 4.1 8.3 Employee entitlements 8.1 9.1 13.9 Other employee expenses 1.7 2.3 4.2 Total staff costs 136.3 127.8 276.2

Materials and supplies 44.8 43.5 67.1 Fuel and traction electricity 60.0 48.6 105.3 Lease and rental costs 24.8 23.5 46.7 Incidents, casualties and insurance 7.6 6.8 13.9 Contractors’ expenses 7.6 7.7 14.2 Fees paid to auditors: Audit fees 0.3 0.1 0.4 Impairment of receivables (0.2) (0.1) (0.5) Directors’ fees 0.2 0.2 0.3 Loss on disposal of property, plant and equipment 0.3 0.8 1.3 Other expenses 23.7 23.8 42.2 Total operating expenses 305.4 282.7 567.1

18 NEW ZEALAND RAILWAYS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

4. GRANT INCOME 6 months ended 6 months ended Year ended Note Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Capital grants for metro projects Auckland rail development 7b 2.3 15.4 46.6 Wellington rail development 7b 1.7 62.6 79.9 Auckland electrification project 7b 49.7 60.5 125.0 Other capital grants Rail upgrade and growth 7b 6.9 53.7 70.8 Other 12.1 10.1 21.8 Public policy grant - - 0.5 Total grant income 72.7 202.3 344.6

5. TRANSFER OF ELECTRICAL MULTIPLE UNITS (“EMU”) FOREIGN EXCHANGE CONTRACTS TO AUCKLAND COUNCIL GROUP

During the year an agreement was reached between the Crown and Auckland Council Group to transfer the procurement and ownership of the EMUs from NZRC to Auckland Transport. During the initial phases of the procurement process NZRC entered into forward exchange contracts to mitigate the foreign currency exposure on the EMU units. These forward exchange contracts were being hedge accounted in NZRC’s financial statements. In October 2011 the hedge contracts were novated to Auckland Council Group and from this date, hedge accounting for these contracts was discontinued and the contracts derecognised in the financial statements. This has resulted in the following: ▪▪ A gain in the Statement of Financial Performance of $42.8m being the value of the liability novated to Auckland Council Group for nil consideration. This profit on derecognition has been separately disclosed in the Statement of Financial Performance. ▪▪ An expense in the Statement of Financial Performance of $40.2m being the cumulative loss on the hedging instruments held in the cashflow hedge reserve. This expense has been separately disclosed in the Statement of Financial Performance. The difference between the gain on derecognition and the cumulative loss on the hedging instrument is the ineffective portion of the hedge contract that was expensed in the 2011 financial year.

KiwiRail - Half year report December 2011 19 NEW ZEALAND RAILWAYS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

6. NET FINANCE COSTS

6 months ended 6 months ended Year ended Note Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited)

$m $m $m Finance income Interest income on bank deposits 0.8 1.7 4.4 0.8 1.7 4.4 Less Finance costs Interest expense on borrowings (15.9) (14.3) (28.9) Interest expense on finance lease - - (0.7) Interest expense – other - (0.8) (1.1) Net change in fair value of derivatives 7f (10.2) (0.9) (5.9) (26.1) (16.0) (36.6) Net finance costs (25.3) (14.3) (32.2)

7. ACTUAL COMPARATIVE INFORMATION a) Revenue The 11% increase in Freight revenue from $199.8m to $221.3m over the comparable half year period was delivered across all major segments through increased volumes whilst maintaining yields. The $8.8m reduction in Tranz Metro revenue compared to 31 December 2010 is due to the change in funding arrangements with Greater Wellington Regional Council following the transfer of Wellington metro assets to them on 30 June 2011. The reduction in revenue is offset by a reduction in costs borne by the Group. b) Grant Income KiwiRail receives grant income from the Crown and Regional Councils to complete specific rail projects. The most significant projects include the Wellington Regional Rail Plan (WRRP) and the Auckland metro rail developments (DART and AEP). The reduction in grant income of $129.7m (-64.1%) for the period ended 31 December 2011 reflects the lower levels of activity as these projects draw to completion. c) Cashflow hedge gains and losses The cashflow hedge losses recorded in the Statement of Comprehensive Income represent unrealised foreign exchange losses on asset purchases where hedge accounting is applied and effective. The ineffective portion of these foreign exchange gains and losses is recorded in net finance costs in the Statement of Financial Performance. These gains and losses are of a non-cash nature. During the period some asset purchases were completed for which hedged foreign exchange contracts had been taken out in the prior year. A total of $4.4m in cumulative losses on these contracts was transferred from the cash flow hedge reserve to the carrying value of the assets on purchase. d) Turnaround plan funding & Cash balances KiwiRail presented to the shareholder a Turnaround Plan business case which was in principal supported for $750m equity funding over 3 years. Each budget year KiwiRail presents to the Crown specific programmes for which the equity is invested in. At December 2011 three instalments ($200.0m) of the funding for the second year of the turnaround plan have been received.

20 NEW ZEALAND RAILWAYS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

e) Depreciation Depreciation is $17.7m higher than the six months ended 31 December 2010 primarily due to an increase in Railway Infrastructure deprecation resulting from adjustments to the remaining useful lives of structures to reflect the capital replacement programme. In addition Rolling Stock depreciation increased by a net $3.3m over the comparable period last year. Freight rolling stock depreciation increased $5.3m following the purchase of new wagons and locomotives offset by a $2.0m decrease in Tranz Metro depreciation following the transfer of Wellington Metro rolling stock to Greater Wellington Regional Council. f) Net change in fair value of interest rate derivatives The change in the fair value of interest rate derivatives is due to a reduction in long term interest rate swap rates below the fixed rate of the hedging resulting in an unrealised loss being recognised.

8. OPERATING LEASE COMMITMENTS

The Group leases vessels and plant and equipment in the normal course of its business. Included in these lease commitments is the Group’s charter for the roll-on-roll-off ferry, Kaitaki. On 20 March 2009 the lease period of the Kaitaki vessel was extended by a non-cancellable term of three years and the lease expires on 30 June 2013. Motor vehicle leases generally have a non-cancellable term of three years. Where lease payments are denominated in foreign currencies, they have been converted to New Zealand currency at the exchange rate ruling at balance date. The future aggregate minimum lease payments payable under non-cancellable operating leases as follows:

31 Dec 2011 31 Dec 2010 30 June 2011 (Unaudited) (Unaudited) (Audited) $m $m $m Total minimum lease payments due: Not later than one year 24.6 26.2 26.8 Later than one year but not later than five years 49.9 46.7 55.6 Later than five years 16.0 8.4 19.2 90.5 81.3 101.6

KiwiRail - Half year report December 2011 21 NEW ZEALAND RAILWAYS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

9. CAPITAL AND OTHER COMMITMENTS The Group has capital commitments for network upgrades, infrastructure renewal materials, manufacturing of new rolling stock, refurbishment costs relating to rolling stock and purchases of plant and equipment. Other commitments include Mechanical inventory and Information Technology operating expenditure commitments for software maintenance and telecommunication services.

31 Dec 2011 31 Dec 2010 30 June 2011 (Unaudited) (Unaudited) (Audited) $m $m $m Capital expenditure commitments: Not later than one year 139.5 284.3 224.7 Later than one year but not later than five years 37.4 100.2 88.9 Later than five years - - - 176.9 384.5 313.6

10. RECONCILIATION OF NET SURPLUS / (DEFICIT) TO NET CASH FLOWS FROM OPERATING ACTIVITIES

6 months ended 6 months ended Year ended Dec 2011 Dec 2010 June 2011 (Unaudited) (Unaudited) (Audited) $m $m $m Net surplus after tax (45.7) 90.8 34.0 Add/(deduct) items classified as investing or financing activities Loss on sale of assets 0.3 0.7 0.9 Loss on transfer of assets to GWRC - - 98.3 Fair value movement in derivatives (4.1) 0.1 0.8 Capital grant receipts (72.7) (204.2) (344.6) (122.2) (112.6) (210.6) Add non-cash flow items Depreciation and amortisation expense 155.4 137.7 283.1 Movements in deferred tax and provisions (13.4) - (22.2) 19.8 25.1 50.3 Add/(deduct) movements in working capital Decrease in trade receivables (12.0) 5.9 6.2 (Increase)/decrease in other receivables 9.5 (25.2) (8.9) (Increase)/decrease in inventories (13.9) (8.7) (6.7) Increase/(decrease) in trade payables (12.2) (13.7) 3.4 Increase/(decrease) in other payables (4.2) 10.1 3.3 Net cash flows from operating activities (13.0) (6.5) 47.6

22 NEW ZEALAND RAILWAYS CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2011 (CONTINUED)

11. CONTINGENT LIABILITIES

(a) Claims The Group continues to manage residual activities relating to the previous operations of the organisation. Although the impact of such activities has diminished over time, a number of claims against the Group remain outstanding. In addition, the Group faces the continuing likelihood that liabilities not previously identified may arise in the future. No right of recourse exists for reimbursement of these claims. The outcome of these claims is uncertain at this stage and an estimate of financial effect is not practicable. (b) Treaty of Waitangi claims Claims lodged under the Treaty of Waitangi Act 1975, in respect of land and other assets currently or previously administered by the Group, have not been recognised in these financial statements. Since 1 July 1993 such claims are considered to be the responsibility of the Crown rather than that of the Group and administered by the Office of Treaty Settlements, Ministry of Justice. The outcome of these claims is uncertain at this stage and an estimate of financial effect is not practicable. (c) Option to purchase Wellington Railway Station Included in the Waitangi Treaty Settlement signed by the Crown dated 19 August 2008, Taranaki Whanui Ki Te Upoko O Te Ika and The Port Nicholson Block Settlement Trust, has an option to purchase the Wellington Railway Station and surrounding land. This option was exercised on 1st September 2011 and valuers have been appointed and the parties are currently working through the joint statutory valuation procedure to assess the price and terms of the sale and purchase of the Station. (d) Removal of contaminated material The Group may need to make provision for the removal of contaminated material from land previously used for rail operations. The cost of this remedial work is uncertain. An estimation of the likely cost is to be made at the time that an investigation is undertaken. (e) Marsden Point rail corridor designation The Group has recently confirmed it’s designation of the rail corridor from the North Auckland Line to Marsden Point but is still negotiating with the last appelants against the designation. The Northland Regional Council will purchase any land that may be required. The Group has an agreement with the Northland Regional Council that it will share the holding costs of such land with the Council.

KiwiRail - Half year report December 2011 23