F.18a 2014 ANNUAL REPORT KiwiRail Overview From 1 January 2013, railway business activities were separated from rail land holdings as a result of a Government restructure carried out to put the business on a more commercial footing. The former parent, New Zealand Railways Corporation (NZRC), continued to hold the 18,000 hectares of rail network land, from which no financial return is expected. The business activities were transferred to a new State Owned Enterprise, KiwiRail Holdings Ltd. NZRC is managed by KiwiRail Holdings Ltd under a long-term nominal fee management agreement, and therefore has limited operational activities. We conduct business in the following areas: Whangarei Logistics: We are a logistics provider to customers who use Dargaville our rail freight and ferry services. Each week, approximately 900 freight trains operate on the KiwiRail network. They carry AUCKLAND bulk freight such as coal and milk, containerised import or export freight to and from ports and full container loads for Hamilton Tauranga Kawerau New Zealand freight forwarders. Three ferries provide the inter- Te Kuiti Kinleith island supply chain link with more than 4000 sailings a year. New Plymouth Taumarunui Shipping: We are an owner and operator of shipping services Stratford Napier operating under the Interislander brand. Of our three ferries, Waiouru Wanganui two are owned and one is chartered. Dannevirke Palmerston North Otaki Tourism Experiences: We provide tourism experiences by Masterton Featherston rail and sea. Three long-distance rail passenger trains - the Picton WELLINGTON Blenheim TranzAlpine, Coastal Pacific and Northern Explorer - provide Westport daily, tri-weekly or seasonal services. Train charters provide Reefton specific rail experiences and service the cruise market. Greymouth Kaikoura Interislander ferry services operate daily between Wellington Hokitika and Picton return. CHRISTCHURCH Ashburton Public Transport: We operate public transport services in Wellington on behalf of Greater Wellington Regional Timaru Council. Each week, Tranz Metro suburban services provide Oamaru approximately 2,200 services. KiwiRail currently operates Port Chalmers the Capital Connection commuter train on weekdays Dunedin Wairio between Palmerston North and Wellington. In Auckland, Invercargill we control the movements of 2,000 passenger services Bluff a week on trains operated by Transdev on contract to Auckland Transport. Infrastructure: We are an infrastructure provider in the form of the New Zealand rail network. Our role is to operate, maintain and improve the 4,000 km track network. Rolling Stock: KiwiRail owns and operates 189 mainline locomotives, 4,820 freight wagons and approximately Assets 60 passenger carriages. We are a rolling stock owner, manufacturer, maintainer and refurbisher. Mechanical services 4,000kms tracks are provided at depots around the country as well as the major railway workshop in Lower Hutt. 189 Mainline Locomotives Property: Our property group earns income from leasing and 2 owned, 1 leased ferry managing the property portfolio. 4,100 staff approximately Contents KiwiRail Overview 2 Summary of Results 6 Chairman’s Report 8 Chief Executive Officer’s Report 10 Sustaining a Zero Harm Environment 14 Empowering our People 18 Business Reviews 20 Freight 22 Infrastructure & Engineering 28 Interislander 32 Passenger 36 KiwiRail in the Community 38 KiwiRail Board 40 KiwiRail Executive Team 42 Governance 44 Key Performance Indicators 46 Audited Annual Financial Statements 48 Directory 131 5 INTRODUCTION | ANNUAL REPORT 2014 Summary of Results Infrastructure & KiwiRail Group Freight Engineering Revenue & Operating Surplus Revenue & Operating Surplus Network Investment ($m) Revenue ($m) Operating Surplus ($m) Revenue ($m) Operating Surplus ($m) 800 500 250 700 400 200 600 500 300 150 400 300 200 100 200 100 50 100 0 0 0 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 Revenue by Business Segment Revenue Infrastructure Improvements Freight Tranz Metro Scenic Journeys Bulk Import-Export Domestic New rail laid (km) New sleepers laid Property & Corporate Interislander Forestry Other Bridges Replaced Infrastructure & Engineering 600 500 400 300 200 100 0 2011-12 2012-13 2013-14 New rail laid (km) New sleepers laid Bridges replaced (km) 6 INTRODUCTION | ANNUAL REPORT 2014 Interislander Passenger Key Indicators Revenue & Operating Surplus Revenue & Operating Surplus On-time Performance Revenue ($m) Operating Surplus ($m) Revenue ($m) Operating Surplus ($m) Tranz Metro Train Freight - Premium Train Interislander 140 80 100% 70 120 60 90% 100 50 80 40 80% 60 30 70% 20 40 10 60% 20 0 2011-12 2012-13 2013-14 0 -10 50% 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 Segment Revenue Segment Revenue Mainline Derailment Passenger Rail CV Freight Metro TranzAlpine Other Insurance Recovery Northern Explorer Coastal Pacific Other 80 70 60 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2010-11 2011-12 2012-13 2013-14 INTRODUCTION | ANNUAL REPORT 2014 7 Chairman’s Report We have put the cost of the Aratere issue at $27 million which includes lost freight and passenger revenue and the costs associated with leasing the replacement vessel. This has impacted on our result for the year and it has also had a lingering impact in terms of the time it will take us to regain the confidence of customers, as it will on revenue. The DL locomotives’ asbestos issue is also described in greater detail elsewhere. It took 40 new locomotives in an overall fleet of 189 out of service at the end of February. The 20 newest locomotives began re-entering service in mid-April but the remaining 20 have filtered back more slowly. KiwiRail does not take these service failures lightly. In each case we have established thorough forensic John Spencer investigation processes as to why these occurred. Chairman Wherever possible, we will pursue compensation if it emerges that our suppliers or advisors have not KiwiRail has made significant progress since met their obligations. being formed in 2008. Growth in traffic volume The direct and indirect effects of these issues, along and revenue, improving customer confidence with a reduction in import-export traffic and a softening and asset quality illustrate this progress. forestry market, resulted in revenue being held in line with FY 2013 but falling 6 percent below plan. This performance has been achieved despite the The costs to maintain our services, however, were global financial crisis, earthquakes, droughts and significant and account for much of the poorer floods, land slippages and the vagaries of the operating earnings outcome of $75.3 million, $32.9 market. These have all tested the character and million (30 percent) lower than FY 2013. resilience of the rail industry and its staff. They have impacted on our business and on the plan we The FY 2014 result is particularly disappointing have been implementing to achieve greater financial because the year had begun so promisingly. The independence. introduction of new and improved rolling stock provided the Freight business with the capacity to Two events during the 2014 financial year rank meet demand created by a growing economy. Freight among the tougher tests we have faced because of revenue in the first four months of the year was their effect on our earnings and on our reputation tracking ahead of plan. with our customers. At year’s end, Freight revenue was $1.7 million The events in question were a propeller shaft below FY 2013, impacted not only by the Aratere failure on the Interislander ferry Aratere and the and locomotive issues, but by lower than expected identification of asbestos contamination import-export and bulk freight revenue. In the in our new DL locomotives. circumstances, this was a creditable performance The propeller shaft failure and its consequent loss from the business unit that generates the bulk of our are dealt with in greater detail elsewhere in this income. report. In short, it took the ferry out of service from While the year had its share of disappointments, early November — the beginning of the peak freight and passenger period — beyond the end of the there were also achievements that deserve to be financial year. recognised. Total harm injuries reduced 44 percent from the prior year, mainline derailments dropped It created capacity constraints, frustrated freight and to 18, a far cry from the 60 recorded 10 years ago passenger customers and required Interislander to and a reflection of the improving quality of network lease a replacement vessel to fill the gap. While it was gratifying to be able to source a replacement at short infrastructure. notice, the replacement ship did not have Aratere’s capability to carry rail wagons and passengers. 8 CHAIRMAN’S REPORT | ANNUAL REPORT 2014 The FY 2014 result brings us to the view that the The Board places on record its appreciation for sustainability plan as it was originally conceived, did Jim Quinn’s help and cooperation in ensuring not make sufficient provision for unexpected events. as seamless a transition as possible. During his This should not come as a surprise. No plan could tenure, he led a fast and wide-ranging reform of have made provision for the combination of events the business that included the development and that have undermined the original revenue premises. implementation of the 10-year plan, encouraging growth in the freight business, capital investment in As a result of this realisation the Board network improvements, new rolling stock and ferry infrastructure and building stronger relationships has instituted a commercial review of with key customers. the business with the aim of developing Peter has brought a stronger focus on health and a new 30-year plan. The review safety issues. The Board is confident we will see significant improvement in KiwiRail’s safety record in provides us with an opportunity to the years to come. re-examine rail’s role in the A new position of General Manager Zero Harm, New Zealand economy.