F.18a 2015 - KiwiRail

1 1 KiwiRail annual REPORT | KIWI-OWNED LOGISTICS PARTNER GROWING NEW ZEALANDAt a glanceWe avoid the need for million truck trips a year on our roadsWe transport around 30% of New Zealand s exportsWe move 18 million tonnes of freight and provide 13 million passenger trips a yearWe carry 16% of New Zealand s total freight volume We are a significant property holderWe operate, maintain and improve 4,000km of track networkRICHIE ROWLANDS (Uncle)Remote Control Operator3 KiwiRail annual REPORT | 2015 Strong performance in our Interislander, Scenic Journeys and Property business groups together with efficiency gains across the business have resulted in a 17% improvement in operating surplus over the previous year.

2 Reduction in operational cost per employee$91 millionOperating Surplus4%Reduction in Total Recordable Injury Frequency Rate50%Improvement in operating surplus17%Reduction in mainline train derailments56%Improvement in operating margin20%183 serviceable mainline locomotives and 4,665 serviceable freight wagons18 million tonnes of freight moved each year by rail1,500+ bridgesInterislander carries 800,000 passengers per yearTranz Metro provides 12 million passenger journeys per year900 freight trains each weekPictonBlenheimKaikouraAshburtonTimar uOamaruDunedinInvercargillWairioCHRISTCH URCHH okitikaGreymouthWestportReeftonWhangarei DargavilleTaurangaKawerauKinleithHamilto nTe KuitiNew PlymouthStratfordTaumarunuiWaiouruNapier DannevirkeMastertonFeatherstonWELLINGTON W anganuiPalmerston NorthOtakiBluffPort ChalmersAUCKLANDC ontentsChairman Review.

3 6 Chief Executive Review ..10 Commercial Above/Below Rail ..14 KiwiRail Board ..16 KiwiRail Executive Team ..18 Sustaining a Zero Harm Environment ..20 Our People ..22 Freight ..24 Interislander ..25 Tranz Metro ..26 Infrastructure ..27 Property ..28 Scenic Journeys ..29 Key Financials ..30 Audited annual financial Statements ..32 Key Performance Indicators ..80 ANDREW SHIPPTeam Leader The current New Zealand Government s investment and growing confidence in KiwiRail is a sign of an emerging understanding of the importance of rail to the New Zealand economy. Bruce PlestedExecutive Chairman, Mainfreight I would like to thank our many customers who continue to show strong support for our business.

4 John SpencerChairman7 KiwiRail annual REPORT | 2015 ChairmanReviewAfter significant disruptions in the 2014 financial year, 2015 was a year of consolidation with the new management team led by Chief Executive Peter Reidy focusing on its task of uniting One KiwiRail , building customer confidence, aspiring to Zero Harm and lifting the company s financial the year we adopted a new vision statement for the company, which is to be a trusted Kiwi-owned logistics partner growing New Zealand .The aspiration to be trusted is important. It means being trusted by our customers and passengers to get them and their freight delivered safely and efficiently.

5 It means being trusted by our staff to be a good employer, and trusted by our shareholding ministers to continually look for improvements in running the company. On all those counts, the Board, management and staff share a strong commitment to Performance KiwiRail s operating surplus of $91m in FY15 is a 17% improvement over the previous year and is a credible result in the current environment, despite revenue falling by 3% to $721m. Our Interislander, Scenic Journeys and Property business groups all increased their revenues, reflecting our ongoing commitment to lift KiwiRail s financial performance by focusing on customers needs and working with our employees and unions to improve ReviewDuring the year the most significant piece of work for the Board was the Commercial Review.

6 It arose from an undertaking given by the KiwiRail Board to Shareholding Ministers that the company would develop a refreshed, comprehensive long-term view of its business. The Review was completed in December 2014 and was an opportunity to engage with Government on long-term funding options and future network configurations. The Review found that financial self-sufficiency of the network is not achievable. It confirmed that it is difficult for KiwiRail to increase revenue from commodity-based sectors and to improve productivity given historical inflexible labour agreements. Additionally, given the capital-intensive nature of rail, there are implications should we retain the national network in its entirety.

7 However, the Review also identified a number of opportunities for KiwiRail . It reviewed the economics of each rail corridor and service, and provided a range of future options from maintaining the status quo to closing the network considered the Review and in Budget 2015 they expressed their commitment to a national freight network. Finance Minister Bill English announced $210m in new capital for the company in Budget 2015 , and announced a pre-commitment of a further $190m against Budget 2016. However, the Government also indicated KiwiRail must continue to drive significant efficiency and productivity improvements to reduce the ongoing level of Crown funding the last financial year the Board and the Executive Team have had a strong focus on simplifying the business, reducing the cost of operations and building the consistent on-time performance that our customers expect.

8 The Government s Budget announcements and expectations reinforce our on-going commitment to drive savings and improve efficiency across the business. True ValueThe public release of Treasury documents relating to the Commercial Review sparked debate over the true value of rail. One oft-quoted figure is that if all the freight currently carried by our trains was moved to the road, it would need an additional truck trips. That is another way of looking at the value of rail. It is pleasing to reflect on a year of recovery and consolidation in which KiwiRail improved its profitability, worked on implementing its customer-focused business model, and considered its role in the wider transport KIWI-OWNED LOGISTICS PARTNER GROWING NEW ZEALANDM edia reporting that Ministers could have decided to close the freight network prompted some of our important customers to go public in their support of KiwiRail , and of rail generally.

9 While we welcome this broader discussion, it in no way undermines or distracts the Board and management from the importance of lifting the company s performance. Local communities are certainly willing to be vocal in their support of retaining rail services in their own areas. However, there is a balance to be struck here because while regions may value the presence of rail, KiwiRail cannot continue to support lines that are plainly uneconomic and where there is no prospect of profitability occurring in the medium some cases, the company would be prepared to look at other funding models if communities choose to offer support to maintain a service that they value, and which is uneconomic for KiwiRail to continue.

10 This year, for example, there was doubt over the future of the Capital Connection commuter service between Wellington and Palmerston North because it was uneconomic for KiwiRail to operate. However, with financial contributions from Greater Wellington Regional Council and Horizons Regional Council, who wanted the link to continue, the service has been secured for another three years. Optimising InvestmentTaking a wider view of the value and funding of rail will inevitably lead to questions about the sustainability of the current structure. In addition, thinking more broadly about rail invites further discussion about integrating rail into land transport planning and investment, so that optimal use is made of public and private investment in transport welcomes the opportunity to work more closely with the New Zealand Transport Agency to ensure we make best use of taxpayer money and deliver a transport system that is as effective, efficient and resilient as possible.