SUMMARY OF THE HEADS OF AGREEMENT BETWEEN THE GOVERNMENT AND TRANZ RAIL

There are three main parts to the Heads of Agreement announced today: a recapitalisation package, the purchase of the rail network by the Crown, and an agreement on access.

Tranz Rail will call a special meeting, likely to be held on 11 July, where the Tranz Rail board will recommend the deal to shareholders for approval.

Recapitalisation package

The Crown will immediately provide Tranz Rail with a cash injection of $44 million, to help the company to address its urgent short-term liquidity issues. If shareholders approve the rest of the deal, this $44 million will be offset against the purchase price of the assets and revenue streams associated with Tranz Rail’s lease of the rail corridor (see below).

Should shareholders not give approval, the $44m will be due for repayment on 30 June, 2004. This debt will be second ranking, behind Tranz Rail’s banks and major lease holders. The Crown will charge a commercial rate of interest.

Tranz Rail’s banks have agreed to postpone upcoming bank debt repayments, so that the Crown’s funds are not used to reduce the banks’ exposure.

Upon acceptance of the deal by Tranz Rail shareholders, Tranz Rail would then issue equity to the Crown, giving the Crown a 35% shareholding in Tranz Rail at $0.67 per share, which will cost the Crown $76 million. The price reflects Tranz Rail’s financial position, the benefits to the company of the total package, and the fact that the Crown is seeking to inject new equity, rather than seeking to buy existing shares.

A 35% stake would give the government effective control of Tranz Rail as it would be the largest single shareholder. The Crown would be able to nominate three of the seven directors to the board of Tranz Rail.

Purchase of rail network
As part of the deal, the Crown will purchase the rail network and the associated infrastructure for $1. This purchase will include all the elements necessary to run the network, including track infrastructure, structures, signals, the train control centre, intellectual property and the plant and rolling stock used for track maintenance. Transfer of ownership is expected to take place on 30 September, 2003.

Freight, passenger and ferry operations will transfer out of Tranz Rail into a subsidiary called OpCo. This is to ringfence the rail operations in order to exclude the trucking operations and the Tasmanian Tranz Rail interests when determining how much of the costs of TrackCo should be recovered.

A Crown entity called TrackCo will be set up to manage the rail network. TrackCo’s responsibilities will include maintenance and control of the network, safety systems and incident management and investigation.

Around 100 Tranz Rail staff are likely to eventually transfer to Trackco. TrackCo will also take over current third party contracts for network maintenance.

The Crown will terminate the majority of Tranz Rail’s existing lease of the land underneath the tracks, although Tranz Rail will retain specific properties, notably the core terminal land that Tranz Rail currently uses for its operations.

As part of this, the Crown will purchase a variety of assets and revenue streams from Tranz Rail, including access rights to surplus land and property and sub-leases, for around $50 million, subject to valuation. The $44 million cash injection will serve as part payment of this sum.

The Crown also intends to invest $100 million to refurbish and improve the network.

Access agreement
Under the terms of the deal, Tranz Rail will have exclusive access rights to the network for freight services. However, the Crown will have “step-in” rights, which will allow it to grant access rights to another operator, should Tranz Rail fail to satisfy Service Level Agreements relating to volume. Tranz Rail will also be subject to financial penalties should it not meet agreed service standards.

Tranz Rail will also have first right of refusal for any new line and any new subsidy for a line or a freight service.

Existing access rights by Auckland metro, heritage operators and Tranz Scenic will also be provided for under the agreement.

The Crown will set total access charges to recoup part of TrackCo’s costs from rail users. The total charge will be based on an “open book” appraisal of Tranz Rail’s historical and forecast performance, and be capped for the first four years. These charges will be reviewed every three years, and the access charging agreement will remain in place for ten years.

Current modelling of Tranz Rail’s expected financial performance under the new arrangements shows that this access charging arrangement will amount to an implicit subsidy to Tranz Rail of around $20 million per annum.

The access charges will be allocated among the different rail users and services on two bases: firstly, a fixed component that will reflect the density of traffic that a particular line is capable of handling and secondly, a variable component that will reflect the actual tonnage and distance of the traffic on that line.

ENDS

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