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Tranz Rail & NZ Govt Propose Rail Agreement

Tranz Rail & NZ Govt Propose Rail Development Agreement

Auckland- New Zealand Tranz Rail Holdings {NZSE:TRH}

Tranz Rail Holdings Limited (TRH) and the New Zealand Government signed heads of agreement today on a joint plan for restructuring and developing the New Zealand railway system.

The proposal is conditional on approval by TRH shareholders.

Under the terms of the agreement announced today, the Government would pay about $75.8 million to acquire a 35% interest in TRH in the form of new shares to be issued at a price of 67c per share. After the share issue, the Government would be entitled to elect three of the seven directors on the TRH Board of directors.

The Government would also buy back the rail track, associated land lease, yards, terminals and control systems from TRH for $1 and other land, property and leases surplus to TRH requirements for about $50 million, subject to final valuations.

The Government is making a payment to TRH of $44 million in mid-June as a deposit on rail network and assets it will acquire from TRH. If the proposed transaction is not approved by TRH shareholders, this deposit will be repayable with interest on 30 June 2004.

A special shareholders’ meeting will be held in Auckland in July to consider the proposed transaction.

TRH shareholders will be provided with an independent appraisal of the proposed transaction together with notice of the special meeting. The independent appraisal will be undertaken by merchant bankers and corporate advisors, Grant Samuel & Associates.

If the proposal is approved by TRH shareholders in July, it is intended that the restructured railway system would commence operations on 30 September.

Under the proposal to be considered by TRH shareholders,

TRH would place its rail network operations activities into a separate company to be purchased, owned and operated by the Crown. Initially, the rail network operating company would be managed by TRH until midway through next year, after which it would function as a separate entity.

TRH would operate rail services on the track network under the terms of an exclusive access agreement, subject to existing third party access rights, which will terminate on 31 December 2070, unless terminated earlier under the provisions of the agreement.

TRH would obtain exclusive network access under a “use it or lose it” requirement that would be triggered if tonnage carried on lines drops below agreed levels. In general, the trigger levels are equivalent to 60% of the tonnage carried in the current financial year ending 31 July 2003, with lower levels specified for some industrial lines. The “use it or lose it” requirement would contain a provision protecting TRH exclusive track access rights against the impact of events which are outside its control.

TRH would pay a track access charge to the Government-owned track network operating company. The access charge would be set at levels that enable TRH to achieve a commercial return based on the weighted average cost of capital required to operate its rail freight, rail passenger and ferry businesses.

The track access charge would be payable in arrears, reviewable every three years, and subject to adjustment for investments in innovation that generates value for TRH.

The track access charge for the first nine months of operation to 30 June 2004 would be fixed at $41.2 million.

TRH would initially manage the track network operations on behalf of the Crown-owned company until 1 July 2004 while the company establishes its own management structure.

The Crown track network operating company intends to invest an incremental $100 million over five years on projects to upgrade track network operations and safety standards.

Commenting on the proposal today, the Chairman of the TRH Board of Directors Wayne Walden said that directors considered that it was in the best interests of the company and would be recommending its approval by TRH shareholders.

“As matters stand today, it is the unanimous view of the directors that the proposed transaction with the Government is in the best interests of the company. It will immediately underpin the operating cash flow of TRH and stabilise its financial structure.

“Going forward, the proposed transaction would see road and rail freight carriers competing on a level playing field for the first time – with both contributing towards the cost of essential supporting infrastructure by user charges,” he said

“The immediate deposit paid by the Government safeguards the company against potential short-term liquidity problems while shareholders consider the broader proposal and, subject to their approval, while we carry out the subsequent restructuring of railway operations,” he said. “This transaction would enable Tranz Rail to break out of its current subsistence mode of operation, move into a new operating cost structure, and undertake development investments that will see the company realise its full commercial potential as a highly competitive rail-based freight transporter.

“The proposal has real potential to enable rail to move much more freight, reduce heavy truck traffic on the roads, produce fuel saving efficiencies, and deliver land transport in a way that involves less wear and tear on our environment. It promises benefits to the company and benefits to the country.

“In terms of other options that could be available to TRH shareholders before they consider the proposal announced today, the directors will examine proposals from other interested parties as they are made and make appropriate recommendations to shareholders. The company will also continue the negotiations for the sale of assets that are currently in progress,” Mr Walden said.

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