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1 Dominic D Smith Senior Vice President & Company Secretary Aurizon Holdings Limited ABN T F E CompanySecretary@aurizon.com.au W aurizon.com.au Level 17, 175 Eagle Street Brisbane QLD 4000 GPO Box 456 Brisbane QLD May 2013 ASX Market Announcements ASX Limited 20 Bridge Street Sydney NSW 2000 BY ELECTRONIC LODGEMENT Aurizon Progresses its Debt Refinancing On May 13, 2013, Aurizon Holdings Limited (Aurizon) announced to the market its intention to implement a new long term capital structure, involving stand-alone debt facilities at both Aurizon and its subsidiary, (Aurizon Network). As part of the debt refinancing, a first set of general purpose standalone accounts has been prepared for Aurizon Network for the year ended 30 June 2012, together with two years of comparatives. Potential debt providers will be given the following data to assist with their assessment of Aurizon Network. This material includes: Background slides about Aurizon Network (Attachment 1); and The standalone historic financial statements for Aurizon Network and its subsidiaries for the years ended 30 June 2010, 2011 and 2012 and the half years ended 31 December 2011 and 2012 (Attachment 2) Yours faithfully Aurizon Dominic D Smith SVP & Company Secretary

2 Further information on Aurizon Network May 2013

3 Further information overview On May 13, 2013, Aurizon Holdings (Aurizon) announced to the market its intention to implement a new long term capital structure, involving stand-alone debt facilities at both Aurizon and its subsidiary, Aurizon Network Pty Ltd (Aurizon Network). As announced, Aurizon has new committed debt facilities of $3.0 billion which will be placed at the Aurizon Network level. Aurizon has now initiated proceedings to finalise the debt structure and will update the market upon completion, expected in late June 2013, with details, including debt maturity profile and funding sources. Potential debt providers will be given certain financial and other relevant data to assist with their assessment of Aurizon Network. This material includes: Background material about Aurizon Network; and Standalone historic financial statements for Aurizon Network and its subsidiaries for the years ended 30 June 2010, 2011 and 2012 and the half years ended 31 December 2011 and The following slides provide the background material and a high level reconciliation of the standalone financial statements compared to the business unit Network Services as provided in Aurizon Holdings financial statements (as part of the segment note) for FY 2011, FY 2012 and 1H FY

4 Reconciliation: Network Segment to Network Legal Entity HY13 FY12 FY11 Aurizon Holdings Ltd Network Segment EBIT Services Business Construction & Rail Grinding (11) (32) (3) Maintenance (8) (19) (31) Finance Costs (6) Other Profit Before Income Tax represents one component of the Network Segment within Aurizon Holdings Ltd Other components of the Network segment are mostly represented by the non-regulated Services Business Services earnings will fluctuate driven by mix of projects No change is proposed to FY13 segment disclosure FY14 segment disclosure will change 4 1. Note: FY10 excluded due to separation of Queensland Rail Passenger business not occurring until 1 July Network segment for FY12 restated to reflect the implementation of the functional model, as disclosed in the HY13 Aurizon interim results release 3. Finance costs are included in Profit Before Income Tax for, but are not included in Network Segment EBIT 4. Details of changes and retrospective adjustments will be provided for FY11, FY12 and FY13 at the appropriate time ahead of the HY14 results 3

5 Overview 4

6 This image cannot currently be displayed. About Aurizon Network Aurizon Network (Network) controls, manages, operates and maintains the fixed rail infrastructure "below rail" assets on the Central Queensland Coal Network (CQCN) Regulated Asset Base (RAB) of $4.3 billion¹ Rated Baa1/BBB+ (stable/stable) Network also delivers rail infrastructure to the major mines in the Central Queensland coal regions and is the largest coal export rail network in Australia The CQCN is regulated by the Queensland Competition Authority (QCA) and provides open access to all accredited rail operators Network is a subsidiary of Aurizon Holdings Australia's largest rail freight company (by tonnes hauled) Listed in the S&P/ASX 50 index Market capitalisation of $9.4 billion² State of Queensland ownership interest of 8.85%² Also rated Baa1/BBB+ (stable/stable) 1. As at June 30, 2012, the estimated value of our RAB, excluding $453 million of assets subject to access facilitation deeds (AFDs), subject to QCA approval 2. As at May 23,

7 Below rail infrastructure Traction power Signal Track Signalling/ Overhead/ Telecoms Signal phone Power Ballast Rail Ballast Structures Super-structure Sleeper Facilities Sub-structure 6

8 About the CQCN The CQCN comprises 4 major coal systems serving Queensland s Bowen Basin coal region: Newlands, Goonyella, Blackwater and Moura and GAPE, a connecting system link 2,667 kilometres network length 44 operating coal mines serviced¹ Network's operations are governed by 99 year lease arrangements with the State of Queensland Key statistics ² FY13 Contracted Tonnages 249.9mt Coal Mines Serviced (2013) ³ 44 Coal Export Terminals 5 Coal Domestic Terminals 5 Export Coal (FY12) 95% Port Capacity (2012) Network Length Electrified Track Length 257mtpa 2,667km 1,866km 1. Includes an estimate of mines that are expected to be linked to the CQCN by the end of Based on management estimates as at December 31, Aurizon analysis 7

9 New capital structure On May 13, 2013, Aurizon Holdings announced its intention to implement a new long term capital structure Standalone debt facilities will be established at the Network level, supported by the below rail regulated infrastructure assets Network's gearing levels will be broadly consistent with the regulator's assumption of 55% Debt/RAB Network has obtained credit ratings from Moody's (Baa1 stable) and S&P (BBB+ stable) The new capital structure will provide financial flexibility to Aurizon Holdings and Network going forward, including the ability to introduce a minority equity interest in Network in the future Following the refinancing, Aurizon Holdings and Network will continue to provide integrated rail solutions to its customers Group overview Proceeds of new debt facilities at Aurizon Network and Aurizon Holdings will be used to repay existing $3bn senior debt facility New standalone structure $3.0bn of new senior debt Committed debt facilities with maturities up to 5 years Total of $2.2bn expected to be drawn initially Aurizon Holdings Baa1/BBB+ Aurizon Network Baa1/BBB+ Other functions 8

10 Network's strategy and key strengths 9

11 Overview of Aurizon Network 1 Regulated revenues within a stable and well-established regulatory regime Access charges represented 94.9% and 90.6% of revenue for 1H13 and FY12 respectively 2 Revenue protection mechanisms limit our exposure to patronage and volume risk Under the regulatory regime, we benefit from contractual take or pay provisions and a revenue cap mechanism Long term lease arrangements supported by the Queensland coal mining sector 99 year lease arrangements with the State of Queensland High quality metallurgical and thermal coal supported by significant reserves in close proximity to Asian export markets Long term customer relationships with the two main above rail operators servicing well-established miners Users of the CQCN include Anglo American, BHP Billiton Mitsubishi Alliance, Glencore Xstrata, Peabody Energy Corporation, Rio Tinto and Vale Network is part of a vertically integrated rail service provider Long term service agreements with Aurizon Operations Limited, Australia s largest rail freight company Strong balance sheet and financial flexibility Prudent capital structure with a commitment to a long term sustainable financial profile Commitment to strong investment grade credit ratings Experienced Board and management team Multi-sector (domestically and internationally), multi-disciplinary experience, with a track record of successfully executing major coal rail network expansion projects for Network 10

12 Network's strategy Cooperative framework with the Aurizon Holdings Group The Aurizon Holdings Group is vertically integrated, with Network providing access to the regulated below rail heavy haul infrastructure to supply unregulated above rail services Commitment to the long term expansion and growth of the CQCN CQCN capacity is currently fully contracted Midway through expansion program to add 76Mtpa of capacity from FY11 base, lifting total system capacity to approximately 310Mtpa by FY15 Maintaining prudent capital management and ratings commitment Gearing levels broadly consistent with the QCA s assumption of 55% Debt to RAB Continue plans to diversify funding sources Commitment to strong investment grade credit ratings Building comprehensive asset management and operating system strategy Strategy consistent with the practice employed by North American Class 1 railroads Focus on commercial excellence Since IPO, the Aurizon Holdings Group has sought to increase returns and profitability Continued focus on safety performance Aurizon Holdings Group is committed to zero harm in our workplace 11

13 Regulated revenues Coal volumes (mt) % Revenue protection mechanisms mitigates revenue risk if volumes are below forecast Revenue ($m) % 495 FY10 FY11 FY12 LTM¹ 1H FY12 1H FY13 FY10 FY11 FY12 LTM¹ 1H FY12 1H FY13 Regulated Asset Base ($bn)² EBITDA ($m) % 4.3 Stable growth in RAB drives stable growth in revenue and EBITDA Recently completed GAPE project has delivered growth over last 12 months 57% % % % % 312 FY10 FY11 FY12³ FY10 FY11 FY12 LTM¹ 1H FY12 1H FY13 1. LTM refers to Last Twelve Months to December Excluding assets subject to access facilitation deeds ($453m in FY12) 3. Subject to QCA approval EBITDA margin 12

14 Revenue protection mechanisms 1. Take or pay For personal use only Revenue protection mechanisms ensure that Network has reduced exposure to patronage and volume risk Calculated first and allows Network to recover revenue shortfalls directly from the customer 2. Revenue cap mechanism In the event that the take-or-pay mechanism does not recover the shortfall, the remaining shortfall revenue will be recovered 2 years later through an adjusted tariff In the event that revenue collected exceeds the Maximum Allowable Revenue, the revenue cap mechanism will return the surplus revenue 2 years later through reduced tariffs Revenue building block approach and revenue protection RAB Return on Assets AT1 AT2 Incremental maintenance charge, volume exposed Reflects investment for each additional train path X Regulated WACC Opex Maintenance Revenue cap Take or pay AT3 AT4 Recovers the cost of investment in and operation of the network Depreciation AT5 Recovers the costs related to electric traction assets Tax EC Recovers the cost of electrical energy 13

15 Strong customer relationships The CQCN delivers rail infrastructure to over 40 operating coal mines in the Bowen Basin coal region The mines are operated by a diversified group of coal miners including: Anglo American BHP Billiton Mitsubishi Alliance Glencore Xstrata Peabody Energy Corporation Rio Tinto Vale In FY12, ~84% of our regulated coal access revenue was derived from access agreements with Aurizon Operations, while ~14% was derived from Pacific National (a subsidiary of Asciano) During the same period, ~2% of our regulated coal access revenue was derived from direct contractual relationships with coal mining users Estimated FY13 contract volumes (split by customer group) 20% 80% Other Aurizon Holdings Group 1 Blackwater Goonyella Moura Newlands 1. Includes direct contractual relationships 14

16 Fully integrated offering to customers We are part of a vertically integrated rail service provider and have secured services necessary for our operations Network will enter into a number of agreements with Aurizon Operations, to facilitate access to skills and capabilities amongst the group The agreements will allow Network to fulfil its regulatory obligations and the group's growth objectives The agreements are expected to be effective by June 30, 2013, subject to employee / union consultation Aurizon Holdings Aurizon Network Aurizon Operations Other Aurizon functions Network Operations Commercial Development Network Finance Regulation Engineering & Project Delivery Specialised Track Services Other Existing Aurizon Network divisions Asset management Rail infrastructure management Train control & planning & scheduling Capacity analysis Routine maintenance Corporate services Construction Support services Engineering & project management Specialised track maintenance Services Agreements Note: chart does not show legal entities and is only illustrative of the proposed organisational model 15

17 Network capacity expansion CQCN capacity is currently fully contracted Going forward, we anticipate that growth projects, involving coal basins not linked to the CQCN today, will be developed and funded by Aurizon Holdings Any decision to fund growth projects by Network will be made in line with our strategy to maintain strong investment grade credit ratings CQCN capacity under construction (mtpa) mt 310 Goonyella to Abbot Point Expansion (GAPE) $1.0bn project, railings commenced in December 2011 Above regulated returns Full ramp up expected by FY16 FY10 FY11 FY12 FY15 Wiggins Island Rail Project (WIRP) Stage I $910m project, expected to be completed by FY15 Above regulated returns Full ramp up expected by FY18 Goonyella System Expansion (GSE) $185m project, expected to be completed by June 2014 Regulated returns Additional capacity expected by FY15 from FY11 GAPE WIRP Goonyella System Expansion Blackwater enhancements Total Source: Management estimates +33mtpa +27mtpa +11mtpa +5 mtpa +76mtpa 16

18 Regulation 17

19 Current regulatory framework The CQCN operates under a stable and well established regulatory regime The CQCN is regulated by the QCA and provides open access to all accredited rail operators The form of regulation is a conventional revenue cap Network can earn a set return on its asset base over the regulatory period WACC x RAB plus other adjustments Network s revenue is independent of tonnes hauled on the network (limited volume risk) The core of the current Access Undertaking (AU) goes back to the initial AU from 2004 (UT1) The AU has evolved since this time, as has the coal market and customer priorities and expectations Some aspects remain unchanged from the original AU and some aspects are quite different The current AU, referred to as UT3, expires on June 30, 2013 It has been Network management practice to give a voluntary AU every 4 years On April 30, 2013, Network submitted a new voluntary AU to the QCA for approval (UT4) 18

20 QCA's approach to regulation The QCA takes a three step approach for determining the reference tariffs charged by Network to CQCN users Step 1 Step 2 Step 3 RAB is approved by the QCA on a Depreciated Optimal Replacement Cost basis The approved RAB is rolled forward annually with adjustments for consumer price index escalation, depreciation based on asset life, new capital expenditure proposed and asset disposals Building block approach adopted to determine the CQCN s notional revenue requirement Capital costs WACC return on capital, and depreciation Non capital costs expenses relating to operating costs, tax and maintenance Reference tariffs determined, taking into consideration forecast volumes Split between 6 reference tariffs reflecting the various cost recovery components Future tariffs will be adjusted should actual volumes differ from forecast volumes BUILDING BLOCKS WACC (Return on Capital) Depreciation + (Return of + Opex + Maintenance + Tax Capital) = Network's Maximum Allowable Revenue (MAR) 19 19

21 Growth in Network's RAB QCA determines Aurizon Network's access pricing based on the estimated value of the RAB RAB ($bn) 1 RAB value of $3.1bn 1 as at June 30, 2011 (approved by the QCA) +39% Value of the RAB determined by: Opening balance add inflation add capex less depreciation 4.3 Management estimates the value of the RAB as at June 30, 2012 to be $4.3bn Note this is subject to QCA approval FY10 FY11 FY12² 1. RAB excludes assets subject to access facilitation deeds (AFDs) ($453m in FY12) 2. Subject to QCA approval 20

22 Recent UT4 submission Network submitted its UT4 submission on April 30, 2013 Key elements of UT3 have been retained in UT4, to ensure continuity and stakeholder confidence in the regulatory regime Changes proposed include: Removal of the mandatory investment threshold for Network to fund projects up to $300 million Amendment to certain tariffs to promote efficient investment and use of the CQCN Modifications to the operation of the maintenance cost component of the revenue cap mechanism The submission also covers our proposed calculation of MAR over the UT4 period Proposed reduction in WACC from 9.96% p.a. to 8.18% p.a., reflecting changes in financial market conditions including historically low risk free rates Proposed change in Gamma (the value ascribed to imputation credits) Proposed change in depreciation to reflect life of mine associated with mines on the CQCN Operating Expenses and Maintenance allowances to reflect plan submitted by Network It is unlikely that UT4 will be approved by the QCA prior to the expiry of UT3 on June 30, 2013 A draft amending AU was submitted to the QCA on May 9, 2013, seeking to extend the expiry of UT3 to June 30, 2014 This provides for transitional reference tariffs until approval of UT4 21

23 Indicative timeline for UT4 We currently expect UT4 to be confirmed by the QCA by June 2014 Mar 13 Apr 13 Sep 13 Dec 13 Apr 14 Jun 14 UT4 development Stakeholder briefing 1 QCA & customer consultation (commences June) QCA consideration 2 Extended consultation period 3 QCA consideration 4 30 April, 2013 UT4 lodgement with QCA QCA draft determination Network response to draft determination QCA final determination 9 May, 2013 UT4 lodgement transitional tariff and extension DAAU Transitional tariffs are expected to apply from 1 July, 2013, until such time as UT4 arrangements are determined by the QCA Dates are indicative only and subject to change 22

24 Network financials and capital management 23

25 Financials and operating metrics Historic financials ($ millions) 1 FY10 FY11 FY12 1H FY12 1H FY13 1H FY13 vs 1H FY12 Total assets 3,343 3,838 4,392 Regulated Asset Base 2 3,004 3,089 4,286 Revenue % EBITDA % Tonnes (m) % NTK (bn) % Access revenue/ntk ($/000 NTK) % Maintenance/NTK ($/000 NTK) % 1. Historically, Network's financial results have been consolidated into audited accounts of Aurizon Holdings. Summary financials and operating metrics are not comparable with information previously filed by Aurizon Holdings 2. Excludes assets subject to access facilitation deeds (AFDs) ($453m in FY12). FY12 subject to QCA approval 24 24

26 Capitalisation and credit metrics Strong balance sheet, with gearing levels broadly consistent with the QCA's assumption of 55% Debt / RAB ($m, as at 31 December, 2012) Pro forma Cash 0.2 Intercompany loan from Aurizon Operations Debt 2,200 Equity 1,763 Debt / RAB 50% Debt / LTM EBITDA 4.0x 25 25

27 Capital expenditure FY11 and FY12 capex spend related predominantly to GAPE and Blackwater electrification projects Historic growth vs. maintenance capex ($m) Major growth projects currently in progress are WIRP Stage I and Goonyella System Expansion Funding for growth projects, whether at the Network or Aurizon Holdings level, will be decided on a project by project basis, dependent on: 152 the relationship of the project to the CQCN the quantum of funding required the risk profile of the project Going forward, we anticipate that growth projects, involving coal basins not linked to the CQCN today, will be developed and funded by Aurizon Holdings Any decision to fund growth projects at the Network level will be made in line with our strategy to prudently manage capital and maintain strong investment grade credit ratings FY11 FY12 1H FY12 1H FY13 Growth capex Maintenance capex 26

28 Disclaimer and important notice Document is a summary only This document contains information in a summary form only and does not purport to be complete and is qualified in its entirety by, and should be read in conjunction with, all of the information which Aurizon files with the Australian Securities Exchange. No investment advice This document is not intended to be, and should not be considered to be, investment advice by Aurizon nor a recommendation to invest in Aurizon. The information provided in this document has been prepared for general informational purposes only without taking into account the recipient s investment objectives, financial circumstances, taxation position or particular needs. Each recipient to whom this document is made available must make its own independent assessment of Aurizon after making such investigations and taking such advice as it deems necessary. If the recipient is in any doubts about any of the information contained in this document, the recipient should obtain independent professional advice. No offer of securities Nothing in this presentation should be construed as a recommendation of or an offer to sell or a solicitation of an offer to buy or sell securities in Aurizon in any jurisdiction (including in the United States). This document is not a prospectus and it has not been reviewed or authorised by any regulatory authority in any jurisdiction. This document does not constitute an advertisement, invitation or document which contains an invitation to the public in any jurisdiction to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities in Aurizon. Forward-looking statements This document may include forward-looking statements which are not historical facts. Forward-looking statements are based on the current beliefs, assumptions, expectations, estimates and projections of Aurizon. These statements are not guarantees or predictions of future performance, and involve both known and unknown risks, uncertainties and other factors, many of which are beyond Aurizon s control. As a result, actual results or developments may differ materially from those expressed in the forward-looking statements contained in this document. Aurizon is not under any obligation to update these forward-looking statements to reflect events or circumstances that arise after publication. Past performance is not an indication of future performance

29 (formerly QR Network Pty Ltd) ABN Interim Financial Report for the half-year ended 31 December 2012

30 ABN Interim Financial Report - 31 December 2012 TABLE OF CONTENTS Consolidated income statement...3 Consolidated statement of comprehensive income...4 Consolidated balance sheet...5 Consolidated statement of changes in equity...6 Consolidated statement of cash flows Summary of significant accounting policies Critical accounting estimates and judgements Revenue Profit before income tax Income tax expense/(benefit) Dividends Contingencies Related party transactions Events occurring after the reporting period...11 Directors declaration...12 Independent auditor's report to the members...13 is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level Eagle Street BRISBANE QLD

31 Consolidated income statement For the half-year ended 31 December December 31 December Notes $m $m Revenue from continuing operations Consumables (145.9) (164.6) Employee benefits expense (34.9) (26.9) Depreciation and amortisation expense (92.0) (73.6) Other expenses (2.2) (3.1) Finance costs - - Profit before income tax Income tax expense 5 (61.2) (40.6) Profit for the year The above consolidated income statement should be read in conjunction with the accompanying notes. 3

32 Consolidated statement of comprehensive income For the half-year ended 31 December December 31 December $m $m Profit for the half-year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges recognised in equity Other comprehensive income for the half-year, net of tax Total comprehensive income for the half-year The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 4

33 Consolidated balance sheet As at 31 December December 30 June $m $m ASSETS Current assets Cash and cash equivalents Trade and other receivables Other assets Total current assets Non-current assets Property, plant and equipment 4, ,285.5 Total non-current assets 4, ,285.5 Total assets 4, ,391.6 LIABILITIES Current liabilities Trade and other payables Provisions Other liabilities 1, ,007.1 Total current liabilities 1, ,094.0 Non-current liabilities Provisions Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities 1, ,712.1 Net assets 2, ,679.5 EQUITY Contributed equity 1, ,634.1 Retained earnings 1, ,045.4 Total equity 2, ,679.5 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 5

34 Consolidated statement of changes in equity For the half-year ended 31 December 2012 Attributable to owners of Contributed equity Reserves Retained profits Total equity $m $m $m $m Balance at 1 July ,633.1 (0.1) 1, ,654.3 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends provided for or paid - - (90.3) (90.3) Capital contribution from the parent for share-based payments (90.3) (89.9) Balance at 31 December , , ,661.5 Balance at 1 July , , ,679.5 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends provided for or paid - - (112.2) (112.2) Capital contribution from the parent for share-based payments (112.2) (111.7) Balance at 31 December , , ,726.5 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 6

35 Consolidated statement of cash flows For the half-year ended 31 December December 31 December $m $m Cash flows from operating activities Receipts from customers Payments to suppliers and employees (193.8) (228.6) Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment (298.7) (370.7) Interest paid for qualifying assets (8.4) (26.2) Net cash (outflow) from investing activities (307.1) (396.9) Cash flows from financing activities Net proceeds from loans from related parties Dividends paid to Company's shareholders (112.2) (90.3) Net cash inflow from financing activities Net (decrease) increase in cash and cash equivalents (0.2) 0.1 Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year The Company does not hold any cash and cash equivalents as it is funded by the parent entity. The statements of cashflows have been prepared on the basis that the net movement in intercompany loans is presented in cash flows from financing activities and transactions are represented as cashflows from operating and investing activities. The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 7

36 1 Summary of significant accounting policies Notes to the consolidated financial statements 31 December 2012 The financial statements of ("the Company") as at and for the period ended 31 December 2012 are for the consolidated entity consisting of the Company and its subsidiaries (together referred to as "the Group"). The financial statements are presented in Australian currency. (a) Basis of preparation This condensed consolidated interim financial report has been prepared in accordance with Australian Accounting Standard AASB 134 Interim Financial Reporting. This condensed interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this financial report is to be read in conjunction with the annual report of the Company for the year ended 30 June The principal accounting policies adopted in the preparation of these consolidated financial statements are consistent with those of the previous financial year, except as modified as required for the adoption of new accounting standards. These policies have been consistently applied to both half-years presented, unless otherwise stated. Where necessary, comparative information has been restated to conform with changes in presentation in the current year. (i) New and amended standards adopted by the Group The Group has adopted a number of Australian Accounting Standards and Interpretations that are mandatory for annual reporting periods beginning on or after 1 July The adoption of these standards did not have any impact on the current period or any previous period and is not likely to affect future periods. (ii) Early adoption of standards The Group has not elected to early adopt any of the pronouncements available for adoption for the annual reporting period beginning 1 July (iii) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and assets and liabilities (including derivative instruments) at fair value. (iv) Rounding of amounts Amounts in the financial report have been rounded off to the nearest hundred thousand dollars, unless otherwise indicated. (v) Going concern The financial report has been prepared on a going concern basis despite current liabilities exceeding current assets by $1,148.8 million at 31 December The deficit in current liabilities has arisen as a result of all finance and cash management functions being undertaken by the Aurizon group on behalf of Aurizon Network. The intercompany account effectively operates as a cash account and the net liability position is classified as a current liability as Aurizon Network has no contractual right to avoid settlement if requested by the parent entity. In the absence of alternative strategic or funding options being secured, Aurizon Network remains dependent on the financial support of Aurizon Holdings Group to fund capital investment and provide treasury and cash management functions. In the absence of such alternative funding options, it is not the intention of the Aurizon Holdings Group to call the outstanding balance of the intercompany account within the next 12 months, enabling Aurizon Network to continue as a going concern and be able to service its debts as and when they fall due. 8

37 Notes to the consolidated financial statements 31 December 2012 (continued) 2 Critical accounting estimates and judgements The preparation of interim financial statements requires management to make estimates, judgements, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable in the circumstances. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The same significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty as those that applied to the financial report as at and for the year ended 30 June 2012 have been made for 31 December The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed. (a) Take or Pay During the half-year, actual tonnages have been below the regulatory forecast. As a result, significant estimates have been made in forecasting annual tonnages to determine the amount of annual net take or pay the Group is entitled to receive in respect of the half-year in accordance with the Access Undertaking agreements. 3 Revenue 31 December 31 December $m $m Revenue from continuing operations Services revenue Track access Other services revenue Other revenue Profit before income tax Included within profit before income tax, and not adjusted as significant items, are the following: 31 December 31 December $m $m Revenue Take or pay Revenue cap Expense Voluntary redundancy costs Where annual actual tonnages railed are less than the regulatory approved annual tonnage forecast, an annual take or pay mechanism may become operative. A variable component of take or pay may also be applied where tonnage forecasts do not meet certain consecutive monthly thresholds. The take or pay portion of access revenue is recognised in the year that the contractual railings were not achieved. 9

38 4 Profit before income tax (continued) Notes to the consolidated financial statements 31 December 2012 (continued) Access revenue is subject to a revenue cap mechanism that serves to ensure the network recovers its full regulated revenue over the regulatory period, with the majority of under or over recovery in access tariffs (net of take or pay charges) during a financial year being charged or refunded, and recognised as revenue, in the second year following the period in which the contractual railings were not achieved. The revenue cap of $26.6 million recovered in the half-year ended 31 December 2012 relates to contractual railings that were not achieved in Income tax expense/(benefit) (a) Income tax expense/(benefits) 31 December 31 December $m $m Current tax Deferred tax (b) Numerical reconciliation of income tax expense/(benefit) to prima facie tax payable 31 December 31 December $m $m Profit before income tax expense Tax at the Australian tax rate of 30% (2011: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Sundry Items (4.3) - Research and development (0.5) (0.7) Non-assessable development Adjustment for current tax of prevous periods - - Total income tax expense/(benefit) Dividends (a) Ordinary shares Final dividend for the year ended 30 June 2011 of $902,800 per share, paid September 2011 (unfranked) Final dividend for the year ended 30 June 2012 of $1,122,400 per share, paid September 2012 (unfranked) 31 December 31 December $m $m

39 6 Dividends (continued) Notes to the consolidated financial statements 31 December 2012 (continued) (b) Dividends not recognised at the end of the reporting period 31 December 31 December $m $m Since 31 December 2012, the directors have recommended the payment of a final dividend of $876,000 per fully paid ordinary share (2011: $902,800), unfranked. The aggregate amount of the proposed dividend expected to be paid on 30 April 2013 out of retained earnings, but not recognised as a liability at 31 December 2012, is: Contingencies Issues relating to common law claims and product warranties are dealt with as they arise. There have been no material changes in contingent assets or liabilities since 30 June Related party transactions Arrangements for related parties continue to be in place as disclosed in the 30 June 2012 financial report. 9 Events occurring after the reporting period Subsequent to 31 December 2012 the Blackwater and Moura coal systems in the Central Queensland Coal Network have been impacted by heavy rain and flooding associated with ex Tropical Cyclone Oswald. The Blackwater system was closed for 12 days and the Moura system was closed for 26 days. The Group continues to assess the volume and financial impact from this event and is working closely with customers to recover tonnages. 11

40

41 Independent auditor s review report to the members of Report on the half-year financial report We have reviewed the accompanying half-year financial report of (the company), which comprises the balance sheet as at 31 December 2012, and the income statement, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, a summary of significant accounting policies other explanatory notes and the directors declaration for the Aurizon Network Group (the consolidated entity).the consolidated entity comprises the company and the entities it controlled at the half-year end or from time to time during the half-year. Directors responsibility for the half-year financial report The directors of the company are responsible for the preparation and fair presentation of the half-year financial report that gives a true and fair view in accordance with the accounting standards (including the Australian Accounting Interpretations) for such internal control as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement whether due to fraud or error. Auditor s responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, anything has come to our attention that causes us to believe that the financial report does not give a true and fair view of the consolidated entities balance sheet as at 31 December 2012 and its performance for the half year ended on that date, and complying with Accounting Standard AASB 134 Interim Financial Reporting. As the auditor of the company, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report. A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. It also includes reading the other information included with the financial report to determine whether it contains any material inconsistencies with the financial report. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. PricewaterhouseCoopers, ABN Riverside Centre, 123 Eagle Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: , F: , Liability limited by a scheme approved under Professional Standards Legislation. 13

42 Conclusion Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the half-year financial report of does not 1. give a true and fair view of the consolidated entities financial position as at 31 December 2012 and of its performance for the half year ended on that date; and 2. comply with Australian Accounting Standard AASB 134 Interim Financial Reporting PricewaterhouseCoopers John Yeoman Brisbane Partner 30 April

43 (formerly QR Network Pty Ltd) ABN Financial report for the years ended 30 June 2012, 30 June 2011 and 30 June 2010

44 (formerly QR Network Pty Ltd) ABN Financial report for the years ended 30 June 2012, 30 June 2011 and 30 June 2010 TABLE OF CONTENTS Consolidated income statement... 2 Consolidated statement of comprehensive income... 3 Consolidated balance sheet... 4 Consolidated statement of changes in equity... 5 Consolidated statement of cash flows Summary of significant accounting policies Critical accounting estimates and judgements Financial risk management Revenue Other income from continuing operations Expenses from continuing operations Income tax expense Income tax expense Discontinued operations and assets classified as held for distribution Trade and other receivables Other assets Property, plant and equipment Deferred tax assets Trade and other payables Provisions Other liabilities Deferred tax liabilities Contributed equity Contributed equity (continued) Reserves Dividends Key management personnel disclosures Contingencies Contingencies (continued) Commitments Interests in joint ventures and associates Related party transactions Remuneration of auditors Reconciliation of profit after income tax to net cash inflow Parent entity financial information Events occurring after the reporting period Directors declaration Independent auditor s report to the members... 50

45 These financial statements are the consolidated financial statements of the consolidated entity consisting of Aurizon Network Pty Ltd (formerly QR Network Pty Ltd) and its subsidiaries (the "Group"). is a subsidiary of Aurizon Operations Limited (Aurizon Operations), formerly QR Limited. The ultimate parent entity is Aurizon Holdings Limited (Aurizon Holdings), formerly QR National Limited. Aurizon Holdings and its subsidiaries together are referred to as the Aurizon Group. These are the first set of general purpose financial statements that have been prepared for this entity. As no audited financial statements have previously been prepared the two years of comparatives have been included. The financial results and balance sheet of Aurizon Network have historically been included in the audited financial statements of Aurizon Holdings Limited (formerly QR National Limited). The financial statements are presented in Australian dollars. is a company limited by shares, incorporated and domiciled in Australia. Its registered office is: Level Eagle Street BRISBANE QLD 4000 The nature of the entity's operations and its principal activities are: the provision of access to, and operation and management of the Central Queensland Coal Network; and the provision of design, construction, overhaul, maintenance and management service to the Aurizon Group as well as external customers.

46 Consolidated income statements For the years ended 30 June 2012, 30 June 2011 and 30 June Notes $m $m $m Revenue from continuing operations Other income Consumables 6 (302.7) (318.6) (268.4) Employee benefits expense 6 (62.0) (50.8) (49.1) Depreciation and amortisation expense 6 (162.7) (140.5) (137.0) Other expenses 6 (4.6) (7.2) (8.0) Finance costs 6 - (5.7) (2.1) Profit before income tax Income tax (expense)/benefit 7 (84.8) (89.5) Profit from continuing operations Profit from discontinued operations (net of tax) Profit for the year The above consolidated income statements should be read in conjunction with the accompanying notes. 2

47 Consolidated statements of comprehensive income For the years ended 30 June 2012, 30 June 2011 and 30 June Notes $m $m $m Profit for the year Other comprehensive income Changes in the fair value of cash flow hedges recognised in equity 18(a) - (0.1) - Changes in the fair value of cash flow hedges recognised in the income statement 18(a) Income tax relating to components of other comprehensive income 7(c) - - (0.1) Other comprehensive income for the year, net of tax 0.1 (0.1) 0.2 Total comprehensive income for the year The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes. 3

48 Consolidated balance sheets As at 30 June 2012, 30 June 2011 and 30 June Notes $m $m $m ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other assets Assets held for distribution Total current assets Non-current assets Inventories Property, plant and equipment 11 4, , ,215.5 Total non-current assets 4, , ,215.6 Total assets 4, , ,343.2 LIABILITIES Current liabilities Derivative financial instruments Trade and other payables Provisions Other liabilities 15 1, Liabilities held for distribution Total current liabilities 1, Non-current liabilities Provisions Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities 1, , Net assets 2, , ,431.4 EQUITY Contributed equity 17(b) 1, , ,708.0 Reserves 18(a) - (0.1) - Retained earnings 1, , Total equity 2, , ,431.4 The above consolidated balance sheets should be read in conjunction with the accompanying notes. 4

49 Consolidated statements of changes in equity For the years ended 30 June 2012, 30 June 2011 and 30 June 2010 Attributable to owners of Contributed equity Reserves Retained profits Total equity Notes $m $m $m $m Balance at 1 July (0.2) Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Capital contribution from Aurizon Operations Limited 8(d) 1, , , ,708.0 Balance at 30 June , ,431.4 Balance at 1 July , ,431.4 Profit for the year Other comprehensive income - (0.1) - (0.1) Total comprehensive income for the year - (0.1) Transactions with owners in their capacity as owners: Capital distribution to Aurizon Operations Limited 8(e) (75.7) - - (75.7) Dividends provided for or paid 19(a) - - (86.4) (86.4) Capital contribution from the parent for sharebased payments 17(b) (74.9) - (86.4) (161.3) Balance at 30 June ,633.1 (0.1) 1, ,654.3 Balance at 1 July ,633.1 (0.1) 1, ,654.3 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends provided for or paid 19(a) - - (180.6) (180.6) Capital contribution from the parent for sharebased payments 17(b) (180.6) (179.6) Balance at 30 June , , ,679.5 The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes. 5

50 Consolidated statements of cash flows For the years ended 30 June 2012, 30 June 2011 and 30 June Notes $m $m $m Cash flows from operating activities Receipts from customers ,695.1 Interest received Payments to suppliers and employees (446.4) (431.1) (748.9) Interest and other costs of finance paid - (5.8) (13.8) Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment (662.3) (660.0) (643.9) Interest paid for qualifying assets (34.4) (24.2) (18.3) Net cash (outflow) from investing activities (696.7) (684.2) (662.2) Cash flows from financing activities Net proceeds from loans from related parties (273.5) Dividends paid to Company's shareholders 19(a) (180.6) (86.4) - Net cash inflow from financing activities (273.5) Net increase/(decrease) in cash and cash equivalents (1.7) Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year The Company does not hold any cash and cash equivalents as it is funded by the parent entity. The statements of cashflows have been prepared on the basis that the net movement in intercompany loans is presented in cash flows from financing activities and transactions are represented as cashflows from operating and investing activities. The cashflow statement for the year ended 30 June 2010 represents the operations of the combined continuing and discontinued business. Note 8 provides an overview of discontinued cashflows. For non-cash investing and financing activities in 2010, refer to note 8. Net assets comprising primarily of property, plant and equipment were transferred to the parent entity via the loan account. The loan accounts were then forgiven for a capital contribution of $1,708 million. The above consolidated statements of cash flows should be read in conjunction with the accompanying notes. 6

51 1 Summary of significant accounting policies Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of ("the Company") and its subsidiaries and together are referred to as the "Group". (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. Aurizon Network Pty Ltd is a for-profit entity for the purpose of preparing the financial statements. These are the first set of general purpose financial statements that have been prepared for this entity. As no audited financial statements have previously been prepared the two years of comparatives have been included. The financial results and balance sheet of Aurizon Network have historically been included in the audited accounts of Aurizon Holdings Limited (formerly QR National Limited). The financial statements were approved for issue by the directors on 30 April The directors have the power to amend and reissue the financial statements. (i) Application of AASB 1 First-time Adoption of Australian Accounting Standards These financial statements are the first financial statements to be prepared in accordance with Accounting Standard AASB 1 First-time Adoption of Australian Accounting Standards. AASB 1 has been applied in preparing these financial statements. As the financial results and balance sheet of Aurizon Network have historically been included within the audited financial statements of Aurizon Holdings Limited (formerly QR National Limited), there has been no adjustments to the opening balances as at 1 July 2009 as a result of applying AASB 1. (ii) Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). (iii) New and amended standards adopted by the Group The Group adopted a number of Australian Accounting Standards and Interpretations which were mandatory for annual reporting periods beginning on or after 1 July There has been no effect on the financial performance or position of the Group from the adoption of these standards and interpretations. (iv) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities (including derivative instruments) at fair value. (v) Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. (vi) Going concern The financial report has been prepared on a going concern basis despite current liabilities exceeding current assets by $987.9 million at 30 June The deficit in current liabilities has arisen as a result of all finance and cash management functions being undertaken by the Aurizon Group on behalf of Aurizon Network. The intercompany account effectively operates as a cash account and the net liability position is classified as a current liability as Aurizon Network has no contractual right to avoid settlement if requested by the parent entity. Refer to note 21 regarding the Deed of Cross Guarantee the Company has entered into. In the absence of alternative strategic or funding options being secured, Aurizon Network remains dependent on the financial support of the Aurizon Group to fund capital investment and provide treasury and cash management functions. In the absence of such alternative funding options, it is not the intention of the Aurizon Group to call the outstanding balance of the intercompany account within the next 12 months, enabling Aurizon Network to 7

52 1 Summary of significant accounting policies (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Basis of preparation (continued) (vi) Going concern (continued) continue as a going concern and be able to service its debts as and when they fall due. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Group as at reporting date and the results of all subsidiaries for the year then ended. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and de-consolidated from the date that control ceases. Transactions between continuing and discontinued operations are treated as external from the date that the operation was discontinued. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. (ii) Joint ventures Jointly controlled assets or operations Where the Group has jointly controlled assets or operations, the proportionate interests in the assets, liabilities, revenues and expenses of a joint venture activity are incorporated in the financial statements under the appropriate headings. Details of joint venture operations and jointly controlled assets are set out in note 23. Joint venture entities Where the Group has an interest in a joint venture entity, the interest is accounted for using the equity method after initially being recognised at cost. Under the equity method, the share of the profits or losses of the joint venture entity is recognised in the income statement and the share of post-acquisition movements in reserves is recognised in other comprehensive income. Details of joint venture entities are set out in note 23. Profits or losses on transactions establishing the joint venture entity and transactions with the joint venture are eliminated to the extent of the Group s ownership interest until such time as they are realised by the joint venture entity on consumption or sale. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. Aurizon Network operates in only one business and geographical segment (Australia). The nature of the Group s business is that it enters into long-term contracts with key customers. Access contracts with Aurizon Operations Limited, as disclosed in note 24, represent a significant component of the Group s revenue. (d) Foreign currency and commodity transactions (i) Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Australian dollars, which is the Group s functional and presentation currency. (ii) Transactions and balances Where the Group is exposed to the risk of fluctuations in foreign exchange rates and commodity prices, it enters into financial arrangements to reduce this exposure. While the value of these financial instruments is subject to risk that market rates/prices may change subsequent to acquisition, such changes will generally be offset by opposite effects on the items being hedged. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies 8

53 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (d) Foreign currency and commodity transactions (continued) (ii) Transactions and balances (continued) are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance costs. All other foreign exchange gains and losses are presented in the income statement on a net basis within other income or other expenses. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss is recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-forsale financial assets are recognised in other comprehensive income. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group's activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised for the major business activities as follows: (i) Services revenue Services revenue comprises revenue earned from the provision of the following services: Track access Other services revenue (including construction and engineering services revenue). Track access Access revenue generated from the regulated rail network Central Queensland Coal Network ("CQCN") is recognised as services are provided, and is calculated on a number of operating parameters, such as the tonnage hauled, and applied to regulator-approved tariffs. The tariff is determined by the total maximum allowable revenue, applied to the regulatory approved annual tonnage forecast. Where annual actual tonnages railed are less than the annual tonnage forecast, an annual take or pay mechanism may become operative. A variable component of take or pay may also be applied where tonnage forecasts do not meet certain consecutive monthly thresholds. The take or pay portion of access revenue is recognised in the year that the contractual railings were not achieved. In addition, access revenue is subject to a revenue cap mechanism that serves to ensure the network recovers its maximum allowable revenue over the regulatory period such that where actual tonnages railed are less than the regulatory approved tonnage forecast, the revenue shortfall (net of take or pay) is recovered in subsequent years and conversely, where actual tonnages railed are greater, the excess revenue received is refunded through the access tariffs in subsequent years. The majority of under or over recovery in access tariffs (net of take or pay charges) are recognised as revenue in the second year following the period in which the contractual railings were under/over achieved in accordance with the regulatory framework. (ii) Other revenue Revenue from other service works is recognised by reference to the contractual entitlement. Access facilitation deeds for mine-specific infrastructure The Company builds mine-specific infrastructure for customers and provides access to those clients under access facilitation deeds. In substance, charges under the deeds comprise capital charges and interest charges (where the Company finances the assets). The capital charges are recognised on a straight-line basis over the term of the access facilitation deed while the interest charges are accrued in accordance with the contractual terms of the access facilitation deed arrangements. Where the customer prepays the future charges, the amounts received are recognised as deferred income and recognised within income on a straight-line basis over the term of the access facilitation deed. 9

54 1 Summary of significant accounting policies (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (e) Revenue recognition (continued) (ii) Other revenue (continued) Liquidated damages Liquidated damages occur when contractors fail to meet the key performance indicators set out in their contract with the Group. Income resulting from claims for liquidated damages is recognised as other income when all performance obligations are met (including when a contractual entitlement exists), it can be reliably measured (including the impact of the receipt, if any, on the underlying asset s carrying value) and it is probable that the economic benefits will flow to the Group. (f) Other income (i) Disposal of assets The gain or loss on disposal of assets is recognised at the date the significant risks and rewards of ownership of the asset passes to the buyer, usually when the purchaser takes delivery of the assets. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal and is recognised as other income or expenses in the income statement. (ii) Interest income Interest income is recognised using the effective interest method. (iii) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match those with the costs that they are intended to compensate. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. (g) Income tax The income tax expense or revenue for the period is the tax payable on the current period s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. 10

55 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (g) Income tax (continued) Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. To the extent that an item is recognised directly in equity, the deferred tax is also recognised directly in equity. Tax consolidation legislation is a member of a tax consolidated group of which Aurizon Holdings Pty Ltd is the head entity and which has implemented tax consolidation legislation as of 22 November accounts for its own current and deferred tax amounts. These tax amounts are measured as if continues to be a stand-alone taxpayer in its own right. However, the current tax liability and deferred tax assets arising from unused tax losses and unused tax credits are subsequently assumed by Aurizon Holdings Pty Ltd, as the head entity of the tax consolidation group. The entities have also entered into a tax funding agreement which sets out the funding obligations of members of the tax consolidated group in respect of income tax amounts. The tax funding agreement allocates tax liabilities using the standalone taxpayer approach. These tax funding arrangements result in Aurizon Network recognising a current inter-entity receivable/payable equal in amount to the tax liability/asset assumed by the head entity on behalf of the Aurizon Network. Details of the tax funding agreement are disclosed in Note 7. (h) Leases Leases on property, plant and equipment Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease's inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee is classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Rental revenue from operating leases where the Group is a lessor is recognised as income on a straight-line basis over the lease term. Where a sale and lease back transaction has occurred, the lease is classified as either a finance lease or operating lease, based on the factors described above. (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation; and are tested annually for impairment or more frequently if events or changes in circumstances indicate they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, largely independent of the cash flows from other assets or groups of assets (cash-generating units). The recoverable amount is the greater of an asset s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 11

56 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (i) Impairment of assets (continued) Impairment losses are recognised in the income statement. After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset is adjusted in future periods to allocate the asset s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. Impairment losses, if any, recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then, to reduce the carrying amount of other assets in the unit on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other non-financial assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (j) Cash and cash equivalents For the purpose of presentation in the statement of cash flow, as the Company s treasury operations are managed by the Aurizon Group, the Company does not have its own bank accounts. All transactions are managed through the intercompany balances and as such for the purposes of the cashflow the movement in the intercompany balances is reflected as financing activities and transactions are reflected as cashflows from operating and financing activities. Cash on hand represents cash held by the Surat Basin Coal joint venture. (k) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables generally have credit terms ranging from seven to 31 days. They are presented as current assets, unless collection is not expected for more than 12 months after the reporting date. Collectability of trade and other receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due, according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in the income statement within other expenses. When a trade or other receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement. (l) Inventories Inventories include items held in centralised stores, workshops and infrastructure and rollingstock depots and are stated at the lower of cost and net realisable value. Cost comprises the cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost is determined predominantly on an average cost basis. Items expected to be consumed after more than one year are classified as non-current. The provision for inventory obsolescence is based on assessments by management of particular inventory classes and relates specifically to infrastructure maintenance items. The amount of the provision is based on a proportion of the value of damaged stock, slow moving stock and stock that has become obsolete during the reporting period. 12

57 1 Summary of significant accounting policies (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (m) Investments and other financial assets Classification The Group classifies its non-derivative financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are expected to be settled within 12 months, otherwise they are classified as non-current. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 9) in the balance sheet. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through the income statement, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through the income statement are expensed in the income statement. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Available-forsale financial assets are subsequently carried at fair value. Changes in the fair value of other monetary and nonmonetary securities classified as available-for-sale are recognised in equity, unless they are impaired. The Group assesses at each reporting date whether there is objective evidence that a financial asset (or group of financial assets) are impaired. A financial asset (or a group of financial assets) is impaired and impairment losses are incurred only if there is objective evidence of impairment, as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset (or group of financial assets) that can be reliably estimated. In the case of securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. Assets carried at amortised cost For loans and receivables, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flow (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in the income statement. 13

58 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (n) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Company designates certain derivatives as hedges of the cash flows of recognised assets and liabilities and highly probable forecast transactions ( cash flow hedges ). At inception, the Company documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that is used in hedging transactions have been, and will continue to be, highly effective in offsetting future cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. (i) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement in other income or expense. Amounts accumulated in equity are reclassified to the income statement to consumables in the periods when the hedged item affects profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost or carrying amount of the asset. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement in consumables. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to the income statement. (ii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement in other income or expense. (iii) Embedded derivatives Through the Company s purchase and sale contracts, it is possible that embedded derivatives have been entered into. An embedded derivative will cause some or all of the cash flows of the purchase or sale contract (i.e. the host contract) to be modified by reference to a variable such as a foreign exchange rate or a commodity price. Embedded derivatives are separated from the host contract and accounted for as a stand alone derivative if the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract. (o) Property, plant and equipment (i) Methodology for valuation of fixed assets Buildings and plant and equipment Buildings and plant and equipment are carried at cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the asset or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. Cost may also include interest and transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment and may include capitalised interest. 14

59 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (o) Property, plant and equipment (continued) Land Land is carried at cost. As the Transport Infrastructure Act 1994 stipulates that corridor land is owned by the State, only non corridor land owned by the Company is recorded in the financial statements. Ownership of corridor land is with the Department of Environment and Resource Management, on behalf of the State. This land is leased to the Department of Transport and Main Roads and subsequently sub leased to under two separate subleases, each with a rental of $1.00 per year if demanded. The subleases each expire on 30 June The land subleases will automatically be renewed for a period of 99 years if the infrastructure leases are renewed for that period (refer leased coal infrastructure below). Leased property, plant and equipment Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership, are classified as finance leases. Assets held under finance leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss on an effective interest rate basis. Owned infrastructure Infrastructure assets are transferred from Assets under construction once fully constructed and available for use. They are carried at cost and represent capitalised expenditures that are directly related to capital projects and may include materials, labour and equipment, in addition to an allocable portion of indirect costs that clearly relate to a particular project that will provide future economic benefit and remain within the control of the Group. Leased coal infrastructure Coal infrastructure assets are owned by (a) the State, with respect to the Central Queensland Coal Network and (b) Queensland Rail, with respect to the North Coast Line (each referred to as the Infrastructure Lessors). Under each infrastructure lease the infrastructure is leased to the Company. The term of each of the leases is 99 years (at a peppercorn rate of $1 per year), unless the Infrastructure Lessor exercises an option to extend its lease for a further 99 years. The notice period for the Infrastructure Lessor to renew or allow expiry of the lease is not less than 20 years prior to the end of the 99 year term. To the extent that the lease expires at the end of 99 years, the Infrastructure Lessor will pay the fair market value of the infrastructure assets, including the infrastructure existing on commencement of the lease as well as any railway assets added during the lease term as are reasonably required to enable the infrastructure to be operated as a fully functioning railway network. As the assets are not considered to be providing a public service, the Company s economic interest in the assets is accounted for as property, plant and equipment. Assets under construction Assets under construction represents the cost of fixed assets currently under construction and includes the cost of all materials used in construction, direct labour, site preparation, interest, foreign currency gains and losses incurred where applicable, and an appropriate proportion of variable and fixed overheads. Costs of assets under construction are only capitalised when it is probable that future economic benefit associated with the asset will flow to the Group and the costs can be measured reliably. (ii) Borrowing costs Borrowing costs which are directly attributable to the acquisition, construction or production of a material qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. A qualifying asset is an internally funded asset that necessarily takes a substantial period of time to be prepared for its intended use or sale. The rate used to determine the amount of borrowing costs to be capitalised is the interest rate charged to the Company from a subsidiary of Aurizon Holdings on its outstanding borrowings during the year of 6.10% (2011: 7.37%; 2010: 7.04%). Other borrowing costs are expensed. (iii) Subsequent costs Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. 15

60 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (o) Property, plant and equipment (continued) (iv) Depreciation and amortisation Assets are depreciated or amortised from the date of acquisition, or, in respect of internally constructed or manufactured assets, from the time an asset is completed and held ready for use. Buildings, infrastructure and plant and equipment are depreciated using the straight-line method to allocate their costs, net of their residual values, over their estimated useful lives. Motor vehicles are depreciated using the diminishing value basis (percentages range from 13.6% to 35.0%). Land and assets under construction are not depreciated. Assets controlled by the Group under finance leases are amortised over the useful lives of the assets. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. Where assets have separately identifiable components that are subject to regular replacement, these components are assigned useful lives distinct from the asset to which they relate. Any expenditure that increases the originally assessed capacity or service potential of an asset is capitalised and the new depreciable amount is depreciated over the remaining life of the asset. The Company builds mine-specific infrastructure for customers and provides access to those clients under access facilitation deeds. Infrastructure controlled by the Company under these deeds is depreciated over the term of the deed, except where economic benefits are expected to flow to the Company after the end of the term of the deed. The depreciation and amortisation rates used during the year were based on the following range of useful lives: - Owned and leased infrastructure, including: Tracks years Track turnouts years Ballast 8-20 years Civil works years Bridges years Electrification years Field signals years - Buildings years - Plant and equipment 3 20 years - Leased property 3 40 years The depreciation and amortisation rates are reviewed annually and adjusted if appropriate, refer note 2. An asset's carrying amount is written down to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are recognised in the income statement. (p) Intangible assets (i) IT development and software Software (mainly comprising the SAP development costs) has a finite useful life and is carried at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over the estimated useful life which varies from 3 to 11 years. (ii) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. 16

61 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (q) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days or within the terms set by the supplier. Trade and other payables are presented as current liabilities. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. (r) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. (s) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and leave loading are recognised as current liabilities. These liabilities are in respect of employees services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled plus related on-costs. (ii) Other long-term employee benefit obligations Liabilities for long service leave where employees have completed the required period of service, or are entitled to pro-rata payments, are recognised as current liabilities. The remaining unvested liabilities are included as noncurrent liabilities. The liability for long service leave is measured using the present value of the expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future non-current payments are discounted using market yields at the reporting date on Commonwealth government bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. (iii) Retirement allowance Retirement allowance is payable to employees who fulfil the following requirements: Employees who retire or who are paid according to Voluntary Redundancy Scheme or Medical Separation; are not members of an accumulation super fund; and were employed prior to 1 February Liabilities for retirement allowance for employees who have fulfilled these requirements are recognised as current liabilities. The remaining liabilities are included within employee benefits and recognised as non-current liabilities. The non-current liability for retirement allowance is measured at the present value of expected future payments to be made in respect of services provided by qualifying employees. Consideration is given to expected future wage and salary levels, experience of the departure of qualifying employees and periods of service. Expected future payments are discounted using market yields at the reporting date on Commonwealth government bonds with maturities that match, as closely as possible, to the estimated future cash outflows. (v) Bonus plans The Company recognises a liability and an expense for bonuses based on a formula that takes into consideration the Company and individual key performance indicators, including profit attributable to the Company s shareholders after certain adjustments. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (i) Sick leave Sick leave is not provided for on the grounds that it is non-vesting and on average, no more than the annual entitlement is taken each year. 17

62 1 Summary of significant accounting policies (continued) (s) Employee benefits (continued) (ii) Superannuation Contributions are expensed as they are made. Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) The Company pays an employer subsidy to the Government Superannuation Office in respect of employees who are contributors to the Public Sector Superannuation (QSuper) scheme. Employer contributions to the QSuper Defined Benefit Fund are determined by the State of Queensland Treasurer having regard to advice from the State Actuary. The primary obligation to fund the defined benefits obligations are that of the State. However, the Treasurer has the discretion to request contributions from employers that contributes to the defined benefit category of QSuper. No liability is recognised for accruing superannuation benefits as this liability is held on a Whole of Government basis and reported in the Whole of Government financial statements. The State Actuary performs a full actuarial valuation of the assets and liabilities of the fund on a triennial basis. The latest valuation was completed as at 30 June 2010 and the State Actuary found the fund was in surplus from a Whole of Government perspective. In addition, from late 2007, the Defined Benefit Fund was closed to new members so any potential future deficit would be diluted as membership decreases. Accordingly, no liability/asset is recognised for the Company s share of any potential deficit/surplus of the Super Defined Benefit Fund of QSuper. The Company also makes superannuation guarantee payments into the QSuper Accumulation Fund (Non- Contributory) and QSuper Accumulation Fund (Contributory) administered by the Government Superannuation Office and to other complying Superannuation Funds designated by employees nominating Choice of Fund. (t) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. The grant by Aurizon Holdings of rights over its equity instruments to the employees of subsidiary undertakings in the Aurizon Group is treated as a capital contribution to that subsidiary undertaking. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period in as an expense with a corresponding credit to equity. (u) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at reporting date. (v) Goods and Services Tax ("GST") Revenues, expenses and assets are recognised net of the amount of associated GST, unless the amount of GST incurred is not recoverable from the Australian Taxation Office ("ATO"). In this case, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the ATO is included with other receivables or payables in the balance sheet. Cash flows are presented in the cash flow statement on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the ATO, are presented as operating cash flows. Aurizon Holdings Limited and its subsidiaries are grouped for GST purposes. Therefore, any inter-company transactions within the Group do not attract GST. (w) Rounding of amounts Amounts in the financial report have been rounded off to the nearest hundred thousand dollars, unless otherwise indicated. 18

63 1 Summary of significant accounting policies (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (x) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods and have not yet been applied in the financial statements. The Group's assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments, AASB Amendments to Australian Accounting Standards arising from AASB 9 and AASB Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013 but is available for early adoption. The standard impacts the accounting for available-for-sale financial assets, only permitting fair value gains and losses (not gains and loses from available-for-sale assets) to be recognised in other comprehensive income if they relate to equity investments that are not held for trading. As the Group does not classify any assets as available-for-sale, there will be no impact. There will be no impact on the Group s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. The Group does not intend to adopt the new standard before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 30 June (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the Australian Accounting Standards Board (AASB) issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation - Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. There is also new guidance on participating and protective rights and on agent/principal relationships. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or a joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account for their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 128. AASB 127 is renamed Separate Financial Statements and is now a standard dealing solely with separate financial statements. Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a 'partial disposal' concept. The Group does not intend to adopt the new standards before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 30 June They are not expected to have any significant impact on the financial statements. 19

64 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (x) New accounting standards and interpretations (continued) (iii) AASB 13 Fair Value Measurement and AASB Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September It explains how to measure fair value and aims to enhance fair value disclosures. The Group does not use fair value measurements extensively. It is therefore unlikely that the new rules will have a significant impact on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 30 June (iv) Revised AASB 119 Employee Benefits, AASB Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) and AASB Amendments to AASB 119 (September 2011) arising from Reduced Disclosure Requirements (effective 1 January 2013) In September 2011, the AASB released a revised standard on accounting for employee benefits. It requires the recognition of all remeasurements of defined benefit liabilities/assets immediately in other comprehensive income (removal of the so called 'corridor' method) and the calculation of a net interest expense or income by applying the discount rate to the net defined benefit liability or asset. This replaces the expected return on plan assets that is currently included in profit or loss. The standard also introduces a number of additional disclosures for defined benefit liabilities/assets and could affect the timing of the recognition of termination benefits. It also changes the distinction between short and long-term benefits for measurement purposes to be based on when payment is expected to be made, not when payment can be demanded. Since the Group does not have any defined benefit obligations, the amendments are not expected to have any significant impact on its financial statements. The Group does not intend to adopt the new standard before their operative date, which means that it would be first applied in the annual reporting period ending 30 June (v) AASB Amendments to Australian Accounting Standards - Presentation of Items of Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July (vi) AASB Amendments to Australian Accounting Standard - Offsetting Financial Assets and Financial Liabilities and AASB Disclosures -Offsetting Financial Assets and Financial Liabilities (effective 1 January 2014 and 1 January 2013 respectively) In June 2012, the AASB approved amendments to the application guidance in AASB 132 Financial Instruments: Presentation, to clarify some of the requirements for offsetting financial assets and financial liabilities in the balance sheet. These amendments are effective from 1 January They are unlikely to affect the accounting for any of the entity's current offsetting arrangements. However, the AASB has also introduced more extensive disclosure requirements into AASB 7 which will apply from 1 January When they become applicable, the Group will have to provide a number of additional disclosures in relation to its offsetting arrangements. The Group intends to apply the new rules for the first time in the financial year commencing 1 July (vii) AASB Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) In July 2011 the AASB removed the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. (y) Discontinued operations A discontinued operation is a component of the entity that: has been disposed of and that represents a separate major line of business or geographical area of operations; is part of a single co-ordinated plan to dispose of such a line of business or area of operations; or is a subsidiary acquired exclusively with a view to resale. 20

65 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 1 Summary of significant accounting policies (continued) (y) Discontinued operations (continued) The results of discontinued operations are presented separately in the income statement. The assets of a disposal group classified as held for distribution are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for distribution are presented separately from other liabilities in the balance sheet. Non-current assets (or disposal groups) are classified as held for distribution if their carrying amount will be recovered principally through a distribution transaction rather than through continuing use and a distribution is considered highly probable. As the distribution of assets/liabilities is to the Company's owners, the assets/liabilities to be distributed continue to be measured at their carrying value at the reporting date. 2 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Impairment The Group considers annually whether there has been any indicators of impairment and then tests whether non current assets, including goodwill, have suffered any impairment, in accordance with the accounting policy stated in note 1(i). The recoverable amounts of cash generating units have been determined based on value in use calculations or fair value less costs to sell. These calculations require the use of assumptions. Refer to note 15 for further details on the carrying amounts of non-current assets subject to impairment testing. (ii) Employee benefits The determination of the provisions required is dependent on specific assumptions including expected wage increases, length of employee service and bond rates. Refer to note 14 for more information. (iii) Taxation The Group's accounting policy for taxation requires management's judgement as to the types of arrangements considered to be subject to tax. Judgement is also required in assessing whether certain deferred tax assets and certain deferred tax liabilities are recognised on the balance sheet. Deferred tax assets, including those arising from non-recoupable tax losses, capital losses and temporary differences, are recognised only when it is considered probable that they will be recovered. Recoverability is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. These in turn depend on estimates of future sales volumes, operating costs, capital expenditure and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty; hence, there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the balance sheet and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may then require adjustment, resulting in a corresponding credit or charge to the income statement. Refer to notes 12 and 16 for carrying amounts of deferred tax assets and deferred tax liabilities respectively. (iv) Depreciation Management estimates the useful lives and residual values of property, plant and equipment based on the expected period of time over which economic benefits from use of the asset will be derived. Management reviews useful life assumptions on an annual basis having given consideration to variables including historical and forecast usage rates, technological advancements and changes in legal and economic conditions. Refer to note 1(o) for details of current depreciation rates used. 21

66 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 2 Critical accounting estimates and judgements (continued) (v) Take or pay The calculation of Take or Pay is based on an assessment of access charges from contracted railings that have not been achieved, subject to an adjustment for ("below rail") cause. Below rail cause is based on information on below rail versus operator/mine cancellations in the relevant year. The estimate of Take or Pay is based on management s judgement of below rail cause and is recognised in the year in which the contractual railings have not been achieved. (vi) Discontinued operations The financial separation of the operations, assets and liabilities between continuing and discontinuing operations on 30 June 2010 was performed in accordance with AASB 5 Assets Held for Sale and Discontinued Operations. Historically the operations of the continuing and discontinuing businesses were not operated as distinct business units and as a result the separation of the financial performance of the continuing and discontinuing businesses resulted in a high degree of management estimation and judgement in the allocation of revenue and expenses between continuing and discontinuing businesses. Had the continuing and discontinuing operations been operated as stand alone businesses, actual results would be likely to differ from the disclosures in note 8. 3 Financial risk management The Group has exposure to a variety of financial risks including market risk (foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Aurizon Holdings Limited Board approved Treasury Policy addresses the management of these risks using various financial instruments. Trading for speculation is strictly prohibited. Compliance with the Policy is monitored on an ongoing basis through regular reporting to the Board. (a) Market risk Market risk is the risk that adverse movements in foreign exchange and interest rates will increase costs and negatively impact the Group s income or the value of its holdings of financial instruments. The Group measures market risk using cash flow at risk. The objective of risk management is to manage the market risks inherent in the business to protect profitability and return on assets. (i) Foreign exchange risk Exposure to foreign exchange risk Foreign exchange risk arises from the purchase of capital equipment and operating expenditure that are denominated in or related to a currency that is not the entity's functional currency. These transactions apply in large part to the US Dollar ("USD") and the Euro ("EUR"). The Group's exposure to foreign currency risk at the end of the reporting period, expressed in AUD, was as follows: USD EUR USD EUR USD EUR $m $m $m $m $m $m Net forward exchange contracts Net exposures Risk management In order to protect against foreign exchange movements, the Group enters into forward foreign exchange contracts. These contracts are hedging highly probable forecast foreign currency exposures. Such contracts are designated as cash flow hedges. Realised gains or losses on these contracts arise due to differences between the spot rates on settlement and the forward rates of the derivative contracts. Sensitivity on foreign exchange The following table summarises the gain/(loss) impact of reasonably possible changes in market risk, relating to existing financial instruments, on net profit and equity before tax. For the purpose of this disclosure, the following assumptions were used: 15% (2011: 15%; 2010: 15%) appreciation/depreciation of the AUD against the USD; Sensitivity analysis assumes hedge designations and effectiveness test results as at 30 June 2012 remain unchanged; Sensitivity analysis is isolated for each risk assuming all other variables remain constant; and Sensitivity analysis on foreign currency rates represent current market conditions. 22

67 3 Financial risk management (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Market risk (continued) Profit (before tax) Equity (before tax) $m $m $m $m $m $m 15% movement in foreign currency rates 15% USD depreciation % USD appreciation (0.1) - 15% EUR depreciation % EUR appreciation - - (0.2) (ii) Interest rate risk Exposure to interest rate risk The Group does not have any direct borrowings and does not hold any interest bearing asset or liabilities, and therefore has no interest rate exposure. (b) Credit risk Credit risk is managed on an Aurizon Group basis. Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with financial institutions and receivables from customers. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Credit risk further arises in relation to financial guarantees given to certain parties. Refer to note 3(d). The Group does not have any material credit risk exposure to any single receivable or group of receivables under financial instruments entered into by the Group. For some trade receivables the Group may also obtain security in the form of guarantees, deeds of undertaking or letters of credit which can be called upon if the counterparty is in default under the terms of the agreement. Refer to note 3(d) for further details. The Group has policies in place to ensure that sales of services are only made to customers with an appropriate credit profile. If customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, the credit quality of the customer is assessed, taking into account its financial position, past experience and other factors. Credit risk on cash transactions and derivative contracts is managed through the Aurizon Holdings Board approved Treasury Policy which restricts the Group to financial institutions whose long-term credit ratings, determined by a recognised ratings agency, are at or above the minimum rating of A-. This Policy also limits the amount of credit exposure to any one financial institution. The Group's net exposures and the credit ratings of its counterparties are regularly monitored. An analysis of the Group's trade and other receivables that have been impaired and the ageing of those that are past due but not impaired at the balance date is presented in note 9. (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulties in meeting the obligations associated with its financial liabilities. The Group s approach to managing liquidity is to ensure, as far as possible, sufficient liquidity is available to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. Financing arrangements The Group has access to undrawn borrowing facilities through the Aurizon Group s Syndicated Facility Agreement from November 2010, and prior to that from Queensland Treasury Corporation. The following table summarises the contractual timing of undiscounted cash flows including estimated interest payments of derivative instruments. The contractual amount assumes current interest rates and foreign exchange rates estimated using forward curves applicable at the end of the reporting period. Other liabilities in the table below represent loans payable to entities within the Aurizon Group for which there are no fixed terms. No payment on these loans had been called at 30 June

68 3 Financial risk management (continued) (c) Liquidity risk (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) Carrying Less than 1 Between 1 Total Over 5 contractual amount (assets)/ yea r and 5 years yea rs cash flows liabilities 2012 $m $m $m $m $m Non-derivatives Trade and other payables Other liabilities Financial guarantees Total non-derivatives 1, , ,037.4 Derivatives Foreign exchange contracts used for hedging - (inflow) outflow Total derivatives Non-derivatives Trade and other payables Other liabilities Financial guarantees Total non-derivatives Derivatives Foreign exchange contracts used for hedging - (inflow) (0.6) - - (0.6) (0.6) - outflow Total derivatives Non-derivatives Trade and other payables Other liabilities Financial guarantees Total non-derivatives Derivatives Foreign exchange contracts used for hedging (inflow) (1.2) - - (1.2) (1.2) - outflow Total derivatives

69 3 Financial risk management (continued) (d) Fair value measurements Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) The net fair value of cash, cash equivalents and non interest bearing financial assets and liabilities approximates their carrying value due to their short maturity. The net fair value of other financial assets and liabilities is determined by valuing them at the present value of future contracted cash flows. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flows. The net fair value of forward foreign exchange is determined as the unrealised gain/loss at balance date by reference to market exchange rates. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flow. Carrying amount Fair value $m $m $m $m $m $m Financial assets carried at fair value Forward exchange contracts Financial assets carried at amortised cost Trade and other receivables Other assets Financial liabilities carried at fair value Forward exchange contracts - (0.1) (0.1) - (0.1) (0.1) - (0.1) (0.1) - (0.1) (0.1) Financial liabilities carried at amortised cost Trade and other payables (59.2) (66.2) (57.2) (59.2) (66.2) (57.2) Other liabilities (978.2) (474.1) (3.1) (978.2) (474.1) (3.1) (1,037.4) (540.3) (60.3) (1,037.4) (540.3) (60.3) Off-balance sheet Unrecognised financial assets Third party guarantees Bank guarantees Insurance company guarantees Unrecognised financial liabilities (4.2) (0.9) (0.2) Fair value hierarchy Financial instruments carried at fair value may be grouped into 3 valuation categories: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). All of the Group s financial instruments are categorised as Level 2. There were no transfers between Level 1 and Level 2 fair value hierarchies in any year. 25

70 4 Revenue Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) $m $m $m Revenue from continuing operations Services revenue Track access Other services revenue Other revenue Included in track access is nil (2011: $26.1 million; 2010: $44.0 million) of Revenue Cap recovered in the year in relation to contractual railings that were not achieved in two years prior $m $m $m Revenue from discontinued operations Services revenue Track access Other services revenue Other revenue Refer to note 8 in respect of discontinued operations. 5 Other income from continuing operations $m $m $m Interest revenue Expenses from continuing operations Profit/(loss) before income tax includes the following specific expenses: $m $m $m Consumables Repairs and maintenance Insurance Consulting and professional services Energy and fuel Other

71 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 6 Expenses from continuing operations (continued) $m $m $m Employee benefits expenses Defined benefit superannuation expense Defined contribution superannuation expense Voluntary redundancies and ex-gratia payments Salaries, wages and oncosts Total employee benefit expense $m $m $m Depreciation and amortisation expense Depreciation Property Plant and equipment Infrastructure Total depreciation Amortisation Leased property Leased plant and equipment Total amortisation Total depreciation and amortisation of property, plant and equipment (note 15) $m $m $m Other expenses Rental expenses relating to leases Research and development Losses on derivatives at fair value through profit or loss Loss on sale of asset Impairment losses - financial assets Trade receivables Other expenses Total other expense Finance costs Interest and finance charges paid/payable Amount capitalised to qualifying assets (34.4) (24.2) (18.3) Total finance costs

72 7 Income tax expense Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Income tax expense $m $m $m Current tax - post privatisation Current tax - pre privatisation Deferred tax 61.0 (18.9) (194.2) Deferred tax base reset on consolidation and privatisation - (190.0) (111.5) Income tax expense/(benefit) is attributable to: Profit/(loss) from continuing operations 84.8 (111.5) 89.5 Profit/(loss) from discontinued operations Aggregate income tax expense 84.8 (111.5) Deferred income tax (revenue) expense included in income tax expense/(benefit) comprises: Decrease (increase) in deferred tax assets (Note 12) (0.7) (Decrease) increase in deferred tax liabilities (Note 16) 61.7 (214.6) (209.7) 61.0 (208.9) (194.2) (b) Numerical reconciliation of income tax expense/(benefit) to prima facie tax payable $m $m $m Profit from continuing operations before income tax expense Profit from discontinued operations before income tax expense Tax at the Australian tax rate of 30% (2011: 30%; 2010: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-assessable income (0.7) (4.3) - Research and development (1.3) (1.4) - Tax consolidation benefit - (190.0) - Other (0.1) 2.4 (0.4) Total income tax expense/(benefit) 84.8 (111.5) (c) Tax expense (income) relating to items of other comprehensive income $m $m $m Cash flow hedges (d) Tax privatisation legislation The entities within the Aurizon Holdings Limited Group, including Aurizon Network and its wholly owned subsidiaries, exited the State administered National Tax Equivalents Regime upon privatisation of Aurizon Holdings Limited on 22 November At the same time, Aurizon Holdings Limited and its wholly-owned Australian subsidiaries entered the Federal Tax Regime. 28

73 7 Income tax expense (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (e) Tax consolidation Aurizon Holdings Limited and its wholly-owned Australian subsidiaries, including have implemented the tax consolidation legislation as of 22 November All Australian wholly-owned companies in the Aurizon Group (including ) are part of the tax consolidated group and are therefore taxed as a single entity. Aurizon Holdings Limited has notified the ATO that it has formed a tax consolidated group, applying from 22 November (f) Tax base reset During the year ended 30 June 2011, as a consequence of the privatisation of the Aurizon Holdings Limited Group and the election to consolidate under the Australian tax consolidation regime, the Company reset the tax base of its assets and liabilities as required by the specific privatisation tax rules and the tax consolidation regime. This resulted in a net tax benefit to the Company of $190 million at 30 June (g) Tax funding agreement The entities within the Aurizon Holdings Limited tax consolidated group, including, have entered into a tax funding agreement to govern the funding of the liability for tax (which resides with the head company) by all members of the tax group and prevent any equity adjustments arising under the Accounting Standards. Under the tax funding agreement, Aurizon Network must pay a notional income tax (to Aurizon Holdings Limited) as if the company is a stand-alone taxpayer. (h) Tax sharing agreement The entities within the Aurizon Holdings Limited tax consolidated group, including have entered into a tax sharing agreement which limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity. 8 Discontinued operations and assets classified as held for distribution Disposal of non-coal network businesses (a) Description On 30 June 2010, as part of the separation of the Aurizon Operations Limited Group, Aurizon Network was separated into two distinct businesses which comprise the continuing and discontinued operations presented in these financial statements as follows: Continuing operations: The continuing operations are known as Aurizon and comprise the operation and management of the Central Queensland Coal Network infrastructure and selected services businesses. Discontinued operations: The discontinued operations are known as Queensland Rail and include the metropolitan rail networks and the regional non-coal freight networks (excluding lines primarily dedicated to coal). In accordance with directions issued by the State of Queensland Treasurer and Minister for Employment and Economic Development, pursuant to the Infrastructure Investment (Asset Restructuring and Disposal) Act 2009: assets and liabilities relating to the discontinued Queensland Rail business were transferred within the Aurizon Operations Limited Group to Queensland Rail Limited; and Aurizon Operations Limited s shares in Queensland Rail Limited were transferred to the State of Queensland. These transactions occurred on 30 June 2010 via Transfer Notice and were recorded at net book value. Aurizon Network received a capital contribution of $1,708 million for the net assets relating to the discontinued business transferred to Queensland Rail. Subsequent to 30 June 2010, additional assets and liabilities attributable to the discontinued Queensland Rail business which were omitted from the Transfer Notice above were identified. These assets and liabilities were transferred to the State in accordance with directions issued by the Treasurer and Minister for Employment and Economic Development and have been classified as held for distribution in the balance sheet as at 30 June Refer to note 8(e) for more details. 29

74 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 8 Discontinued operations and assets classified as held for distribution (continued) (b) Financial separation methodology The financial separation of the continuing and discontinued operations has been performed with regard to the measurement principles set out in AASB 5 Assets Held for Sale and Discontinued Operations. Revenues and expenses for the year ended 30 June 2010 have been classified between continuing and discontinued operations in accordance with AASB 5 Assets Held for Sale and Discontinued Operations. The restructure was considered to represent a coordinated set of restructuring steps. Corporate functions have been allocated between continuing and discontinued operations based on allocations having regard to the accounting principle under AASB 5 that allocations should only be made to discontinued operations if the cost will no longer be incurred once the discontinued operation is disposed of. As the continuing operation, Aurizon Network includes the costs that it cannot avoid in future as a result of the discontinued Queensland Rail business. As a result, in some circumstances Aurizon Network has received the majority of the historical expenses, whilst the discontinued Queensland Rail business has received the residual between the reported historical results and that presented as continuing operations. In deriving the financial separation allocation, key business drivers were considered. For example, the allocation between continuing and discontinued operations was made with reference to the split of employees between the entities, whilst having regard to future employee requirements. The determination of allocation principles and assumptions has required the exercise of judgement. The directors of Aurizon Operations Limited believe that the assumptions applied are appropriate. Deferred taxation assets and liabilities relating to the discontinued Queensland Rail business have been calculated and included in the assets and liability transfers described above. Historical transactions between continuing and discontinued businesses which have eliminated on consolidation in the past, have been reclassified as appropriate to reflect revenue and expenses of the continuing and discontinued businesses. Financial information relating to the discontinued operations to the date of disposal is set out below. Total equity relating to discontinued operations has been allocated based on the book value of retained earnings at the date of financial separation. The balance has been allocated to contributed equity. (c) Financial performance and cash flow information 2010 $m Revenue (note 4) Expenses (577.4) Profit before income tax Income tax expense (note 7) (88.0) Profit from discontinued operations Profit attributable to ordinary equity holders relates to: Profit from continuing operations Profit from discontinued operations Net cash inflow from operating activities Net cash (outflow) from investing activities 1 (222.3) Net cash (outflow) from financing activities 2 (225.6) Net (decrease) / increase in cash generated by the discontinued operations Included in the above results are the following items: Depreciation and amortisation expense 88.7 Interest expense Cash outflows from investing activities includes expenditure on assets held for distribution at reporting date. 2 Cash flows generated by the discontinued businesses in previous periods were accounted for consistently with those from continuing operations through Aurizon Operations Limited's Treasury function which is part of the continuing business operations. 30

75 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 8 Discontinued operations and assets classified as held for distribution (continued) (d) Carrying amounts of assets and liabilities The carrying amounts of assets and liabilities distributed to Queensland Rail Limited as at 30 June 2010 were: 2010 $m Current assets Trade and other receivables Other current assets Total current assets Non-current assets Property, Plant and Equipment 3,193.8 Other non-current assets 10.5 Total non-current assets 3,204.3 Total assets 3,928.0 Current liabilities Trade and other payables 22.7 Provisions 26.1 Other current liabilities 5,104.0 Total liabilities 5,152.8 Non-current liabilities Deferred tax liabilities Provisions 0.7 Other non-current liabilities Total non-current liabilities Total liabilities 5,636.0 Net assets (1,708.0) Represented by an increase in: - Contributed equity (note 17) 1, ,

76 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 8 Discontinued operations and assets classified as held for distribution (continued) (e) Assets and liabilities classified as held for distribution At 30 June 2010 Aurizon Operations Limited held the following assets and liabilities for distribution to Queensland Rail Limited, subject to the Transfer Notice post year end. These items were transferred at net book value $m Buildings 1.1 Infrastructure 75.4 Total assets classified as held for distribution 76.5 Net deferred tax liabilities (0.8) Total liabilities classified as held for distribution (0.8) Net assets classified as held for distribution Trade and other receivables $m $m $m Current Trade receivables Provision for impairment of receivables (note (a)) - (0.1) (1.6) Net trade receivables Other receivables Other receivables include revenue for services performed but not yet invoiced under contracts including external construction contracts and Take or Pay. 32

77 9 Trade and other receivables (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Impaired trade receivables As at 30 June 2012, the amount of the provision for impaired trade receivables was $Nil million (2011: $0.1 million; 2010: $1.6 million). Movements in the provision for impairment of receivables are as follows: $m $m $m At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectable (0.1) - - Unused amounts reversed - (1.6) The creation or release of the provision for impaired receivables has been included in the income statement. Amounts charged to the provision account are generally written off when there is no expectation of recovering additional cash. The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. (b) Past due but not impaired As at 30 June 2012, trade receivables of $5.1 million (2011: $8.6 million; 2010: $7.9 million) were past due but not impaired. The ageing of these trade receivables is as follows: $m $m $m Up to 3 months to 6 months More than 6 months Other assets $m $m $m Current Loans receivable from other related parties Prepayments

78 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 11 Property, plant and equipment Leased Plant Assets under Leased Plant and and construction Land Property Buildings equipment Infrastructure (1) equipment Total $m $m $m $m $m $m $m $m 2012 Opening net book amount , ,755.0 Additions Transfers between asset classes (1,411.4) , Disposals - (0.4) - - (0.1) (3.6) - (4.1) Depreciation/ amortisation expense (3.4) (159.2) (0.1) (162.7) Closing net book amount , ,285.5 Cost , ,869.0 Accumulated depreciation and impairment losses (12.0) (571.4) (0.1) (583.5) Net book amount , , Central Queensland Coal Network infrastructure was transferred to Queensland Treasury Holdings and Queensland Rail Limited at 30 June 2010 in accordance with the Transfer Notice. Effective from 30 June 2010, this infrastructure was leased back to the Company under a 99 year lease arrangement. The net effect is infrastructure assets have been replaced by leased infrastructure assets to the value of $2,323.7 million at 30 June This has decreased to $2,281.3 million at 30 June 2011 (as depreciation was higher than additions in the year) and $3,143.4 million at 30 June 2012 (largely due to the inclusion of infrastructure relating to the Goonyella to Abbot Point Expansion). Refer to note 1(o) for further information regarding the accounting policy for this transaction. 34

79 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 11 Property, plant and equipment (continued) Leased Plant Assets under Leased Plant and and construction Land Property Buildings equipment Infrastructure (1) equipment Total $m $m $m $m $m $m $m $m 2011 Opening net book amount , ,215.5 Additions Transfers between asset classes (106.7) (0.1) Disposals - - (0.3) (0.3) - (28.6) - (29.2) Depreciation/ amortisation expense - - (0.1) - (3.4) (136.9) (0.1) (140.5) Closing net book amount , ,755.0 Cost , ,178.0 Accumulated depreciation and impairment losses (9.0) (414.0) - (423.0) Net book amount , ,

80 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 11 Property, plant and equipment (continued) Leased Plant Assets under Leased Plant and and construction Land Property Buildings equipment Infrastructure (1) equipment Total $m $m $m $m $m $m $m $m 2010 Opening net book amount 1, , ,059.0 Additions Transfers between asset classes (847.2) Disposals (150.2) (0.7) - (3.8) (1.5) (12.1) - (168.3) Transfer to Queensland Rail on separation (note 8(d)) (615.0) (0.3) - (6.0) (2.6) (2,569.9) - (3,193.8) Assets classified as held for distribution (1.1) - (75.4) - (76.5) Depreciation/ amortisation expense (2) - - (0.2) (1.0) (4.6) (219.9) - (225.7) Closing net book amount , ,215.5 Cost , ,503.0 Accumulated depreciation and impairment losses - - (0.3) (0.4) (5.7) (281.1) - (287.5) Net book amount , , Depreciation/amortisation expense relates to both continuing and discontinued operations. 36

81 12 Deferred tax assets Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) $m $m $m The balance comprises temporary differences attributable to: Provisions/accruals Unearned revenue Other temporary differences Set-off to deferred tax liabilities pursuant to set-off provisions (note 16) (4.5) (3.8) (9.5) Net deferred tax assets Movements Provisions/ Customer Unearned Cash flow accruals Tax losses contracts revenue hedges Other Total $m $m $m $m $m $m $m At 1 July (Charged)/credited - to profit or loss (6.7) - - (8.7) (0.1) - (15.5) - to other comprehensive income At 30 June Movements At 1 July (Charged)/credited - to profit or loss (5.6) - - (0.3) (5.7) - to other comprehensive income At 30 June Movements At 1 July (Charged)/credited - to profit or loss (1.6) to other comprehensive income At 30 June

82 13 Trade and other payables Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) $m $m $m Trade payables Other payables Provisions $m $m $m Current Employee benefits (a) Total current provisions Non-current Employee benefits (a) Total non-current provisions Total provisions (a) Employee benefits Annual Leave Long service leave Other The current provision for employee benefits includes accrued annual leave, leave loading, retirement allowances, long service leave and bonus accrual. Included in long service leave are all unconditional entitlements where employees have completed the required period of service and also a provision for the chance that employees will reach the required period of service. The entire amount of the provision is presented as current, since the Group does not have an unconditional right to defer settlement for any of these obligations. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. Other employee benefit liabilities includes payroll tax and retirement allowances. 38

83 15 Other liabilities Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) $m $m $m Current Income in advance Loan payable to parent entity Loans payable to other related parties Tax loan payable to parent entity , Non-current Income in advance Income received in advance represents amounts received from customers as prepayment of future rentals under agreements of customer specific infrastructure. These amounts are deferred and earned over the term of the agreements. 16 Deferred tax liabilities $m $m $m The balance comprises temporary differences attributable to: Property, plant and equipment Capitalised deductible expenditure Accrued income Other temporary differences Total deferred tax liabilities Set-off of deferred tax assets pursuant to set-off provisions (note 12) (4.5) (3.8) (9.5) Net deferred tax liabilities Property, plant and equipment Capitalised deductible expenditure Consumables Accrued Cash flow and spares income hedges Other Total Movements $m $m $m $m $m $m $m At 1 July Transfer to (248.5) (248.5) discontinued operations Charged/(credited) - to profit or loss (25.8) At 30 June

84 16 Deferred tax liabilities (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) At 1 July Charged/(credited) - to profit or loss (51.1) - (2.5) (24.6) - to profit or loss as result of consolidation and privatisation (190.0) (190.0) At 30 June At 1 July Charged/(credited) - to profit or loss At 30 June Contributed equity (a) Issued capital Shares Shares Shares $ $ $ Ordinary shares Fully paid (b) Other contributed equity $m $m $m Capital contributions from parent for the transfer of discontinued 1, , ,708.0 operations Capital contribution from the parent for share-based payments , , ,708.0 Total contributed equity 1, , ,708.0 The capital contributions from the parent have been made pursuant to Transfer Notices as explained in note 8 - $1,708.0 million on 30 June 2010, reduced by $75.7 million for additional net assets transferred subsequent to 30 June 2010 (refer note 8(e)). (c) Ordinary shares Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. 40

85 17 Contributed equity (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (d) Share-based payments Share-based payments represent the fair value of share-based remuneration provided to employees (e) Capital risk management The Company s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development for the Aurizon Group. Capital consists of issued capital, capital contributions from the parent and retained earnings. The Company s capital structure, including the level of dividends paid to shareholders is monitored by the Board by Directors. 18 Reserves (a) Reserves $m $m $m Hedging reserve - cash flow hedges - (0.1) - - (0.1) - Movements: Hedging reserve - cash flow hedges Balance 1 July (0.1) - (0.2) Fair value (losses) taken to equity - (0.1) - Deferred tax Fair value losses transferred to profit or loss Deferred tax - - (0.1) Balance 30 June - (0.1) - (b) Nature and purpose of reserves Hedging reserve - cash flow hedges The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income, as described in note 1(n). Amounts are recognised in the income statement when the associated hedged transaction affects the income statement. 41

86 19 Dividends Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Ordinary shares Final dividend for the year ended 30 June 2011 of $902,800 per share, paid September 2011 (unfranked) Special dividend for the period to 21 September 2010 of $863, per fully paid share, paid November 2010 (unfranked) Interim dividend for the year ended 30 June 2012 of $902,800 per share (2011:nil, 2010:nil), paid April 2012 (unfranked) $m $m $m (b) Dividends not recognised at the end of the reporting period Since 30 June 2012, the directors have declared the payment of a final dividend of $1,122,400 per fully paid ordinary share (2011: $902,800, 2010:nil), unfranked. The aggregate amount of the dividend paid on 28 September 2012 (2011: 30 September 2011) out of retained earnings, but not recognised as a liability at year end is: Key management personnel disclosures (a) Key Management Personnel compensation $'000 $'000 $'000 Short-term employee benefits 5,767 6,839 2,044 Post-employment benefits Long-term benefits Share-based payments 1, ,888 7,962 2,319 Aurizon Operations Limited has determined the compensation of key management personnel ( KMP ) in accordance with their roles within the entire Aurizon Group. Employee contracts do not include any compensation, including bonuses, specifically related to the role of KMP of the Group and to allocate a figure may in fact be misleading. As there is no reasonable basis for allocating a KMP compensation amount to the Group, the entire compensation of the KMPs has been disclosed above. KMP compensation is provided by the Company, the parent entity (Aurizon Operations Limited) and the ultimate parent entity (Aurizon Holdings Limited). Short term employee benefits include cash salary, at risk performance incentives and fees and non monetary benefits. Non-monetary benefits represent the value of Reportable Fringe Benefits for the respective Fringe Benefits Tax year ending 31 March, the estimated value of car parking provided and annual leave accrued or utilised during the financial year. 42

87 21 Contingencies Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) The Group had contingencies at each reporting period in respect of: (a) Contingent liabilities Issues relating to common law claims and product warranties are dealt with as they arise. There were no material contingent liabilities requiring disclosures in the financial statements, other than as set out below. Guarantees and letters of credit For information about guarantees and letters of credit given by the Group, refer to note 3(d). Deed of cross guarantee Aurizon Holdings Limited (formerly QR National Limited), Aurizon Finance Pty Ltd (formerly QRN Finance Pty Ltd), Aurizon Property Holding Pty Ltd (formerly QRN Property Holding Pty Ltd), Aurizon Property Pty Ltd (formerly QRN Property Pty Ltd), Aurizon Terminal Pty Ltd (formerly QRN Terminal Pty Ltd), Aurizon Operations Limited (formerly QR Limited), Aurizon Intermodal Pty Ltd (formerly QR Intermodal Pty Ltd), Logistics Australasia Pty Ltd, Golden Bros. Group Pty Ltd, CRT Group Pty Ltd, Interail Australia Pty Ltd, Australian Rail Pty Ltd, Australia Eastern Railroad Pty Ltd, Australia Western Railroad Pty Ltd, Australian Railroad Group Employment Pty Ltd and Aurizon Network Pty Ltd (formerly QR Network Pty Ltd) (the QRN Deed Parties, and each a QRN Deed Party ) entered into a Deed of Cross Guarantee dated 11 March 2011 (the New Deed ) with Aurizon National Limited (formerly QR National Limited) as the Holding Entity, under which each QRN Deed Party guarantees the debts of each other QRN Deed Party. The New Deed became effective on lodgement with ASIC on 29 March Prior to the New Deed, Aurizon Operations Limited, Aurizon Intermodal Pty Ltd, Logistics Australasia Pty Ltd, Golden Bros. Group Pty Ltd, CRT Group Pty Ltd, Interail Australia Pty Ltd, Australian Rail Pty Ltd, Australia Eastern Railroad Pty Ltd, Australia Western Railroad Pty Ltd, Australian Railroad Group Employment Pty Ltd and Aurizon Network Pty Ltd (the QRL Deed Parties, and each a QRL Deed Party ) were parties to a Deed of Cross Guarantee dated 11 June 2008 (the Old Deed ) with QR Limited as the Holding Entity, under which each QRL Deed Party guaranteed the debts of each other QRL Deed Party. The QRL Deed Parties entered into two Deeds of Revocation (the Revocation Deeds ) each dated 11 March 2011 for the purposes of revoking the Old Deed, which is expected to become effective on 22 September 2011 (being the date that is six months after lodgement of the Revocation Deeds with ASIC, which occurred on 22 March 2011). Prior to 30 June 2010, Queensland Rail was also a party to the Old Deed and a subsidiary of Aurizon Operations Limited. The QRL Deed Parties and Queensland Rail entered into a Deed of Revocation dated 28 June 2010 for the purposes of releasing Queensland Rail from the Old Deed which become effective on 6 January Defined benefit fund liabilities The State of Queensland has permitted existing employees of Aurizon Holdings Limited and its subsidiaries as at the date of the listing in November 2010, to retain their existing superannuation arrangements with the State Superannuation Public Sector Scheme (QSuper), and has provided the Group an indemnity if the State of Queensland Treasurer requires the Group to pay any amounts required to meet the defined benefit obligations. An actuarial assessment of the fund as at 30 June 2010 has been completed which showed the fund to be in surplus. Existing contribution arrangements are to continue into the foreseeable future. Joint venture arrangements Refer to note 23 for details of the Group's share of the net asset deficiencies in joint venture investments. The Group is required to contribute additional capital, if requested, to make good any deficiency under the terms of the joint venture agreements. In November 2011, the Surat Basin Rail Joint Venture entered into Early Contractor Involvement Deeds ( ECI Deeds ) with two prospective contractors for the development of Stage 2 and 3 offers for the design construction and maintenance of the project. The ECI Deeds includes a $2 million incentive fee payable in the event of financial close (which at this time is indeterminate) and another fee payable if: 1. The contractor submits a conforming offer and executes a deed of release; and 2. One of the following arises: a. The Stage 2 contract has been executed by the joint venture and the other contractor, in which case a $5 million fee is payable to the unsuccessful contractor; b. The contract has been terminated after the date of submission, in which case $5 million is payable to each contractor; or c. The 31 January 2013 is reached and the conforming offer has remained open, in which case $5 million is payable to each contractor. Neither of the 2 bids was conforming at 30 June

88 Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) 21 Contingencies (continued) (a) Contingent liabilities (continued) Additionally, contracts have been executed with several entities which include the provision for payment of success fees in the event of financial close. The potential payment on those contracts equates to $8.9 million. (b) Contingent assets Revenue cap adjustments The Group has a contingent asset in respect of revenue cap adjustments. Access revenue is subject to a revenue cap mechanism that serves to ensure the network recovers its full regulated revenue over the regulatory period, with the majority of under or over recovery in access tariffs (net of take or pay charges) during a financial year being charged or refunded, and recognised as revenue, in the second year following the period in which the contractual railings were not achieved. Subject to regulatory approval and any adjustments resulting from below rail cause, recovery of shortfalls via the revenue cap of $63.1 million will be received during the years ending 30 June 2013 ($49.2 million) and 30 June 2014 ($13.9 million). Guarantees and letters of credit For information about guarantees given to the Group, refer to note 3(d). 22 Commitments (a) Capital commitments $m $m $m Capital expenditure contracted for at the reporting date but not recognised as liabilities is payable as follows: Property, plant and equipment Within one year Later than one year but not later than five years Later than five years (b) Lease commitments $m $m $m Commitments for minimum lease payments in relation to non-cancellable operating leases (excluding GST) are payable as follows: Within one year Later than one year but not later than five years Later than five years Interests in joint ventures and associates Jointly controlled assets The Group has a 33.3% (2011: 33.3%; 2010: 33.3%) participating interest in a joint venture through its wholly owned subsidiary, Aurizon Surat Basin Pty Ltd (formerly QR Surat Basin Pty Ltd), together with two other parties. The Group s share of the joint assets, any liabilities that it has incurred directly, and its share of any liabilities incurred jointly with the other venturers, income from the sale or use of its share of the output of the joint venture, its share of expenses incurred by the joint venture and expenses incurred directly in respect of its interest in the joint venture are detailed below. The amounts are included in the consolidated financial statements under their respective asset, liability, income and expense categories: 44

89 23 Interests in joint ventures and associates (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) $m $m $m Group's share of: Current assets Non-current assets Current liabilities (12.7) (2.2) (0.2) Non-current liabilities - (1.8) (1.8) Total net assets (0.6) (0.7) (1.2) Expenses - - (2.7) Tax benefit Net profit/(loss) after tax (1.7) The balance sheet and income statement is based on the audited financial statements of the Surat Basin Rail joint venture as at 30 June 2012 (2011: 30 June 2011; 2010: 30 June 2010). Under Clause 7.3 of the QR Surat Basin Pty Ltd Joint Venture Agreement dated 4 December 2006, the Project Director may call for additional contributions of funding from the participants in order to fund any expenditure incurred or to be incurred. 24 Related party transactions (a) Parent entities Aurizon Holdings Limited was incorporated on 14 September 2010 and did not undertake any trading activities between its incorporation and 21 September 2010 when it became the non-operating holding company of Aurizon Operations Limited and its controlled entities including. (b) Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 1(b): Name of Entity Country of incorporation Class of shares Equity holding % % % Aurizon Surat Basin Pty Ltd (formerly QR Surat Basin Pty Ltd) Australia Ordinary

90 24 Related party transactions (continued) Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (c) Key management personnel Disclosures relating to key management personnel are set out in note 20. (d) Transactions with entities of the Aurizon Group The following transactions occurred with related parties: $'000 $'000 $'000 Loans receivable from: - Parent Other related parties 52,426 28,848 - Loans payable to: - Parent 813, ,535 3,147 - Other related parties 43,701 9,236 - Tax loan payable to: - Parent 121,329 97,386 - Access revenue received from: - Parent 632, , ,560 - Other related parties 5,241 5, ,579 Other revenue received from: - Parent 7,246 12,736 30,767 - Other related parties 12, ,944 Expenses paid to: - Parent 382, , ,314 - Other related parties 999 1,362 9,386 Income statement items include both continuing and discontinued operations. Expenses paid to the parent entity include maintenance, facilities charges and general corporate overhead. Expenses paid to the parent entity also include $250.6 million (2011: $162.9 million, 2010: $261.3 million) of costs that have subsequently been capitalised to the Balance Sheet in Assets under Construction. (e) Terms and conditions of transactions with related parties other than Key Management Personnel or entities related to them The Company receives an allocation of corporate costs from its parent, Aurizon Operations Limited, in accordance with the costing methodologies determined by the parent for that respective year. These costs include shared services such as payroll, IT, accounts payable and HR operations. All other transactions, other than those with the State as described below, were made on normal commercial terms and conditions and at market rates, except that there are no fixed terms for the repayment of loans between the entities in the Aurizon Group. All loans are non interest bearing. Outstanding balances are unsecured. (f) Transactions with State of Queensland controlled entities Until its 22 November 2010 listing on the ASX, the parent company was a Queensland Government Owned Corporation, with all shares held by the Shareholding Ministers on behalf of the State. Following listing, the State retained a 34.0% interest in the Company that reduced to 33.7% in December 2011 and 18.2% in December 2012, but is no longer a related party to the Group. (f) Economic dependency Aurizon Network is dependent on Aurizon Operations Limited, for approximately 85% of the access revenue derived. 46

91 25 Remuneration of auditors Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: PwC Australia $'000 $'000 $'000 PwC Australia Audit and other assurance services Audit of regulatory returns Other assurance services Total remuneration for audit and other assurance services Other services Advisory services Total remuneration of PwC Australia Non PwC Audit Firms Audit and other assurance services Audit of regulatory returns Other assurance services Total remuneration for audit and other assurance services Other services Advisory services Total remuneration for non PWC Audit Firms Audit fees relating to the statutory audit of the Aurizon Holding Ltd Group, are borne by the parent entity and have not been allocated to entities within the Aurizon Group. Auditor remuneration in 2011 includes $43,291 of non-audit services performed prior to listing on 22 November 2010 and prior to the appointment of PwC as auditor of the Group. 26 Reconciliation of profit after income tax to net cash inflow $m $m $m Profit for the year Depreciation and amortisation Impairment of non-current assets Impairment of financial assets Non-cash employee benefits expense - share-based payments Net (gain) loss on sale of non-current assets Amortisation of prepaid access facilitation deed charges (28.5) (26.4) (26.0) Derivative financial instruments - unrealised - (0.1) - Change in operating assets and liabilities: (Increase) in trade debtors 0.7 (4.0) 20.9 (Increase) in inventories 0.3 (0.2) 1.4 (Increase) decrease in other operating assets (0.1) (Decrease) increase in trade and other payables (7.1) 9.3 (71.9) (Decrease) increase in other operating liabilities 79.6 (88.5) (Decrease) increase in other provisions Net cash inflow (outflow) from operating activities In relation to the 2010 year, the reconciliation includes both continuing and discontinued business cashflows. 47

92 27 Parent entity financial information Notes to the consolidated financial statements 30 June 2012, 30 June 2011, 30 June 2010 (continued) (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts below $m $m $m Current assets Non-current assets 4, , ,219.2 Current liabilities (1,085.0) (597.0) (111.7) Non-current liabilities (618.1) (584.7) (799.9) Net assets 2, , ,436.9 Shareholders' equity Contributed equity 1, , ,708.0 Reserves - (0.1) - Retained earnings 1, , Total equity 2, , ,436.9 Profit from continuing operations Profit from discontinued operations Total profit for the year Other comprehensive income 0.1 (0.1) 0.2 Total comprehensive income (b) Guarantees entered into by the parent entity There are cross guarantees given by Aurizon Holdings Limited (formerly QR National Limited), Aurizon Operations Limited (formerly QR Limited), Aurizon Finance Pty Ltd (formerly QRN Finance Pty Ltd), Aurizon Property Holding Pty Ltd (formerly QRN Property Holding Pty Ltd), Aurizon Terminal Pty Ltd (formerly QRN Terminal Pty Ltd), Aurizon Property Pty Ltd (formerly QRN Property Pty Ltd), Aurizon Intermodal Pty Ltd (formerly QR Intermodal Pty Ltd), Logistics Australasia Pty Ltd, Golden Bros. Group Pty Ltd, CRT Group Pty Ltd, Interail Australia Pty Ltd, Australian Rail Pty Ltd, Australia Eastern Railroad Pty Ltd, Australia Western Railroad Pty Ltd, Australian Railroad Group Employment Pty Ltd and (formerly QR Network Pty Ltd) as described in note 21. (c) Contingent liabilities of the parent entity Contingent liabilities of the parent entity are the same as those disclosed in note 21. For information about guarantees given by the parent entity, please see above. (d) Contractual commitments for the acquisition of property, plant or equipment Contractual commitments for the acquisition of property, plant and equipment of the parent entity are as disclosed in note Events occurring after the reporting period On 5 June 2012, the Group announced the commencement of its consultation process on the voluntary redundancy program as a result of a further strategic review and restructure of the workforce. As at the date of this report, the Group has determined to accept approximately 22 voluntary redundancy applications at a one-off cost estimated at $3.1 million to be incurred in the 2013 financial year. The expected payback period in respect of this is approximately 12 months. Subsequent to 31 December 2012 the Blackwater and Moura coal systems in the Central Queensland Coal Network have been impacted by heavy rain and flooding associated with ex Tropical Cyclone Oswald. The Blackwater system was closed for 12 days and the Moura system was closed for 26 days. The Group continues to assess the volume and financial impact from this event and is working closely with customers to recover tonnages. 48

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94 Independent auditor s report to the members of Report on the financial report We have audited the accompanying financial report of (the company), which comprises the balance sheets as at June 30, 2012, June 30, 2011 and June 30, 2010, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the three years then ended, a summary of significant accounting policies, other explanatory notes and the directors declaration for the group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the years then ended or from time to time during the financial years. Directors of the company responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and for such internal control as the directors of the company determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1(a) the directors of the company also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors of the company, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. PricewaterhouseCoopers, ABN Riverside Centre, 123 Eagle Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 DX77 Brisbane, Australia T: , F: , Liability limited by a scheme approved under Professional Standards Legislation. 50

95 Auditor s opinion In our opinion: (a) the financial report of : (i) (ii) gives a true and fair view of the consolidated entity s financial position as at 30 June, 2012, 30 June, 2011 and 30 June, 2010 and of its performance for each of the three years then ended; and complies with Australian Accounting Standards (including the Australian Accounting Interpretations); and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1(a). PricewaterhouseCoopers John Yeoman Brisbane Partner 30 April