MIGHTY RIVER POWER LIMITED INTERIM REPORT 31 DECEMBER 2005
HIGHLIGHTS 2005
02
CHAIR AND CHIEF EXECUTIVE REPORT
04
INTERIM FIN A NCI A L S TATEMENT S
09
DIRECTORY
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WORK CONTINUES, AT PACE.
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35% INCRE A SE REC ORD GEOTHERM A L PRODUC TION AT PL A NT S W E A RE A S SOCI ATED W ITH
70MW CONSENTS SOUGHT FOR A 70MW $250 MILLION GEOTHERM A L PL A NT AT K AW ER AU
TURITE A WIND FARM SELECTED BY PALMERSTON NORTH CIT Y COUNCIL A S PREFERRED DE VELOPMENT PARTNER
$54.0 MILLION NE T SURPLUS A F TER TA X ATION
TOP CALL CENTRE MERCURY ENERGY THE BE S T ENERGY RE TA ILER IN 20 05 CUS TOMER REL ATION SHIP M A N AGEMENT C ONTAC T CENTRE AWA RDS
323,000 CUSTOMERS RE TA IL CUS TOMER NUMBER S C ONTINUE TO GROW
2
OPERATING SURPLUS BEFORE INTEREST, NON-RECURRING ITEMS AND TAXATION FOR 6 MONTHS TO 31 DECEMBER
$106.8 M I L L I O N $135.7 M I L L I O N $95.3 M I L L I O N
05 04 03
$79.4 M I L L I O N
02 01
$25.8 M I L L I O N
NET SURPLUS AFTER TAXATION FOR 6 MONTHS TO 31 DECEMBER
$54.0 M I L L I O N
05
$77.3 M I L L I O N
04
$51.4 M I L L I O N
03
$99.8 M I L L I O N
02 01
$14.0 M I L L I O N
OPERATING CASHFLOW FOR 6 MONTHS TO 31 DECEMBER
$121.3 M I L L I O N $123.6 M I L L I O N
05 04
$81.6 M I L L I O N
03 02 01
$47.4 M I L L I O N $20.0 M I L L I O N
TOTAL EQUITY/TOTAL ASSETS AT 31 DECEMBER
76.8 P E R C E N T 61.3 P E R C E N T 62.0 P E R C E N T 55.9 P E R C E N T
05 04 03 02
48.3 P E R C E N T
01
NET DEBT/NET DEBT + EQUITY AT 31 DECEMBER 05 04 03 02 01
17.4 P E R C E N T 32.3 P E R C E N T 30.1 P E R C E N T 36.5 P E R C E N T 41.4 P E R C E N T
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CHAIR AND CHIEF EXECUTIVE REPORT
GENERATION DATA
HYDR O
COGENERATION
GEOTHERMAL *
BIOMASS *
2005 2004 2003 2002
TOTAL GENERATION VOLUMES FOR 6 MONTHS TO 31 DECEMBER
2001 GWh
2005
HYDRO 0
GEOTHERMAL *
COGENERATION 1000
2000
BIOMASS *
3000
4000
5000
2004 2003 2002 2001 GWh
0
500
1000
1500
2000
2500
3000
* MIGHTY RIVER POWER DOES NOT OWN 100 PERCENT OF THESE ASSETS AND/OR THE PHYSICAL OUTPUT ** RECORD GEOTHERMAL PRODUCTION
NET DEBT / NET DEBT + EQUITY
6000
On behalf of the Board and Management, we are pleased to report on Mighty River Power’s performance for the six months to 31 December, 2005. HIGHLIGHTS
The Company’s strong financial performance in recent years has enabled reinvestment in the business. Diversification and expansion of our generation portfolio continues to help meet the country’s growing energy requirements. We now have the capability to manage seasonal changes in demand and weather-related fluctuations in our hydro production through the improved flexibility of our generation portfolio. This increased flexibility delivered a sound Net Surplus after Taxation of $54.0 million in the period to 31 December 2005, despite lower than normal inflow levels into, and production from, the Waikato hydro system. A significantly higher depreciation charge for the period ($14.2 million) following the revaluation of generation assets as at 30 June 2005 also impacted on the Net Surplus. Operating revenue in the period to 31 December 2005 was $171.7 million higher than 2004, primarily as a result of high spot prices increasing generation sales revenue. This increase was largely offset by increased purchase cost for energy to service our retail customers and associated hedge contract settlements. The high spot prices at the end of the period had the effect of increasing receivables and payables. Overall, the Net Surplus of $54.0 million and Operating Surplus before Interest, Non-recurring items and Taxation of $106.8 million were considerably lower than the comparable period last year ($77.3 million and $135.7 million respectively), when we enjoyed record hydro production. A final dividend for the 2005 financial year, of $36.4 million was paid out during the period under review. Operating cashflow was stable at $121.3 million compared to $123.6 in the previous comparable period. Mighty River Power’s focus on diversifying our generation portfolio saw cash outflows on capital expenditure rise to $65 million, up from $45 million. This follows the $108 million invested in new energy developments and existing assets in the full 2005 financial year.
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It was pleasing that in November Standard and Poor’s reaffirmed Mighty River Power’s long-term credit rating as BBB+ and its short-term rating as A-2. These ratings reflect our sustained strong financial performance. G E N E R AT I O N
Our total generation volumes were down 8% to 2,989 GWh (compared with 3,244 GWh) for the six months to December 2005. Lower than normal inflows in the period resulted in hydro production of 1,981 GWh, down from 2,631 GWh in the previous corresponding period and the second lowest in the Company’s history. This reduction was partially offset by increased output from geothermal plants and the Southdown station. The decision several years ago to fully acquire Southdown and increase operational flexibility through renegotiation of our gas supply contracts, enabled us to lift production in this period when wholesale prices were high. Total generation at Southdown more than doubled from 224 GWh in the first half of last year to 464 GWh in the six months under review. Geothermal plants we are associated with produced 510 GWh, up significantly from the 377 GWh for the same period last year. This result saw record production of 138 GWh at Rotokawa and 372 GWh at Mokai. The Mokai result was assisted by the commissioning of a $100 million, 39MW expansion by the Tuaropaki Power Company on 3 July 2005. The total production volumes achieved were very pleasing given difficult hydro conditions and demonstrate the significant benefits of Mighty River Power’s transition over the past six years to a diversified energy company. This diversification and development continues at pace as we investigate and develop a range of fuel options and technologies to grow the business to help meet rising energy demand associated with New Zealand’s economic growth. We continue to investigate a wide range of potential wind generation sites around the country and have recently been granted resource consents to begin a wind monitoring programme at Turitea, 10km south east of Palmerston North. Mighty River Power is undertaking the largest geothermal exploration and expansion programme in New Zealand in the past twenty years. As part of this $100 million programme, we have been investigating the viability of the Kawerau geothermal resource. Data from this investigation has led to the lodging of an application for resource consents to develop a plant of approximately 70MW capacity. 6
We also continued our gas exploration joint venture with Swift Energy (NZ) Limited, with drilling for two further onshore exploration wells in southern Taranaki commencing in November 2005. The results of this gas exploration activity are expected to be known prior to the end of the financial year. In December 2005 we also confirmed the purchase of a 40% stake in a Taranaki-based petroleum exploration project. We have joined North Taranaki Exploration Ltd (40%) and Westec Energy New Zealand Ltd (20%) in a joint venture to commence exploration of a 1,000km2 area off the Taranaki coast in 2006. R E TA I L
Mercury Energy continued to gain customer numbers and market share, with customer numbers increasing to 323,000 from 317,000 at 3o June 2005. Successful acquisition campaigns, award winning customer service, and recognition for leading retail performance have seen us continue a three year trend of succeeding against our competitors in building market share through winning and retaining retail customers. Our very successful dual energy programme has continued to deliver growth with customer numbers exceeding 21,000 and market share now over 25% of the Greater Auckland market. Our retail electricity and gas customers are serviced by the market’s best contact/call centre (2004 & 2005 CRM Contact Centre Awards). We also continue to be a market leading provider of electricity price risk management solutions to the commercial and industrial markets. Metrix, our metering business, has continued to maintain significant growth in new connections, across the Greater Auckland region. LOOKING AHEAD
New Zealand’s energy options are limited, but enough new generation programmes are under development to meet forecast demand through to the end of the decade. Nationwide, significant investment in transmission is urgently required to enable renewable generation options to be developed and to provide customer choice through competition.
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Mighty River Power has become a diversified energy company and the resources we have committed to expanding our generation capacity and options, ensure we are playing our part in providing a sustainable energy supply for New Zealand’s future. The challenge is to maintain our momentum. Our strong financial position and our recent financial performances have positioned us well for continuing investment and our thanks go to the many staff whose efforts and commitment created and maintained this position.
CAROLE DURBIN
DOUG HEFFERNAN
CHAIR
CHIEF EXECUTIVE
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I N T E R I M F I N A N C I A L S TAT E M E N T S
FOR THE SI X MONTHS ENDING 31 DECEMBER 2 0 05
C ON SOLIDATED S TATEMENT OF FIN A NCI A L PERFORM A NCE
10
C ON SOLIDATED S TATEMENT OF MOV EMENT S IN EQUIT Y
11
C ON SOLIDATED S TATEMENT OF FIN A NCI A L P OSITION
12
C ON SOLIDATED S TATEMENT OF CA SH FLOW S
14
NOTE S TO THE C ON SOLIDATED INTERIM FIN A NCI A L S TATEMENT S
15
9
C O N S O L I D AT E D S TAT E M E N T O F F I N A N C I A L P E R F O R M A N C E
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
YEAR ENDED 30 JUNE 2005 AUDITED $000
895,669 (222,527)
NOTE
Sales Less line and metering charges
3,649
Interest income
7,585
Other revenue
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
UNAUDITED
UNAUDITED
$000
$000
600,510
414,775
(128,796)
(113,641)
1,003
1,695
5,814
3,980
684,376
Total Operating Revenue
478,531
306,809
241,762
Operating surplus before interest and non-recurring items
106,772
135,686
3,649
Interest income
(36,336)
Interest expense
(22,137)
Non-recurring items
1,021
2
Share of associates net surplus
187,959
Surplus Before Taxation
(66,732)
Taxation expense
121,227
Net Surplus After Taxation
3
The notes set out on pages 15 to 19 form part of, and should be read in conjunction with, these Interim Financial Statements.
10
1,003
1,695
(18,092)
(18,448)
0
0
1,739
(103)
91,422
118,830
(37,374)
(41,536)
54,048
77,294
C O N S O L I D AT E D S TAT E M E N T O F M O V E M E N T S I N E Q U I T Y
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
YEAR ENDED 30 JUNE 2005 AUDITED $000
886,524
Equity at Beginning of the Period
121,227
Net surplus after taxation
1,055,564 1,176,791
Increase in asset revaluation reserve
Total Recognised Revenues and Expenses for the Period
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
UNAUDITED
UNAUDITED
$000
$000
2,033,315
886,524
54,048
77,294
0
0
54,048
77,294
Distributions to owners: (30,000)
Final dividend paid for 2004
0
(30,000)
0
Final dividend paid for 2005
(36,400)
0
2,033,315
Equity at End of the Period
2,050,963
933,818
The notes set out on pages 15 to 19 form part of, and should be read in conjunction with, these Interim Financial Statements.
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C O N S O L I D AT E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N
A S AT 31 DECEMBER 2005
YEAR ENDED 30 JUNE 2005
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
AUDITED
UNAUDITED
UNAUDITED
$000
$000
$000
377,561
377,561
1,673,402
556,257
2,050,963
933,818
1,204
1,204
438,002
365,821
439,206
367,025
136,152
84,417
3,814
3,411
Provision for taxation
13,774
22,653
Deferred taxation
27,845
24,029
0
89,225
181,585
223,735
2,671,754
1,524,578
Equity 377,561 1,655,754
Share capital Reserves
2,033,315
Non-current Liabilities 1,204 469,294
Energy contracts Loans
470,498
Current Liabilities 136,304 5,051 0 22,913 0
Payables and accruals Provisions
Loans – current portion
164,268 2,668,081
Total Equity and Liabilities
The notes set out on pages 15 to 19 form part of, and should be read in conjunction with, these Interim Financial Statements.
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C O N S O L I D AT E D S TAT E M E N T O F F I N A N C I A L P O S I T I O N ( C O N T I N U E D )
A S AT 31 DECEMBER 2005
YEAR ENDED 30 JUNE 2005
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
AUDITED
UNAUDITED
UNAUDITED
$000
$000
$000
2,447,603
1,380,689
32,891
13,278
Non-current Assets 2,437,139
Property, plant and equipment
31,152
Investment in associate
11,005
Other non-current assets
2,479,296
10,150
13,981
2,490,644
1,407,948
6,775
3,707
Current Assets 7,013 16,400 160,316
Cash Short term deposits Receivables and prepayments
3,054
Inventories
2,002
Provision for taxation
188,785 2,668,081
Total Assets
The notes set out on pages 15 to 19 form part of, and should be read in conjunction with, these Interim Financial Statements.
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5,000
5,000
164,937
104,639
4,398
3,284
0
0
181,110
116,630
2,671,754
1,524,578
C O N S O L I D AT E D S TAT E M E N T O F C A S H F L O W S
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
YEAR ENDED 30 JUNE 2005 AUDITED $000
NOTE
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
UNAUDITED
UNAUDITED
$000
$000
474,508
318,117
Cash Flows from Operating Activities Cash was provided from (applied to): 642,965 2,574 (351,134)
Receipts from customers Interest received Payments to suppliers and employees
(34,835)
Interest paid
(71,966)
Taxation paid
187,604
Net Cash Inflow from Operating Activities
4
414
1,707
(319,727)
(157,051)
(17,279)
(18,151)
(16,666)
(21,000)
121,250
123,622
Cash Flows from Investing Activities Cash was provided from (applied to): 89 4,725 (78,541) (150) 0 (29,750) (103,627)
Sale of property, plant and equipment Repayment of advances from associates Purchase of property, plant and equipment
30
41
0
4,725
(65,263)
(31,869)
Purchase of other non-current assets
0
0
Disposal of other non-current assets
37
0
Investment and advances to associate
Net Cash Outflow from Investing Activities
0
(13,000)
(65,196)
(40,103)
Cash Flows from Financing Activities Cash was provided from (applied to): 40,979 0 (105,000) (64,021) 19,956 3,457 23,413
Loan advances
0
26,731
Loans repaid
(31,292)
0
Dividends paid
(36,400)
(105,000)
Net Cash Outflow from Financing Activities
(67,692)
(78,269)
Net Increase (Decrease) in Cash Held
(11,638)
5,250
Cash Balance at Beginning of the Period
23,413
3,457
Cash Balance at End of the Period
11,775
8,707
6,775
3,707
5,000
5,000
11,775
8,707
Cash balance comprises: 7,013 16,400
Cash Short term deposits
23,413 The notes set out on pages 15 to 19 form part of, and should be read in conjunction with, these Interim Financial Statements.
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N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
1. S TAT E M E N T O F A C C O U N T I N G P O L I C I E S
The interim financial statements presented here are the unaudited consolidated financial statements of Mighty River Power Limited for the six months ended 31 December 2005. These interim financial statements have been prepared in accordance with FRS-24 Interim Financial Statements, and should be read in conjunction with the Annual Report for the period ended 30 June 2005. The accounting policies used in the preparation of these interim financial statements are consistent with those used in the annual financial statements and the previously published interim financial statements. 2. NON-RECURRING ITEMS
YEAR ENDED 30 JUNE 2005 AUDITED $000
(20,935) (1,202)
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
UNAUDITED
UNAUDITED
$000
$000
Impairment of exploration expenditure
0
0
Other
0
0
0
0
(22,137)
I M PA I R M E N T O F E X P L O R AT I O N E X P E N D I T U R E
Expenditure relating to exploratory drilling has been expensed as a consequence of a review of the economic viability of the expenditure associated with this drilling. The assessed capacity of the fields involved has been reduced and expected future developments can no longer support the carrying value of these investments
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N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D )
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
3 . TA X AT I O N E X P E N S E YEAR ENDED 30 JUNE 2005
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
AUDITED
UNAUDITED
UNAUDITED
$000
187,959 62,026
$000
$000
Surplus before taxation
91,422
118,933
Taxation at 33 cents
30,169
39,248
7,205
2,288
0
0
37,374
41,536
Taxation effect of permanent differences: 4,545 161 66,732
Other permanent differences Prior year adjustments Taxation expense Analysis of taxation expense:
67,933
Current taxation
32,442
41,621
(1,201)
Deferred taxation
4,932
(85)
37,374
41,536
66,732
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N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D )
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
4 . R E C O N C I L I AT I O N O F N E T S U R P L U S A F T E R TA X AT I O N W I T H N E T C A S H F L O W S F R O M O P E R AT I N G A C T I V I T I E S YEAR ENDED 30 JUNE 2005
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
AUDITED
UNAUDITED
UNAUDITED
$000
121,227
Net Surplus After Taxation
$000
$000
54,048
77,294
40,880
26,651
818
1,190
Add (less) non-cash items: 52,750 3,672
Depreciation Amortisation of other non-current assets
20,935
Exploration expenditure
(1,021)
Share of associates net surplus
0
0
(1,739)
103
(7,291)
Other non-cash items
1,495
(6,639)
41,454
21,305
Decrease (increase) in receivables and prepayments
(4,449)
12,010
Decrease (increase) in inventories
(1,344)
766
45,238
(Decrease) increase in payables and accruals
10,833
(8,289)
(4,034)
Increase in provision for taxation
15,776
20,621
(1,201)
(Decrease) increase in deferred taxation
4,932
(85)
25,748
25,023
121,250
123,622
69,045 Add (less) movements in working capital: (43,667) 996
(2,668) 187,604
Net Cash Inflow from Operating Activities
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N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D )
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
5. COMMITMENTS YEAR ENDED 30 JUNE 2005
SIX MONTHS ENDED 31 DECEMBER 2005
SIX MONTHS ENDED 31 DECEMBER 2004
AUDITED
UNAUDITED
UNAUDITED
$000
$000
$000
22,732
25,504
8,188
8,094
30,920
33,598
Capital Commitments 21,797
Commitments for future capital expenditure
Operating Commitments 9,264
Commitments for future operating expenditure
31,061
6. CONTINGENCIES
Mighty River Power and certain subsidiaries have cross-guaranteed the due and punctual payment of each other’s Guaranteed Indebtedness in relation to bank borrowings under a Standby and Cash Advances Facility and a Revolving Advances Facility. Mighty River Power Limited has a number of potential obligations under on-going support projects with community based groups. Mighty River Power Limited has a contingent liability in respect of the Accident Compensation Corporation’s residual claims levy. The levy is payable annually from May 1999 for up to fifteen years. The Group’s future liability is a function of the Accident Compensation Corporation’s unfunded liability for past claims and future payments to employees. Mighty River Power Limited holds land and interests that may be affected by certain claims that have been brought or are pending against the Crown under the Treaty of Waitangi Act 1975. In the event that a recommendation is made by the Waitangi Tribunal for the return of some or all of the affected land, and that recommendation is confirmed by the Crown, resumption would be effected by the Crown under the Public Works Act 1981 and compensation would be payable to Mighty River Power Limited. 7. S U B S E Q U E N T E V E N T S
There have been no events subsequent to balance date that would affect the fair presentation of these interim financial statements. 8 . I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G S TA N D A R D S
In December 2002 the New Zealand Accounting Standards Review Board (ASRB) announced that New Zealand entities required to comply with NZ GAAP under the Financial Reporting Act 1993 would be required to apply International Financial Reporting Standards (IFRS) for financial periods commencing on or after 1 January 2007 with earlier adoption permitted from 1 January 2005. The new standards that have been approved by the ARSB for application in New Zealand are referred to as New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as certain adaptations have been made to reflect New Zealand circumstances.
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N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D )
FOR THE SIX MONTHS ENDED 31 DECEMBER 2005
8 . I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G S TA N D A R D S ( C O N T I N U E D )
Mighty River Power Limited intends to adopt NZ IFRS from 1 July 2007. A project team, monitored by a steering committee, has been established to achieve transition to NZ IFRS reporting. The project involves assessing the impacts of conversion on existing accounting and reporting policies, procedures, systems and processes, then designing and implementing the changes required to enable the delivery of financial reporting on an NZ IFRS compliant basis. The key differences between current NZ GAAP and NZ IFRS identified to date as potentially having a significant effect on the Group’s financial statements are summarised below.
FINANCIAL INSTRUMENTS
All derivative contracts including electricity hedges will be recorded in the statement of financial position at fair value under NZ IFRS and be adjusted against opening equity. Any movements in the fair value of these instruments from year to year will have the potential to affect the statement of financial performance and the statement of financial position, the extent to which will depend on whether hedge accounting is adopted. The financial impact of the change is not yet reliably estimable.
DEFERRED TAXATION
The IFRS basis of accounting for deferred tax is conceptually different to current GAAP. Under current GAAP deferred taxation is calculated using an income statement approach whereas under NZ IFRS deferred taxation will be calculated based on a balance sheet approach. This method recognises deferred tax balances where there is a difference between the carrying value of an asset or liability and its tax base. The most significant impact for Mighty River Power Limited will be the recognition of a deferred tax liability in relation to the revaluation of generation assets. The financial impact of this change is not yet reliably estimable. This summary should not be taken as an exhaustive list of all the differences between current NZ GAAP and NZ IFRS. Further, the effects of these differences have not yet been quantified by the Group. Accordingly, there can be no assurances that the financial performance and financial position as disclosed in these financial statements would not be significantly different if determined in accordance with NZ IFRS.
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DIRECTORY
DIREC TORS
Carole Durbin, Chair Ian Fraser, Deputy Chair John Baird Caroline Ball Trevor Janes David McConnell Sandy Maier Tania Simpson
E XECUTIVE MANAGEMENT
Doug Heffernan, Chief Executive John Foote, Group Operations Manager Stuart Lush, General Manager Generation Development William Meek, Enterprise Risk Strategist James Moulder, General Manager Sales Greg Raasch, General Manager Geothermal Steve Rawson, General Manager New Business Development Neil Williams, General Manager External Affairs
GROUP FINANCE MANAGER
Tony Gray
CO M PA N Y S E C R E TA R Y
Tony Nagel
REGISTERED OFFICE
Level 19, 1 Queen Street, Auckland TELEPHONE FACSIMILE EMAIL
09 308 8200
09 308 8209
enquiries@mightyriver.co.nz
WEBSITE
www.mightyriverpower.co.nz
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