Interim report 2008 by Mercury

MIGHTY RIVER POWER LIMITED

INTERIM REPORT 31 DECEMBER 2007

< Paul Ware – Mighty River Power Kawerau Project Manager; Malcolm Campbell – Kawerau Mayor and Stuart Lush – Mighty River Power Generation Development Manager at the ever-developing Kawerau Site.

< Apprentices Te Whitu Rakei and Andrew Millyn with Apprenticeship Programme Manager, Ian Carr at the Mokai Geothermal power station.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

THE PERIOD IN REVIEW

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) For the six months ended 31 December 2007

Earnings before Interest, Tax, Depreciation, Amortisation and Financial Instruments (EBITDAF)

Total Equity/Total Assets

FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

(%)

2007

175.1

2006

179.4

2005*

148.1

2004*

58.7 57.0

2006

76.8

2005* 163.5

2003*

2007

118.5

61.3

2004*

62.0

2003*

Proﬁt for the Period

Net Debt / Net Debt + Equity

FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

(%)

2007 2006

83.0

2005*

54.0

2004*

77.3

Operating Cash Flow FOR THE SIX MONTHS TO 31 DECEMBER

($Million) 2007

134.7

2006

154.3 121.3

2004* 2003*

51.4

2005*

23.9 19.3

2006

37.9

2003*

2007

123.6 81.6

* Information for years prior to the Group’s transition date of 1 July 2006 to NZ IFRS have been prepared under existing NZ FRS and have not been translated to NZ IFRS amounts.

17.4 32.3 30.1

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

CHAIR AND CHIEF EXECUTIVE REPORT

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 2007. Renewable Energy Target Well on Track Mighty River Power will treble its involvement in geothermal generation by 2012 through developing and expanding, in conjunction with our iwi partners, across four geothermal sites at Mokai, Rotokawa, Kawerau and Nga Tamariki. This will make a signiﬁcant contribution to New Zealand’s national renewable energy targets for 2025. Our current generation mix is predominantly renewable with signiﬁcant hydro and, increasingly, �� geothermal assets. �� Our Generation Portfolio –

Total Generation Volumes FOR THE SIX MONTHS TO 31 DECEMBER 2007

(GWh)

HYDRO

2109GWh

GEOTHERMAL*

623GWh

CO-GENERATION 407GWh BIOENERGY*

28GWh

* Mighty River Power does not own 100 percent of these assets and / or the physical output.

Geothermal We have invested approximately $130million on geothermal development in the past six months, continuing our commercial commitment to develop reliable geothermal resources as the core part of our growth strategy.

Geothermal production at the ﬁelds we are involved in represented just under 20% of Mighty River Power’s total generation in the six months to 31 December. Geothermal generation for the period at both Mokai and Rotokawa (that we own in conjunction with iwi partners) was 623GWh, compared to 566GWh in the previous comparative period, with worldbest availability levels of 98% achieved over the period.

Geothermal generation is unique in that it provides constant renewable energy and is not subject to changes in rainfall and wind like hydro or wind power. It is �� Mighty River Power’s development therefore a major contributor to energy �� plans involve 500MW of geothermal security and will play an increasing role in �� generation by 2012. Kawerau is the first mitigating the�� impact of weather related of these major new developments that are risk of hydro and wind generation. expected to be completed over the next few years. Geothermal exploration, development and operation is a specialised field Key achievements during the six months requiring a critical mass of technical to 31 December 2007 are as follows: and management capabilities to ensure world-class performance and to manage Rotokawa the significant risks in geothermal In conjunction with our joint venture development. Mighty River Power partner, Tauhara North No. 2 Trust, we has invested to acquire this specialist secured all the required consents for a capability. We are now looking at how to further 130MW geothermal development ensure our capability can best be utilised of the Rotokawa geothermal field. This in the future development of geothermal, $450million new development will be both within New Zealand and potentially built close to the existing Rotokawa offshore. geothermal power station and will connect into existing 220kV transmission lines directly over the field. The plant is expected to generate an average of 1100GWh annually.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

Mokai We completed negotiations with Contact Energy and the Tuaropaki Trust that led to the Trust acquiring 1200ha of land that Contact Energy owned and which lies over some of the existing Mokai geothermal resource, north of Lake Taupo. Through our 25% ownership of the Tuaropaki Power Company, we are working with the Trust on options to develop this resource and to expand the Mokai power station by a further 50-60MW beyond its existing 112MW capacity. Kawerau Construction of our 90MW, $300million geothermal power station is on track for completion in late 2008. The Kawerau geothermal power station will significantly increase generation capacity in the Bay of Plenty, meeting approximately one-third of residential and industrial demand in the region and providing important economic benefits for the Kawerau region through increased industry and employment confidence. Nga Tamariki Mighty River Power has been granted the majority of consents for the Nga Tamariki geothermal field. We anticipate commencing exploration drilling during 2008. The project is expected to be completed by 2012 with construction of a nominal 80MW geothermal power station.

Trading Conditions The dry summer has once again highlighted New Zealand’s reliance on hydro energy. On average, approximately 60% of New Zealand’s annual electricity production is hydro based. During dry periods the electricity system’s reliance on thermal back-up increases significantly. In the period under review, trading conditions were typified by good hydro inflows in the winter followed by very dry conditions from late spring. To compensate, we increased production at Southdown significantly over the period and reduced hydro production by 9.5%, compared to the previous comparative period. This allowed us to build storage in Lake Taupo prior to what has been an extreme drought in the Waikato during summer, resulting in a rapid decline in storage levels in the current period. Hydro Hydro remains a very significant resource for New Zealand and Mighty River Power. Hydro generation figures in the last six months were 2,109GWh (compared to 2,329GWh in the previous comparative period), 67% of Mighty River Power’s total generation. There is increasing demand on water resources around the country. Ongoing access to existing hydro generation is crucial for New Zealand’s electricity security and renewable objectives. The environmental regulator for the Waikato hydro system catchment, Environment Waikato, is currently working through a new water allocation plan. Mighty River Power is actively participating in this process to ensure that the Waikato hydro system continues to make its crucial contribution to New Zealand’s growing electricity needs.

The $20million Arapuni Dam restoration project attracted international interest, as it was the first time a technique of drilling a series of intersecting pile walls was used while the dam remained full and operational, in order to fix historic water seepage under the dam. The project, which repaired fissures in the rock underlying the dam that had existed since its commissioning in 1929, was successfully completed in October and achieved an international first. The technically challenging project was also awarded the Shell Environmental Excellence merit award at the New Zealand Contractors Federation 2007 annual conference which recognised the efforts taken to minimise the environmental impact of the work. Co-generation The Southdown expansion by 45MW to 170MW in early 2007 has proven to be timely, with the plant operating at full load from October to January to compensate for the poor hydro inflows and calm conditions that have caused very low wind generation at times of daily peak demands. In the period under review, Mighty River Power made exhaust duct modifications to one of the three gas turbines, which is expected to provide a 2% efficiency gain. Production at Southdown for the period totalled 407GWh (compared to 188GWh in the previous comparative period), 13% of Mighty River Power’s total generation. Our bio-energy sites contributed 1% of our total generation (28GWh).

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

Wind Wind in New Zealand is a worldclass renewable resource that is complementary to hydro. We have continued to monitor a number of high quality sites, and are working on securing further access to potential sites. We are also investigating the potential for working with New Zealand Windfarms to facilitate the fast track development of smaller wind farms possibly using New Zealand turbines. Customer Service In January 2008, Mercury Energy began installation of a new prepay metering solution. The new Smart Meters will provide our prepay customers with the beneﬁts available from the latest metering technology. The new service is easier and more convenient than the previously contracted technology. Prepay customers will have more places and ways in which they can pay, and facilities are available for customers who need to use their meter to pay off existing debt. In July 2007, Mercury Energy achieved full compliance with the Electricity Commission’s revised guidelines for Vulnerable Customers. The business changes implemented by Mercury Energy mean that in some instances we exceed the Guidelines. For the fourth year in a row, Mercury Energy’s contact centre has been recognised for its high level of customer service at the Customer Relationship Management Awards, winning the Gold Award for the best contact centre with over 50 seats. Mercury Energy achieved a milestone of 30,000 gas customers during the six month period, and maintained its electricity customer base at just under 340,000.

Community Through our many community initiatives, iwi and environmental partnerships, we continue to demonstrate our long term commitment to the communities in which we operate and where our people live and work. The principles of Corporate Social Responsibility are well embedded into our company’s values. Our sponsorship portfolio is focussed on support for community projects and activities. The Waikato River is at the heart of Mighty River Power hydro assets and we are extremely proud to be principal sponsor of a Waikato Museum exhibition which opened in late October 2007. The exhibition titled: The Mighty River Waikato: from Hinaki to Hydropower, shows how much this extraordinary river has and continues to contribute, its history, the wildlife it supports and the impact of humans. There were approximately 2,000 visitors to the exhibition in its first two months. The Waikato River Trails Trust completed another 10km of the Atiamuri trail in December. This follows on from the opening in June of the Snowsill and Dunham Creek trails. The new section takes the track 16km along Lake Whakamaru. In December, the Maungatautari Trust celebrated a major milestone with a kiwi chick hatching at Maungatautari reserve for the first time in over a century. We are glad to be part of such success on the ecological island which was created only five years ago.

Mighty River Power is proud to have assisted Rowing New Zealand to win the rights to host the 2010 World Rowing Championships, bringing the World Championships back to New Zealand for the first time in 32 years. We look forward to 2010 being another success. As sponsors of Rowing New Zealand’s High Performance Centre and Programme, we would like to congratulate Mahe Drysdale, Emma Twigg and the Men’s Coxless Four for winning the Sportsman of the Year, the Emerging Talent and the Sports Team of the Year, respectively, at the 2007 Halberg Awards. All these athletes and most of the current world champions have graduated through the High Performance Centre and Programme. Mighty River Power sponsored the Junior Maori Sportsman of the Year award at the national Maori Sports Awards for the fifth consecutive year. The 2007 recipient was Hawke’s Bay Rugby player Zac Guilford. Financial Summary The period’s accounts are the first prepared under the new International Financial Reporting Standards (NZ IFRS). A detailed reconciliation of the movements between NZ IFRS and old GAAP has been provided in the notes to the financial statements. Due to changes in the application of accounting policy in relation to exchange derivatives, comparison with the previous comparative six months is not meaningful.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

The most meaningful comparison is provided at the earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF). EBITDAF in the period under review was $175.1million, down 2.4% on the previous comparative period. The primary reason for this reduction is the decline in hydro production, and the increased gas use at Southdown. Our generation development work ramped up with $162million spent on capital projects in the six month period compared to $166million in the full year to June 2007. A reassessment of the useful life of our hydro assets has been undertaken resulting in an extension in life. This has had the impact of reducing the depreciation charge by $7.3million with a full year accounting benefit expected of $14.5million. Mighty River Power’s after tax profit was $83million, compared to $38million in the previous comparative period. The Future New Zealand, like many other countries enjoying economic prosperity, is facing significant growth in energy demand. Finding the energy needed to power the economy, while building a sustainable energy future is a challenge shared by the industry and the Government as outlined in the New Zealand Energy Strategy of October 2007.

The extremely dry summer has resulted in lower than normal hydro storage levels for late summer. Whilst it is too early to have a firm view on the supply situation over the coming winter, it is clear that in the absence of significant rainfall in the main hydro catchments meeting winter electricity demands will be challenging. We will continue to operate all our plants prudently, so as to make the maximum contribution possible to the country’s electricity needs. Mighty River Power has achieved some significant milestones in the last six months in implementing strategies that have previously been put in place, in some cases up to a decade ago. We are confident that our existing generation portfolio and our geothermal development programme put us in a strong position to help meet the challenge.

Carole Durbin Chair

Doug Heffernan Chief Executive

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

ENERGY GROSS MARGIN ANALYSIS For the six months ended 31 December 2007

REVENUE Gross revenue Less Transmission and distribution costs Net revenue COSTS Energy purchases Other (direct costs)/income Energy gross margin Generation volumes (GWh)4 Total ﬁxed price variable volumes sales (GWh)5 Average wholesale electricity price ($MWh) Average ﬁxed price variable volume price ($MWh)

HALF YEAR ENDED

31 DECEMBER 2007

31 DECEMBER 2006

RETAIL1

WHOLESALE2

RETAIL1

WHOLESALE2

$000

403.1 164.9 238.1

153.9 153.9

378.6 154.5 224.1

155.2 155.2

(158.6) 16.4

(23.7) (5.2)

(148.2) 17.6

(12.3) (9.2)

93.53

133.7

95.93 2,064.3 98.7

125.0 2,659.3 51.7 -

2,063.7 97.2

Retail includes sales to end user customers of energy and the net impact of electricity ﬁnancial derivatives (excluding inter-generator ﬁnancial derivatives).

Wholesale includes all generation activities, the sale of energy to the wholesale energy market and the net impact of inter-generator electricity ﬁnancial derivatives.

Retail Energy Gross Margin includes full metering costs incurred by Metrix, some of which are eliminated on consolidation.

Generation volumes exclude accounted volumes.

Does not include volumes associated with electricity ﬁnancial derivatives.

2,695.3 53.9 -

Overall conditions were broadly comparable between the periods. There was a 1.6% increase in retail energy gross margins. Wholesale gross margin declined by $8.7million due to an increase in wholesale energy purchase costs as a result of Southdown gas costs.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the six months ended 31 December 2007

10. Consolidated Income Statement 11. Consolidated Statement of Changes in Equity 12. Consolidated Balance Sheet 13. Consolidated Cash Flow Statement 14. Notes to the Financial Statements

10.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

CONSOLIDATED INCOME STATEMENT For the six months ended 31 December 2007

Note

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

578,399 (155,391) 6,950 429,958

539,263 (145,447) 6,269 400,085

1,048,377 (280,921) 12,569 780,025

Energy costs Other operating expenses Total operating expenses

193,008 61,823 254,831

158,445 62,230 220,675

336,536 128,024 464,560

Earnings before net interest expense, income tax, depreciation, amortisation and ﬁnancial instruments (EBITDAF)

175,127

179,410

315,465

(39,757) 8,636 (10,789) 2,258

(44,190) (65,744) 0 2,132

(84,948) (61,056) (19,607) 3,879

Earnings before net interest expense and income tax (EBIT)

135,475

71,608

153,733

Interest expense Interest income Net interest expense

(15,331) 2,787 (12,544)

(19,342) 3,435 (15,907)

(35,248) 8,864 (26,384)

Proﬁt before income tax

122,931

55,701

127,349

(39,948) 82,983

(17,803) 37,898

(29,546) 97,803

Sales Less line and metering charges Other revenue Total revenue

Depreciation and amortisation Change in the fair value of ﬁnancial instruments Impaired exploration expenditure Equity accounted earnings of associate companies

Income tax expense Proﬁt for the period

The accompanying notes form an integral part of these ﬁnancial statements.

8 2 5

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.11

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 31 December 2007

UNAUDITED ASSET

CASH FLOW

ISSUED

RETAINED

REAVALUATION

HEDGE

TOTAL

CAPITAL

EARNINGS

RESERVE

EQUITY

$000

377,561

506,532

725,364

40,361

1,649,818

0 0

(11,729) (11,729)

Total recognised income and expenses for the period Dividend Balance as at 31 December 2006

0 0 377,561

37,898 (50,400) 494,030

0 0 725,364

(11,729) 0 28,632

26,169 (50,400) 1,625,587

Balance as at 1 January 2007

377,561

494,030

725,364

28,632

1,625,587

Fair value revaluation of ofﬁce land and buildings Cash ﬂow hedges gain/ (loss) taken to equity, net of taxation Impact of deferred tax rate change Net income/ (expense) recognised directly in equity

0 0 0 0

1,786 0 32,308 34,094

0 (25,345) 147 (25,198)

1,786 (25,345) 32,455 8,896

Proﬁt for the period Release of asset revaluation reserve for assets

59,905

taken out of service, net of taxation Total recognised income and expenses for the period Dividend Balance as at 30 June 2007

0 0 0 377,561

565 60,470 0 554,500

(565) 33,529 0 758,893

0 (25,198) 0 3,434

0 68,801 0 1,694,388

Balance as at 1 July 2007

377,561

554,500

758,893

3,434

1,694,388

0 0

(8,224) (8,224)

0 0 0 758,893

0 (8,224) 0 (4,790)

82,983 74,759 (56,200) 1,712,947

Balance as at 1 July 2006 Cash ﬂow hedges gain/ (loss) taken to equity, net of taxation Net income/ (expense) recognised directly in equity

Cash ﬂow hedges gain/ (loss) taken to equity, net of taxation Net income/ (expense) recognised directly in equity Proﬁt for the period Total recognised income and expenses for the period Dividend Balance as at 31 December 2007

0 0 0 377,561

The accompanying notes form an integral part of these ﬁnancial statements.

82,983 82,983 (56,200) 581,283

12.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

CONSOLIDATED BALANCE SHEET As at 31 December 2007

Note

SHAREHOLDERS’ EQUITY ASSETS CURRENT ASSETS Cash and cash equivalents Short term deposits Receivables and prepayments Inventories Derivative financial instruments Taxation receivable Total current assets NON-CURRENT ASSETS Property, plant and equipment Intangible assets Investment and advances to associates Derivative financial instruments Other non-current assets Total non-current assets Total assets LIABILITIES CURRENT LIABILITIES Payables and accruals Provisions Derivative financial instruments Taxation payable Total current liabilities NON-CURRENT LIABILITIES Derivative financial instruments Energy contracts Loans Deferred taxation Total non-current liabilities Total liabilities NET ASSETS

The accompanying notes form an integral part of these ﬁnancial statements.

4 5 8

7 8

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

1,712,947

1,625,587

1,694,388

3,833 14,378 131,279 6,887 25,639 18,140 200,156

140,232 3,014 120,325 4,721 17,038 0 285,330

17,038 69,908 154,464 4,666 22,024 27,478 295,578

2,613,981 23,519 54,840 23,953 37 2,716,330 2,916,486

2,492,474 12,435 31,505 30,855 75 2,567,344 2,852,674

2,527,051 21,638 32,436 31,085 75 2,612,285 2,907,863

135,704 1,502 27,753 0 164,959

89,770 0 61,083 14,995 165,848

133,594 0 78,984 0 212,578

3,391 0 557,946 477,243 1,038,580 1,203,539

10,862 1,204 533,117 516,056 1,061,239 1,227,087

7,694 0 516,883 476,320 1,000,897 1,213,475

1,712,947

1,625,587

1,694,388

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.13

CONSOLIDATED CASH FLOW STATEMENT For the six months ended 31 December 2007

Note

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Interest paid Taxes paid Net cash provided by operating activities

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

455,576 (276,556) 2,155 (20,827) (25,647) 134,701

446,751 (259,121) 3,435 (18,209) (18,545) 154,311

788,932 (468,993) 7,655 (36,094) (67,555) 223,945

(161,911) 84

(60,144) 41

(166,483) 5,751

Advances to associates repaid Acquisition of intangibles Proceeds from disposal of other non-current assets Net cash used in investing activities

(23,214) 3,084 (5,317) 38 (187,236)

0 1,935 (2,818) 0 (60,986)

(300) 3,061 (12,295) 0 (170,266)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans Repayment of loans Dividends paid Net cash (used in) / provided by ﬁnancing activities

40,000 0 (56,200) (16,200)

95,957 0 (50,400) 45,557

300,000 (220,697) (50,400) 28,903

Net (decrease)/increase in cash and cash equivalents held Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

(68,735) 86,946 18,211

138,882 4,364 143,246

82,582 4,364 86,946

3,833 14,378 18,211

140,232 3,014 143,246

17,038 69,908 86,946

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of associate

Cash balance comprises: Cash Short term deposits Cash balance at the end of the year

The accompanying notes form an integral part of these ﬁnancial statements.

14.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 1. ACCOUNTING POLICIES 1) Reporting entity Mighty River Power Limited is a company incorporated in New Zealand, registered under the Companies Act 1993 and is a reporting entity for the purposes of the Financial Reporting Act 1993. The condensed consolidated interim NZ IFRS financial statements have been prepared in accordance with the Financial Reporting Act 1993 and the Companies Act 1993. The condensed consolidated interim NZ IFRS financial statements are for Mighty River Power Limited Group (the “Group”). The consolidated NZ IFRS financial statements comprise the Company, its subsidiaries, associates and interests in jointly controlled assets. Mighty River Power Limited is wholly owned by Her Majesty the Queen in Right of New Zealand (the Crown). Consequently, the Company is bound by the requirements of the State-Owned Enterprises Act 1986. The liabilities of the Company are not guaranteed in any way by the Crown. The Group’s principal activities are the production of electricity and the selling of energy and energy related services and products to retail and wholesale customers. 2) Basis of preparation (a) Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”) as applicable to interim financial statements and as appropriate to profit-oriented entities. These condensed consolidated interim financial statements comply with NZ IAS 34 Interim Financial Reporting. These are the Group’s first NZ IFRS condensed consolidated interim financial statements for part of the period covered by the first NZ IFRS annual financial statements and NZ IFRS 1 First Time Adoption of NZ IFRS have been applied. These condensed consolidated interim financial statements do not include all of the disclosures required for full annual financial statements. These condensed consolidated interim financial statements have been prepared on the basis of NZ IFRS in issue that are effective or available for early adoption at the Group’s first NZ IFRS annual reporting date, 30 June 2008.

The NZ IFRS that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 30 June 2008 are still subject to change and to the issue of additional interpretation(s) and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined only when the first NZ IFRS annual financial statements are prepared at 30 June 2008. The preparation of the condensed consolidated interim financial statements in accordance with NZ IAS 34 resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under previous GAAP. The accounting policies set out below have been applied consistently to all periods presented in these condensed consolidated interim financial statements. They have also been applied in preparing an opening NZ IFRS balance sheet at 1 July 2006 for the purposes of the transition to NZ IFRS, as required by NZ IFRS 1. An explanation of how the transition to NZ IFRS has affected the reported financial position and financial performance of the Group is provided in note 11. This note includes reconciliations of equity and profit for comparative periods reported under NZ GAAP (previous NZ FRS) to those reported for those periods under NZ IFRS. (b) Basis of measurement The NZ IFRS financial statements are prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified, as noted below. (c) Estimates and judgements The preparation of interim financial statements in conformity with NZ IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. 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. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below:

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.15

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

Generation plant and equipment The Group’s generation assets are stated at fair value by an independent valuer. The basis of the valuation is the net present value of the future earnings of the assets, excluding any reduction for costs associated with restoration and environmental rehabilitation. The major inputs and assumptions that are used in the valuation model that require judgment include forecast of the future electricity price path, sales volume forecasts, projected operational and capital expenditure profiles, capacity and life assumptions for each generation plant and discount rates. During the six months ended 31 December 2007 management reassessed its estimates of the remaining useful life of its hydro generation assets (see note 4). Retail revenue Management has exercised judgement in determining estimated retail sales for unread gas and electricity meters at balance date. Specifically this involves an estimate of consumption for each unread meter, based on the customers past consumption history. Restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted. Such estimates are valued at the present value of the expenditures expected to settle the obligation. Key assumptions have been made as to the expected expenditures to remediate based on the expected life of the assets employed on the sites. Financial instruments Energy contracts are valued by reference to the Group’s financial model for future electricity prices. Detailed information about assumptions and risk factors relating to financial instruments and their valuation are included in the annual financial statements. (d) Functional and presentation currency These financial statements are presented in New Zealand Dollars ($), which is the Group’s functional currency. All financial information has been rounded to the nearest thousand. (e) Seasonality of operations The energy business operates in an environment that is dependent on weather as one of the key drivers of supply and demand. Fluctuations in seasonal weather patterns, particularly over the short term, can have a positive or negative effect on the reported result. It is not possible to consistently predict this seasonality and some variability is common.

(3) Significant accounting policies (a) Basis of consolidation Subsidiaries Subsidiaries are those entities in which the Group holds a controlling interest either directly, indirectly or beneficially in the equity. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of the acquisition is measured as the fair value of the assets given, equity instruments, issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised in the income statement. All material inter-company transactions, balances and unrealised surpluses and deficits arising from transactions between Group companies are eliminated on consolidation. Associates Associates are those entities in which the Company holds an equity interest and over which the Company has the capacity to significantly affect but not unilaterally determine the operating and/or financial policy decisions. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investments in associates includes goodwill identified on acquisition. The Group’s share of its associates’ post acquisition profits or losses is recognised in the income statement, and its share of post acquisition movements in reserves is recognised in reserves. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. Provision is made for any impairment in the value of investments in associates where the estimated recoverable amount is less than the carrying value. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

16.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

Jointly controlled assets Jointly controlled assets are joint arrangements in which the Group jointly controls or owns one or more assets and is consequently entitled to a share of the future economic benefit through its share of the jointly controlled asset. The Group’s interests in jointly controlled assets are accounted for by recognising its share of the jointly controlled assets, liabilities incurred jointly, income and expenses in the consolidated financial statements. Where an entity becomes or ceases to be a Group entity during the year, the results of that entity are included in the net surplus of the Group from the date of acquisition or up to the date of disposal. (b) Property, plant and equipment Owned assets Generation assets, which include freehold land and buildings and generation plant, are measured at fair value based on periodical valuations by third party valuation experts, less accumulated depreciation and less any impairment recognised after the date of the revaluation. The underlying assumptions are reviewed for reasonableness on an annual basis to ensure that recorded value is not materially different to fair value. Costs incurred in obtaining a resource consent are capitalised and recognised as a non-current asset where it is probable they will give rise to future economic benefit. These costs are amortised over the life of the consent on a straight-line basis. Office land and buildings are measured at fair value based on periodical valuations as determined by third party valuation experts, less accumulated depreciation on buildings and less any impairment losses since the last revaluation. Any surplus on revaluation of an individual item of property, plant and equipment is transferred directly to the asset revaluation reserve unless it offsets a previous decrease in value recognised in the income statement, in which case it is recognised in the income statement. A deficit on revaluation of an individual item of property, plant and equipment is recognised in the income statement in the period it arises where it exceeds any surplus previously transferred to the asset revaluation reserve. Any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Additions to property, plant and equipment stated at valuation subsequent to the most recent valuation are recorded at cost.

All other items of property, plant and equipment are recorded at cost. The cost of property, plant and equipment purchased comprises the consideration given to acquire the assets plus other directly attributable costs incurred in bringing the assets to the location and condition necessary for their intended service. The cost of property, plant and equipment constructed by the Group, including capital work in progress, includes the cost of all materials used in construction, direct labour specifically associated and an appropriate proportion of variable and fixed overheads. Financing costs attributable to a project are capitalised at the Group’s specific project finance interest rate, where these meet certain time and monetary materiality limits. Costs cease to be capitalised as soon as an asset is ready for productive use. Where appropriate, the cost of property, plant and equipment includes site preparation costs, installation costs, and the cost of obtaining resource consents. Provision is made for any impairment in the value of property, plant and equipment where the estimated recoverable amount is less than the carrying value. Where property, plant and equipment is disposed of, the surplus or deficit recognised in the income statement is calculated as the difference between the sale price and the carrying value of the property, plant and equipment. Development of exploration assets Development costs of successful efforts are capitalised and amortised on a units of production basis over the estimated life of the field commencing from the first year of commercial production. Any subsequent impairment in the value of unamortised development costs is charged to the income statement Leased assets The Group leases certain items of property, plant and equipment. Leases under which the Group assumes substantially all the risks and rewards incidental to ownership are classified as finance leases and are capitalised. The asset and corresponding liability are recorded at the inception of the lease at the fair value of the leased asset, or if lower, at the present value of the minimum lease payments.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.17

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

Finance charges are apportioned on a yield to maturity basis over the terms of the respective leases. The cost of improvements to leasehold property is capitalised and amortised over the estimated useful life of the improvements, or over the unexpired portion of the lease, whichever is shorter. Capitalised leased assets are depreciated over the shorter of their estimated useful lives or the lease term. Depreciation Depreciation is provided on a straight-line basis on all property, plant and equipment other than freehold land, capital work in progress and exploration and evaluation assets, so as to write down the assets to their estimated residual value over their expected useful lives. The annual depreciation rates are as follows: Ofﬁce land and buildings Generation assets: • Hydro • Geothermal • Co-generation • Landﬁll Meters Computer hardware and tangible software Other plant and equipment Motor vehicles

Exploratory drilling costs are initially deferred and are subject to regular review to confirm the ability to develop or otherwise extract value from expenditure. If an exploratory field is appraised as unsuccessful, such costs are charged to the income statement. (d) Rehabilitation costs Estimations are made for the expected cost of environmental rehabilitation of commercial sites that require some level of reinstatement resulting from present operations. Any liability is recognised when exposure is identified and rehabilitation costs can be reasonably estimated. (e) Insurance The Group’s property, plant and equipment is predominantly concentrated at power station locations which have the potential to sustain major losses through damage to plant and resultant consequential costs.

1-2% 1-15% 5-8% 7-11% 5-10% 5-10% 20-33% 10-33% 20%

Distinction between capital and revenue expenditure Capital expenditure is defined as all expenditure on the purchase or creation of a new asset, and any expenditure that results in a significant improvement to the original functionality of an existing asset. Revenue expenditure is defined as expenditure that restores an asset to its original operating capability and all expenditure incurred in maintaining and operating the business. (c) Exploration and evaluation expenditure Exploration and evaluation expenditure incurred by the Group is accounted for using the successful effort method. Exploration expenditure, which includes geological, geochemical and geophysical costs, is recognised in the income statement in the period incurred except where future benefits are expected to exceed such expenditure. Land access rights for exploration activities are amortised over the life of the right.

To minimise the financial impact of such exposures, the major portion of the assessed risk is transferred to insurance companies by taking out insurance policies with appropriate counterparties. Any uninsured loss is expensed to the income statement in the year in which the loss is incurred. (f) Intangible assets Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment. Software Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives. (g) Impairment Assets that have an indefinite useful life, for example land, are not subject to amortisation and are tested annually for impairment. Other assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Evaluation and exploration assets are assessed for impairment when there is an indicator that the carrying amount of the asset may exceed its recoverable amount.

18.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash generating units). Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have been reversed. (h) Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined on a weighted average basis and includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location. (i) Cashflow statement The following are the definitions of the terms used in the cash flow statement. • Cash includes cash on hand and bank current accounts. • Investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment and of investments. Investments can include securities not falling within the definition of cash. • Financing activities are those activities that result in changes in the size and composition of the equity structure of the Group. This includes both equity and debt not falling within the definition of cash. Dividends paid in relation to equity structure are included in financing activities. • Operating activities include all transactions and other events that are not investing or financing activities. The cash flow statement includes net cash flows from loan advances as the rollover of loans and deposits is covered by an arranged finance facility. (j) Financial instruments Financial instruments are recognised in the financial statements when the Group has become party to the contract. They include cash balances, receivables, payables, investments and loans. In addition members of the Group are party to financial instruments to meet future financing needs and to reduce exposure to fluctuations in foreign currency exchange rates and energy prices. These financial instruments include cross-guarantees of related entities guaranteed indebtedness, swaps, options, foreign currency forward exchange contracts and energy contracts.

Receivables and payables Receivables and payables are initially recorded at fair value and subsequently carried at amortised cost using the effective interest method, less (in the case of trade receivables) any provision for impairment (doubtful debts). A provision for impairment of trade 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 receivables. Investments The Group classifies its investments in the following categories: financial assets held at fair value through the income statement, held to maturity investments and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the initial classification of its investments at initial recognition. Realised and unrealised gains and losses on investments classified as financial assets at fair value through the income statement are included in the income statement in the period in which they arise. Investments classified as available for sale are held at fair value and unrealised gains and losses are recognised in equity. Held to maturity investments are carried at amortised cost. Debt Loans are initially recorded at fair value net of transaction costs incurred. Loans are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the loan using the effective interest method. Foreign exchange and interest rate derivatives The Group enters various financial instruments for the purpose of reducing its exposure to fluctuations in interest rates and foreign exchange rates. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to fair value. The method of recognising the resulting gain or loss depends on whether the derivative is recognised as a hedging instrument, and if so, the type of hedge. The Group designates certain derivatives as either: a) hedges of the fair value of recognised assets and liabilities or a firm commitment (fair value hedge); or b) hedges of highly probable forecast transactions or variable interest cash flows on recognised liabilities (cash flow hedge).

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.19

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Ineffectiveness arises where the movement in the fair value of the derivative instrument does not perfectly offset the movement in the fair value or cash flows of the hedged item. Amounts included in equity are reallocated to the income statement in the periods when the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a liability, the gains and losses previously deferred in equity are transferred and included in the initial measurement of the asset or liability. Any gains or losses on derivatives that do not qualify for hedge accounting are recognised immediately in the income statement. Energy contracts The Group has entered into a number of contracts to manage its exposure to price fluctuations on the electricity spot market. These contracts are in the form of power supply agreements, contracts for difference, and option based instruments. They are not undertaken for speculative purposes. These energy contracts establish the price at which future specified quantities of electricity are purchased, sold or otherwise exchanged. Energy contracts are a form of derivative and are accounted for on the same basis as other derivatives described above. The fair value of energy contracts is based on the net present value of anticipated cash flows from each contract. Energy contracts are entered into at no cost however their fair value for NZ IFRS purposes is derived using a forward curve that is not the same as that used to set the strike price and therefore a valuation difference arises at inception. To eliminate this valuation difference at inception the forward curve used to ascertain fair value is adjusted by a constant dollar amount to return the initial fair value to nil. This dollar adjustment is then applied to the valuation price path for each subsequent valuation period over the life of the energy contract.

(k) Foreign currencies Transactions in foreign currencies are recognised in the functional currency of the relevant operating unit. Foreign currency transactions are translated to the functional currency using the spot rate at that transaction date. At balance date monetary assets and liabilities denominated in foreign currencies are translated at the closing rate. Exchange variations arising from these translations and the settlement of these items are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. The assets and liabilities of independent foreign operations, whose functional currency is not the New Zealand dollar, are translated at the exchange rates ruling at balance date. Revenue and expense items are translated at the spot rate at the transaction date or a rate approximating that rate. Exchange differences are taken to the foreign currency translation reserve. (l) Employee entitlements A liability for employee entitlements is recognised for benefits earned by employees but not yet received at balance date. Where payment is expected to be within twelve months of balance date, the liability is the amount expected to be paid by the Group. Where payment is expected to be longer term the liability is determined by discounting the expected future cash flows at a pre-tax discount rate that reflects current assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. (m) Operating leases Operating lease payments are representative of the pattern of benefits derived from the leased assets and accordingly are charged to the income statement in the periods in which they are incurred on a straight-line basis over the lease term. (n) Revenue Revenue recognised in the income statement includes the amounts received and receivable for energy and related energy services supplied to customers in the ordinary course of business. Operating revenue is stated exclusive of: • distribution costs paid to lines companies as collected from customers, and • goods and services tax collected from customers. Revenue includes the value of units assessed as being recorded on meters as at balance date, but for which invoices have not yet been rendered.

20.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

(o) Income tax The income tax expense charged to the income statement includes both the current year’s provision and the income tax effect of: • Taxable temporary differences, except those arising from initial recognition of goodwill; and • Deductible temporary differences to the extent that it is probable that they will be utilised. Temporary differences arising from transactions, other than business combinations, affecting neither accounting proﬁt nor taxable proﬁt on initial recognition are ignored.

(q) Capital and reserves Cash flow hedge reserve The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Revaluation reserve The revaluation reserve relates to the revaluation of property, plant and equipment. There have been no changes in share capital during the period.

Deferred tax is not recognised on temporary differences associated with investments in subsidiaries and joint ventures because: • The parent company is able to control the timing of the reversal of the differences; and • They are not expected to reverse in the foreseeable future. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of the assets and liabilities and their carrying amounts in the NZ IFRS consolidated financial statements. A deferred tax asset is only recognised to the extent that there will be future taxable profit to utilise the temporary difference. (p) Goods and services tax The income statement and cash flow statement have been prepared so that all components are stated exclusive of GST. All items in the statements of financial position are stated net of GST with the exception of receivables and payables which include GST invoiced.

(r) Segment reporting An operating segment is a distinguishable component of the Group that is engaged in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete ﬁnancial information is available. Mighty River Power operates in one segment, the New Zealand energy industry. (s) Related parties The Group considers its related parties to be key management personnel, its associates and its joint venture partners. Key management personnel are those people with responsibility and authority for planning directing and controlling the activities of the entity. Key management personnel for the Group are considered to be the Directors and Executive team.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.21

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 2. IMPAIRED EXPLORATION EXPENDITURE The Group is undertaking a gas exploration project. Costs capitalised as property, plant and equipment which relate to exploration efforts that prove to be unsuccessful are expensed to the income statement as impaired exploration expenditure. Impaired exploration expenditure during the six months ended 31 December 2007 was $10.8m and related to the unsuccessful Kanuka and Waitara wells in the gas exploration cash generating unit (31 December 2006:nil, 30 June 2007:$19.6m).

NOTE 3. INCOME TAX EXPENSE

Income tax expense Profit before tax Prima facie income tax expense calculated at 33% on the profit before tax Increase/(decrease) in income tax due to: • effect of tax rate change on deferred tax • share of associate’s tax paid earnings • other permanent differences (Under)/over provision in prior period Income tax expense attributable to profit from ordinary activities

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

122,931 (40,567)

55,701 (18,381)

127,349 (42,025)

0 745 (126)

0 704 (126)

13,351 1,280 (2,115)

0 (39,948)

0 (17,803)

(37) (29,546)

(37,811) (2,137) (39,948)

(32,418) 14,615 (17,803)

(44,271) 14,725 (29,546)

Represented by: Current tax expense Deferred tax expense recognised in the income statement Total

NOTE 4. PROPERTY, PLANT AND EQUIPMENT [COST AND VALUATION]

Assets acquired at cost Net book value of assets disposed Gain/ (loss) on disposal

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

135,549 69 15

61,960 20 21

$000

200,068 6,574 (823)

Reassessment of useful life hydro generation assets During the six months ended 31 December 2007 the Group reassessed its estimates of the remaining useful life of its hydro generation assets. Based on this assessment the depreciation charge for the six month period has been reduced by $7.3m. Realised losses on foreign exchange contracts Realised foreign exchange losses of $55.7m relating to hedge contracts supporting the development programme for which the underlying transaction has still to occur have temporarily been recognised in the cash ﬂow hedge reserve. When the underlying transaction occurs these losses will be transferred to capital work in progress.

22.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 5. INVESTMENTS AND ADVANCES TO ASSOCIATES UNAUDITED

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

Balance at the beginning of the period

32,436

31,308

Additions during the year Equity accounted earnings Repayments during the year

23,638 2,258 (3,492)

65 2,132 (2,000)

300 3,879 (3,051)

Balance at the end of the period

54,840

31,505

32,436

During the six months the Group acquired additional interests in TPC Holdings Ltd. A prepayment of $15m was made for an additional interest in the shares which will be acquired on commissioning of an expansion, or at another date agreed by both parties. A further $8m was paid which allowed for the extension and variation of the shareholder agreement.

NOTE 6. DEFERRED TAX

Balance at the beginning of the period Current period changes in temporary differences affecting tax expense Current period changes in temporary differences affecting reserves Effect of change in corporate tax rate on: • income tax expense • asset revaluation reserve • cash ﬂow hedge reserve Balance at the end of the period

UNAUDITED

6 MONTHS

12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

476,320

536,816

2,137

(14,615) (6,145)

(13,316)

0 0 0

(13,351) (32,308) (147)

477,243

516,056

476,320

(1,214)

UNAUDITED

(1,374)

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.23

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 7. PROVISIONS UNAUDITED

UNAUDITED

6 MONTHS

12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

Provisions made during the year Unwind of discount rate

1,441 61

0 0

Balance at the end of the period

1,502

UNAUDITED

6 MONTHS

12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

19,400 4,455 1,784

12,409 4,621 8

19,746 2,278 0

25,639

17,038

22,024

6,510 1,569 19,674

10,424 6,004 44,655

9,717 330 68,937

27,753

61,083

78,984

23,953

30,855

31,085

23,953

30,855

31,085

3,188 203

9,175 1,687

2,718 4,976

3,391

10,862

7,694

Balance at the beginning of the period

UNAUDITED

Provisions have been recognised for the abandonment and subsequent restoration of areas from which geothermal resources have been extracted.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

CURRENT Interest rate derivative assets Electricity price derivative assets Exchange rate derivative assets

Interest rate derivative liabilities Electricity price derivative liabilities Exchange rate derivative liabilities

NON-CURRENT Electricity price derivative assets

Electricity price derivative liabilities Exchange rate derivative liabilities

Impact of changes in fair value of exchange rate derivatives on the income statement Exchange rate derivatives are held to support our capital development programme. On transition to NZ IFRS (1 July 2006) our then portfolio approach to foreign exchange hedging did not allow us to meet the complex hedge accounting criteria. Consequently, movements in the fair value of these derivatives were recognised through the income statement. A restructure of the portfolio in December 2006 enabled us to adopt hedge accounting from that date resulting in only the ineffective portion of the contracts being recognised through the income statement.

24.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 9. RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES

Profit for the period Items classified as investing/financing activities • Fixed, intangible and investment asset charges • Increase in loan charges Non-cash items Depreciation & amortisation Change in the fair value of financial instruments Impairment of exploration expenditure Share of profits of equity accounted investees Other non-cash items Net cash provided by operating activities before change in assets and liabilities Change in assets and liabilities during the period: • Decrease in trade receivables and prepayments • Increase in inventories • Decrease in trade payables and accruals • Increase/(decrease) in provision for taxation • Increase/(decrease) in deferred taxation Net cash inflow from operating activities

UNAUDITED

6 MONTHS

UNAUDITED 12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

82,983

37,898

97,803

(7,314) 188

(1,152) 1,311

(4,735) 1,383

39,757 (8,636)

44,190 65,744

84,948 61,056

10,789 (2,258) 961

0 (2,132) 996

19,607 (3,879) 6,048

116,470

146,855

262,231

23,186 (2,221) (17,040) 12,253 2,053

47,308 (312) (38,798) 14,243 (14,985)

13,171 (257) (13,190) (28,231) (9,779)

134,701

154,311

223,945

UNAUDITED

6 MONTHS

12 MONTHS

31 DEC 2007

31 DEC 2006

30 JUNE 2007

$000

41,241 16,576

178,110 14,858

113,817 17,382

NOTE 10. COMMITMENTS AND CONTINGENCIES Commitments

Commitments for future capital expenditure Commitments for future operating expenditure

Contingencies 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 the Crown agrees to the return of some or all of the affected land resumption would be effected by the Crown under the Public Works Act 1981 and compensation would be payable to Mighty River Power Limited.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.25

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

NOTE 11. EXPLANATION OF TRANSITION TO NZ IFRS As stated in note one, these are the Group’s first condensed consolidated interim financial statements for part of the period covered by the first NZ IFRS annual consolidated financial statements prepared in accordance with NZ IFRS. The accounting policies set out in note one have been applied in preparing the condensed consolidated interim financial statements for the six months ended 31 December 2007, the financial statements for the year ended 30 June 2007 and the preparation of an opening NZ IFRS balance sheet at 1 July 2006 (the Group’s date of transition). In preparing its opening NZ IFRS balance sheet and restating the 2007 financial statements, comparative information for the six months ended 31 December 2006 and financial statements for the year ended 30 June 2007, the Group have adjusted amounts previously reported in financial statements prepared in accordance with its old basis of accounting (previous NZ FRS). An explanation of how the transition from previous NZ FRS to NZ IFRS has affected the Group’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.

COMPARATIVE INTERIM

Note

COMPARATIVE INTERIM

INCOME STATEMENT

31 DEC 2006

30 JUNE 2007

EFFECT OF

PREVIOUS TRANSITION

NZ FRS

TO NZ IFRS

NZ IFRS

NZ FRS

TO NZ IFRS

NZ IFRS

$000

Sales Less line and metering charges Other revenue Total revenue

533,849 (145,447) 5,481 393,883

5,414 539,263 1,038,734 0 (145,447) (280,921) 788 6,269 11,041 6,202 400,085 768,854

9,643 1,048,377 0 (280,921) 1,528 12,569 11,171 780,025

Energy costs Other operating expenses Total operating expense

152,243 62,230 214,473

6,202 0 6,202

158,445 62,230 220,675

325,365 127,980 453,345

11,171 44 11,215

336,536 128,024 464,560

Earnings before net interest expense, income tax, depreciation, amortisation and ﬁnancial instruments (EBITDAF)

179,410

315,509

(44)

315,465

(43,196) 0 0 1,820

(994) (65,744) 0 312

(44,190) (65,744) 0 2,132

(88,293) 3,345 0 (61,056) (19,607) 0 3,249 630

(84,948) (61,056) (19,607) 3,879

Earnings before net interest expense and income tax (EBIT)

138,034

(66,426)

71,608

210,858

(57,125)

153,733

Interest expense Interest income Net interest expense

(19,342) 3,435 (15,907)

0 0 0

(19,342) 3,435 (15,907)

(35,248) 8,864 (26,384)

0 0 0

(35,248) 8,864 (26,384)

Proﬁt before income tax

122,127

(66,426)

55,701

184,474

(57,125)

127,349

(47,563) 74,564

29,760 (36,666)

(17,803) 37,898

(72,119) 42,573 112,355 (14,552)

(29,546) 97,803

Depreciation and amortisation Change in the fair value of ﬁnancial instruments Impaired exploration expenditure Equity accounted earnings of associate companies

Income tax expense Proﬁt for the period

(a)

(d)

26.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

TRANSITION BALANCE SHEET

Note

SHAREHOLDERS’ EQUITY Issued capital Retained earnings Asset revaluation reserve Cash ﬂow hedge reserve Total shareholders’ equity

COMPARATIVE INTERIM BALANCE SHEET 31 DEC 2006

EFFECT OF

PREVIOUS TRANSITION

(a)

30 JUNE 2007

NZ FRS

TO NZ IFRS

NZ IFRS

NZ FRS

TO NZ IFRS

NZ IFRS

NZ FRS

TO NZ IFRS

NZ IFRS

$000

377,561 0 377,561 377,561 0 (a,b,c,d) 419,609 86,923 506,532 443,773 50,257 (b,c,d) 1,300,517 (575,153) 725,364 1,300,517 (575,153) (a,d) 0 40,361 40,361 0 28,632 2,097,687 (447,869) 1,649,818 2,121,851 (496,264)

ASSETS CURRENT ASSETS Cash and cash equivalents Short term deposits Receivables and prepayments Inventories Derivative ﬁnancial instruments Taxation receivable Total current assets

COMPARATIVE BALANCE SHEET

1 JULY 2006

2,364 2,000 180,225 4,409 0 0 188,998

0 0 (12,590) 0 43,071 0 30,481

2,364 2,000 167,635 4,409 43,071 0 219,479

139,807 3,000 131,774 4,721 0 0 279,302

377,561 377,561 0 377,561 494,030 482,408 72,092 554,500 725,364 1,301,459 (542,566) 758,893 28,632 0 3,434 3,434 1,625,587 2,161,428 (467,040) 1,694,388

425 140,232 14 3,014 (11,449) 120,325 0 4,721 17,038 17,038 0 0 6,028 285,330

16,654 69,500 166,776 4,666 0 22,548 280,144

384 408 (12,312) 0 22,024 4,930 15,434

17,038 69,908 154,464 4,666 22,024 27,478 295,578

NON-CURRENT ASSETS Property, plant and equipment 2,478,979 Intangible assets 0 Investment and advances to associates 31,308 Derivative ﬁnancial instruments (a) 0 Other non-current assets 9,134 Total non-current assets 2,519,421 Total assets 2,708,419

(4,426) 2,474,553 2,498,323 11,588 11,588 0 0 31,308 31,193 31,383 31,383 0 (9,059) 75 8,604 29,486 2,548,907 2,538,120 59,967 2,768,386 2,817,422

(5,849) 2,492,474 2,562,136 12,435 12,435 0 312 31,505 31,806 30,855 30,855 0 (8,529) 75 7,828 29,224 2,567,344 2,601,770 35,252 2,852,674 2,881,914

(35,085) 2,527,051 21,638 21,638 630 32,436 31,085 31,085 (7,753) 75 10,515 2,612,285 25,949 2,907,863

LIABILITIES CURRENT LIABILITIES Payables and accruals Provisions Derivative ﬁnancial instruments Taxation payable Total current liabilities

(7,531) (6,203) 11,061 0 (2,673)

(8,357) (5,920) 78,984 0 64,707

NON-CURRENT LIABILITIES Derivative ﬁnancial instruments Energy contracts Loans Deferred taxation Total non-current liabilities Total liabilities NET ASSETS

(a)

(d)

138,230 6,203 0 753 145,186

0 1,204 435,591 28,751 465,546 610,732

130,699 0 11,061 753 142,513

98,788 4,558 0 14,995 118,341

(9,018) 89,770 (4,558) 0 61,083 61,083 0 14,995 47,507 165,848

3,311 3,311 0 1,204 (867) 434,724 508,065 536,816 510,509 976,055 507,836 1,118,568

0 1,204 532,500 43,526 577,230 695,571

10,862 10,862 0 1,204 617 533,117 472,530 516,056 484,009 1,061,239 531,516 1,227,087

141,951 5,920 0 0 147,871

133,594 0 78,984 0 212,578

0 7,694 7,694 0 0 0 516,000 883 516,883 56,615 419,705 476,320 572,615 428,282 1,000,897 720,486 492,989 1,213,475

2,097,687 (447,869) 1,649,818 2,121,851 (496,264) 1,625,587 2,161,428 (467,040) 1,694,388

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

.27

NOTES TO THE FINANCIAL STATEMENTS For the six months ended 31 December 2007

Notes to the reconciliation of previous NZ GAAP to NZ IFRS a) Fair value of derivative contracts On transition all derivative contracts (including electricity hedges, interest rate and foreign exchange contracts) will be recorded in the balance sheet at fair value under NZ IFRS and be adjusted against retained earnings on transition. Any subsequent movement in the fair value of these instruments from year to year will have the potential to affect the income statement and the balance sheet, the extent to which will depend on whether hedge accounting is adopted. NZ IFRS is very prescriptive on when a derivative contract can be considered an effective hedge of an underlying position of future cash flow. The Group has therefore adopted hedge accounting practices where practical. b) Deemed cost adjustments NZ IFRS 1 has some specific exemptions available to entities on initial transition to NZ IFRS. A first time adopter may have established a deemed cost under previous GAAP for some or all of its assets and liabilities be measuring them at their fair value because of a specific event. It may use such event-driven fair value measurements as deemed cost for NZ IFRS at the date of the measurement. The Group used this exemption in relation to the fair value exercise undertaken on the acquisition of assets and liabilities on the break-up of ECNZ. The impact of this is a transfer between the asset revaluation reserve and retained earnings. The total aggregate amount of property, plant and equipment where this exemption has been taken is $514.2m. The aggregate adjustment to the carrying amount reported under previous GAAP is $244.7m. c) Revaluation of property, plant and equipment Under NZ IFRS downward revaluations below cost of individual assets are not permitted to be set off in the reserve against upward revaluations of other assets within the same asset class and are taken to the statement of financial performance. As permitted under transition to NZ IFRS an amount of $25.2 million, resulting from a devaluation of certain generation assets, was reclassified from the asset revaluation reserve to retained earnings. d) Deferred taxation The IFRS basis of accounting for deferred taxation is conceptually different to previous NZ GAAP. Under previous NZ GAAP deferred taxation is calculated using an income statement approach whereas under NZ IFRS deferred taxation is calculated based on a balance sheet approach. This method recognises deferred taxation balances where there will be a difference between the carrying value of an asset or liability and its taxation base. The most significant impact for the Group is the recognition of a deferred taxation liability in relation to the revaluation of generation assets and the recognition of the fair value of derivative contracts. The above changes increased/ (decreased) deferred tax in the Group as follows:

Note

Asset revaluation reserve Cash ﬂow hedge reserve Retained earnings Other Increase in deferred tax asset/ (liability)

There are no material impacts on the cash ﬂow statements.

1 JULY 2006

31 DEC 2006

$000

30 JUNE 2007 $000

355,666 19,880 132,519 0 508,065

355,666 14,103 102,761 0 472,530

323,079 1,472 90,224 4,930 419,705

28.

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007