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ANNUAL REPORT 2006 MIGHT Y RIVER POWER LIMITED

CUSTOMERS:EXPECTATIONS ADDRE SSING NE W ZE AL ANDER Sâ€™ CHANGING ENERGY NEEDS

HIGHLIGHTS 6 CHAIR’S REPORT 10 CHIEF EXECUTIVE’S REPORT 12 R E TA I L 1 8 METERING 24 G E N E R AT I O N 2 8 PEOPLE, ENVIRONMENT AND COMMUNITY 34 THE BOARD 42 C O R P O R AT E G O V E R N A N C E 4 4 EXECUTIVE MANAGEMENT 46 AUDIT REPORT 50 F I N A N C I A L S TAT E M E N T S 5 2 FIVE YEAR FINANCIAL REVIEW 79 S TAT U T O R Y I N F O R M AT I O N 8 1 DIRECTORY 84

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

R E A S O N A B LY P R I C E D A N D R E L I A B L E P O W E R I S S O M E T H I N G N E W Z E A L A N D E R S H A V E L O N G T A K E N F O R G R A N T E D

A continuous source of electricity has always been central to New Zealand’s economy and standard of living. As the country continues to grow, so does the demand for the energy that powers our homes and businesses. This growth places greater pressures on New Zealand’s limited resources and infrastructure. Population growth and a burgeoning economy over the last decade, have led to an increase averaging two percent in the amount of electricity we consume as a nation each year. That’s the equivalent of adding a city roughly the size of Tauranga every 12 months.

IN RECENT Y E A R S MIGHT Y RI V ER P OW ER H A S CONCENTR ATED IT S EFFORT S ON DI V ER SIF Y ING IT S GENER ATION P ORTFOLIO

As a result of our efforts and those of other generators, we have bought time. New Zealandâ€™s fuel supply outlook for the next seven-to-nine years has improved. New generation projects have been granted resource consents, new fuel sources are being developed and energy efficiency initiatives are in place. But we still face challenges if we are to meet projected demand beyond 2014 and ensure we have the appropriate energy infrastructure in place to carry this new power to where itâ€™s needed. Ultimately, to satisfy the long term energy needs of New Zealanders, we need to find more fuel, construct more generation capacity and build a better national distribution network.

A BIG WIRED WORLD BIG SCREEN TVS LIKE THIS ARE JUST ONE OF A WHOLE RANGE OF NEW APPLIANCES THAT NOW FEATURE IN NEW ZEALANDERS’ HOMES. THE GROWTH IN ENERGY USAGE BROUGHT ABOUT BY INCREASED USE OF HOUSEHOLD TECHNOLOGIES, IS PLACING MORE AND MORE PRESSURE ON THE COUNTRY’S ENERGY INFRASTRUCTURE.

A S A N ISL A ND N ATION THERE A RE SIGNIFIC A NT CH A LLENGE S FINDING SOLUTIONS

We must therefore look at all the energy options available to us and recognise the inherent trade offs that will have to be made between social, environmental and economic considerations, as well as assessing local interests versus the wider national good. Mighty River Power is making solid progress in helping to meet the ever growing power needs of New Zealand’s modern lifestyle and economy. We are exploring and developing more fuel sources, diversifying our generation options and looking at new ways to measure demand and satisfy customer needs and expectations.

GROWTH IS NO GAME NEW ZEALAND’S POPULATION AND ECONOMY CONTINUES TO GROW. THIS GROWTH IS DRIVING INCREASED ELECTRICITY CONSUMPTION. DEVELOPMENTS ARE WELL UNDERWAY TO MEET THIS INCREASED DEMAND.

HIGHLIGHTS 2006

$220.5 MILLION W E R E C O R D E D A N O T H E R S T R O N G O P E R AT I N G S U R P L U S B E F O R E I N T E R E S T, N O N - R E C U R R I N G I T E M S A N D TA X AT I O N

$10 0.8 MILLION N E T S U R P L U S A F T E R TA X AT I O N WA S D O W N O N L A S T Y E A R , M A I N LY A S A R E S U LT O F A S I G N I F I C A N T I N C R E A S E I N D E P R E C I AT I O N C H A R G E S

$195.7 MILLION O U R O P E R AT I N G C A S H F L O W F O R T H E Y E A R WA S U P $ 8 .1 M I L L I O N O N L A S T Y E A R

$ 50. 4 MILLION T H I S Y E A R â€™ S O R D I N A R Y D I V I D E N D R E P R E S E N T S A $14 . 0 M I L L I O N I N C R E A S E O N THE ORDINARY DIVIDEND OF $36.4 MILLION FOR THE 2005 FINANCIAL YE AR

170MW T H E T O TA L G E N E R AT I N G C A PA C I T Y W E W I L L H AV E AT S O U T H D O W N W H E N THE ADDITIONAL GA S TURBINE COMES ONSTREAM IN DECEMBER 2006

WELL UNDERWAY W E H AV E B E E N AWA R D E D R E S O U R C E C O N S E N T S F O R A G E O T H E R M A L P L A N T U P T O 9 0 M W AT K AW E R A U

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

OPERATING SURPLUS BEFORE

NET SURPLUS

INTEREST, NON-RECURRING

AFTER TAXATION

ITEMS AND TAXATION

($MILLION)

12.9

76.2

77.5

121.2195.7

241.8

136.1 195.7 187.6

187.6 113.5 220.5

199.6

99.8

100.8 158.7 109.7

112.5

10.0 9.7

57.3

58.6

90.6

51.3

44.2

119.5

5.7

2003 2004 2005 2006

112.7

110.3

59.1 89.0

103.9

81.7 77.9 47.1 87.2

2001 2002 2003 20012004 20022005 20032006 2004 2005 2006

59.1 77.9

47.1

20012002 20022003 20032004 20042005 20052006 2006 2001

2001 2003 2002 2004 2003 2005 2004 2006 2005 2006 2001 2002

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

14.0

OPERATING CASHFLOW

TOTAL EQUITY/TOTAL ASSETS

($MILLION)

(PERCENT)

12.9

241.8

195.7

76.2

77.5 195.7

121.2

14.0

187.6

113.5 220.5

199.6

11.4

99.8

11.4

158.7 10.0 9.7

57.3

8.6

58.6

51.3

8.6

8.6 8.3

8.3 112.7

44.2 110.3

110.3

6.4

119.5

59.1

6.4

89.0 103.9

6.4

5.7

81.7 77.9 87.2

77.9

4.9

2001 2002 2001 2003 2002 2004 2003 2005 2004 2006 2005 2006

47.1 4.9

2001 2002 20012003 20022004 20032005 20042006 2005 2006

2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2001

2001 2005 2002 2006 2003 2004 2005 2001 2002 2003 2004

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

FREE FUNDS FROM OPERATIONS

NET DEBT/NET DEBT + EQUITY

/INTEREST EXPENSE

(PERCENT)

(TIMES)

121.2

7.0

136.1

7.0

6.8

42.4

99.8

7.0

6.8

42.4

100.8

112.5 109.7

37.6

37.6 35.1

35.1

32.4

90.6

4.1

3.5

3.2

59.1

18.0

18.0 17.1

2004 2001 2005 2002 2006 2003 2004 2005 2006

47.1

2001 2002 2003 20042001 20052002 20062003 2004 2005 2006

17.1

2001 2002 2003 2004 2005 2006

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Chair’s report

ON BEHALF OF THE BOARD, IT IS M Y P L E A S U R E T O R E P O R T T H AT M I G H T Y R I V E R P OW E R H A S O N C E

CUSTOMER DRIVEN – IN HOW WE PERFORM AND HOW WE PL AN

There’s nothing easy about the business Mighty River Power

AGAIN ACHIEVED EXCELLENT

is in. Whilst many organisations manage market requirements

RESULTS, INCLUDING AN OPERATING

within a three-to-five year timeframe, we must find the

S U RP LU S B E FO R E I N T E R E S T , N O N RECURRING ITEMS AND TAXATION OF $220.5 MILLION FOR THE YEAR.

right balance between meeting the immediate needs of our customers and much longer term market demand. This is because energy is not a supply-driven industry. It is a demand-driven one. As a result, we must not only ensure that every time a customer flicks a switch, the light comes on, but given the many years it takes to develop power stations we must also anticipate what consumers will want over coming decades and plan to keep the lights on then as well. Such a dynamic situation requires Mighty River Power to not only grow but diversify its business to mitigate risk. Because whilst customers may be happy with how their energy needs are currently being met, we need to ensure that the investment decisions we are taking now meet their expectations in the longer term. This year we have made good progress. The Company has continued to expand its generation options across a range of complementary fuel sources and locations, it has looked for innovative and competitive ways to meet retail customers’ needs, and it is currently investigating new ways of measuring customer consumption through, our metering business, Metrix. The Board is very pleased with this progress.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

T R A N S M I S S I O N C A PA B I L I T Y N E E D S F O C U S

DIVIDENDS

Consumers want reliable power. They want fewer interruptions

In October 2005, the Board declared and paid an ordinary

and quicker resolutions if they do lose power. We are working

dividend of $36.4 million for the 2005 financial year.

hard to generate more electricity but we remain concerned

In August 2006, the Board declared an ordinary dividend

about the other half of the supply equation - the country’s

of $50.4 million for the 2006 financial year. Payment of

transmission infrastructure. Whilst beyond our control, this

this year’s dividend will be be made in September 2006.

has the potential to markedly affect the reliability that our

The Board acknowledges our Shareholders’ support

customers have come to expect. New Zealand needs a

for reinvestment in the Company to underpin continued

strong flexible transmission grid to deliver the power from

development of our generation capacity.

the generation sites, wherever they are located, to the nation’s homes and businesses. We do not fully have this at present. The Board is of the view that infrastructure as fundamental

A YEAR WE CAN BE PROUD OF

In the time that I have been on the Board of Mighty River Power,

as the grid system should be seen as an enabler of the

this has always struck me as a Company prepared to

economy and its growth. For this reason we welcome

address issues quickly, decisively and creatively and

the Government’s recent national infrastructure policy

through an open consultative approach with stakeholders.

statement confirming that it sees upgrading the national

The progress we have made this year in addressing longer-

transmission network as a high priority. We look forward

term consumer demand is entirely consistent with that.

to constructive and positive outcomes from discussions

At the same time, the result shows that we are more than

between Transpower and the Electricity Commission.

meeting performance requirements in the shorter term.

D I V E R S I T Y A N D E X P E R T I S E AT B O A R D L E V E L

The demands of this business require a real commitment to a considered approach. We are fortunate that the Company has Directors with wide commercial expertise and a strong understanding of the issues associated with successful governance. Collectively, these individuals tap a diversity

CAROLE DURBIN

of views and experiences as part of our deliberations.

CHAIR

Part of continuing to address the dynamic challenges of

30 AUGUST 2006

overseeing an integrated energy company is also ensuring that we have robust succession capability. This year, David McConnell, a founding director of the Company, retired from the Board, and his place has been taken by Patrick Strange, who brings to Mighty River Power a breadth of energy industry experience. I wish to take this opportunity to thank my fellow Board members for their hard work and the valuable contributions they have made over the year. My thanks too, on behalf of the Board, to the Mighty River Power management team and to every member of staff, who have worked so hard this year to achieve another strong result.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Chief Executive’s report

OVER THE PAST YEAR, WE HAVE CONTINUED TO DEVELOP AS AN INTEGRATED ENERGY COMPANY WITH THE RESOURCES, PEOPLE

E X PA N D I N G O U R C O R E S T R E N G T H S

The ongoing development of our generation portfolio reﬂects

AND PRODUCTS CAPABLE OF MEETING

this progress, as we continue to diversify geographically and

CUSTOMER DEMANDS IN THE YEARS AHEAD.

to cultivate new energy options that are taking this Company beyond its core hydro generation strengths. This growth and diversiﬁcation is being driven by the need to meet growing consumer demand and will help to meet requirements out to the middle of the next decade. Our retail business Mercury Energy continued to perform strongly with total revenue, sales volumes and customer numbers all up significantly. At the same time Metrix, our metering business, is pioneering new ways to measure demand through innovative metering technology. We recognise that geothermal, as the only reliable source of renewable power, is crucial to offsetting the weather related risks associated with hydro and wind generation. Over the past year, our geothermal capabilities have gone from strength to strength. The Tuaropaki Power Company, in which we have a minority equity interest, and which owns the 94MW Mokai power station, is now the sixth-largest generator in the country. At Kawerau, we signed a power sales agreement with Norske Skog Tasman, and progressed plans to embark on a $275 million construction project – the largest we have ever undertaken. These additions to our generating capabilities are mirrored by exciting developments in other fuels and new technologies that are steadily making a broader range of options not just available, but also much more viable. Our Southdown co-generation plant is undergoing a significant expansion and in the last 24 months, our wind development team and investigation portfolio have grown significantly. We have also continued our gas exploration efforts and while we haven’t had success to date, we have secured quality permits for further exploration. We remain committed to exploring or developing new hydro and thermal options.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

THE TR ANSMISSION DILEMMA

H E A LT H Y R E T U R N S , E X C E L L E N T P E R F O R M A N C E S

Unfortunately, other parts of the energy infrastructure

Persistent dry conditions in the South Island, and for an

are not yet fully equipped to deliver the nation’s future

extended period in the North Island, resulted in higher

electricity requirements. Having tapped new and varied

electricity spot prices. The dry North Island conditions saw

sources of power supply, we now find ourselves in a

lower than average output from the Waikato Hydro System.

situation where we may not be able to reliably transport

This reduced production was offset by a signiﬁcant increase in

that energy to where it is needed.

gas fired production from Southdown illustrating the value of

The current grid infrastructure once served the country well, but most of it was built between 1950 and 1980.

a diversified portfolio, both to the Company and to the country. Despite these difficult operating conditions, Operating Surplus

The historical lack of investment in the transmission network

before Interest, Non-recurring Items and Taxation was

since then must be addressed as a matter of urgency.

strong at $220.5 million, but below the 2005 result by $21.3

For the most part, New Zealand’s reliable, renewable fuel resources are all located away from high population areas. Most geothermal resources are located in a volcanic belt that runs from Taupo to Kawerau; the best wind sites are at

million. This reduction was largely driven by the increase in depreciation charges of $27.1 million, brought about by signiﬁcant revaluing of our generation assets as at 30 June 2005. Net Surplus after Taxation was $100.8 million, down $20.4

the bottom of the North Island; and hydro is concentrated in

million on 2005. This includes a $17.5 million non-recurring

the South Island and the middle of the North Island. So, while

cost for the impairment of exploration expenditure.

the country continues to develop a range of new generation sources across the regions, they are only valuable if we have the transmission network in place to distribute the power to areas of high demand, such as Auckland. The Government is approaching this matter with a real sense of urgency. Transmission is the number one security issue facing the industry and the main hurdle to overcome if we are to continue to meet consumers’ expectations for reliable power. I look forward to working collaboratively with all industry players as we seek a swift resolution and map out a firm way forward.

Operating cashflow continued to be solid at $195.7 million, up $8.1 million on last year’s cashflow. Capital expenditure of $148.4 million (up $40.1 million on last year) demonstrates the Company’s commitment to investing in the business and growing its generation capacity.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

ENERGY G R O SS M A R G I N A N A LY S I S 2006 1

RETAIL

2005

WHOLESALE

RETAIL

WHOLESALE

Operating Results Revenue Gross Revenue

734.4

521.0

608.0

287.6

Less Transmission and Distribution Costs

273.5

238.3

Net Revenue

460.9

521.0

369.7

287.6

508.1

43.5

264.6

25.0

49.9

(18.1)

(25.8)

13.2

(97.1)

495.6

130.9

249.4

5,283.6

5,346.8

3,874.7

3,690.6

92.6

50.1

93.8

88.2

Costs Energy Purchases Other Direct Costs/(Income) Energy Gross Margin

Generation Volumes (GWh)

Total Fixed Price Variable Volume Sales (GWh)5 Average Wholesale Electricity Price ($MWh) Average Fixed Price Variable Volume Price ($MWh) 1.

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 equity accounted volumes.

Does not include the volumes associated with electricity ďŹ nancial derivatives. See notes 1 and 2 for treatment of electricity ďŹ nancial derivative settlements.

In the interests of increased transparency we have included in this Report a breakdown of our Energy Gross Margin by Wholesale and Retail. The key difference between the 2005 and 2006 Energy Gross Margin was the significant increase in electricity spot prices due to persistent dry weather over the 2006 financial year. The above table shows that higher spot prices increased the Wholesale Energy Gross Margin to $495.6 million from $249.4 million in 2005. This increase was largely offset by retail energy purchase costs increasing by $243.5 million from 2005 levels to $508.1 million in 2006. The offsetting nature of these movements resulted in an aggregate Energy Gross Margin increase of $18.2 million.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

MAKING BEST USE OF OUR FUNDS

The balance sheet was relatively stable, with total assets of $2.7 billion. Shareholders’ equity was steady at $2.1 billion. Strong operating cashflows enabled a $33.7 million repayment of debt. Looking ahead, the Company has announced plans to issue NZ$300 million of 15 year floating rate credit wrapped bonds, which will be settled in September 2006. This will provide long term funding to underpin the Company’s development programme, and will materially strengthen the debt maturity profile. Part of the proceeds from this bond issue will be used to exercise the Company’s option to repay the NZ$113.8 million fixed rate bonds on 15 September 2006. These fixed rate bonds were issued by the Company in 2003.

DEMANDING WORKLOADS

Overall, the year has seen us make pleasing progress. Developments in exploration and conversion of generation opportunities, our continuing ability to integrate sales activities, and our successful investigation of new technologies in metering see us well prepared for future consumer demands. My thanks to the Board for their ongoing support and guidance for the business. My sincere thanks to the hard working management team and to all our staff who have successfully faced demands of their own in terms of workload to help us achieve all that we have over the last year. Our result reflects their continued dedication, and it is one in which we can all have great pride.

DOUG HEFFERNAN CHIEF EXECUTIVE 30 AUGUST 2006

SHINE ON THESE ENERGY SAVING LIGHT BULBS CAN RETAIL FOR $4.95 EACH BUT COULD BE WORTH AN ESTIMATED $150 MILLION A YEAR IN SAVINGS. IF EVERY HOUSEHOLD IN NEW ZEALAND USED JUST FIVE OF THESE ENERGY SAVING BULBS IN HIGH USE AREAS, THE COUNTRY COULD SAVE 2% OF ITS ELECTRICITY.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Retail

350,000 New Zealanders – at home and at work. Every day, we work hard to meet our customers’ expectations: for quality, with innovative product offerings; for convenience, with single billing and/or electronic bills; for services online, with a comprehensive website; and for service, with a contact centre that’s acknowledged as the best in the industry. Increasingly, success for any retail business focuses on truly understanding and consistently meeting the demands of customers. For them, it’s all about ease and certainty. Our goals are to offer people a competitive deal, great service, a strong environmental commitment and real community involvement.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

I M P O R TA N T A D VA N C E S I N A H I G H LY C O M P E T I T I V E Y E A R

D O I N G R I G H T B Y C U S T O M E R S W I T H O U R P R I C E P L A N R E B AT E

The energy retail market generally was much more active

In October 2004, the Government introduced Low Fixed Charge

this year, with heavy marketing activity and a large increase

Tariff regulations for customers using less than 8,000kWh

in media spend as energy retailers sought to secure more

per household annually. We reported last year that we had

market share. This didn’t surprise us, as we had anticipated

used the introduction of the Low Fixed Charge Tariff as an

a tougher year. What pleased us greatly was that despite

opportunity not just to make the new price plan available to

the level of competition, our customer numbers climbed to

those who qualified, but also to ensure all our customers were

330,000 electricity customers and 24,000 gas customers.

on the best value plan for their usage. Currently 65% of our

Progress towards our ambition of being a leading service based organisation can be seen in the awards we received.

customers qualify for the Low Fixed Charge Tariff. This year, we went even further. We raised the bar in the

These included the 2005 CRM Award for Best Customer

electricity retail sector on 1 April 2006 with the launch of

Service in the Electricity Retail sector, and second overall

our unique Price Plan Rebate service that ensures qualifying

nationally for 50 seat+ contact centres across all industries.

customers always benefit from the best Mercury Energy

There were plaudits for our service from other quarters as

residential price plan for their usage. Under the Price Plan

well: a leading consumer advocate organisation rated us

Rebate service, Mercury Energy annually checks whether

top for customer satisfaction; in an Electricity Commission

customers have been on the best price plan for their usage

survey for large industrial clients, we emerged as the best

at the same property over the previous 12 months. If we find

provider of electricity hedges in the New Zealand market;

that a different Mercury Energy plan would have given them

and elsewhere we were named as the best energy provider

better value, Price Plan Rebate will automatically credit

for monthly meter reads and easy to understand invoices

their account with the difference between what they did pay

by the farming sector.

and what they would have paid under the better Mercury Energy plan. At the same time, we will move them to the best Mercury Energy plan for their electricity usage, to ensure they continue to save. So far, more than 7,000 customers have received rebates and over the course of the year, we expect to return more than $600,000 to our customers. This development is a good example of the benefits that competitive markets generate. It’s certainly worked to the advantage of our customers who are now assured that they will never pay Mercury Energy more for their electricity than they should and that they’ll receive the industry’s best customer service.

2006 MERC UR Y E N E R GY C OVE R AG E

SEGMENT VOLUMES

MASS MARKET AND LARGE COMMERCIAL AND INDUSTRIAL

MASS MARKET, LARGE COMMERCIAL AND INDUSTRIAL MASS MARKET, LARGEAND COMMERCIAL AND INDUSTRIAL LARGE COMMERCIAL INDUSTRIAL LARGE COMMERCIAL AND INDUSTRIAL MASS MARKET AND LARGE COMMERCIAL AND INDUSTRI MASS AND LARGE COMMERCIAL AND INDUSTRI LARGEMARKET COMMERCIAL AND INDUSTRIAL

LARGE COMMERCIAL AND INDUSTRIAL

MASS MARKET, LARGE COMMERCIAL AND INDUSTRIAL LARGE COMMERCIAL AND INDUSTRIAL

43 PERCENT

43 PERCENT 43 PERCENT

57 PERCENT

57 PERCENT 57 PERCENT

2006 2006

2006

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

H E L P I N G T H E E N V I R O N M E N T A N D O U R C U S T O M E R S ’ WA L L E T S

R AMPING UP THE CONVENIENCE ONLINE

Our lateral approach to problem solving has also been evident

In addition to more accurate bills and environmentally smart

in the moves we’ve taken to help meet the demands of the

energy savings, we’ve continued to look for new ways

environment. This year, in partnership with the Electricity

to deliver our customers more services, and therefore

Commission, we delivered vouchers to more than 255,000

convenience. Our revamped website allows customers to

Mercury Energy customers in the Auckland region allowing

change their price plan online, but also makes it much easier

them to buy energy efficient bulbs at a substantial discount.

to move house or join Mercury Energy. By year end, 6,000

These Ecobulbs use 80% less electricity than standard bulbs

customers were visiting us online every week, with 10,000

and last up to 10 times longer.

customers choosing to receive their bills online each

In September 2006, the campaign will be extended to the whole

month – another environmental benefit.

of Auckland, with the aim of helping all Auckland households to reduce their energy usage. The campaign is already the

P O W E R F U L WAY S T O H E L P T H E C O M M U N I T Y

largest energy efficient lighting programme in New Zealand.

Further afield, our sponsorship of the Starship Foundation

The extension of the campaign could reduce Auckland’s peak

continued with great success. Through the Star Supporters

energy demand by 60MW. That’s the equivalent of one full

Club, our customers helped lift children’s health through

year’s growth in Auckland’s electricity usage.

donations on their bill. In addition, recognising that good

Household budgets will also benefit. Replacing the five most frequently used bulbs with Ecobulbs could save households $5 on their monthly power bill.

health begins at home, we worked with the Starship Foundation on the Snug Homes project, looking for ways to deliver better insulation and power savings to families in an effort to make their homes warmer, drier and healthier. More details about these initiatives can be found in the Environment, People and Community section of this Report.

TECHNOLOGY IS KEY A S N E W Z E A L A N D E R S B E C O M E I N C R E A S INGLY SECURITY CONSCIOUS, THE NEED TO GATHER E N E R GY C O N S U M P T I O N DATA W I T H O U T ACCESSING THE PROPERTY ITSELF IS MAKING T E C H N O LO GY A N I N C R E A S I N G LY S T R O N GER OPPORTUNITY.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Metering

Accurate but unobtrusive. More than 60,000 homes and businesses cannot be easily entered for meter readings because of dogs, alarms, fences or other obstacles. But we rely on these readings to correctly bill our customers for the energy they use, and every year, our people make millions of property visits to gather this information. Respecting our customersâ€™ desire for privacy, Metrix has been trialling new smart technologies that will reduce the need to enter properties.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

I M P O R TA N T A D VA N C E S I N A H I G H LY C O M P E T I T I V E Y E A R

The energy measurement sector is changing rapidly. New

We are also installing new meters that allow meter reads

technologies are revolutionising how accurate measurements

to be done remotely. Our goal is to have 3000 of these devices

can be taken; global advances in the communication sector

installed by the end of 2006.

continue to deliver new platforms and ideas. Metrix is assessing technology from around the world to identify the best solutions for a range of access issues; from security to remote locations. Each requires an appropriate technology choice.

Finally, we announced that in August 2006, we will begin installing new smart technology, AmpySmart meters. These meters have a range of potential applications including use in places that are costly to read such as

Not content to simply stick with what has always been done,

Waiheke Island. Our goal is to install up to 6000 of these

Metrix has actively trialled and tested emerging technologies

meters over the following 12 months.

in the field, looking for products that will enable us to proactively resolve the dilemma of restricted access versus expected accuracy. The establishment of Metrix Technologies as a business unit has been another step in our ongoing commitment to encourage the use and development of new technologies. Through this business unit we plan to assess demand for these new ideas and gather empirical evidence. We will also look to prepare our own business for the transforming impact these technology advances will have on our processes and systems. A successful trial of automated meter readers in a number of apartment blocks confirmed that the meters worked to expectations, although the economics still require further investigation.

Meanwhile, Metrix enjoyed continuing growth in the numbers of installed metering assets, with new connection growth again exceeding expectations. A total of 4.7 million meter reads were achieved for the year, an 8% increase on last year. Metering is a business where the demands of the present need to be carefully balanced with consumersâ€™ expectations going forward. We have continued to meet a heavy work schedule, and have more than achieved what is currently required of us. But if we are to continue to perform strongly, then we must simultaneously invest in what will be required of us in the future. This year saw important advances on both fronts.

GAT H E R I N G S T E A M AS LONG AS THE POPULATION AND ECONOMY GROW, CONSUMPTION OF ELECTRICITY WILL INCREASE. EFFICIENCY AND TECHNOLOGY IMPROVEMENTS WILL MODERATE THIS GROWTH, BUT IT IS VITAL WE BROADEN THE SOURCES OF ENERGY WE USE AND MAINTAIN THE CURRENT DEVELOPMENT MOMENTUM.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Generation

Planning for growth. The economic and population growth driving the nation’s rising demand for energy has underpinned Mighty River Power’s move to diversify and expand its generation portfolio. The Company already has signiﬁcant and proven hydro, thermal and geothermal generating capacity, but in the last year we have put greater emphasis on areas such as wind generation. We have also continued to explore further opportunities in gas, geothermal and small hydro. All of these developments are about aligning what we have and will have available with what our customers will expect us to deliver.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

On any given day, up to 22% of the country’s peak energy

At Rotokawa, we have continued working with our joint

demand is met by Mighty River Power. Hydro is still a major

venture partners Tauhara North No. 2 Trust. This year,

feature of our generation portfolio, but other generation sources

two injection wells and a production well (which we have

are assuming increasing importance, as we continue to add

subsequently identified as the largest producing well in

reliable, renewable ways to reconcile supply with future demand.

New Zealand) were brought online. The Rotokawa Joint Venture also owns geothermal rights over a number of

G E N E R AT I N G M O R E C A PA B I L I T Y

Today, almost 20% of the electricity we can generate comes from non-hydro sources. We currently have three consented projects in our development portfolio with one under construction. Over the next year, we intend to create further options and develop them into consented projects. With more fuel becoming

surrounding properties which collectively represent a further 250 – 400 MW of resource. At this point, we are only producing a fraction of that - 33MW – but plans to develop more generation are well advanced, and next year in conjunction with our partners, we plan to move to the consenting stage for a 80MW plant.

available, our emphasis now is on building a supply portfolio

In addition to these sites, Mighty River Power and its

so that we can profitably help meet growing demand.

partner also have geothermal rights at Nga Tamariki for an undeveloped field, located approximately 10 kilometres

GEOTHERMAL STEAMS AHEAD

This year, we have continued to successfully grow our geothermal capabilities in conjunction with our joint venture partners. Geothermal remains a core part of our future focus for generation and we are committed to securing long-term access to resources through mutually beneficial relationships. The year itself has been outstanding, with Rotokawa and Mokai both achieving station records for availability and generation output. Rotokawa produced 284 GWh at 97% availability, while Mokai delivered 785 GWh at 96% availability.

north of Rotokawa, where we are aiming for consents within a year. This field has a further 200MW potential. At Kawerau, we continued to make excellent progress. Purchase of the Crown’s geothermal assets by the Company was completed in early July 2005, and these assets were then on-sold to Ngati Tuwharetoa Geothermal Assets. We subsequently signed a power sales agreement with Norske Skog Tasman. In December 2005, we received construction proposals for the largest development we have ever undertaken – a $275 million construction project, scheduled to take 100 weeks. Resource consents were granted in March

On 3 July 2005, Mokai, which is owned by the Tuaropaki

2006, however they have subsequently been appealed with

Power Company, in which Mighty River Power has a 25%

an Environment Court hearing date set for November 2006.

shareholding, underwent a significant expansion that lifted generation at the site by a further 38MW to 94MW output.

Our search for more geothermal sources will continue, with a land exploration programme using geophysics and surface exploration throughout the Waikato and Bay of Plenty regions.

MIGHTY RI V E R P OW E R P E R M I T A R E A S FO R GA S E X P LO R AT I O N

GENERATION DATA

(GWh)

HYDRO COGENERATION GEOTHERMAL* BIOMASS* * MIGHTY RIVER POWER DOES NOT OWN 100% OF THESE ASSETS AND/OR THE PHYSICAL OUTPUT

6000

5000

4000

3000

2000

1000

MIGHTY RIVER POWER IS JOINTLY EXPLORING THESE PERMIT AREAS WITH ITS PARTNERS 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

W I N D G AT H E R S PA C E

After geothermal, wind represents the next biggest opportunity

We are now increasing the generating capacity at Southdown

for Mighty River Power. We expect to be generating 20-30%

considerably by adding another gas turbine. When this

of New Zealand’s wind energy within a decade. At Turitea near

turbine comes onstream towards the end of 2006, the total

Palmerston North, the Palmerston North City Council are

capacity at Southdown will increase by 45MW to 170MW.

currently working through a land management plan change

This additional capability has the added bonus of being sited in

prior to Mighty River Power seeking consents to build a wind

Auckland, increasing the generation available to the region.

farm of up to 180 MW, consisting of 50-60 turbines. Four other secured wind development options make us confident about the opportunities over the next decade. However, global

H Y D R O V O L U M E S D O W N B U T V I TA L LY I M P O R TA N T

The South Island drought and its impact on national hydro

demand for wind turbines and the value of the Euro are

production this year proved the value of a diverse and

affecting the relative economics of this renewable resource.

ﬂexible energy portfolio. Facing the possibility of signiﬁcantly reduced national availability of water, we conserved water

G A S R E Q U I R E S PAT I E N C E A S W E B U I L D O U R P O R T F O L I O

Gas is another fuel that Mighty River Power is keen to tap, as part of our plans to build a diversified portfolio. This year, we made good progress in that regard, continuing to accumulate a portfolio of gas exploration interests. So far, we have built a quality acreage position in a competitive market over a short period of time.

in spring/early summer in anticipation of possible dry months ahead, in order to retain fuel should it be required. Hydro volumes were down by 9% on last year to 4065 GWh. This year, we finalised 35 year consents around our principal hydro generating source, the Waikato River. At the same time, we continued to look for ways to make more of our existing assets. Improvement work on the Arapuni dam has commenced. This multi-year project will ultimately bring the dam up to

This is vital because managing exploration risk is all about

modern design standards. Across the wider Waikato Hydro

being able to participate in a range of exploration opportunities.

System, incremental efficiency gains through improved

Two sites drilled in 2006 at Tawa and Trapper in the Taranaki

maintenance and asset management continue to be made.

proved not to contain commercially feasible levels of gas and were plugged and abandoned. Our third, at Goss, is currently being tested with Swift Energy, our operating partner. Elsewhere in Taranaki we are in the early phases of exploration - collecting and processing seismic data for interpretation, to define suitably prospective structures. Gas continues to be a longer term fuel option for us. Even when we do find attractive prospects, the limited availability of offshore drilling rigs means we cannot realistically expect to begin drilling until at least mid 2008.

S O U T H D O W N P L AY S A K E Y R O L E I N M E E T I N G D E M A N D

The driest year in 29 years in the South Island left a significant shortfall in available national hydro generation, making thermal a more important generating source this year. Our thermal production was up 39% to 876 GWh from our co-generation plant at Southdown, although increases in gas prices made it more expensive to use co-generation than previously.

As to the future, hydro continues to be an important part of our portfolio, and is not exempt from the search for new opportunities. Finally, we have continued to run our synchronous condenser at Marsden A to support upper North Island voltage (particularly for Auckland); support that assists security for households and industry. The option of repowering Marsden B for further thermal capacity also remains. The resource consent for Marsden B is currently being appealed, and at year end, we were awaiting an Environment Court hearing date.

T R E A D C A R E F U L LY THE WAIKATO RIVER TRAIL TRUST HAS TO DATE OPENED 8.8 KILOMETRES OF WALKWAY ALONGSIDE THE SPECTACULAR WAIKATO RIVER, CREATING NOT JUST A UNIQUE TOURISM ATTRACTION, BUT ALSO AN INSPIRING ICON FOR THE WHOLE COMMUNITY. WORKING WITH COMMUNITIES ON LOCAL PROJECTS THAT INCREASE ACCESS TO THE ENVIRONMENT BENEFITS EVERYONE; LOCALS, THE COMMUNITY AND BUSINESS.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

People, environment, community

Meeting the demands we place on ourselves. A commitment to sustainability offers signiďŹ cant opportunities for creative, consultative and innovative problem-solving. Weâ€™re certainly striving through our sponsorships, our relationships and our approach to communities and the environment to do all we can to make real differences.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Energy companies have no choice but to interact with

COMPLIANCE WITH RESOURCE CONSENTS

the environment. For example, our operations around the

This year, we were granted a 35 year resource consent for the

Waikato Hydro System reflect our commitment to using

Waikato Hydro System – a sure sign that those responsible

the resources we are responsible for wisely and in thorough

for ensuring the river’s environmental health are satisfied

consultation with others who share an interest in these

that we take our guardianship role very seriously and are fully

waterways. In a bid to make the best use of water, for

committed to protecting the river itself. Mighty River Power

example, we proactively manage our hydro generation

has a strong record in consulting thoroughly and sensitively

system, to ensure it is both safe and as economically efﬁcient

with community groups and we are proud of the relationships

as possible. Equally, we monitor our geothermal sites,

we have developed and maintained. Our intention is to continue

biomass, thermal and co-generation sites carefully and

to work closely with interested parties to ensure that the river

diligently to ensure they fully comply with resource consents.

that is so important to so many continues to thrive.

Beyond our legal obligations to behave in this manner, which

HYDRO

we look upon as a minimum, it is vitally important to us that

the Waikato Hydro System. These include consents to use,

15 resource consents with 151 conditions control

we ensure the environments we affect are managed in the

upgrade and maintain structures on the bed of the Waikato

best interests of all.

River; divert, take and discharge water for generation of hydroelectricity; and control the water levels and operation of the Waikato Hydro System. During the reporting period there were no breaches of these resource consents. METHANE

Resource consents for Rosedale, Silverstream

and Greenmount cover such areas as controlling what gets discharged into the atmosphere. We were 100% compliant with these resource consents throughout the year. GEOTHERMAL

The 16 consents for Rotokawa govern such

areas as the amount of geothermal fluid that can be taken from underground and the amount of water that can be taken from the Waikato River. Rotokawa had one non-compliant incident when geothermal fluid discharges were in excess of the consent limit. This breach was reported to Environment Waikato and flow rates were adjusted to achieve compliance. C O - G E N E R AT I O N

Southdown has 5 operating consents.

There were no issues of land use or trade waste non-compliance during the year. One of our consents requires continuous monitoring of emissions and recording emission levels averaged over each 10 minute period. During the year, there were a total of 126 10 minute non compliant periods for NOx emissions and 26 10 minute non compliant periods for CO 2 emissions. One CO2 analyser was also removed for maintenance for a two month period, but the ARC was notiﬁed of its removal and return to service. We sent quarterly reports to the ARC notifying them of non compliance periods and the steps we took to remedy the events.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

C L I M AT E C H A N G E , E N E R G Y E F F I C I E N C Y A N D R E N E WA B L E S

As an electricity generator and retailer, we are very conscious of the environmental effects of our operations. We recognise

C O 2 E M I T T E D B Y G E N E R AT I O N T Y P E 2 0 0 6

PERIOD

and share others’ concerns about climate change.

co-generation plant, but also from our geothermal and landfill plants. Our generation output from these plants and

Co-Generation Geothermal

for electricity and the availability of hydro generation.

Total

Our landfill plants capture methane gas from the landfills and

41,361 tonnes of CO2. However, the production of electricity through these plants avoided the emission of 15,040 tonnes of methane, which has a CO 2 equivalent of 279,479 tonnes. Our non-generation greenhouse gas emissions come largely from staff travel and internal energy consumption. We have a number of initiatives underway to reduce our internal carbon footprint (see next section for more details). We also encourage our customers to reduce their greenhouse footprint by actively promoting energy efﬁciency. See page 21 for more details on our ‘Ecobulb’ campaign.

CO 2

GWh

2005

C0 2

GW h

EMISSIONS

(TONNES)

Methane1

thus our CO 2 emissions, are dependent on both the demand

use it to produce electricity. This year, these plants emitted

2006

EMISSIONS

Our greenhouse gas emissions are driven by our generation activity, primarily thermal generation at our Southdown

2006

(TONNES)

41,361

41,255

368,145

876

230,659

535

46,922

475

40,275

393

456,428

1,414

312,189

991

Data is reported on an equity-share basis in all businesses where we have a minority interest.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

T H E E N V I R O N M E N TA L C O N T R I B U T I O N O F E A C H B U S I N E S S U N I T

This year, we made considerable progress in integrating our

Internally we use the Enviro-Mark global standard to

environmental commitments within the business.

evaluate our environmental performance. Our performance

Until now, each part of the business has had a separate cross-functional environmental team responsible for setting internal measures and monitoring outcomes. At year end, we introduced a new Company-wide environmental management programme and associated policy that brings together all areas of the business under the one umbrella. Below are the results across the Company for the past financial year:

against the Enviro-Mark NZ standards is measured through an external audit process conducted by Landcare Research, an independent Crown Research Institute. New Zealand has five Enviro-Mark Standards: BRONZE

Compliance with the most commonly applicable

environmental and health & safety legislation. S I LV E R

Production of an appropriate environmental policy,

built upon a determination of environmental impacts.

WASTE REDUCTION

Waste to landfill has been significantly

reduced across the Company (up to 40% in some areas) through the introduction of efficient glass, plastic, can, cardboard and paper recycling systems at main sites. All old or damaged meters are refurbished if possible but if not, components that can be, are recycled. ENERGY EFFICIENCY

Internal energy efﬁciency campaigns have

GOLD

Effective monitoring of targets and objectives to

achieve continuous improvement. P L AT I N U M

Control of the organisation’s activities with

operational documentation. DIAMOND

Correction and improvement driven by a proven

internal audit programme.

reduced consumption by reminding staff to turn off PCs,

Our business units achieved the following Enviro-Mark

monitors and lights at night and before leaving for the

status during the year:

weekends. We also helped customers become more energy efficient through the ‘Ecobulb’ campaign – see page 21 for more details. CARBON FOOTPRINT

We currently capture data across three areas

of the Company. During the last financial year, we emitted

BUSINESS UNIT ENVIRO-MARK STATUS BUSINESS UNIT

2006

2005

Generation

Gold

Bronze Bronze

815 tonnes of CO2 into the atmosphere from these areas.

Corporate

Platinum

Full monitoring across the Company will be implemented in

Retail

Diamond

the next financial year.

Metering

Diamond

Platinum

C O M PA N Y T R A V E L

We currently capture data across three

areas of the Company. Staff in those areas travelled 1.65 million kms either in company vehicles, rental or private motor vehicles during the year. Full monitoring across the Company will be implemented in the next financial year. PA P E R U S A G E

The introduction of printers capable of printing

double sided and the setting of computers across the Company to automatically print this way has resulted in significant paper savings. The Retail business has reduced paper consumption by almost 50% from 2003 levels, the equivalent of approximately 138 mature trees per year in savings. Over 10,000 of our customers now receive their bills online and increasingly we are communicating with our customers electronically.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

S TA K E H O L D E R C O N S U LTAT I O N

WAT E R , A R E S O U R C E U N D E R D E M A N D

We are committed to building strong, productive and trusting relationships with the Companyâ€™s stakeholders. We took a number of steps in the past year to further our stakeholder consultation and engagement efforts. These included: W A I K AT O / TA U P O S TA K E H O L D E R B R I E F I N G

Over a hundred

stakeholders attended our fourth annual briefing aimed at ensuring our key stakeholders are kept up to date

We aim to operate the Waikato Hydro System as efficiently as possible. One area we monitor is the amount of water released from our dams without generating electricity â€“ hydro spill. The table below shows how much electricity was lost and the key reasons for the spill. WAIKATO HYDRO SYSTEM HYDRO SPILL

on Company plans and are given a chance to discuss

2006

2005

GWh

industry issues.

Regulatory

G E N E R AT I O N P R O J E C T S C O N S U LTAT I O N

Plant2

stakeholders at every stage of each new generation

Other

project, from the initial assessment through the consent

Total Energy Lost

We continue to engage

process and as the project gathers momentum. OTHER ACTIVITY

We have an active programme of

interacting and consulting with an extensive range of stakeholders.

We have a regulatory requirement to schedule daily releases of water down the

Hydro spill due to a plant malfunction, or from plant testing or from planned or unplanned outages.

Aratiatia Rapids for tourism purposes.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

R E C R E AT I O N A L WAT E R R E L E A S E S

ADDRESSING THE NEEDS FOR MORE SKILL S

We are very aware of the fact that we’re not the only ones

Mighty River Power is an active learning organisation. We have

with a stake on the Waikato River. Every year, thousands of

a responsibility to the Company, to the industry and to

New Zealanders and international visitors enjoy recreational

communities to ensure our people achieve the best mix

activities on the Waikato Hydro System. Many of these activities

of skills they can while they are with us.

require specific lake levels or water flows. We work hard to

This year, we aligned some of our leadership and Call Centre

accommodate the requests of a wide variety of organisations. We released water on the Waikato Hydro System for recreational purposes on 79 days during the financial year. These releases often represent lost income to the Company for the benefit

have taken part in the Management Certificate Level 4 programme designed for new Managers. This is a 19 week education programme using NZQA accredited facilitators

of the community. O R GA N I S AT I O N

training with NZQA units and qualifications. So far, 12 staff

that offers learning on the job for a half day every fortnight, ACT I O N E D WAT E R RELEASE DAYS

Boathouse Events

Cambridge Charitable Trust

Eastern Fish & Game

Karapiro Rowing Inc

Nga Kaihoe O Aotearoa

followed by an assessment and certificate. Another 24 people will enter the programme early in the new financial year. In total, 9% of our staff are currently working towards NZQA qualifications through our internal training programmes. We’ve also instigated Developing Future Leaders, a development programme for those identified as having strong potential within the Company. The programme consists of a competency

NZ Canoeing

suite for managers to help them develop people in current

NZ Grand Prix Hydroplane Drivers Club

roles. It also acts as a succession programme for those seen

NZ Secondary Schools Canoeing Association

NZ Tournament Water Ski Club

Our ongoing and highly successful Apprenticeship Programme

Ironman NZ

continued this year. We currently have 24 apprentices within

NZ White Water Slalom

Pairere Water Ski Club

Rapids Jet (Taupo)

completion of the foundation programme, apprentices undertake

Taupo District Council

on-the-job instruction and experience plus block courses.

Taupo Harbour Master

Successful completion of the programme will lead to an

Waikato Tainui

Waikato Rowing Association

Waipa District Council

Waipa Delta

Wakeboarding NZ

us as permanent employees early next year. We also have a

Whakamaru Christian Youth Camp

group of interns working with us this summer. They are civil,

as having exciting potential into the future.

the organisation who have attended a foundation program covering NZQA unit standards towards a full apprenticeship in mechanical or electrical engineering. Following successful

electrical or mechanical trade qualiﬁcation in three years and it is expected that apprentices will then find work with us, one of our contractors or within the industry in New Zealand. Through our Graduate Recruitment Programme we have three graduates finishing their final year and starting with

mechanical, electrical and chemical and process engineers. We will be looking to recruit similar levels of graduates in the coming year. In addition, the Company is providing educational support to two Masters and one PhD candidates through the ‘Bright Futures’ programme for study related to energy solutions for the industry.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

C O M M U N I T Y I N V O LV E M E N T

We believe in contributing to the social and economic

2010 WORLD ROWING CHAMPIONSHIPS

development of the communities in which we operate

New Zealand to successfully bid for the 2010 World Rowing

because doing so is fundamental to the broader success we

Championships by boosting our sponsorship of the organisation

seek to achieve as a business. What follows is a snapshot

as it sought to have Lake Karapiro recognised as an appropriately

of some of this year’s achievements: W A I K AT O E C O L O G I C A L E N H A N C E M E N T T R U S T

We helped Rowing

world class setting for this prestigious event. Lake Karapiro This Trust was

formed following discussions and agreement between Mighty River Power and representatives from the

has already hosted a very successful World Rowing Championships in 1978 and Rowing New Zealand are conﬁdent that the 2010 event will more than repeat that success.

Department of Conservation, Fish & Game NZ, Royal Forest

Mighty River Power has enjoyed a long association with

and Bird Protection Society and the Advisory Committee for

Rowing New Zealand through its sponsorship of the high

Regional Environment, to assess the future impacts of

performance programme based at Lake Karapiro. This

operations on the Waikato River and to enhance restoration

programme has been instrumental in helping develop many

projects. In the past year, the Trust has authorised grants of

of our elite athletes and world champions, some of whom

$327,000 to fund 24 projects.

will no doubt compete at the 2010 Championships.

M A U N G ATA U TA R I E C O L O G I C A L I S L A N D T R U S T

Mighty River Power

S TA R S U P P O R T E R S C L U B

Mercury Energy’s involvement with the

is a founding partner of The Maungatautari Ecological

Starship Foundation dates back to 2000. The Star Supporters

Island Trust, which leads a project to restore the ecology

Club, launched in April 2004, enables customers to donate

of Maungatautari, a forested volcanic cone that rises above

money on a monthly basis to Starship through their

the Waikato basin. Over the course of the year, the Trust

bills, with all the money raised being used to buy a range

completed a 47 kilometre pest proof perimeter fence around

of essential equipment.

the top of the mountain. Kiwi were returned to Maungatautari for the first time in a century and the mountain is now home to the first breeding takehe to be released onto the North Island.

Three vital pieces of equipment have already been purchased. The Club raised $160,000 to purchase a new Mobile Image Intensifier that allows doctors to gain detailed X-ray images during surgery on children. $155,000 was raised towards an Echocardiography System that provides surgeons with a four dimensional image of the heart to help diagnose and treat serious heart problems. $89,000 went towards keyhole surgery equipment that enables babies and young children to have less invasive operations. Currently, the Club is raising $300,000 to refurbish the occupational, physiotherapy and speech language therapy facilities. This project will include new rehabilitation equipment and a renovated gymnasium for the 4000 young patients who use the facility every year.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

SNUG HOMES

New Zealand has one of the highest rates of

CAROLS BY CANDLELIGHT

These popular family events are

respiratory illness in the developed world. Mercury Energy has

part of Auckland City’s free programme of summer events.

teamed up with the Starship Foundation to help improve the

Held each year at local Auckland community parks, the

health of more than 50 young Auckland children who suffer

events receive great support. Once again this year, each

from such illness. The project will see the children’s homes

event drew a big crowd.

insulated free of charge to help make them warmer and drier with ceiling and floor insulation, draught proofing of doors, hot water cylinder wraps, pipe lagging and energy efﬁcient light bulbs and shower heads. This will also make the homes more energy efﬁcient and therefore reduce the families’ power bills. BALLOONS ON TOUR WITH MIGHTY RIVER POWER

Again this year,

Mighty River Power brought hot air balloon displays to communities in the greater Waikato region during the Balloons Over Waikato Festival. Large turnouts in Mangakino, Tokoroa, Te Awamutu and Ngaruawahia enjoyed the evening festivities including rides in the balloons. C H R I S T M A S I N T H E PA R K

This year, Mercury Energy marked 12

attended by more than 200,000 people. For the

of the Christmas at the Lake in Hamilton. Around 12,000 people attended. Mercury Energy lit up

the Coromandel as major sponsor of The Mercury Energy Pohutukawa Festival. The Festival included family-oriented events, showcasing the best in local cuisine, arts, sports, culture and the environment.

Museum, the monument on One Tree Hill, Tamaki Drive and the Michael Joseph Savage Memorial at Bastion Point. MIGHTY RIVER POWER PHOTOGRAPHIC COMPETITION

The fourth

Mighty River Power Photographic Competition gave secondary and tertiary students and non-professional photographers the opportunity to win prizes by capturing on film their interpretation of the theme: Art as Life. The 2005 winners were:

Winner Runner-Up

Elina Prawito

Auckland

Nadine Meddings-Malone

Raglan

Jessica Hill

Unitec

Rowan Christopherson

Unitec

Sarah McElroy

Howick College

Grace Willoughby

Howick College

TERTIARY

third time, Mercury Energy was naming rights sponsor

M E R C U R Y E N E R GY P O H U T U K AWA F E S T I VA L

In this event, major landmarks are

NON PROFESSIONAL

years as sponsor of this much-anticipated event, once again

M E R C U R Y E N E R G Y C H R I S T M A S AT T H E L A K E , H A M I LT O N

LIGHTING LANDMARKS

lit up at night. Icons lit this year included the Auckland

Winner Runner-Up SECONDARY SCHOOL

Winner Runner-Up

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

The Board

(1)

(4)

(3)

(8)

(5)

(2)

(6)

(7)

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

(1)

Carole Durbin is the Chair of Mighty River Power.

She was formerly the Deputy Chair of the Board and was

(5)

Trevor Janes was appointed to the Board in June 2005.

Trevor is an investment banker and financial analyst.

a member of the original establishment group for the

He is the Chairman of Trinity Hill, a Hawkes Bay based winery.

Company. She is a Fellow of the Institute of Directors,

Trevor is also a Director of Capital+Merchant Finance, Watercare

Chair of the Legal Services Agency, a Director of Southern

Services, Abano Healthcare and also sits on the Investment

Cross Medical Care Society and Fidelity Life Assurance and a

Committee of the Board of the Accident Compensation

Commissioner on the Board of the Earthquake Commission.

Corporation. Trevor is a Chartered Accountant, a Fellow of

She is an advanced panel member of LEADR (a mediation

the Institute of Financial Professionals NZ Inc. and of the

organisation) and a Fellow of the Arbitrators’ and Mediators’

Institute of Directors and a member of the CFA Institute (USA)

Institute of New Zealand. Carole is a former partner of

at UK Society of Investment Professionals.

law firm Simpson Grierson. (2)

Ian Fraser is Deputy Chair of the Board and has been a

(6)

Sandy (Samford) Maier is the Chairman of the Audit

Committee. He has worked in international commercial

Director of Mighty River Power since it began operations

and investment banking with Citicorp/Citibank for 15

in April 1999. Ian has a comprehensive background in

years in various management positions in the Caribbean,

engineering and engineering management, and is a Director

South America and Australasia. He has lived and worked

of Beca Group; the largest New Zealand owned consulting

in New Zealand since 1986, serving on the Board of Bank

engineering company. He is also Managing Director of

of New Zealand and as the Statutory Manager of DFC New

Beca Carter Hollings and Ferner Ltd, the major New Zealand

Zealand, for which he received a 1990 Commemoration

operating Beca Company. He is a past president of the

Medal for services to New Zealand. For the past 10 years

Association of Consulting Engineers of New Zealand.

he has had his own international management consulting

(3)

John Baird joined the Board of Mighty River Power in

May 2004 and is Chairman of the Remuneration Committee. He is a member of the Waitangi Tribunal, Chair of NIWA Natural Solutions, and is a Director of Motion Industries and Sleepyhead. John has been Managing Director of several consumer products businesses. (4)

Caroline Ball was appointed a Director of Mighty River

Power in November 2002. She has extensive experience in New Zealand’s energy industry having been Chief Executive for Fitzroy Worley, and General Manager Transmission at Natural Gas Corporation. Caroline is Managing Director of Strategic Developments, a consulting firm specialising in business growth issues and investments.

firm specialising in strategic financial and human resource issues. He has served as Chief Executive and Board member of a number of companies, and has been a Director of Mighty River Power since April 2002. (7)

Tania Simpson was appointed as a Director of Mighty

River Power in November 2001 and is the founding Director of Maori policy adviser, Kowhai Consulting. She is of Ngati Maniapoto and Ngati Manu descent and lives in the Maniapoto district. She has previously held management positions in Housing Corporation, Ministry of Maori Development and Office of Treaty Settlements and has worked on social policy, economic development and Treaty-related matters. (8)

Patrick Strange was appointed as a Director of Mighty

River Power in June 2006. Patrick, who holds a PhD in Engineering, has held a number of senior executive roles in both the United States and New Zealand. In his last management role he was Chief Executive of Vector, New Zealand’s largest electricity network company.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Corporate Governance

Mighty River Power operates under a corporate governance

BOARD MEETINGS

framework, consisting of its legal requirements (under such

The full Board met 11 times during the year. For the year

legislation as the Companies Act 1993 and the State-Owned

ended 30 June 2006, Board meetings were attended as follows:

Enterprises Act 1986), and formal and informal practices adopted by the Board of Directors. These include the Board Charter, the Code of Ethics, Audit Committee Terms of

DIRECTOR

Reference, Remuneration Committee Terms of Reference

Carole Durbin (Chair)

BOARD MEETINGS

and the Trading Disclosure Policy – Company Securities.

Ian Fraser (Deputy Chair)

The Board is responsible for corporate governance of the

John Baird

Company – in other words, the direction and control that is

Caroline Ball

undertaken by the Directors of the Company and also for

Trevor Janes

Sandy Maier

their accountabilities to shareholders and others for the Company’s performance and its compliance with appropriate laws and standards.

ROLE OF THE BOARD

Tania Simpson

Patrick Strange

2 (from May 2006)

David McConnell

8 (until April 2006)

The Board is responsible for the overall direction of Mighty River Power’s business and other activities on behalf of Shareholding Ministers. The Company’s principal objectives are to operate as a successful business and to be: ≠ as profitable and efficient as comparable businesses not owned by the Crown; ≠ an employer that operates policies which are judged to be fair and equitable in their treatment of all staff in all aspects of their employment; ≠ an organisation that displays an informed sense of social responsibility by having regard to the interests

BOARD COMMITTEES

To assist Directors to carry out their duties, the Board has three standing committees. Other ad hoc committees may be formed from time to time.

AUDIT COMMIT TEE

This committee comprises Sandy Maier (Chairman), Caroline Ball, Trevor Janes and Ian Fraser with Carole Durbin as an ex-officio member. It met four times during the year. The Audit Committee’s role is to assist the Board in fulfilling

of the communities in which the Group operates and by

its duties and responsibilities around the establishment

supporting these communities when able to do so;

and continued effectiveness of the Company’s policies,

≠ a leader in achieving the objectives of sustainable development – working to achieve sustainable development for the communities in which the Group operates through world’s best management of generation resources.

BOARD MEMBERSHIP

The Board is made up of eight non-executive Directors. Profiles of the individual Directors can be found on page 43.

practices, procedures and internal control systems. The committee also reviews the performances of internal and external auditors. Internal audit is outsourced to Deloitte. All Directors are invited to attend Audit Committee meetings and are provided with copies of meeting minutes and any reports received by the committee.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

R E M U N E R AT I O N C O M M I T T E E

AUDITOR INDEPENDENCE

This committee comprises John Baird (Chairman), Patrick

The Board’s policy on auditor independence places responsibility

Strange and Tania Simpson with Carole Durbin as an ex-

for managing the relationship with the Audit Committee.

officio member. It met four times during the financial year. The Remuneration Committee’s primary role is to consider organisational matters and remuneration policies concerning the Company’s employees, including the Chief Executive.

During the year the Board reviewed the Company’s relationship with the auditor of the financial statements, J Freeman of Ernst & Young, on behalf of the AuditorGeneral. This review confirmed the present audit arrangements and noted no need to change them.

G E N E R AT I O N D E V E L O P M E N T C O M M I T T E E

This Committee comprises all Board members and is chaired by Carole Durbin. It met 10 times during the

The Audit Committee also reviewed the scope of services provided to Mighty River Power by J Freeman of Ernst & Young.

financial year, in conjunction with each Board meeting. The Generation Development Committee’s role is to oversee the Company’s extensive generation development programme and to evaluate and monitor proposed exploration activities.

R E S P O N S I B I L I T Y S TAT E M E N T

The Board of Directors has responsibility for ensuring the Company has effective policies in place to manage its risks. The Board decides the level and nature of the risks which are

BOARD PERFORMANCE REVIEW

Each year, the Board evaluates the performance of the Board as a whole and of the Chair. This is done using

acceptable to the Company. The Chief Executive has overall responsibility for the day to day running of the Company and the day to day management of normal business risk.

a variety of techniques including external consultants, questionnaires and Board discussion. The Chair’s performance is reviewed by all Directors and is then discussed with the Chair.

S TAT E M E N T O F C O R P O R AT E I N T E N T

In accordance with its obligations under the State-Owned Enterprises Act, the Company publishes an annual Statement of Corporate Intent as approved by its shareholders that

PL ANNING

The Board held a strategic planning session and other review sessions this year. It also approved the Company’s draft Statement of Corporate Intent for shareholder approval, business plan, and budgets as part of its normal functions.

RISK MANAGEMENT

It is a Board responsibility to identify and control the Company’s business risks. Major policies which are subject to the Board’s approval and review include capital investment, treasury, electricity trading and risk management, accounting and financial, insurance and delegated authority limits. As part of managing its broader risk profile, the Board recognises the importance of full compliance with laws controlling environmental activities, management of natural resources, health and safety in employment and working conditions within buildings, and monitors the Company’s compliance with relevant statutes through the regular reports it receives from management.

communicates the goals and strategies of the Company and outlines its expected performance. This document also contributes to Mighty River Power’s disclosure obligations.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Executive Management

(1)

(5)

(4)

(6)

(2)

(3)

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

(1)

Doug Heffernan, Chief Executive. Doug was appointed

(4)

James Moulder, General Manager Sales. James is

Chief Executive in December 1998. Previously, he was Chief

responsible for the management of the Company’s sales

Executive of Power New Zealand Limited from 1991 to

activities which supply residential, commercial and

1997, leading it through corporatisation, merger and stock

industrial customers. He is also responsible for the optimal

exchange listing. He has also assisted governments on policy

utilisation of the Company’s generation portfolio within the

development, provided strategic advice to the electricity

wholesale market, consistent with defined risk management

industry and performed a number of governance roles

policies. James joined Mighty River Power following experience

within the sector. His senior management responsibility has

in financial markets and strategic and financial consulting

extended across all parts of the electricity value chain. (2)

John Foote, General Manager Generation. John’s main

focus is to oversee the generation activities of the Company

work in the Australian energy sector. He brings extensive business experience in managing risk, commodity trading and financial management.

including development, construction and operations. He has

(5)

Greg Raasch, General Manager Geothermal. Greg joined

over 25 years’ experience in general management roles

Mighty River Power in January 2004 after spending 30 years in

including 15 years in the electricity sector. He was previously

geothermal exploration and development around the world.

Chief Operations Manager with Power New Zealand Limited

His role has been to establish internal competencies across

and prior to joining the electricity industry, was involved in

all geothermal activities. He was previously the Programme

the construction industry, which included a number of large

Manager responsible for creating a Geothermal Division

overseas industrial and infrastructural projects. (3)

Tony Gray, Group Finance Manager. Tony joined Mighty

River Power in September 1999 following previous roles at Tourism Holdings Limited and as Chief Financial Ofﬁcer at TVNZ. He was closely involved in TVNZ’s business

within the state-owned oil company in Chile. He was the Operations Manager for a 756MW geothermal generating facility in the Philippines and has developed geothermal and natural gas-fired power plants in North America, Latin America and South East Asia.

development in the 1990’s. His background provides an

(6)

extensive mix of experience in both the private and state-

our trading area and has almost 15 years experience in the

Neil Williams, Group Strategist. Neil previously headed

owned enterprises sectors.

New Zealand electricity industry across retailing, distribution and trading. His responsibilities include identifying, for the Company and its stakeholders, opportunities emerging from market change and policy development. In his role he guides our strategic industry policy, relationships with central government, iwi and other stakeholders. He is also responsible for public relations and media communications.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Financial and commercial performance targets

Our objective is to increase shareholder value at a rate that is similar to the increases in market value achieved by comparable private sector companies. Our Statement of Corporate Intent sets out our financial and non-financial performance targets. Our achievements against targets for the 2006 financial year were as follows:

FINANCIAL PERFORMANCE TARGETS

2006 ACTUAL

2006 TARGET

4.9

> 4.0

Total Equity/ Total Assets (%)

77.5

> 72.8

Net Debt/ Net Debt plus Equity (%)

17.1

< 23.0

7.0

> 5.14

Safety â€“ Frequency (lost time accidents per 100,000 hours worked)

0.44

<1.25

Environmental Performance (%)

100

Customer switching to Industry standards (%)

100

Customer Contacts per year

2.8

< 2.5

Plant Availability (%)

92.8

> 93.0

Forced Outage Rate (%)

0.55

< 2.1

Return on Average Shareholdersâ€™ Equity (%)

Free Funds from Operations/ Interest Expense (times) NON-FINANCIAL PERFORMANCE TARGETS

No enforcements by regulatory authorities arising from a breach of environmental standards and controls.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Directors’ responsibility statement

The Directors are pleased to present Mighty River Power

The Directors believe that proper accounting records

Limited’s Annual Report and financial statements for the

have been kept which allow for the determination of the

year ending 30 June 2006.

Company’s financial position with reasonable accuracy, and

The Directors are responsible for ensuring that the financial statements comply with generally accepted accounting

that the financial statements themselves comply with the Financial Reporting Act 1993 and the Companies Act 1993.

practices and represent a true and fair view of Mighty River

The Directors consider that they have taken adequate steps

Power Limited’s financial position as at 30 June 2006, and

to safeguard the Company’s assets and to prevent and where

of the financial performance and cashflows for the current

necessary detect fraud and any other irregularities.

financial year.

The Audit Office is required to be the Company’s auditor, and

The Directors consider that the Group and Company’s

has appointed Mr J Freeman of Ernst & Young to undertake

financial statements have been prepared using appropriate

the audit on its behalf.

accounting policies, that these have been consistently applied and are supported by reasonable judgments and estimates, and that all relevant financial reporting and accounting standards have been followed.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Audit report

To the readers of Mighty River Power Limited and Group’s

BASIS OF OPINION

financial statements for the year ended 30 June 2006.

We carried out the audit in accordance with the Auditor-

The Auditor-General is the auditor of Mighty River Power

General’s Auditing Standards, which incorporate the

Limited (the Company) and Group. The Auditor-General

New Zealand Auditing Standards.

has appointed me, Jonathan Freeman, using the staff and

We planned and performed the audit to obtain all the

resources of Ernst & Young, to carry out the audit of the financial statements of the Company and Group, on his behalf, for the year ended 30 June 2006.

information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements did not have material misstatements, whether caused by fraud or error.

UNQUALIFIED OPINION

In our opinion: ≠

amounts and disclosures that would affect a reader’s overall

The ﬁnancial statements of the Company and Group on

understanding of the financial statements. If we had found

pages 54 to 78:

material misstatements that were not corrected, we would

comply with generally accepted accounting practice in

≠

New Zealand; and ≠

give a true and fair view of: ≠

the Company and Group’s ﬁnancial position as at 30 June 2006; and

≠

the results of operations and cash ﬂows for the year ended on that date.

≠

Material misstatements are differences or omissions of

Based on our examination the Company and Group kept proper accounting records.

The audit was completed on 30 August 2006, and is the date at which our opinion is expressed. The basis of the opinion is explained below. In addition, we outline the responsibilities of the Board of Directors and the Auditor, and explain our independence.

have referred to them in the opinion. The audit involved performing procedures to test the information presented in the financial statements. We assessed the results of those procedures in forming our opinion.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Audit procedures generally include: ≠ determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data; ≠ verifying samples of transactions and account balances; ≠ performing analyses to identify anomalies in the reported data; ≠ reviewing significant estimates and judgements made by the Board of Directors; ≠ confirming year-end balances; ≠ determining whether accounting policies are appropriate and consistently applied; and

RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THE AUDITOR

The Board of Directors is responsible for preparing financial statements in accordance with generally accepted accounting practice in New Zealand. Those financial statements must give a true and fair view of the financial position of the Company and Group as at 30 June 2006. They must also give a true and fair view of the results of operations and cash flows for the year ended on that date. The Board of Directors responsibilities arise from the State-Owned Enterprises Act 1986 and the Financial Reporting Act 1993. We are responsible for expressing an independent opinion on the ﬁnancial statements and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 19(1) of the State-Owned Enterprises Act 1986.

≠ determining whether all required disclosures are adequate. We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements. We evaluated the overall adequacy of the presentation of information in the financial statements. We obtained all the information and explanations we required to support our opinion above.

INDEPENDENCE

When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the New Zealand Institute of Chartered Accountants. In addition to the audit we have carried out assignments in the area of International Financial Reporting Standards Advisory, which are compatible with those independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the Company or any of its subsidiaries.

J O N AT H A N F R E E M A N ERNST & YOUNG ON BEHALF OF THE AUDITOR-GENER AL AUCKL AND, NEW ZEAL AND

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Financial Statements

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

S TAT E M E N T O F F I N A N C I A L P E R FO R M A N C E 5 4 S TAT E M E N T O F M OV E M E N T S I N E Q U I T Y 5 5 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 5 6 S TAT E M E N T O F CA S H F LOW S 5 8 N OT E S TO T H E F I N A N C I A L S TAT E M E N T S 5 9

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statement of Financial Performance

FOR THE ye ar ENDED 30 june 2006

GROUP

PARENT

2006

2005

2006

2005

NOTE

$000

Sales

1,255,385

895,669

1,150,436

847,829

Less line and metering charges

(257,730)

(222,527)

(257,730)

(222,527)

Interest income

2,501

3,649

5,355

17,999

11,781

7,585

13,829

9,791

1,011,937

684,376

911,890

653,092

Other revenue Total Operating Revenue

Operating surplus before interest and non-recurring items

220,463

241,762

193,062

250,997

Interest income

2,501

3,649

5,355

17,999

Interest expense

(37,147)

(36,336)

(37,055)

(36,336)

Non-recurring items

(17,532)

(22,137)

(17,532)

(6,139)

Share of associate net surplus

4,156

1,021

172,441

187,959

143,830

226,521

Taxation expense

(71,669)

(66,732)

(63,237)

(79,572)

Net Surplus After Taxation

100,772

121,227

80,593

146,949

Surplus Before Taxation

The notes set out on pages 59 to 78 form part of, and should be read in conjunction with, these Financial Statements.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statement of Movements In Equity

FOR THE ye ar ENDED 30 june 2006

Group

Parent

2006

2005

2006

2005

NOTE

$000

Equity at Beginning of the Year

2,033,315

886,524

2,105,818

911,956

Net surplus after taxation

100,772

121,227

80,593

146,949

Increase in asset revaluation reserve

1,055,564

1,076,913

Total Recognised Revenues and Expenses for the Year

100,772

1,176,791

80,593

1,223,862

Distributions to owners: Final dividend paid

(36,400)

(30,000)

(36,400)

(30,000)

Equity at End of the Year

2,097,687

2,033,315

2,150,011

2,105,818

The notes set out on pages 59 to 78 form part of, and should be read in conjunction with, these Financial Statements.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statement of Financial Position

A S AT 30 june 2006

Group

Parent

2006

2005

2006

2005

$000

Note

Equity Share capital

377,561

Reserves

1,720,126

1,655,754

1,772,450

1,728,257

2,097,687

2,033,315

2,150,011

2,105,818

Non-Current Liabilities Energy contracts

1,204

435,591

469,294

435,591

469,294

436,795

470,498

436,795

470,498

Loans

Current Liabilities Payables and accruals

138,230

136,304

126,252

126,160

Provisions

6,203

5,051

6,203

5,051

Deferred taxation

28,751

22,913

17,075

14,657

Provision for taxation

753

8,214

173,937

164,268

149,530

154,082

Total Equity and Liabilities

2,708,419

2,668,081

2,736,336

2,730,398

The notes set out on pages 59 to 78 form part of, and should be read in conjunction with, these Financial Statements.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statement of Financial Position (continued)

A S AT 30 june 2006

Group

Parent

2006

2005

2006

2005

Note

$000

Non-Current Assets Property, plant and equipment

2,478,979

2,437,139

2,260,818

2,294,943

Investment in subsidiaries

161,859

84,959

Investment and advances to associate

31,308

31,152

21,000

25,000

Other non-current assets

9,134

11,005

6,857

8,428

2,519,421

2,479,296

2,450,534

2,413,330

Cash

2,364

7,013

2,247

6,955

Short term deposits

2,000

16,400

2,000

16,400

Current Assets

Receivables and prepayments

180,225

160,316

277,009

290,708

Inventories

4,409

3,054

4,179

3,005

Provision for taxation

2,002

367

188,998

188,785

285,802

317,068

2,708,419

2,668,081

2,736,336

2,730,398

Total Assets

For and on behalf of the Board of Directors, who authorised the issue of the financial statements on 30 August 2006.

CAROLE DURBIN

IAN FRASER

Chair

DEPUTY Chair

30 AUGUST 2006

The notes set out on pages 59 to 78 form part of, and should be read in conjunction with, these Financial Statements.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statement of Cash Flows

For the ye ar ended 30 June 2006

Group

Parent

2006

2005

2006

2005

$000

Note

Cash Flows from Operating Activities Cash was provided from (applied to):

Receipts from customers

984,058

642,965

890,566

601,898

Interest received

1,506

2,574

1,432

2,532

(691,943)

(351,134)

(633,230)

(314,850)

Payments to suppliers and employees

Interest paid

(34,847)

(34,835)

(34,847)

(34,835)

Taxation paid

(63,079)

(71,966)

(63,079)

(71,966)

Net Cash Inflow from Operating Activities

195,695

187,604

160,842

182,779

Cash Flows from Investing Activities Cash was provided from (applied to):

Sale of property, plant and equipment

147

Repayment of advances by associate

4,000

4,725

4,000

4,725

Purchase of property, plant and equipment

(148,415)

(78,541)

(59,278)

(55,321)

Disposal of other non-current assets

Purchase of other non-current assets

(448)

(150)

(448)

(150)

(29,750)

Net Cash Outflow from Investing Activities

(144,641)

(103,627)

(55,504)

(80,407)

Investment and advances to associate

Cash Flows from Financing Activities Cash was provided from (applied to):

Loan advances

40,979

(33,703)

Loans to subsidiaries

(54,343)

(18,378)

Dividends paid

(36,400)

(105,000)

(36,400)

(105,000)

Net Cash Outflow from Financing Activities

(70,103)

(64,021)

(124,446)

(82,399)

Loans repaid

Net (Decrease) Increase in Cash Held

(19,049)

19,956

(19,108)

19,973

Cash Balance at Beginning of the Year

23,413

3,457

23,355

3,382

Cash Balance at End of the Year

4,364

23,413

4,247

23,355

Cash balance comprises: Cash

2,364

7,013

2,247

6,955

Short term deposits

2,000

16,400

2,000

16,400

4,364

23,413

4,247

23,355

The notes set out on pages 59 to 78 form part of, and should be read in conjunction with, these Financial Statements.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements

FOR THE ye ar ENDED 30 june 2006

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

Reporting Entit y

Mighty River Power Limited is a company registered under the Companies Act 1993 and is an issuer for the purposes of the Financial Reporting Act 1993. The financial statements have been prepared in accordance with the Financial Reporting Act 1993 and the Companies Act 1993 and comprise the following: significant accounting policies, statements of financial performance, movements in equity, financial position and cash flows, as well as the notes to these statements. The Parent Company’s financial statements are for Mighty

performance and its share of post acquisition increases or decreases in net assets in the consolidated statement of financial position. J o i n t V e n t u r e s Joint ventures are joint arrangements

with other parties in which the Company has several liability in respect of costs and liabilities, and shares in any resulting output. The Company’s share of the assets, liabilities, revenues and expenses of joint ventures is incorporated into the Company and Group financial statements on a line-by-line basis. I n v e s t m e n t s Investments in subsidiaries are stated at cost.

River Power Limited (the “Company”) and the consolidated

Short-term investments comprise investments that mature

financial statements are for Mighty River Power Limited

or are otherwise realisable within not more than twelve

Group (the “Group”). The consolidated financial statements

months from the date of purchase and are stated at cost,

comprise the Company, its subsidiaries, associates and

less unamortised premium or discount.

interests in joint ventures.

Acq u i s i t i o n o r D i s p o s a l d u r i n g t h e Y e a r Where

Co n s t i t u t i o n , O w n e r s h i p a n d Ac t i v i t i e s

an entity becomes or ceases to be a Group entity during

Mighty River Power Limited is wholly owned by Her

the year, the results of that entity are included in the net

Majesty the Queen in Right of New Zealand (the Crown).

surplus of the Group from the date of acquisition or up to

Consequently, the Company is bound by the requirements

the date of disposal.

of the State-Owned Enterprises Act 1986.

G o o d w i l l Goodwill represents the excess of the purchase

The liabilities of the Company are not guaranteed in any

consideration over the fair value of the identifiable net

way by the Crown.

assets acquired at the date of acquisition of an equity

The Group’s principal activities are the production of

interest. Goodwill is recognised as an asset and separately

electricity and the selling of energy and energy related services and products to retail and wholesale customers. Me a surement Ba se

The 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. S p e c i f i c Acco u n t i n g P o l i c i e s

The following specific accounting policies that materially affect the measurement of financial performance, financial position and cash flows have been applied.

disclosed. Goodwill is amortised on a straight-line basis over the period of expected benefits. Discount on acquisition of businesses is accounted for by reducing proportionately the fair values of the nonmonetary assets acquired. O p e r at i n g R e v e n u e Operating revenue recognised in the

statement of financial performance 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

B a s i s o f Co n s o l i d at i o n

goods and services tax collected from customers.

S u b s i d i a r i e s Subsidiaries are those entities in which the

≠

Group holds a controlling interest either directly, indirectly

Operating revenue includes the value of units assessed as

or beneficially in the equity. Subsidiaries are consolidated

being recorded on meters as at balance date, but for which

under the purchase method on a line-by-line basis.

invoices have not yet been rendered.

All material inter-company transactions, balances and unrealised surpluses and deficits arising from transactions between Group companies are eliminated on consolidation. ASSO C IATES 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. Associates are reflected in the consolidated financial statements on an equity accounting basis which recognises the Group’s share of retained surpluses or deficits in the consolidated statement of financial

R e c e i va b l e S Receivables are stated at their estimated

realisable value, after providing for debts where collection is doubtful. Bad debts are expensed during the period in which they are identified. Ta x at i o n The taxation expense charged to the statement

of financial performance includes both the current year’s provision and the income tax effect of timing differences calculated using the liability method.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

Tax effect accounting is applied on a comprehensive basis

financial performance in the period it arises where it

to all timing differences. A debit balance in the deferred

exceeds any surplus previously transferred to the asset

taxation account arising from timing differences or income

revaluation reserve. Additions to property, plant and

tax benefits from income tax losses, is only recognised if

equipment stated at valuation subsequent to the most

there is virtual certainty of realisation.

recent valuation are recorded at cost.

F o r e i g n C u rr e n c i e s Foreign currency assets and

All other items of property, plant and equipment are

liabilities are translated at exchange rates ruling at balance

recorded at cost.

date. Exchange differences arising on translation are taken

The cost of property, plant and equipment purchased

to the statement of financial performance. Hedged foreign currency assets and liabilities are translated at the rates of exchange determined by the underlying hedge contracts.

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

Foreign currency transactions are translated at the

intended service.

exchange rates ruling at the date of the transaction except

The cost of property, plant and equipment constructed by

where hedging contracts are taken out to cover shortterm forward currency commitments, in which case the transaction is translated at the forward rate specified in those contracts.

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

The assets and liabilities of independent foreign operations

to a project are capitalised at the Groupâ€™s specific project

are translated at the exchange rates ruling at balance date.

finance interest rate, where these meet certain time and

Revenue and expense items are translated at the spot rate

monetary materiality limits. Costs cease to be capitalised as

at the transaction date or a rate approximating that rate.

soon as an asset is ready for productive use.

Exchange differences are taken to the foreign currency

Where appropriate, the cost of property, plant and

translation reserve.

equipment includes site preparation costs, installation

Surpluses and deficits relating to outstanding forward

costs, unrecovered operating costs incurred during planned

foreign exchange contracts which are not designated

commissioning and the cost of obtaining resource consents.

as hedges are recognised in the statement of financial

Provision is made for any permanent impairment in the

performance in the period in which they are incurred. D e b t Debt is stated at face value. Bank borrowing costs

value of property, plant and equipment where the estimated recoverable amount is less than the carrying value.

such as origination, commitment and transaction fees are

Where property, plant and equipment is disposed of, the

expensed as incurred.

surplus or deficit recognised in the statement of financial

Pr o p e r t y, P l a n t a n d E q u i p m e n t Owned Assets

The Group has adopted fair value accounting

for its generation assets which include freehold land and buildings and generation plant. The underlying valuation performed by independent third party valuation experts

performance is calculated as the difference between the sale price and the carrying value of the property, plant and equipment. Leased assets

The Group leases certain property, plant

and equipment.

and reviewed by the Board is conducted at a minimum

Leases under which the Group assumes substantially

of five yearly intervals with the underlying assumptions

all the risks and rewards incidental to ownership are

being reviewed for reasonableness on an annual basis.

classified as finance leases and are capitalised. The asset

The basis of the valuation is net present value of future

and corresponding liability are recorded at the inception of

earnings of the assets on an existing use basis, excluding

the lease at the fair value of the leased asset, at amounts

any costs associated with disposal, restoration and

equivalent to the discounted present value of minimum

environmental rehabilitation.

lease payments, including residual values.

Office land and buildings are revalued to market value

Finance charges are apportioned over the terms of the

tri-annually as determined by third party valuation experts.

respective leases.

Any surplus on revaluation of a class of property, plant and

The cost of improvements to leasehold property is

equipment is transferred directly to the asset revaluation

capitalised and amortised over the estimated useful life

reserve unless it offsets a previous decrease in value

of the improvements, or over the unexpired portion of the

recognised in the statement of financial performance, in

lease, whichever is shorter.

which case it is recognised in the statement of financial

Capitalised leased assets are depreciated over the shorter

performance. A deficit on revaluation of a class of property, plant and equipment is recognised in the statement of

of their estimated useful lives or the lease term.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

Operating lease payments are representative of the pattern

The exploratory drilling costs of successful efforts are

of benefits derived from the leased assets and accordingly

amortised on a units of production basis over the estimated

are charged to the statement of financial performance in the

life of the field, commencing from the first year of

periods in which they are incurred.

commercial production from that field.

D e p r e c i at i o n Depreciation is provided on a straight-

Development

line basis on all property, plant and equipment other than

are capitalised and amortised on a units of production basis

freehold land and capital work in progress, so as to write

over the estimated life of the field, commencing from the

down the assets to their estimated residual value over their

first year of commercial production. Any impairment in the

expected useful lives.

value of unamortised development costs is charged to the

The development costs of successful efforts

statement of financial performance.

The annual depreciation rates are as follows: Freehold buildings

1 – 2%

Generation assets:

R e h a b i l i tat i o n Co s t s Estimations are made for the

expected cost of environmental rehabilitation of commercial sites that require some level of reinstatement resulting

≠

Hydro

2 – 15%

≠

Geothermal

≠

Co-generation

7 – 11%

≠

Landfill

5 – 10%

5 – 8%

Meters

5 – 10%

from present operations. Any liability is recognised when exposure is identified and rehabilitation costs can be reasonably estimated. I n s u r a n c e The Group’s property, plant and equipment

is predominantly concentrated at power station locations which have the potential to sustain major losses through

Computer hardware and software

20 – 33%

damage to plant and resultant consequential costs.

Other plant and equipment

10 – 33%

To minimise the financial impact of such exposures,

Motor vehicles

20%

the major portion of the assessed risk is transferred to insurance companies by taking out insurance policies with

R e s o u rc e Co n s e n t s

appropriate counter parties. Any uninsured loss is expensed

Costs incurred in obtaining resource consents are

to the statement of financial performance in the year in

capitalised and recognised within generation assets where

which the loss is incurred.

they are more likely than not to give rise to future economic benefit. These costs are amortised over the life of the consents on a straight-line basis. D i s t i n c t i o n b e t w e e n C a p i ta l a n d R e v e n u e E x p e n d i t u r e 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.

I n v e n t o r i e s 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. Em p l o y e e E n t i t l e m e n t s A liability for employee

entitlements is accrued and recognised in the statement of financial position. The liability is stated at the estimated

Revenue expenditure is defined as expenditure that

value of future cash outflows resulting from employee

restores an asset to its original operating capability and

services provided up to balance date.

all expenditure incurred in maintaining and operating the business.

Financial Instruments Treasury

The Group has various financial instruments

E x p l o r at i o n a n d D e v e l o p m e n t E x p e n d i t u r e

with off-balance sheet risk for the purpose of reducing

Exploration and development expenditure incurred by the

its exposure to fluctuations in interest rates and foreign

Group is accounted for using the successful effort method.

exchange rates.

Exploration

Exploration expenditure, which includes

geological, geochemical and geophysical costs, is recognised in the statement of financial performance in the period incurred except where future benefits are expected to exceed such expenditure. 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 statement of financial performance.

For interest rate swap agreements, the differential to be paid or received is accrued and is recognised as a component of interest expense or interest revenue over the life of the swap agreement. Premiums paid on interest rate and currency options and the net settlement on maturity of forward rate agreements are amortised over the life of the underlying asset or liability protected by the instrument.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued) Surpluses and deficits relating to financial instruments entered into with no corresponding underlying position are recognised in the statement of financial performance in the period in which they are incurred. 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. Surpluses and deficits on energy contracts are recognised in the statement of financial performance in the period incurred. A portfolio of energy contracts existing at 1 April 1999 was marked-to-market using an expected price path for future wholesale electricity prices determined by independent experts. The resulting net present values of unrealised revenues and expenses associated with these contracts have been recognised in the financial statements at balance date and the provisions are amortised over the remaining terms of individual contracts based on the expected price path. S tat e m e n t o f C a s h F l o w s

The following are the definitions of the terms used in the statement of cash flows. ≠

Cash includes cash on hand and bank current accounts, net of bank overdrafts.

≠

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 statement of cash flows includes net cash flows from loan advances as the rollover of loans and deposits is covered by an arranged finance facility. CO M PA R ATIVES

Prior year comparatives have been restated to conform with current year presentation. C h a n g e s i n Acco u n t i n g P o l i c i e s

There have been no changes in accounting policy during the period.

FOR THE ye ar ENDED 30 june 2006

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 . O P E R AT I N G R E V E N U E

All operating revenue was derived from continuing activities.

Group

Parent

2006

2005

2006

2005

$000

3. Operating Surplus Before Interest and Non-recurring Items After charging (crediting):

Net surplus on disposal of property, plant and equipment

(2)

(54)

(2)

(54)

Bad debts written off

2,405

2,145

2,405

2,145

Change in provision for doubtful debts

193

155

193

155

Depreciation: ≠

Buildings

225

≠

Generation assets

74,092

43,990

61,570

28,572

≠ Meters

3,431

3,363

3,431

3,363

≠

Computer hardware and software

3,285

3,324

3,342

3,290

≠

Other plant and equipment

1,244

1,755

1,100

1,568

≠ Motor vehicles

185

255

173

241

Rental and operating lease costs

1,882

2,006

1,882

2,006

Directors’ fees

331

319

331

319

Donations

Fees paid to auditors for: ≠ Auditing the financial statements

260

228

170

162

≠

IFRS advisory

124

Net foreign currency exchange losses (gains)

(1,038)

(1,117)

225

Amortisation of other non-current assets

1,080

3,672

780

3,372

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

Group

Parent

2006

2005

2006

2005

$000

4. NON-RECURRING ITEMS

Impairment of exploration expenditure

(17,532)

(20,935)

(17,532)

(4,937)

Other

(1,202)

(17,532)

(22,137)

(17,532)

(6,139)

impairment of Exploration Expenditure

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.

5. TAXATION EXPENSE

Surplus before taxation Taxation at 33 cents

172,441

187,959

143,830

226,521

56,905

62,026

47,464

74,752

Taxation effect of permanent differences: Other permanent differences

15,015

4,545

16,024

4,659

Prior year adjustments

(251)

161

(251)

161

Taxation Expense

71,669

66,732

63,237

79,572

Analysis of Taxation Expense

Current taxation

65,831

67,933

60,819

78,203

Deferred taxation

5,838

(1,201)

2,418

1,369

71,669

66,732

63,237

79,572

6 . N E T S U R P L U S A F T E R TA X AT I O N

All net surplus after taxation was derived from continuing activities.

PARENT

2006

2005

$000

Balance at beginning of the year

97,803

77,293

Imputation credits attached to dividends received during the year

Imputation credits attached to dividends paid during the year

(17,928)

(51,716)

Income tax payments during the year

63, 079

72,226

Balance at end of the year

142,954

97,803

Through direct shareholding in the Company

133,063

87,979

Through indirect interests in subsidiaries

9,891

9,824

142,954

97,803

7. IMPUTATION CREDIT ACCOUNT

At balance date the imputation credits available to the shareholder were:

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

8 . S H A R E C A P I TA L

The share capital is represented by 377,561,000 (2005: 377,561,000) ordinary shares issued and fully paid. All shares have equal voting rights and share equally in dividends and surplus on winding up.

GROUP

PARENT

2006

2005

2006

2005

$000

9. RESERVES Asset Revaluation Reserve

Balance at beginning of the year

1,300,517

244,953

1,419,117

342,204

Increase in asset revaluation reserve

1,055,564

1,076,913

Balance at end of the year

1,300,517

1,419,117

Retained Surplus

Balance at beginning of the year

355,237

264,010

309,140

192,191

Net surplus after taxation

100,772

121,227

80,593

146,949

Distributions to owners:

(36,400)

(30,000)

(36,400)

(30,000)

Balance at end of the year

Final dividend

419,609

355,237

353,333

309,140

1,720,126

1,655,754

1,772,450

1,728,257

6,500

21,000

The final dividend was approved by the Board on 26 October 2005 and paid on 31 October 2005.

10. LOANS

Bank loans (unsecured)

6,500

21,000

Commercial paper (unsecured)

99,270

118,473

99,270

118,473

Fixed Rate Bonds (unsecured)

313,821

ECNZ Residual loans (unsecured)

16,000

435,591

469,294

435,591

469,294

Repayable as follows

Interest rate

Within one year

One to two years

7.5%

6,500

Two to five years

7.5% to 8.0%

115,270

155,473

115,270

155,473

Later than five years

6.7% to 7.0%

313,821

Total

435,591

469,294

435,591

469,294

Less current portion

Total term loans

435,591

469,294

435,591

469,294

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

10 . L oans ( continued )

The unsecured bank loans represent amounts drawn down at balance date on the Company’s $225 million of revolving advance facilities of which $75 million matures in October 2007 and $150 million matures in November 2007. These facilities carry floating interest rates which, at balance date, were 7.5%. It is the Company’s intention to renew these facilities. The unsecured commercial paper has a cash advances and standby facility available which provides liquidity support. The cash advances and standby facility expires in March 2009. It is the Company’s intention to continually re-new this facility for the foreseeable future. The Company has classified both its unsecured bank loans and its commercial paper as at 30 June 2006 to reflect the underlying committed facilities in place. The unsecured and unsubordinated Fixed Rate Bonds represent subscriptions of $200 million dated 9 May 2003 and $114 million dated 27 August 2003. The Bonds dated 9 May 2003 carry a fixed interest rate of 7.01% for the first five years and have a maturity date of 15 May 2013, unless the Company exercises its early repayment option to redeem the Bonds on 15 May 2008. The Bonds dated 27 August 2003 carry a fixed interest rate of 6.73% for the first three years and have a maturity date of 15 September 2011, unless the Company exercises its early repayment option to redeem the Bonds on 15 September 2006. The Company has entered into a Master Trust Deed with the New Zealand Guardian Trust Company Limited, acting as trustee for the holders of Fixed Rate Bonds, in which the Company has agreed subject to certain exceptions, not to create or permit to exist a security interest over or effecting its assets to secure indebtedness, and to maintain a minimum level of shareholders’ equity. The Company has also entered into specific Supplementary Trust Deeds for the issue of $200 million of 10 year Fixed Rate Bonds and $114 million of 8 year Fixed Rate Bonds. The Company has entered into a negative pledge deed in favour of its bank financiers in which the Company has agreed subject to certain exceptions, not to create or permit to exist a security interest over or effecting its assets to secure its indebtedness, and to maintain certain financial ratios in relation to the Company.

Group

Parent

2006

2005

2006

2005

$000

Trade payables

122,590

118,773

111,112

113,217

Employee entitlements

3,490

3,109

3,490

3,109

Sundry creditors

12,150

14,422

11,650

9,834

138,230

136,304

126,252

126,160

11. PAYABLES AND ACCRUALS

12. PROVISIONs Provision for Prompt Payment Discounts

Balance at beginning of the year

5,051

4,254

5,051

4,254

Movements during the year

1,152

797

1,152

797

Balance at end of the year

6,203

5,051

6,203

5,051

Provision for prompt payment discounts represents the prompt payment discount allowed for electricity retail customers. The discount is utilised when outstanding accounts are paid by the due date as specified on the monthly electricity invoice. The level of discount provided for is assessed on an ongoing basis

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

GROUP

PARENT

2006

2005

2006

2005

$000

22,913

24,114

14,657

13,288

13. DEFERRED TAXATION

Balance at beginning of the year

Movements during the year: Timing differences

9,622

(1,228)

6,207

1,398

Prior year adjustments

(3,784)

(3,789)

(29)

Balance at end of the year

28,751

22,913

17,075

14,657

At valuation

17,662

At valuation

4,739

3,417

4,739

3,417

Accumulated depreciation

(578)

(353)

(578)

(353)

4,161

3,064

4,161

3,064

14. PROPERTY, PLANT AND EQUIPMENT Freehold Land

Freehold Buildings

Generation assets

At valuation

2,332,146

2,289,979

2,209,062

2,183,811

(74,092)

(61,570)

2,258,054

2,289,979

2,147,492

2,183,811

Accumulated depreciation

Meters

At cost

59,626

57,421

59,626

57,421

Accumulated depreciation

(24,219)

(20,851)

(24,219)

(20,851)

35,407

36,570

35,407

36,570

Computer Hardware and Software

At cost

41,662

36,237

41,228

36,032

Accumulated depreciation

(33,079)

(32,269)

(32,868)

(32,088)

8,583

3,968

8,360

3,944

Other Plant and Equipment

At cost

21,029

18,932

19,760

17,736

(13,317)

(12,176)

(12,731)

(11,736)

7,712

6,756

7,029

6,000

Accumulated depreciation

Motor Vehicles

At cost

1,550

1,472

1,404

1,326

Accumulated depreciation

(605)

(719)

(522)

(648)

945

753

882

678

Capital Work in Progress

At cost

146,455

78,387

39,825

43,214

2,478,979

2,437,139

2,260,818

2,294,943

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

14 . P R O P E R T Y, P L A N T A N D E Q U I P M E N T ( C O N T I N U E D )

Generation assets shown at valuation were revalued to net present value by PriceWaterhouseCoopers as at 30 June 2005. As a consequence of the revaluation, accumulated depreciation on these assets has been reset to nil as at 30 June 2005. Revalued office land and buildings, included within freehold land and buildings, are stated at their net market value as determined by Attevell Gerbich Havill Limited, an independent valuer, on 22 April 2004. During the year a review of exploration expenditure was performed. Refer note 4 on non-recurring items.

Parent

2006

2005

$000

15. INVESTMENT IN SUBSIDIARIES

Shares in subsidiaries at cost

161,859

84,959

161,859

84,959

The parent company recapitalised a number of its subsidiaries as at 30 June 2006. Subsidiaries comprise: COMPANY

% HOLDING

PRINCIPAL ACTIVITIES

BALANCE DATE

2006

2005

Southdown Cogeneration Limited

100

Electricity generation

30 June

Rotokawa Generation Limited

100

Electricity generation

30 June

Mighty River Power Investments Limited

100

Investment holding

30 June

Mighty River Power (Rotokawa) Limited

100

Investment holding

30 June

ECNZ International Limited

100

Investment holding

30 June

Enalysis Limited

100

Non trading

30 June

Energy Auckland Limited

100

Non trading

30 June

First Electric Limited

100

Non trading

30 June

Mercury Energy Limited

100

Non trading

30 June

PT ECNZ Services Indonesia

100

Non trading

31 December

Rotokawa Geothermal Limited

100

Non trading

30 June

Southdown Cogen Power Limited

100

Non trading

30 June

Kawerau Geothermal Limited

100

Geothermal development

30 June

Mangakino Geothermal Limited

100

Geothermal development

30 June

Mighty River Power Gas Investments Limited

100

Investment holding

30 June

Mighty River Power (Tawa) Limited

100

Gas development

30 June

Mighty River Power (Goss) Limited

100

Gas development

30 June

Mighty River Power (Kaheru) Limited

100

Gas development

30 June

Mighty River Power (Trapper) Limited

100

Gas development

30 June

Mighty River Power (Mangaa 491) Limited

100

Gas development

30 June

Mighty River Power (Koru 488) Limited

100

Gas development

30 June

Mighty River Power (Toro 489) Limited

100

Gas development

30 June

Mighty River Power (Opunake 490) Limited

100

Gas development

30 June

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

16 . J O I N T V E N T U R E S

The Company has interests in the following unincorporated joint ventures:

COMPANY

% HOLDING

PRINCIPAL ACTIVITIES

BALANCE DATE

2006

2005

Rotokawa

50.0

Electricity generation

30 June

Rosedale/Greenmount

77.5

Electricity generation

30 June

Silverstream

93.0

Electricity generation

30 June

The Groupâ€™s share of revenue, expenses, assets and liabilities of joint ventures which have been proportionately consolidated within the financial statements are as follows:

Group

2006

2005

$000

Rotokawa

Share of revenue

3,345

3,135

Share of expenses

3,257

3,058

Non-current assets

15,675

16,521

Share of assets

15,675

16,521

Current liabilities

203

201

Share of liabilities

203

201

Rosedale/Greenmount

Share of revenue

2,137

2,453

Share of expenses

1,975

2,188

Silverstream

Share of revenue Share of expenses

1,210

596

933

720

Current assets

Non-current assets

1,723

1,762

Share of assets

1,803

1,861

Current liabilities

301

Share of liabilities

301

Ownership of and responsibility for the assets of Rosedale/Greenmount are retained by the party contributing those assets. The financial statements of Rosedale/Greenmount are unaudited. Subsequent to the year end the company took a 50% interest in a new joint venture, Waipa JV, which has been set up to develop a small hydro opportunity.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

GROUP

PARENT

2006

2005

2006

2005

$000

17. Investment and advances to Associate

Shares at cost

5,000

250

Share of retained surplus

5,308

1,152

Cost of investment acquired during the year

4,750

Advances

21,000

25,000

21,000

25,000

Balance at end of the year

31,308

31,152

21,000

25,000

On 18 June 2003 the Group acquired a 25% ownership in TPC Holdings Limited, whose principal activity is investing in its 100% owned subsidiary Tuaropaki Power Company Limited an electricity generator.

18. Other Non-current Assets

Energy contracts

3,818

4,537

3,818

4,537

Generation development options

2,625

2,577

348

Bond issue costs

2,616

3,741

2,616

3,741

Other

150

9,134

11,005

6,857

8,428

118,720

138,678

Non-current assets are stated at cost less amortisation and any impairment.

19. Receivables and Prepayments

Subsidiaries Trade receivables

169,552

151,267

148,996

143,129

Sundry receivables

6,389

5,390

6,389

5,390

Prepayments

4,284

3,659

2,904

3,511

180,225

160,316

277,009

290,708

Consumable stores

4,132

2,826

3,902

2,777

20. Inventories

Finished goods

277

228

277

228

4,409

3,054

4,179

3,005

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

Group

Parent

2006

2005

2006

2005

$000

121,227

80,593

146,949

21. Reconciliation of Net Surplus after Taxation with Net Cash Flows from Operating Activities Net Surplus after Taxation

100,772

Add (less) non-cash items: Depreciation

82,462

52,750

69,841

37,097

Amortisation of other non-current assets

1,080

3,672

780

3,372

Impairment of exploration expenditure

17,532

20,935

17,532

4,937

Share of associate net surplus

(4,156)

(1,021)

Other non-cash items

7,598

(7,291)

1,143

(6,011)

104,516

69,045

89,296

39,395

Increase in receivables and prepayments

(19,909)

(43,667)

(6,259)

(39,286)

Add (less) movements in working capital: (Increase) decrease in inventories

(1,355)

996

(1,174)

1,045

Increase in payables and accruals

3,078

45,238

1,244

41,463

Increase (decrease) in provision for taxation

2,755

(4,034)

(8,581)

(2,031)

Increase (decrease) in deferred taxation

5,838

(1,201)

2,418

2,678

(9,593)

(2,668)

(12,352)

3,869

Add (less) items classified as investing activities: Transfers between group companies

3,305

(7,434)

3,305

(7,434)

195,695

187,604

160,842

182,779

Within one year

24,825

21,797

3,882

20,577

24,825

21,797

3,882

20,577

Within one year

2,377

1,351

2,377

1,351

One to two years

2,320

1,331

2,320

1,331

Two to five years

6,255

4,092

6,255

4,092

Later than five years

6,690

2,490

6,690

2,490

17,642

9,264

17,642

9,264

Net Cash Inflow from Operating Activities

22. Commitments Capital Commitments

Commitments for future capital expenditure are:

Operating CommitmentS

Commitments under non-cancellable operating leases and other contracts are:

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 3 . C ontingencies

Mighty River Power Limited 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 on-going support projects with community based groups. 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. A third party has made a claim against the Company following a contract dispute. It is the Directors view, based on legal advice received, that the claim can be successfully defended. No further disclosure can be provided on the grounds that it could prejudice the outcome of arbitration.

2 4 . R esource C onsents

Mighty River Power Limited requires land, water and air consents, obtained under the Resource Management Act 1991 (the Act), to enable it to operate its geothermal, thermal and hydro power stations. The duration of consents under the Act is for a maximum of 35 years. Resource consents, within which the hydro power stations operate, were granted during the year.

2 5 . s E G M E N T I N F O R M AT I O N

Mighty River Power operates predominantly in one segment, being the generation and marketing of energy in New Zealand.

2 6 . F inancial I nstruments

R e v e n u e R i s k – E n e r g y Co n t r a c t s

The Group, in the ordinary course of business, enters into energy contracts that establish a fixed price at which future specified quantities of electricity are purchased, sold or otherwise exchanged. The Group’s exposure to spot electricity prices is limited by a Board approved Electricity Market and Credit Risk Policy. On maturity of the energy contracts, any difference between the hedge price and the spot market price is settled between the parties. Settlement occurs irrespective of the amount of electricity actually supplied or consumed. Credit Risk

To the extent that the Group has a receivable from another party, there is a credit risk in the event of non-performance by that counter party. Financial instruments which potentially subject the Group to credit risk principally consist of bank balances, receivables, investments and interest rate swaps. The Group manages its exposure to credit risk. The Group performs credit evaluations on all electricity customers and normally requires a bond from customers who have yet to establish a suitable credit history. The Group monitors the credit quality of the major financial institutions that are counter parties to its off balance sheet financial instruments and does not anticipate non-performance by the counter parties.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 6 . F inancial I nstruments ( continued )

With respect to energy contracts, the Group has a potential credit risk exposure to the counter party dependent on the spot market price at settlement, and does not anticipate any non-performance of any obligations which may exist on maturity of these contracts. Credit risk in relation to these counter-parties is managed in accordance with a Board approved Electricity Market and Credit Risk Policy. Maximum exposures to credit risk at balance date are:

Group

Parent

2006

2005

2006

2005

$000

2,364

7,013

2,247

6,955

Short term deposits

2,000

16,400

2,000

16,400

Receivables

171,106

151,412

269,271

281,952

Bank balances

Taxation receivable

2,002

367

Investments

31,308

31,152

21,000

25,000

Other non current assets

150

Interest rate swaps

5,022

3,910

5,022

3,910

The above maximum exposures are net of any recognised provision for losses on these financial instruments. Collateral in the form of customer bonds totalling $455,000 (2005: $451,000) is held in respect of the above amounts. Concentrations of credit risk Included in receivables are the following balances:

Group

Parent

2006

2005

2006

2005

$000

46,486

35,521

39,793

28,491

Energy Clearing House Limited

The Group does not have any other significant concentrations of credit risk. F o r e i g n E xc h a n g e R i s k

The Group has exposure to foreign exchange risk as a result of transactions and forecast transactions denominated in foreign currencies. The Group uses foreign currency forward exchange contracts and foreign currency options to manage these exposures. At balance date the principal or contract amounts of foreign currency forward exchange contracts and foreign currency options are:

Group

Parent

2006

2005

2006

2005

$000

Foreign currency forward exchange contracts

565,288

213,716

565,288

213,716

At balance date the Group also has US funds of $623,535 (2005: $3,972,206) in US dollar accounts that are not hedged.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 6 . F inancial I nstruments ( continued )

I n t e r e s t R at e R i s k

The Group has exposure to interest rate risk to the extent that it borrows for a fixed term at floating interest rates. The Group manages its cost of borrowing by placing limits on the proportion of floating to fixed rate borrowings. The Group uses interest rate swaps and interest rate options to manage interest rate risk. At balance date the principal or contract amounts of interest rate swaps and interest rate options outstanding are:

Group

Parent

2006

2005

2006

2005

$000

Interest rate swaps

675,000

670,000

675,000

670,000

Interest rate options

90,000

R e p r i c i n g A n a ly s i s

The following tables identify the periods in which repriced financial instruments are subject to interest rate risk. The overall effective interest rate incorporates the effect of the relevant derivative contracts.

effective total within interest rate O N E year

Group and Parent 2006

O N E to T W O years

T W O to later than F I V E years F I V E years

$000

Assets Cash

7.2%

2,364

Short term deposits

7.2%

2,000

Advances to associate

0.0%

21,000

Total Assets

25,364

4,364

21,000

Less Liabilities Bank loans (unsecured)

7.5%

6,500

Commercial paper (unsecured)

7.5%

99,270

Fixed Rate Bonds (unsecured) (refer note 29)

6.9%

313,821

ECNZ Residual loans (unsecured)

8.0%

16,000

Total Liabilities

435,591

6,500

115,270

313,821

Interest rate swaps

675,000

145,000

220,000

190,000

120,000

Interest rate options

90,000

60,000

30,000

Repricing Profile

354,773

209,364

213,500

104,730

(172,821)

Off Balance Sheet

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 6 . F inancial I nstruments ( continued )

effective total within interest rate O N E year

Group and Parent 2005

O N E to T W O years

T W O to later than F I V E years F I V E years

$000

Assets Cash

6.7%

7,013

Short term deposits

6.7%

16,400

Advances to associate

0.0%

25,000

Total Assets

48,413

23,413

25,000

Less Liabilities Bank loans (unsecured)

7.0%

21,000

Commercial paper (unsecured)

7.1%

118,473

Fixed Rate Bonds (unsecured)

6.9%

313,821

ECNZ Residual loans (unsecured)

8.0%

16,000

Total Liabilities

469,294

155,473

313,821

Interest rate swaps

670,000

155,000

275,000

240,000

Interest rate options

90,000

60,000

30,000

Repricing Profile

339,119

23,413

215,000

149,527

(48,821)

Off Balance Sheet

Fa i r Va l u e s

The estimated fair values of financial instruments that differ from carrying values are as follows:

Group &Parent

Group & Parent

2006

2005

CARRYING VALUE

FAIR VALUE

CARRYING VALUE

FAIR VALUE

$000

Interest rate swaps

(158)

(3,321)

3,910

(9,503)

Interest rate options

583

498

983

440

Foreign currency forward exchange contracts

35,971

(366)

The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Ba nk ba l a nces, recei va bles, paya bles, loa ns, in v estments

The carrying amount is the fair value for each of these classes of financial instrument and accordingly they are excluded from the table above. Foreign currency options a nd foreign currency for wa rd e xch a nge contr acts

The fair value of these classes of financial instruments is based on the quoted market price of comparable instruments. Interest r ate s wa ps a nd interest r ate options

The fair value of these classes of financial instruments is the current market valuation provided by the Groupâ€™s bankers.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 6 . F inancial I nstruments ( continued ) Energy contr acts

The fair value of energy price hedge contracts varies in accordance with the market price for electricity. As at balance date, the face value of energy contracts amounted to $779.7 million (2005: $742.1 million) with terms of up to 12 years. The carrying value of energy contracts within non-current liabilities in the financial statements of $1.2 million (2005: $1.2 million) represents the value of the contracts acquired by the Group on 1 April 1999, as valued by PriceWaterhouseCoopers, less the amortisation credited to the Statement of Financial Performance since the date of acquisition.

2 7. R elated Party T ransactions

During the year the Company entered into the following transactions with subsidiaries, associates and joint ventures:

2006

2005

$000

Management fees charged to subsidiaries/joint ventures

2,305

2,590

Advances to subsidiaries

118,720

138,678

Advances to associates

21,000

25,000

Advances to subsidiaries are interest free and repayable on demand with the exception of Mighty River Power Investments Limitedâ€™s advances to Mighty River Power (Rotokawa) Limited. The Group uses the services of a number of law firms including Simpson Grierson. Carole Durbin, Chair, consults on a part time basis to Simpson Grierson. Partners and staff of that firm have rendered various legal services to the group in the ordinary course of business on normal commercial terms. The Company has incurred expenditure for the period of $179,684 (2005: $75,593) with Simpson Grierson with related amounts payable at balance date of $14,083 (2004: $9,842). The Group uses the professional services of Beca Carter Hollings & Ferner Ltd as well as Beca AMEC Ltd. Ian Fraser, Deputy Chair, is the Managing Director of Beca Carter Hollings & Ferner Ltd and an Executive Director of the Beca Group Limited. Professional Services have been rendered by staff members of these organisations in the ordinary course of business and on normal commercial terms. The Company has incurred expenditure for the period of $526,317 (2005: $12,919) with related amounts payable at balance date of $69,161 (2005: $8,223) Doug Heffernan (Chief Executive), a director of Mighty River Power Investments Limited and its subsidiaries, is also a director of TPC Holdings Limited and Tuaropaki Power Company Limited and Tim Densem (General Manager Hydro/Thermal Generation) is a director of Damwatch Services Limited. The Company has the following transactions and balances with these entities: T ua ropa k i P ow er Compa n y Limited:

The Group has a number of related party contracts with the Tuaropaki Power Company. These contracts include operational and maintenance services, engineering services and energy contracts. Net payments from energy contracts and services performed totalled $19,978,031 (2005: net payment $2,471,148) and related amounts receivable at balance date of $1,304,315 (2005: $981,546).

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 7. R elated Party T ransactions ( C O N T I N U E D ) Da m watch Ser v ices Limited:

Monitoring services expense for the period of $1,779,056 (2005: $1,589,290) and related amounts payable at balance date of $26,139 (2005: $34,690). Directors and employees of the Group deal with Mighty River Power Limited as electricity consumers on normal terms and conditions within the ordinary course of trading activities. No related party debts have been written off or forgiven during the year. The ultimate shareholder of Mighty River Power Limited is the Crown. All transactions with the Crown and other StateOwned Enterprises are at arm’s length, and it is considered that these do not fall within the intended scope of related party disclosures.

2 8 . S ubsequent E vents

On 29th August 2006 the Company executed documents for issue of a 15 year NZ$ 300 million credit wrapped floating rate bond. This will be issued on 7th September 2006. The Company has also advised the Guardian Trust on the 29th August 2006 of its intention to exercise its early repayment option in relation to NZ$113.8m of fixed rate bonds. The repayment will be made on the 15th September 2006. On the 30th August 2006 the Directors approved a final dividend of $50.4 million to be paid on the 8th September 2006.

2 9. I nternational F inancial R eporting S tandards

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 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 ASRB 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. The Group 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 to NZ IFRS reporting 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 for the 30th June 2008 financial year. The comparative period in the 30 June 2008 financial statements will also need to be reported on a NZ IFRS compliant basis. Consequently during the period from 1st July 2006 to 30th June 2007, known as the transition year, two sets of records will be maintained: one under current NZ GAAP; the other under NZ IFRS. The key differences between current NZ GAAP and NZ IFRS identified to date as having a significant effect on the Group’s financial position are summarised below and are based on NZ IFRS that exist at the date of issue of these financial statements. Future developments of those standards, that occur prior to the first set of financial statements under NZ IFRS, may result in material amendments to the adjustments detailed below. No attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions or events are presented. Only a complete set of financial statements including notes, the first to be presented as at 30 June 2008, together with comparative balances, will provide a true and fair presentation of the Group’s results in accordance with NZ IFRS.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Notes to the Financial Statements (continued)

FOR THE ye ar ENDED 30 june 2006

2 9. I nternational F inancial R eporting S tandards ( continued )

Provisional estimate of the impact of adopting NZ IFRS on the current NZ GAAP statement of financial position as at 1 July 2006: G R O U P

T O TA L EQUITY

T O TA L LIABILITIES

T O TA L ASSETS

$000 DR/(CR)

Key NZ IFRS Adjustments

Fair value of derivative contracts

(60,241)

(9,192)

69,433

Deferred tax

525,771

(525,771)

Deemed cost adjustments

Revaluation of property, plant & equipment

Fa ir va lue of deri vati v e contr acts

On transition all derivative contracts (including electricity hedges, interest rate and foreign exchange contracts) will be recorded in the statement of financial position at fair value under NZ IFRS and be adjusted against opening equity. Any subsequent movement 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. NZ IFRS is very prescriptive on when a derivative contract can be considered an effective hedge of an underlying position or future cash flow. The Group has therefore adopted hedge accounting practices where practical. Deferred ta x ation

The IFRS basis of accounting for deferred tax is conceptually different to current NZ GAAP. Under current NZ 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 the Group will be the recognition of a deferred tax liability in relation to the revaluation of generation assets and the recognition of the fair value of derivative contracts. Deemed cost a djust ments

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 by 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 that measurement. The Group will use 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 will be a transfer of $244.7 million between the asset revaluation reserve and retained earnings. Re va luation of propert y pl a nt & 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 income statement. As permitted under transition to NZ IFRS an amount of $25.2 million, resulting from a devaluation of certain generation assets, will be reclassified from the asset revaluation reserve to retained earnings.

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Five Year Financial Review

2006

2005

2004

2003

2002

$000

Statement of Financial Performance Operating Revenue

1,011,937

684,376

599,248

646,246

595,108

Operating surplus before interest & non-recurring items

220,463

241,762

199,551

119,474

87,177

Net interest

(34,646)

(32,687)

(29,401)

(27,083)

(26,658)

4,156

1,021

131

(17,532)

(22,137)

(14,705)

34, 217

6,772

Share of associate net surplus Non-recurring items Surplus before taxation

172,441

187,959

155,576

126,608

67,291

Taxation expense

(71,669)

(66,732)

(55,748)

(13,077)

(20,208)

Net surplus after taxation

100,772

121,227

99,828

113,531

47,083

Operating cashflow

195,695

187,604

88,988

81,727

77,872

Investing cashflow

(144,641)

(103,627)

(47,957)

(28,532)

(16,696)

Financing cashflow

(70,103)

(64,021)

(42,456)

(51,588)

(63,301)

Net increase (decrease) in cash

Statement of Cash Flows

(19,049)

19,956

(1,425)

1,607

(2,125)

Opening cash

23,413

3,457

4,882

3,275

5,400

Closing cash

4,364

23,413

3,457

4,882

3,275

4.9%

8.3%

11.4%

14.0%

6.4%

Total equity/total assets

77.5%

76.2%

58.6%

57.3%

51.3%

Net debt/net debt plus equity

17.1%

18.0%

32.4%

35.1%

37.6%

7.0x

6.8x

4.1x

3.5x

Performance Indicators Return on average shareholdersâ€™ equity

FFO/interest expense

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Five Year Financial Review (continued)

2006

2005

2004

2003

2002

$000

Statement of Financial Position Equity and Liabilities Share capital

377,561

Reserves

1,720,126

1,655,754

508,963

484,135

382,404

2,097,687

2,033,315

886,524

861,696

759,965

Loans

435,591

469,294

374,315

434,771

209,402

Other

1,204

56,002

133,843

436,795

470,498

375,519

490,773

343,245

Non-current liabilities

Current liabilities Loans

54,000

36,000

252,657

Other

173,937

164,268

197,263

115,376

124,780

173,937

164,268

251,263

151,376

377,437

2,708,419

2,668,081

1,513,306

1,503,845

1,480,647

2,478,979

2,437,139

1,369,319

1,375,053

1,355,059

Total Equity and Liabilities Assets Non-current assets Property, plant and equipment Other

40,442

42,157

17,846

21,354

19,318

2,519,421

2,479,296

1,387,165

1,396,407

1,374,377

4,364

23,413

3,457

4,882

3,275

Other

184,634

165,372

122,684

102,556

102,995

188,998

188,785

126,141

107,438

106,270

2,708,419

2,668,081

1,513,306

1,503,845

1,480,647

Current assets Cash and short term deposits

Total Assets

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statutory Information SHAREHOLDERS

In accordance with the State-Owned Enterprises Act 1986, the Company has two shareholders: The Minister for State-Owned Enterprises (Hon. Trevor Mallard) and Minister of Finance (Hon. Dr Michael Cullen). In accordance with Section 15 of the Act, an Annual Report is to be submitted to the Shareholding Ministers, such report to contain sufficient information to enable an informed assessment to be made of the operations of the Group. The Group will provide any other information requested by the shareholding ministers pursuant to Section 18 of the Act.

P rincipal A ctivities

The principal activities of the Group are: ≠

production of electricity including operation and maintenance of generating plant

≠

management of hydro and geothermal reservoirs

≠

securing fuel to enable operation and development of generation facilities

≠

trading electricity, gas, and related financial products and selling of energy and energy related services and products to customers, including marketing of value-added products and management of energy sales.

F inancial P erformance

A full set of financial statements of Mighty River Power Limited and the Group for the 12 month period to 30 June 2006 are included on pages 54 to 78 of this report. These statements include details of the Group’s accounting policies on pages 59 to 62.

R emuneration of D irectors

The following table sets out the total remuneration and other benefits received by each Board member as a Director of Mighty River Power Limited for the reporting period. Carole Durbin (Chair)

$71,787

Ian Fraser (Deputy Chair)

$44,867

John Baird

$35,894

Caroline Ball

$35,894

Trevor Janes

$32,672

Sandy Maier

$37,724

Tania Simpson Patrick Strange David McConnell

$35,894 $28,954

$29,793

* Includes fees for consulting work prior to appointment as a Director.

DISCLOSURES OF INTERESTS

The general disclosures of interest made by the Directors of Mighty River Power Limited pursuant to Section 140 (2) of the Companies Act 1993 are shown on page 82. There were no declarations of interests made pursuant to Section 140 (1) of the Companies Act 1993 that were entered in the interests register of Mighty River Power Limited or its subsidiaries for the reporting period. No Director of Mighty River Power Limited is a shareholder of Mighty River Power Limited or any of its subsidiaries

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statutory Information [continued] D EC L A R AT I O N O F G E N E R A L I N T E R E S T P U r S UA N T T O S EC T I O N 14 0 ( 2 ) O F T H E C O M PA N I E S AC T19 9 3 A S AT 3 0 AU G U S T 2 0 0 6

Carole Durbin

Sandy Maier

Earthquake Commission: Commissioner

Directions Understanding Governance Limited:

Fidelity Life Assurance Company Limited: Director

Chairman and Shareholder

Legal Services Agency: Chair

Green Acres Franchise Group Limited: Chairman

Southern Cross Medical Care Society: Director

Maier Limited: Director and Shareholder

Southern Cross Hospital Trust: Trustee

McConnell Limited: Director

Ian Fraser

McConnell Developments Limited: Director

Beca Carter Hollings & Ferner Limited: Managing Director

Pacific Print Group Limited: Chairman and Shareholder

Beca Group Limited and various other Group

Pacific Print Group Holdings Limited: Director and Shareholder

companies: Executive Director and Shareholder

Porter Novelli Investor Relations Advisory Board: Member

John Baird

RECT Funds Management Limited: Director

4PL Limited: Director and Shareholder

Synergy Limited: Director

Motion Industries Limited: Chair

Taranaki Investment Management Limited: Director

NIWA Natural Solutions Limited: Chair

Tilda Holdings Limited: Director and Shareholder

Project K: Trustee

Tania Simpson

Sleepyhead Manufacturing Company Limited: Director

Kowhai Consulting Limited: Director and Shareholder

South Island Forklifts Limited: Director and Shareholder

Kokakotaea Forestry Corporation: Shareholder

Waitangi Tribunal: Member

Maraeroa C Incorporation: Member of Management Committee

Caroline Ball

Maraeroa Holdings Limited: Shareholder

Strategic Developments Limited: Managing

Oceania Group Limited: Director

Director and Shareholder

Ruapehu, Whanganui, Rangitikei Regional

Trevor Janes

Partnership Tourism Board: Member

Abano Healthcare Limited: Director,

Tui Trust: Trustee

Chair Audit Committee

Patrick Strange

Accident Compensation Corporation:

Civil Engineering Advisory Board, University of

Independent Member, Investment Committee of the Board

Auckland School of Engineering: Chair

Capital + Merchant Finance Limited: Director

Waitahoata Farms Limited: Director and Shareholder

Selenium Corporation Limited: Director and Shareholder Trinity Hill Limited and vineyard owning subsidiaries: Chairman Watercare Services Limited: Director, Chair Audit and Risk Committee

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Statutory Information [continued] I ndemnity and I nsurance

C ompany C redit R ating

Mighty River Power Limited has resolved to indemnify

As at 30 June 2006, the Company had the following credit

Directors and employees for any costs or liabilities referred

rating:

to in Section 162 (3) and 162 (4) of the Companies Act 1993. The Company has arranged insurance for those Directors and employees in respect of any liability or costs referred to

Standard & Poorâ€™s Short-Term: Outlook:

[A-2]

Long-Term:

[BBB +]

Stable

in Section 162 (5) of the Companies Act 1993. L oans to D irectors E mployee R emuneration

There were no loans by the Group to Directors.

During the reporting year, the number of employees (including former employees) of Mighty River Power Limited and its subsidiaries, not being Directors, who received remuneration and other benefits in excess of $100,000 are:

D irectors â€™ U se of I nformation

There were no notices from Directors of the Group requesting to use Company information received in their capacity as Directors which would not otherwise have been available to them.

Remuneration Bands

Number of Employees

$100,001 - $110,000

E vents S ubsequent to B alance D ate

$110,001 - $120,000

The Directors would like to draw your attention to Note 28

$120,001 - $130,000

$130,001 - $140,000

$140,001 - $150,000

$150,001 - $160,000

$160,001 - $170,000

$170,001 - $180,000

$180,001 - $190,000

$190,001 - $200,000

$200,000 - $210,000

$210,001 - $220,000

$230,001 - $240,000

$280,001 - $290,000

$290,001 - $300,000

$300,001 - $310,000

$310,001 - $320,000

$860,001 - $870,000*

*This includes provision for a retention payment.

of the financial statements. The Directors are not aware of any other circumstance since the end of the year that has significantly or may significantly affect the operations of the Group.

A nnual R eport C ertificate

This Annual Report is dated 30 August 2006 and is signed on behalf of the Board by:

CAROLE DURBIN

IAN FRASER

Chair

DEPUTY CHAIR

30 AUGUST 2006

MIGHT Y RIVER POWER LIMITED ANNUAL REPORT 20 06

Directory D irectors

R egistered O ffice

Carole Durbin, BCom, LLB (Hons) FInstD, FAMINZ (Chair)

Level 19, 1 Queen Street, Auckland

Ian Fraser, BE (Hons), FIPENZ (Deputy Chair)

Telephone

John Baird, BSc, BA, MA (Hons), Rhodes Scholar,

Facsimile

Dip Marketing (UK) Caroline Ball, BE Chem (Hons)

09 308 8200

09 308 8209

enquiries @mightyriver.co.nz

Website

www.mightyriverpower.co.nz

Trevor Janes, BCA (Econ), CA Sandy Maier, JD, BA Tania Simpson, BA, MMM Patrick Strange BE (Hons), ME, PhD

Auditor

The Auditor-General pursuant to section 14 of the Public Audit Act 2001. J Freeman of Ernst & Young was appointed in February 2006

E xecutive M anagement

to perform the audit on behalf of the Auditor-General.

Doug Heffernan, BE (Hons), ME, PhD, FIPENZ (Chief Executive) John Foote, BSc, BE (Civil) (General Manager Generation) Tony Gray, FCA (Group Finance Manager) James Moulder, BA, BCA (General Manager Sales) Greg Raasch, BSc, MSc, PE (Prof Engineer)

S olicitors

Chapman Tripp Cowper Campbell Kensington Swan Simpson Grierson

(General Manager Geothermal) Neil Williams, BA (Group Strategist)

B an k ers

Company Secretary

ABN AMRO Bank

Tony Nagel, LLB, MComLaw (Hons)

ANZ National Bank ASB Bank Bank of New Zealand Citibank Commonwealth Bank of Australia Deutsche Bank Westpac Institutional Bank

ANNUAL REPORT 2006 MIGHT Y RIVER POWER LIMITED