Mighty River Power Annual Review 2013

annual review 2013

Smart thinking.

mighty river power LIMITED annual report 2013

The growth and evolution of Mighty River Power has been driven by smart thinking.

Over 90% of our electricity

This vital focus continues every day – looking at innovation through the eyes of our customers and delivering operational excellence and efficiencies to build strength at the core, as we keep growing value for shareholders.

comes from renewable hydro and geothermal resources. These power stations are expensive to build (capital cost) but have very low operating costs.

Our online toolbox Mercury Energy’s GEM (Good Energy Monitor), gives our customers accurate and up-to-date information, with tools and tips to manage power usage and cost.

02/03

04/05

06/09

10/11

12/17

2013 highlights

Chair’s report

Chief Executive’s Report

financial Summary

Our Business

18/19

20/21

22/23

24/

25/

COMPANY OVERVIEW

Executive management

board of directors

glossary

shareholder information

MORE THAN 100,000 shareholders have a stake in the future of Mighty River Power (MRP/MYT) and will receive our FY2013 fully imputed final dividend of 7.2 cents per share.

MIGHTY RIVER POWER’S investment of more than $1.4 billion in geothermal development has grown this ‘premium’ low-cost renewable to 40% of our annual production.

is an industryleading solution using ‘smart meter’ technology, allowing 17,000 incomeconstrained customers to better manage their energy use and costs.

GLO-BUG PRE-PAY

we have been helping Starship children’s hospital for more than a decade.

This year, the Star Supporters Club and Mercury Energy raised a record $1 million.

Together with our customers,

2013 highlights

Smart achievements.

100,000 More than

Shareholders in Mighty River Power.

Retail ownership up from IPO.

40

%

Geothermal generation now 40% of total annual production with the completion of the Ngatamariki power station.

17

%

Reduction in Total Recordable Injury Frequency Rate (TRIFR), a key Health & Safety measure.

02 | Mighty river power | ANnual review 2013

FY2013 fully imputed Final Dividend per share in line with forecast.

7.2

Out-perform FY2013 financial results above IPO forecast.

96.5

%

Availability of base-load geothermal generation.

$

390 Operating Earnings (EBITDAF) up 2% on IPO forecast.

M NPAT and Underlying Earnings $20 million above IPO forecast.

20

above ipo

$

M

| 03

chair’s REPORT

From the Chair.

In our first report to shareholders as a listed company, I am pleased to be confirming positive results for the 2013 financial year – above IPO forecasts – and our outlook for growth in the year ahead.

Importantly, in what has been an intensive period, we have been able to keep a laser-sharp focus on driving shareholder value. This is where our attention and efforts have been, and will continue to be, directed.

“ We have been able to keep a laser-sharp focus on driving shareholder value. This is where our attention and efforts have been, and will continue to be, directed.”

Joan Withers CHAIR

04 | Mighty river power | ANnual review 2013

In FY2013, we were able to negotiate the significant challenges of transitioning to listed company status along with attaining other strategic milestones, while still maintaining a strong operational performance. The completion of our third major geothermal power station project since 2008, Ngatamariki, adds further strength and scale to our operating portfolio in New Zealand. We can now apply these proven development skills through hands-on involvement in our international geothermal business – and at a prudent pace, in line with the commercial conditions.

In our core retail businesses, the Company is focused on improving customer satisfaction and loyalty with innovative solutions and tools. Our Good Energy Monitor (GEM) launched this year has been met with a rapid uptake among our Mercury Energy customers – giving them a new level of visibility so that they can take more control of their energy consumption and cost. This builds on the platform of greatly improved information coming from the roll-out of AMI (smart meter) technology, where our business Metrix is a leader and is focused on additional growth opportunities.

Underpinning the strong operating performance and financial results, is what I see as a real strength of your Company – smart thinking, with a depth of management capability and expertise among our people at all levels that means we can deal with change and complexity.

Financial results above IPO forecast Providing forecast financial information is an important part of the IPO process. Mighty River Power again demonstrated that in tough market conditions we have the ability to deliver both growth in electricity market share by adding value for our customers, and operating performance and financial results above IPO forecasts.

Mighty River Power has reported financial results for the year to 30 June 2013, with Operating Earnings (EBITDAF), Net Profit after Tax (NPAT), Underlying Earnings and Operating Cash Flow all above forecasts included in the Mighty River Power Share Offer Investment Statement and Prospectus we issued in April.

We have delivered on all these fronts by controlling expenditure, and using the competitive advantages of our diverse and flexible generation and sales portfolio to offset the impact of a Waikato drought.

Competitive strength in geothermal Geothermal is a distinctive competitive strength for us in the New Zealand electricity market, and now with the completion of our new Ngatamariki Power Station, it contributes more than 40% of our annual production.

Geothermal has the advantage of very low operating costs and is the only renewable generation that is not dependent on the weather. It has about double the output of hydro of the same capacity and about three times the output of a wind farm. In FY2013 the availability of our geothermal plants was more than 96%, which is truly world class.

Given the current demand profile in the New Zealand electricity market, the Company is unlikely to build a new large power station in New Zealand in the next three to five years. We have been focused on how we can best leverage our globally rare geothermal capability in higher-growth markets offshore. In the second half of the financial year we took direct control of our international geothermal interests and we are now applying our successful New Zealand model, which involves taking a very patient and measured approach to geothermal opportunities. Our priority is around our current investments in the United States and Chile.

At the same time, we will remain absolutely focused on our core business in New Zealand – in a highly-competitive market, delivering innovation and value to our customers through improved services, and on driving effectiveness and efficiencies across the business.

Capital management The Company is now moving out of a high growth period during which the Company has transformed from a single river hydro company, to the much stronger and diversified business we have today. This involved investment of over $1.4 billion and an increase in debt facilities to more than $1.3 billion. The strong cash flows from the Waikato Hydro System were fundamental to enabling that investment, and together with the cash flows from our geothermal assets, are now crucial to maintaining this level of debt and preserving our investment-grade credit rating of BBB+/Stable.

While we have forecast a period of lower domestic capital expenditure, we have committed to investing in improving the efficiency and future reliability of the Waikato Hydro System.

We are now in a period of relatively high re-investment capital expenditure through this decade, with an expected annual cost of approximately $70 million.

As we announced at our Results in August, the Board will be reviewing our capital management – taking into account lower FY2013 capital expenditure, the lower debt at year-end, and lower capital expenditure now planned for FY2014.

Dividend and growth in 2014 We are pleased to have paid our first dividend as a listed company to more than 100,000 shareholders. Since listing in May, the Company has seen an increase in the number of shareholders and our total retail shareholder base grow from 27% to 28%.

The Board has declared a fully imputed final dividend of 7.2 cents per share (cps), in line with the IPO forecast and paid less than five months after listing. This brings total dividends declared in FY2013 to $168 million (or 12cps), which represents a gross dividend yield of 6.7% on the IPO price of $2.50.

For the coming financial year, FY2014, the Board remains comfortable with our IPO forecasts of significant growth in EBITDAF, reflecting the earnings contribution from the new Ngatamariki geothermal plant.

The forecasts at the time of the IPO also anticipated an 8.3% increase in fully imputed full year dividends from 12cps to 13cps for FY2014.

Based on our share price on 20 September, this represents a gross yield of 8.1%.

We will be providing updated guidance on our expected performance for FY2014 and on any new information in regard to capital management initiatives at our Shareholders’ Meeting in November.

Governance and management We have asked a lot of our people in FY2013 and they have delivered. I want to thank my fellow directors and our Chief Executive and the wider team for their exemplary contribution to the Company. Through the IPO we have been energised by our collective responsibility to drive sustainable long-term shareholder value. A special thanks goes to my Deputy Chair, Trevor Janes, who will be retiring from the Board when his term ends later this year. He has been a strong voice over more than eight years, providing valuable capital markets expertise through a time of major evolution and growth for Mighty River Power.

We have reviewed the skills we need around the Board table, and will be considering the addition of two Directors in the near term to bring the Board up to eight Directors. Another key priority for the Board through this year will be commencing the selection of the successor to our Chief Executive, Doug Heffernan, who will leave the Company on 31 August 2014.

Joan Withers Chair

| 05

chief executive’s report

Chief Executive’s report.

In our 2013 financial results and the very significant achievements Mighty River Power has delivered this year, you will have a good measure of the strength and resilience of the business along with the importance of the long-term thinking that has shaped this Company.

“ During the 2013 financial year we’ve demonstrated once again the distinctive strengths of our generation and sales portfolio.”

Doug Heffernan CEO

06 | Mighty river power | ANnual review 2013

The strength comes from the very low operating cost of our

renewable hydro and geothermal generation, which makes up more than 90% of our total annual production. The large geothermal component (now over 40% of total production) has the added advantage of being reliable base-load generation – running 24/7 – which, as the only renewable not dependent on the weather, is regarded as the ‘premium’ renewable.

The resilience that is showing through in our results comes from Mighty River Power’s diverse generation base and sales portfolio – and our ability to better mitigate downside risks to earnings that are inherent in the New Zealand electricity market. For shareholders, that means greater earnings surety under most market conditions, including weak Waikato hydro conditions.

Resilience in operating performance Our core business is based on electricity production (generation) and sales (retailing) to New Zealand homes and businesses. During the 2013 financial year we’ve grown sales to customers through strong volume growth in the commercial segment, controlled costs across the business, and demonstrated once again the distinctive strengths of our generation and sales portfolio.

A key feature in delivering on performance this year, was that we were able to almost completely offset the impact of weak inflows to the Waikato catchment that were significantly lower than average for the second half of the year, with annual hydro production 8% below the prior year.

Our strengths are based on having three different fuels, hydro and geothermal production that is renewable with low operating costs, along with flexible gas generation for times when it is valuable. This is balanced with nationwide commercial and residential customers served through multiple channels and consumer brands including Mercury Energy, Tiny Mighty Power, Bosco Connect and GLO-BUG. At the time of the Initial Public Offering (IPO) in April we published forecasts for the 2013 and 2014 financial years in the Investment Statement and Prospectus (Offer Document). Against all the key financial measures, we achieved results that were above the IPO forecasts for 2013.

Operating Earnings (EBITDAF) for the year were $8 million favourable to the forecast of $383 million, with Net Profit (NPAT) up 21% and Underlying Earnings up 13% on forecasts in the Offer Document. Operating Expenditure was below the IPO forecasts, reflecting a focus on cost management and some deferral of spending into FY2014 that lifted operating performance during the last quarter of FY2013.

Comparing the 2013 financial year with the previous year: EBITDAF was down $71 million to $390 million (FY2012: $461 million), due primarily to $69 million of one-off costs related to international geothermal and costs associated with the IPO. NPAT was up $47 million on FY2012 to $115 million and Underlying Earnings were up $17 million to $180 million.

We achieved 5% growth in electricity sales to customers in FY2013 due to a 12% increase in commercial volumes ahead of our new 82MW Ngatamariki geothermal station coming online. There was a small drop-off in residential demand, which is consistent with the picture nationally. With no growth in national demand and the significant supply side investment in recent years, including our own geothermal projects, competition has increased markedly, limiting retail energy price increases to just 1.6%.

Mighty River Power’s total generation for the FY2013 year reduced 9% to 6,462GWh primarily due to the Company’s lower hydro volumes, down 8% (or 350GWh) as a result of weak inflows into the Waikato catchment.

A key measure of operating performance, Energy Margin, held up well (down only 1%) despite the drought – highlighting once again our ability to limit the downside variability in the Company’s earnings under low Waikato hydro inflows in most circumstances.

Core strength in Waikato hydro and geothermal Even with large reductions in our Waikato hydro generation, as we saw this year, these variations in volumes are small relative to overall national supply and have little influence on national wholesale electricity pricing. For example in FY2013 our lower hydro volumes represented less than 1% of national supply.

This means that although hydro volumes in the Waikato were well below average, we could buy cheaply from the market to cover our sales portfolio.

The Company achieved another excellent level of availability from our base-load geothermal generation, of 96.5%. With wholesale prices 13% below FY2012, we reduced the use of our flexible gas-fired generation, preferring to purchase lower-cost wholesale electricity to manage customer sales requirements. This flexibility of our gas-fired Southdown plant is another important feature of our portfolio, with the mode of this station changing as we have increased base-load geothermal output. Ongoing investment in strengthening the National Grid will see further changes in the role of thermal plants, which have comparatively high running costs.

The settlement of a contract between Meridian Energy and New Zealand Aluminium Smelters with lower pricing is a positive outcome for Mighty River Power and provides a lot of confidence for us – as an operator of low-cost renewables – and the notice provisions allow more time for the market to adjust should the smelter reduce demand, including terminating inflexible fossil fuel contracts and closing high-cost, high-emission thermal plant.

New Ngatamariki station Our new Ngatamariki Geothermal Power Station marks a further important step in the evolution of Mighty River Power, which was formed 15 years ago as a State-Owned Enterprise with only the Waikato River hydro generation.

Ngatamariki is the product of long-term thinking, backed by strong governance and first-class execution which is testament to our experience and capability in managing the inherently complex issues involved in geothermal development, including geothermal science and technology, and complex project management. This project has been more than a decade in the planning since we secured the geothermal development rights over the land in 2000, with our partners Tauhara North No.2 Trust.

Ngatamariki is our third major geothermal project successfully completed since 2008 and means the Company now has about 2,800GWh, or more than 40%, of our annual electricity output coming from geothermal generation – which, while capital intensive, is both reliable and has very low running costs.

5 2,800 %

Growth in electricity sales to customers in FY2013.

GWh

Annual electricity output from geothermal generation following completion of Ngatamariki.

| 07

chief executive’s report

We are delighted to see a project of this scale – the largest of its type in the world – successfully completed, and with power output now expected to be 3MW (4%) higher than specification, which will be positive for the plant’s economics and cash flow into the future.

For Mighty River Power the completion of this project is an important strategic milestone and the key driver of the strong growth in EBITDAF we’re forecasting for the next financial year (FY2014).

This project is also an excellent example of the Company’s long-term focus and the approach to capital allocation that is behind our successful track record in geothermal development in New Zealand.

With the low growth in electricity demand domestically, we are utilising Mighty River Power’s rare geothermal capability in highergrowth markets offshore. During the year, we took direct control of our international geothermal investment in Chile and the US and have focused on integrating them with our team in New Zealand and sharing knowledge and expertise. We are now applying our successful New Zealand model, involving a very patient and measured approach in line with commercial conditions.

As we have announced, we have reviewed our capital expenditure forecast for FY2014, reducing from $199 million to a range of $125$175 million, reflecting lower spending on international geothermal and a small increase in capital expenditure related to smart metering.

Customer focus The roll out of AMI (smart meter) technology to over 300,000 customer locations by the Company’s metering subsidiary, Metrix, has allowed electricity retailers to introduce new products and services for their customers. Metrix now operates at arm’s-length from our retail businesses, with a focus on leveraging a competitive advantage in the flexibility and architecture of its metering products and services.

In the case of Mercury Energy, the now widespread availability of AMI has enabled the introduction of our new GEM (Good Energy Monitor) product to residential customers, allowing them to take more control of their energy usage and costs – with features including detailed energy-use, comparisons with similar homes, and a library of savings tips.

This is an exciting space and one where we see considerable potential for the future.

We have seen further growth with our pre-pay GLO-BUG technology that we have developed and deployed. This is an industry-leading solution, allowing 17,000 income-constrained customers to better manage their electricity costs and benefit from AMI information. We know that the vast majority of customers who convert to GLO-BUG end up paying less in total for their electricity supply than before, and many save energy by becoming more aware of their consumption and more in control. We have continued to expand the number of GLO-BUG retail and top-up outlets, with about 14,000 at the end of the financial year, and work closely with community groups and budgeting agencies to provide support and solutions. We have plans to extend the availability of GLO-BUG beyond Auckland and Christchurch.

08 | Mighty river power | ANnual review 2013

The success of GLO-BUG has been a key factor in the sharp fall in our customer disconnections, with Mercury Energy bucking the industry trend and tracking lower during the year and, at the same time, achieving industry-leading low levels of bad debt.

Disconnections and bad debt write-offs are something no one wants to see, at an individual customer level and because it is simply not good business.

Priorities with people The health and safety of our people, and those who work with us, is a central and ongoing priority across the business – focusing on our aim of ‘zero harm’. With a large project, Ngatamariki, involving more than 1 million person-hours, it was particularly pleasing to achieve a significant reduction in the Total Recordable Injury Frequency Rate (TRIFR) compared with the previous project (Nga Awa Purua) from 3.54 to 0.98, and vindicates the effort and discipline that we have been applying across the business to improving Health and Safety outcomes.

However, we were disappointed during the year to have a potentially-serious near-miss involving a contractor and subcontractor on the project. Our absolute priority following the incident was to co-operate fully with the investigating authorities to understand why the incident happened, what we as principal could have done differently, and on capturing those learnings so that we can embed them as part of a proactive health and safety culture across Mighty River Power and its contractor workforce.

We were pleased to see employee engagement remaining high through what has been an intensive year across the business.

Our survey results, with a record 94% participation, showed a good level of improvement against all but one of the core engagement measures, which is being addressed through agreed follow-up actions in all our teams.

With the evolution of our business, and the change from a strong geothermal growth phase in New Zealand to one that is

17,000 Customers using GLO-BUG to manage their electricity costs.

$

1,000,000

Record amount raised by Mercury Energy and the Star Supporters Club for Starship Hospital.

Ngatamarikistisone of on ti le mp co The rategic mile an important st

characterised by operational excellence with customer delivery and operational efficiencies and effectiveness at the core, we are focusing on making sure that we have the right mix of talent and our best people applied in leadership and technical roles to drive performance. This includes new employees in Chile who were welcomed to the team in March 2013.

In the community, we have enjoyed a rewarding 14-year relationship supporting New Zealand Rowing with many aspiring and elite athletes training on the Waikato River at Lake Karapiro, upstream of one of our hydro dams. During the year we celebrated the great success of the New Zealand rowers at the Olympics, and at the Halberg Awards. Together with our customers, we have also been helping Starship children’s hospital for more than a decade. Over the past 12 months, Mercury Energy and our Star Supporters Club raised a record $1 million for Starship. Donations from the Star Supporters Club have helped fund the refurbishment of Starship’s Level 6 – the high dependency ward for neurological and ongoing serious health conditions – which opened in July this year.

Looking forward We are now several months into FY2014, with our attention firmly on achieving the strong forecast growth in EBITDAF and further lift in underlying profitability forecast at the time of the Company’s IPO. Hydro inflows to the Waikato catchment have been lower than average through the traditionally wetter months of July and August but, as we have demonstrated in the previous two financial years, we have some ability to manage this downside earnings risk when national wholesale prices are low as they have been through this period.

Alongside the Board’s overview of capital management, and our lower planned capital spend for FY2014, an important area of focus is on cost management across the business, consolidating the savings made in the last quarter of the financial year.

In September 2013, the Waikato Regional Council announced that there would be no review of Mighty River Power’s resource consent conditions for the operation of the Waikato Hydro System.

The decision, based on the Council’s monitoring and scientific investigation, confirmed our expectation that there is no basis for a review in 2013, the same conclusion reached in 2008. The consents were granted by the Council in 2006 for a 35-year term until 2041 – with the next consideration of a review in 2018.

This has been a very big year for your Company and the strong results would not have been achieved without a ‘whole of company’ effort from everyone in the business, recognising the challenges involved with the changing timetable of the IPO. In particular, I acknowledge the Board’s support for management and staff through this process, which has built a stronger and more focused company, and will be an enduring benefit.

Doug Heffernan Chief Executive

| 09

FINANCIAL SUMMARY

Financial Summary.

Financial Performance Trends 2013

2012

2011

2010

2009

Energy margin

678.3

684.6

654.7

534.7

589.9

EBITDAF Net profit for the year

390.5 114.8

461.5 67.7

443.1 127.1

327.8 84.6

447.1 159.6

3,181.7 5,802.1 2,620.3

3,014.2 5,877.4 2,863.2

2,906.5 5,376.6 2,470.0

2,689.0 4,894.9 2,205.9

2,621.6 4,388.1 1,766.5

286.0 (83.9) (230.3)

277.0 (291.6) 27.8

292.8 (202.4) (68.8)

199.5 (296.4) 48.0

317.1 (221.8) (72.5)

252.4 183.0 69.4

361.6 287.8 73.8

220.0 162.7 57.3

387.9 322.0 65.9

289.2 263.1 26.1

179.5 216.6 168.0 12.0 8.2 1,027.8 54.8 24.4 4.4

162.7 203.2 119.8 8.6 4.8 1,115.6 51.3 27.0 5.3

162.2 235.5 110.4 7.9 9.1 975.8 54.1 25.1 5.6

139.6 133.6 86.5 6.2 6.0 970.9 54.9 26.5 6.4

211.7 291.0 229.8 16.4 11.4 585.7 59.7 18.3 11.6

0.76 5,252 388,000 6,462

0.92 5,021 386,000 7,068

1.28 4,776 392,000 6,833

2.22 4,857 412,000 5,812

1.84 4,316 372,000 6,129

For the year ended 30 June ($ million)

Income Statement

Balance sheet Total shareholders’ equity Total assets Total liabilities Cash flow Operating cash flow Investing cash flow Financing cash flow Capital expenditure Total capital expenditure Growth capital expenditure Reinvestment capital expenditure Other financial measures Underlying earnings after tax Free cash flow Declared dividends Dividends per share (cents)1 Basic and diluted earnings per share (cents)1 Net debt Equity/Total assets (%) Gearing (net debt/net debt+equity, %) Interest cover (times) Operational measures Total recordable injury frequency rate (TRIFR) Sales to customers (fixed price variable volume) Electricity customers Electricity generation (GWh)

The additional financial measures we use In reporting to you on the Company’s financial performance, there are a number of measures and terms that we consistently use and that we believe are useful for investors, but are not part of the GAAP (Generally Accepted Accounting Principles) standards we follow in preparing our Financial Statements. A description of these measures and full reconciliations can be found on page 62 of the 2013 Annual Financial Report.

1

To aid comparability, the 2009 to 2011 dividend and basic and diluted earnings per share has been calculated using a consistent number of shares on issue of 1.4 billion.

10 | Mighty river power | ANnual review 2013

EBITDAF

Net profit

500

180

450

160

400

140

350

120 $m

$m

300 250

100 80

200 150

60

100

40

50

20

0

2009

2010

2011

2012

2013

Financial Year

0

2013* Forecast

EBITDAF was up $7.9 million on forecast reflecting lower domestic operating expenditure. Compared with the prior year, EBITDAF fell by $71.0 million to $390.5 million impacted by $68.7 million of one-off costs related to international geothermal and costs associated with the IPO.

200

150

150 $m

$m

200

100

100

50

50

0 2011

2012

2012

2013

2013* Forecast

total declared dividend 250

2010

2011

Net profit for the year was $20.0 million higher than forecast principally reflecting lower operating expenditure. Year-on-year the Company’s net profit increased by $47.1 million to $114.8 million reflecting lower EBITDAF more than offset by non-cash fair value movements and the accounting impact of higher earnings from the Company’s EnergySource investment.

250

2009

2010

Financial Year

Underlying earnings

0

2009

2013

Financial Year

2013* Forecast

Underlying earnings was $20.2 million higher than forecast reflecting the difference in net profit for the year against forecast. Underlying earnings increased by $16.8 million (10.3%) on FY2012 reflecting higher earnings from jointly controlled entities and lower interest costs year-on-year.

Special dividend

2009

2010

2011

2012

2013

2013* Forecast

Financial Year In line with forecast, the Board declared a fully imputed final dividend of 7.2 cents per share paid on 30 September 2013 bringing total declared dividends for the year to $168 million (or 12 cents per share) which represents 78% of free cash flow and an increase of 40% from the prior year.

CAPITAL expenditure

FREE cash flow

400

350

350

300

300

250 200

200

$m

$m

250

150

150

100

100

50

50

0

2009

2010

2011

2012

2013

2013* Forecast

Financial Year Capital expenditure was $91.6 million lower than anticipated in the forecast principally due to $64.1 million less capital expenditure in the United States and Chile. In the United States and Chile the Company is applying its successful New Zealand model employing a patient and disciplined approach before committing to further capital expenditure.

0 2009

2010

2011

2012

2013

2013* Forecast

Financial Year Free cash flow, represented as net cash provided by operating activities less reinvestment capital expenditure was up $21.5 million on forecast and $13.4 million on FY2012 due to improved net cash provided by operating activities and a small reduction in reinvestment capital expenditure.

*2013 Forecast is the Prospective Financial Information included within the Mighty River Power Share Offer Investment Statement and Prospectus published April 2013.

| 11

Our business

GEM of an idea:

New tools and tips to manage energy use.

turn off some lights and Mercury Energy’s GEM (Good Energy Monitor) will show you the impact on your power usage and costs.

Switch on a heater,

An online toolbox launched in 2013, GEM gives customers an accurate and up-todate picture of their electricity usage – by month, by day, or even down to the half hour. An increasing number of our customers are now using this rich information to see how their electricity consumption changes through the day, across seasons and to identify unusual spikes or high levels of standby power.

GEM uses data from smart meters on customers’ properties to generate easy-to-read charts and a detailed breakdown of energy use. It can tell you how much you have spent in every 30 minutes and predict how much your monthly account will be long before it arrives, and even alert you if you are heading for a higher-than-usual bill.

This innovative technology is designed to improve understanding about energy consumption and help put our customers in control.

Along with being able to log-in to view their latest bill, make payments, and manage their account details, Mercury customers can now use GEM to access features like ‘Similar Home Comparison’ to compare usage with other customers; view weather information showing the effect of temperature; get bill projections; and build energy savings plans with personalised tips and recommendations.

12 | Mighty river power | ANnual review 2013

GEM gives an ure up-to-date pictusage of electricity

Geothermal smarts:

Evolving and strengthening our business.

Successfully and sustainably tapping high-temperature reservoirs 3,000 metres underground requires expertise that is a fine blend of technical know-how, geothermal art and precision engineering.

The 82MW Ngatamariki Power Station, completed this year, was more than a decade in the planning since the geothermal development rights over the land were secured with our partners in 2000. The success of a project of this scale – the largest of its type in the world using this technology, and requiring 40km of production and re-injection wells – relies on careful evaluation of the resource and its sustainability, its temperature, chemistry and geological characteristics, along with a tailored plant design and operating specifications.

Mighty River Power’s investment of more than $1.4 billion in geothermal development and the successful completion of three major projects since 2008 has spearheaded a geothermal renaissance in New Zealand, and established the Company as a world leader in this growing global niche. Reliable renewable base-load geothermal has displaced more expensive fossil fuel generation in New Zealand’s energy mix and now contributes about 15% of the country’s total electricity supply.

Geothermal has been key to the evolution of Mighty River Power from its beginnings as a hydro generator – diversifying and strengthening the Company’s production base with 40% of annual production now coming from geothermal. This growth and evolution of our business has been built through the development of long-term equity partnerships with Maori Trust landowners, such as Tauhara North No.2 and Tuaropaki.

3

We have successfully completed three major geothermal projects since 2008.

Ngatamariki Power Station was more than a decade in the planning

| 13

Our Business

GLO-BUG goodness:

Innovation helping keep the lights on. has quietly revolutionised the way that more than 17,000 New Zealanders manage their electricity accounts.

GLO-BUG pre-pay technology

An innovative and industry-leading solution developed by Mighty River Power, GLO-BUG allows customers to pay-asthey-go at a time that works for them and in increments they can afford. Traditionally, customers have paid for power through a monthly in-arrears account, which is often out of synch with their income stream and can mean other bills have taken priority.

GLO-BUG, a first for pre-pay power in New Zealand, uses smart technology to help make customers more aware of their electricity consumption and ensure they have control over how much they spend. Most end up paying less in total for their electricity, and many make energy savings through their increased awareness and knowledge.

Improvements in the technology over the past year have ensured GLO-BUG customers can now access their account information through a wider range of channels, including the internet, e-mail, smart phone apps, and text messages.

Most GLO-BUG customers end up paying less in total for their electricity

14 | Mighty river power | ANnual review 2013

GLO-BUG’s features give income-constrained customers greater control over their power use, ensuring they can view their account balance, daily usage and costs, top-up their credit online, reconnect their power, and sign up to receive alert messages about their balance.

Working with the support of community groups and budgeting agencies, we are seeing a significant reduction in the number of disconnections and debt write-offs – a traditional industrywide challenge.

Strong partnerships: Focusing on trust and shared values.

Harnessing New Zealand’s indigenous

resources sustainably to generate renewable electricity has provided opportunities for economic participation and partnership within our communities, based on shared values and a focus on the long-term. In every area of our business we respect the kaitiakitanga (guardianship) approach of our partners in the local communities and do our share in meeting those responsibilities.

A key foundation for Mighty River Power’s successful track record of geothermal development has been our partnerships with Maori landowners, with the establishment of a business model that enables their equity involvement and ensures direct and aligned economic participation. This enables our partners to generate longterm value related to their land and its resources – and to invest the returns for the benefit and well-being of their people.

In every area of our business we respect kaitiakitanga (guardianship)

Ingrained in our approach is a sustainability focus, which includes the responsible inter-generational management of natural resources that is expected by the community. As joint owners in geothermal power projects, the sustainable use of the resource is fundamental to long-term shareholder value and crucial to quality consenting processes. Ensuring we meet our obligations under all our consents, and providing mitigation assistance where our operations may impact directly on the environment, is part of a philosophy that recognises the importance of these natural resources to the wider community as well as the importance of continued access to support our business.

The regulatory authorities have confirmed again this year the high level of compliance we achieved in FY2013, across 100 separate resource consents and 1,400 consent conditions, further evidence of the commitment we have to this philosophy. Another excellent example is our long-standing collaborative effort within the Waikato Catchment Ecological Enhancement Trust (WCEET), established more than 10 years ago with funding from Mighty River Power, as part of the resource consenting process for the Company’s hydro operations, supporting a wide range of environmental projects within the Waikato River catchment.

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Our business

Waikato hydro: A distinctive strength.

is a unique combination of eight dams, nine hydro stations and 39 generating units – harnessing the power of water to produce about 10% of New Zealand’s annual electricity requirement. These core assets, some of which have been operating for more than 80 years, offer some distinctive competitive advantages for Mighty River Power.

The Waikato Hydro System

Together with its prime location near to major load centres and its capability to quickly ‘ramp up’ output to meet demand peaks, the Waikato Hydro System and the storage in Lake Taupo has the benefit of being relatively small compared with overall national supply, with little influence on national wholesale electricity pricing.

Much larger hydro generation systems have a causal and inverse relationship between volume and price. This means that even in times when there is less rainfall and lower inflows to the Waikato River catchments, the Company would normally be able to buy electricity cheaply from the market to make up any shortfall and cover our customer sales requirements.

In FY2013 Mighty River Power continued a decade-long programme of work that represents the largest-ever lifecycle and maintenance investment in these vital hydro assets. With a focus on ensuring high levels of efficiency, improved availability and reliability of the hydro generation assets, the Company is applying state-of-the-art technology and engineering techniques – along with an approach that respects the heritage and original construction of the stations – to achieve gains in performance.

The Waikato Hydro System produces about 10% of New Zealand’s electricity

16 | Mighty river power | ANnual review 2013

Safety culture: Beyond compliance and commitment.

An area of particular focus is on early identification of situations that pose a serious risk

The health and safety of our people, and those we work with, is focused around an aim of ‘zero harm’ and building a strong proactive culture that embeds best practice in everything we do.

As a business with a diversity of work sites and sources of risk, we have invested significant effort as part of an ongoing strategy to lift awareness and ensure appropriate systems and processes are in place, including transparent reporting of safety data. Our key measure is showing improvement, with the Total Recordable Injury Frequency Rate (TRIFR) down 17% in FY2013 and the Ngatamariki geothermal project – involving more than 1 million person-hours – recording a rate of 0.98 compared with 3.54 for our previous major project (Nga Awa Purua). We are also achieving positive levels of ‘near miss’ reporting and capturing the learnings these offer.

These achievements are part of a journey, which takes our Company beyond compliance and commitment to a robust safety culture that delivers consistently positive outcomes and sustainable improvements. An area of particular focus, including with the major contractors and industry partners involved in our business, is on early identification of situations that pose a risk of serious harm or fatality.

As a major player in the electricity market in New Zealand, Mighty River Power was a founding member of the StayLive generation safety group, a cross-industry partnership with the aim of achieving a material improvement in health and safety practice in the sector, including with contractors and their sub-contractors – through information sharing, establishing common training approaches and procurement requirements.

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COMPANY OVERVIEW

Mighty River Power at a glance. is one of New Zealand’s largest electricity companies – with its core business based on reliable, low fuel cost, high capital cost electricity generation complemented by sales to homes and businesses.

Mighty River Power

The Company typically generates about 17% of New Zealand’s electricity. It operates the nine hydro stations on the Waikato River, five geothermal power stations in the central North Island and a multi-unit gas-fired station in Auckland. More than 90% of its electricity production is from renewable sources. Mighty River Power sells electricity through multiple channels and consumer brands, including Mercury Energy, GLO-BUG, Bosco Connect and Tiny Mighty Power. Mighty River Power’s metering business, Metrix, provides electricity retailers with advanced metering infrastructure solutions for their residential and commercial customers.

Mighty River Power is one of the world’s largest geothermal power station owners, and has a successful track record in one of the world’s largest recent geothermal development programmes, investing more than $1.4 billion in geothermal development since FY2006. The Company is applying this capability and experience – gained through domestic geothermal exploration, development, construction and operations – to invest in international growth opportunities. our generation assets

GAS-FIRED 1 station, 4 units, Southdown

Flexible gas-fired generation can respond to wholesale market opportunities and reduce risk in a dry year.

HYDRO 9 stations on the Waikato River

Flexible and rain-fed, with peak winter inflows, hydro output can be increased or decreased quickly and efficiently.

See opposite page for locations.

our FY2013 generation portfolio hydro geothermal

7%

gas-fired

61% 32%

18 | Mighty river power | ANnual review 2013

GEOTHERMAL 5 stations through the central North Island

Steady base-load geothermal, normally runs at full capacity more than 95% of the time.

RETAIL MARKET SHARE (%) 0-9 10-29 30-49 50-69

lies about Mighty River Power suhoppmes and 1 in 5 New Zealand ity through businesses with electrics and channels multiple retail brand

Company OWNERSHIP As at August 2013 CROWN NZ RETAIL InvestorS

10% 10%

52%

NZ Institutional InvestorS INTERNATIONAL Institutional InvestorS

28%

our retail portfolio

our metering business

MERCURY ENERGY is one of New Zealand’s longest-established retail electricity brands and our largest, accounting for more than 96% of the Company’s end-user sales volume.

Our pre-pay service GLO-BUG provides an industry-leading solution for residential customers to monitor their electricity use and align payments with their income cycles.

tiny mighty Power focuses

bosco connect specialises in servicing inner-city apartments, supplying more than half of the contestable Auckland CBD apartment market.

on servicing customers in smaller regional towns.

metrix provides electricity retailers

with advanced metering infrastructure (AMI) solutions for their residential and business customers. Metrix has deployed more than 300,000 AMI (smart) meters.

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EXECUTIVE MANAGEMENT TEAM

The Executive team.

01.

02.

03.

04.

05.

06.

07.

20 | Mighty river power | ANnual review 2013

01. Dr Doug Heffernan Chief Executive

05. Marlene Strawson General Manager Human Resources

BE (Elect.) (Hons), ME, PhD, DistFIPENZ

BSocSc, MMgt (HR)

Doug Heffernan has been Chief Executive of Mighty River Power since it was formed in December 1998 and now has nearly 40 years’ experience in the New Zealand electricity industry. He has led the Company through a period of sustained growth and evolution from its beginnings as a hydro-only operator to a diversified electricity generator and retailer with a significant geothermal business. Doug is a director of Tuaropaki Power Company and was, until 2012, Chair of Rotokawa Joint Venture Limited and the Nga Awa Purua Joint Venture. Doug was formerly Chief Executive of Power New Zealand Limited (distributor and retailer) from 1991 to 1997, leading it through the processes of corporatisation, merger and listing with NZX through demutualisation and initial development of the Rotokawa geothermal field. Prior to that Doug worked for the Electricity Corporation of New Zealand working in national transmission grid and generation development and sales and marketing.

Marlene Strawson joined Mighty River Power in 2012 with responsibility for delivering Mighty River Power’s human resources strategy. Marlene has over 20 years’ experience in HR, with a strong organisational development background. Prior to joining Mighty River Power, Marlene held a number of human resources roles in a wide range of sectors including telecommunications, banking and health sectors, including a period at Yellow Pages after it was acquired from Telecom.

02. William Meek Chief Financial Officer BCom (Hons)

William Meek joined Mighty River Power in 1999 and heads the finance, treasury, and investor relations functions. William was previously responsible for the Company’s generation investment strategy and enterprise risk functions. He has 15 years’ industry experience in areas such as risk management, power development, wholesale markets and forecasting.

06. Mark Trigg General Manager Development BE (Chem)

Mark Trigg is responsible for Mighty River Power’s generation development and growth strategy, both within New Zealand and internationally. He joined Mighty River Power in 2010 following 14 years’ experience in the New Zealand power sector where he has held a number of senior executive roles. Mark brings a range of experience in operations, business development, trading and risk management and strategy development. Before moving to the energy sector, Mark spent ten years in the financial markets, predominantly in trading roles.

07. Fraser Whineray General Manager Operations BE (Chem) (Hons), MBA (Cambridge), GRADDIP DY.SCI.TECH (Distinction)

03. James Munro General Manager Retail James Munro joined Mighty River Power in 2008 with responsibility for the consumer brands businesses. James has a broad range of commercial experience having started his career as an accountant, and with a background in media, finance and banking. James has over 20 years’ experience in complex retail services businesses.

Previously, he has worked for a number of companies including The Economist in London, TVNZ, and St George Bank.

Fraser Whineray is responsible for optimising the performance of all of Mighty River Power’s domestic generation operations, portfolio and industrial sales activities. He joined Mighty River Power in 2008 from Carter Holt Harvey where he was Director Operational Improvement. Prior to that he held a number of senior roles in the dairy industry and with Credit Suisse First Boston in New Zealand and Australia. He has considerable experience in performance management, strategy, mergers and acquisitions and international business. Fraser is an independent non-executive director of Opus International Consultants.

04. Matthew Olde General Manager Business Strategy & Solutions BCom (Hons) / LLB

Matthew Olde is responsible for facilitating the development of Company strategy including delivery of technology strategies for information and metering services. In addition, he is responsible for the communications and legal functions. Matthew joined Mighty River Power in 2010, prior to which he spent over a decade as an investment banker in Auckland, Sydney and London with Deutsche Bank and ABN AMRO, predominantly providing corporate finance advice across a wide range of sectors.

To view the Director and Employee Remuneration section of the 2013 Annual Report, please refer to page 70 of the Annual Financial Report.

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board of Directors

Meet the Board.

01.

02.

03.

04.

05.

06.

07.

22 | Mighty river power | ANnual review 2013

01. Joan Withers Chair

05. James Miller Director

MBA, AFInstD

BCom, FCA, AMInstD

Joan Withers was appointed a director of Mighty River Power in August 2009 and Chair of the Board in October 2009. She is Chair of Auckland International Airport, Deputy Chair of Television New Zealand, a director of ANZ and of The Treasury Advisory Board, a Trustee of Pure Advantage, the Sweet Louise and the Tindall foundations. Joan has more than 20 years’ experience at a senior executive level in the New Zealand media industry, including serving as Chief Executive Officer of Fairfax New Zealand and the Radio Network of New Zealand.

James Miller was appointed a director of Mighty River Power in May 2012. He is Deputy Chair of NZX, a director of New Zealand Clearing and Depository Corporation (a subsidiary of NZX), the Accident Compensation Corporation and Auckland International Airport and is a member of the Financial Markets Authority. He has 15 years’ experience in capital markets, having recently retired as a director and Head of NZ Wholesale Equities with Craigs Investment Partners in Auckland. James’ prior roles included Head of Equities and Head of Research at ABN AMRO in New Zealand. James is a Fellow of the Institute of Finance Professionals New Zealand Inc. He is also a Fellow of the Institute of Chartered Accountants of New Zealand.

02. Trevor Janes Deputy Chair BCA, CA, FCFIP, FInstD

Trevor Janes joined the Mighty River Power Board in June 2005.

He is Chair of Abano Healthcare, Deputy Chair of the Accident Compensation Corporation, Chair of the ACC Investment Committee of the Board and a director of ProCare Health. Trevor is also a member of the Ministry of Foreign Affairs and Trade International Development Advisory and Selection Panel, a member of the NZ Post Network Access Committee and an issuers’ representative on the New Zealand Markets Disciplinary Tribunal. Trevor is a Chartered Accountant and Fellow of the Institute of Directors and the Institute of Financial Professionals NZ Inc. He is a member of the CFA Institute (USA) and the UK Society of Investment Professionals.

03. Dr Michael Allen Director BE (Chem) (Hons), PhD

Michael Allen was appointed a director of Mighty River Power in November 2009 and is also a director of Mid Century Design and Geothermal New Zealand. With a background in engineering, he has 25 years’ experience in the management, promotion and marketing of international geothermal engineering consulting. He has been involved in more than 20 geothermal developments in 12 countries and has undertaken project consultancy in South East Asia, Africa, Japan, and Central and South America. More recently he has been active in brokering finance from banking and private equity sources for clean energy projects internationally. Michael is also Executive Chairman of ReEx Capital Asia Pte (Singapore). He has been appointed to the office of Special Envoy for Renewable Energy by the Ministry of Foreign Affairs and Trade.

04. Prue Flacks Director LLB, LLM

06. Tania Simpson Director BA, MMM, AMInstD

Tania Simpson became a director of Mighty River Power in November 2001, making her the longest serving member of the current Board and is Chair of its Human Resources Committee.

Tania is the founding director of Māori policy advisor, Kōwhai Consulting. She has previously held management positions in Housing Corporation, Ministry of Māori Development and Office of Treaty Settlements and has worked on social policy, environment, economic development and Treaty-related matters. She is of Tainui, Ngāi Tahu and Ngā Puhi descent. Tania is a Member of the Waitangi Tribunal, a director of Landcare Research, Oceania Group, AgResearch and a Trustee of Te Reo Irirangi o Maniapoto Trust, Waikato Endowment Colleges Trust, Kowhai Trust and Tui Trust.

07. Keith Smith Director BCom, FCA

Keith Smith was appointed a director of Mighty River Power in May 2009 and is Chair of its Risk Assurance and Audit Committee. He is Chair of Goodman (NZ), Healthcare Holdings, Enterprise Motor Group and Mobile Surgical Services. He is Deputy Chair of The Warehouse Group and a director of Tourism Holdings and various private companies covering a range of industry sectors. Keith is also a Trustee for Cornwall Park Trust Board and a member of the Advisory Board of the New Zealand Tax Trading Company.

To view the Corporate Governance section of the 2013 Annual Report, please refer to page 64 of the Annual Financial Report.

Prue Flacks joined the Mighty River Power Board in May 2010.

She is a barrister and solicitor with extensive specialist experience in commercial law and, in particular, banking and finance and securities law. Prue is a consultant to Russell McVeagh, where she was a partner for 20 years. She is a director of Chorus Limited and Bank of New Zealand Limited, and a Trustee of the Victoria University of Wellington Foundation.

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GLOSSARY / SHAREHOLDER INFORMATION

Glossary Base-load

Producing electricity at a constant rate and running continuously

Dividend

The distribution of a proportion of a company's earnings, decided by the board of directors, to its shareholders. The dividend is most often quoted in terms of the dollar amount per share. May be paid as Interim Dividend and Final Dividend

EBITDAF

Earnings before net interest expense, income tax, depreciation, amortisation, change in fair value of financial instruments, impairments and equity accounted earnings

Energy Margin

The amount of the company’s sales, less lines charges, energy costs and other direct costs of sales, including metering

Equity Interest

Where Mighty River Power has equity (investment) in another business entity

Fair Value Adjustments

An accounting process that reassesses the fair value (estimate of a company’s potential market price) taking into account various factors

Fixed Price Variable Volume (FPVV)

A contract for electricity that allows the consumer to use as much electricity as they want at a fixed price per unit

Free Cash Flow

Net cash provided by operating activities, less re-investment capital expanditure (including accrued costs)

GWh

Gigawatt hour. One gigawatt hour is equal to one million kilowatt hours

Interest Rate Derivatives

A financial instrument based on an underlying financial security whose value is affected by changes in interest rates

MWh

Megawatt hour. One megawatt hour is equal to 1,000 kilowatt hours.

A megawatt hour is the metering standard unit for the wholesale market

NPAT

Net profit after tax

Operating Cash Flow

The amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities

Operating Expenses

Total costs incurred in the business, less energy costs and other direct costs of sales including metering

Peaking

Flexible generation output used to meet peak demand. At Mighty River Power, our co-generation plant is used primarily for peaking as is a large proportion of our hydro capacity

Spot market / wholesale market

The buying and selling of wholesale electricity is done via a ‘pool’, where electricity generators offer electricity to the market and retailers bid to buy the electricity.

This market is called the spot or physical wholesale market

Spot price

The half-hour price of wholesale (‘spot’) market electricity

Total Recordable Injury Frequency Rate (TRIFR)

A record of the number of reported medical treatment, restricted work, lost time and serious harm injuries per 100,000 hours, including employees and contractors

Underlying Earnings

Net profit for the year adjusted for one-off and/or infrequently occurring events exceeding $10 million of net profit, impairments and any changes in the fair value of derivative financial instruments

24 | Mighty river power | ANnual review 2013

Shareholder information Shareholder enquiries

Investor information

Changes in address, dividend payment details and investment portfolios can be viewed and updated online: www.investorcentre.com/nz. You will need your CSN and FIN numbers to access this service.

Our website at www.mightyriver.co.nz is an excellent source of information about what’s happening within the Company.

Enquiries may be addressed to the Share Registrar: New Zealand

Annual Shareholders’ Meeting

Computershare Investor Services Postal address: Private Bag 92 119 Auckland 1142 New Zealand

The 2013 Annual Shareholders’ Meeting will be held at Ellerslie Event Centre (80 Ascot Ave, Remuera, Auckland) at 2pm on 7 November 2013.

Electronic shareholder communication

Phone: +64 9 488 8777 Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz www.investorcentre.com/nz Australia Postal Address: GPO Box 3329 Melbourne, VIC 3001 Australia Phone: 1 800 501 366 (within Australia) Phone: +61 3 9415 4083 (outside Australia) Fax: +61 3 9473 2500 Investor Relations Anna Hirst Head of Investor Relations Mighty River Power Corporate Office Level 14, 23-29 Albert Street P O Box 90399 Auckland 1142 New Zealand

Our Investor Centre allows you to view all regular investor communications, information on our latest operating and financial results, dividend payments, news and share price history.

Please think about the environment and help us save paper and costs

Around 75% of Mighty River Power shareholders have already opted to receive their Annual and Interim reports electronically – the most environmentally-friendly, efficient and cost-effective method of communication. It is important that you have the choice and we will keep sending you printed copies of these reports if that is your preference.

If you are one of the shareholders receiving a copy of our report and you don’t really need it, you can help the environment and us in reducing costs – the paper from the printed copies of the 2013 Annual Report laid end-to-end would cover the length of the Waikato River from Lake Taupo to the sea.

It is quick and easy to make the change to receiving your reports electronically. This can be done either: •• Online at www.investorcentre.com/nz by using your CSN and FIN numbers. Select ‘View Portfolio’ and log in.

Then select ‘Update My Details’ and select ‘Communication Options’; or •• Contacting Computershare Investor Services Limited by email, fax or post.

designedbyinsight.com MRP117

Phone: +64 9 308 8200 Fax: +64 9 308 8209 Email: investor@mightyriver.co.nz

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Level 14, 23–29 Albert Street, Auckland 1010. PO Box 90399, Auckland 1142, New Zealand Phone +64 9 308 8200 Fax +64 9 308 8209 www.mightyriver.co.nz