Interim report 2009

Mighty River Power LimITed

INTERIM Report 31 DECEMBER 2008

With the commissioning of the Kawerau Geothermal Power Station, Mighty River Power is now the largest geothermal operator in New Zealand.

Record inflows into Lake Taupo and the Waitako River created a challenge for us in managing our operations within consent levels while assisting Environment Waikato with flood management.

MightY River Power Interim Report 31 December 2008

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The PERIOD In Review

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

Total Equity/Total Assets

FOR THE SIX MONTHS TO 31 DECEMBER

AS AT 31 DECEMBER

($Million)

(%) 234.5

31/12/08 175.1

31/12/07

Net Debt / Net Debt + Equity

FOR THE SIX MONTHS TO 31 DECEMBER

AS AT 31 DECEMBER

($Million)

(%)

30.7

31/12/08

31/12/07 31/12/06

83.0 37.9

31/12/07

31/12/05*

54.0 77.3

31/12/04*

31/12/0*

Operating Cash Flow FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

201.0

31/12/08 31/12/07

134.7

31/12/06

31/12/04*

19.0 23.9 19.3

31/12/06

31/12/05*

31/12/05*

76.8 61.3

31/12/04*

Net Surplus after Tax

31/12/08

57.0

31/12/05*

163.5

31/12/04*

59.0

31/12/06

148.1

31/12/05*

58.0

31/12/07

179.4

31/12/06

31/12/08

154.3 121.3 123.6

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

17.4 32.3

5.

MightY River Power Interim Report 31 December 2008

Chair and chief executive report

On behalf of the Mighty River Power Board and management we are pleased to report on Mighty River Power’s performance for the six months to 31 December 2008.

Total Generation Volumes For the six months to 31 December 2008

Production mix (%)

Summary The six-monthly result again highlights the success of Mighty River Power’s diversified generation strategy which was brought sharply into focus in 2008.

In the six months to 31 December 2008, the company: 2008

•

Benefited from the commissioning of the 100MW Kawerau Geothermal Power Station ahead of plan

•

Experienced higher than average hydro generation after recovering from the summer–autumn drought

•

Reduced use of gas cogeneration from Southdown

2007

31/12/07

31/12/08

HYDRO

2,137

2,595

GEOTHERMAL*

264

628

CO-GENERATION

406

244

BIOENERGY

27

23

2,834

3,490

GWh

TOTAL

•

Increased total generation production for the comparative period by 23% from 2,834GWh to 3,490GWh

•

Recognised a $121.4m accounting charge due to fair value movements on interest rate derivatives

* Mighty River Power’s ownership share of output

•

Launched a residential electricity offer from Mercury Energy into Dunedin for the first time

•

Made good progress on construction of the 132MW Nga Awa Purua Geothermal Power Station

The introduction of generation from Kawerau is pleasing as it boosted the output of geothermal power plants owned or operated by the company by 67% on the prior comparable period, from 605GWh to 1,012GWh. Geothermal generation now represents 18% of our total generation portfolio – up from 9% a year earlier.

During the first quarter of the financial year we experienced the highest inflows ever recorded in a 90-day period into the Waikato systems lakes and rivers. This meant Lake Taupo storage was able to be rebuilt from the lows of June 2008 as well as achieve hydro output that was 21% higher than the previous comparable period at 2,595GWh. Conversely, our gas-fired co-generation output reduced by 40% on the prior comparable period to 244GWh illustrating the flexibility of our Southdown plant to adjust for changing national hydrological and wind conditions to meet the continuously changing demands of the market.

The higher generation volumes also received significantly stronger wholesale prices, especially in the first quarter, due to competitors’ fuel constraints. At the retail level, average energy only prices were up 4.7% on the previous year.

This combination of factors led to a record first six month turnover of $741.3m compared to $578.4m for the previous comparable period. Earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF) were also a company record at $234.5m compared to $175.1m for the same period in the last financial year.

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MightY River Power Interim Report 31 December 2008

Depreciation and amortisation charges have increased to $51.8m from $39.8m on the prior comparable period, following the asset revaluation of 30 June 2008, together with depreciation for the recently commissioned Kawerau Geothermal Power Station.

Mighty River Power is a perpetual borrower and hedges its interest costs into the future. The rapid fall-off of interest rates over the six months to December 2008 resulted in a $121.4m adverse movement in the fair value of interest rate derivatives. Mighty River Power does not hedge account for these derivatives and accordingly these unrealised losses are expensed to the income statement.

The impact of fair value movements on derivative contracts recognised in the income statement reduced the net profit after tax to $30.7m compared to $83m in the prior comparable period.

Extra financing facilities were negotiated in October 2008 which reinforced the company’s already strong liquidity position with Mighty River Power’s total debt facilities now $810m, of which $661m was drawn at 31 December 2008.

The company has $500m issued as bonds that mature in 2013 and 2021. A further $150m facility matures in December 2012.

At a time when credit availability is tight, Mighty River Power continues to have a high degree of certainty and liquidity in its debt portfolio indicating the continued significant commitment to its development of new geothermal generating capacity.

Capital expenditure (excluding realised gains or losses on hedge contracts supporting the development programme for which the underlying expenditure has still to occur) was $158.8 million compared to $111.5 million in the prior comparable period.

Operational Overview Mighty River Power is well on target to achieve its strategic objective of developing geothermal resources to enhance our renewable and sustainable generation mix.

Our total production increased 23% on the prior comparable period which – despite reduced gas-fired co-generation of 40% – established a new record for this period and formed a good basis for sustained market share growth.

Mighty River Power has sold the Silverstream landfill generating plant to a privately owned Wellington company. The plant was acquired during the industry deregulation and subsequent purchase of Mercury Energy in 1999. It was originally built through a joint venture between Hutt City Council, Energy Direct and Mercury Energy in 1994. Its output accounted for approximately 14GWh pa of production or about 0.25% generation. The small size of the plant and lack of future growth meant Silverstream no longer met the company’s needs.

Mighty River Power continues to be a significant provider of employment – particularly in regional areas through the on-going geothermal construction process. We currently have 200 people at Nga Awa Purua and at its peak will have 450 people on site. We anticipate a similar number if our adjacent Ngatamariki geothermal project proceeds. We now employ 90 skilled staff in our geothermal team - which we expect to grow to 120 by 2012.

Mighty River Power currently has 823 staff including apprentices, part-time and casual workers and those on parental leave. Full Time Employment numbers (permanent and fixed term) are 768.

Our Apprenticeship Programme continues to flourish with 70 young people going through the programme in the past four years, including 12 in 2008. We have a

stakeholder and Joint Venture Partner representation of 31% across all intakes.

Of the first intake who are now completing their apprenticeships, two are directly employed by Mighty River Power – one at Southdown and another in the hydro team at Hamilton - and seven are employed by other companies either working on the Waikato River or in the Hamilton region.

Geothermal Geothermal energy is the near-term priority for the company’s generation development and we are well on track to have more than 400MW of geothermal generation by 2012.

All our geothermal projects involve Maori partners, including Maori Land Trusts, iwi and Maori commercial interests in joint venture projects. With the Kawerau Geothermal Power Station on-stream, the total output from projects owned or operated by Mighty River Power is 263MW. In addition, Mighty River Power operates 64MW equivalent of Direct Heat geothermal steam supply at Kawerau, making it the largest geothermal operator in New Zealand.

Geothermal Generation and Direct Use Actual production for the six month period

OWNERSHIP OPERATING

INTEREST

MW

GENERATION

170

DIRECT USE* TOTAL

- 170

GWh

628 - 628

RESPONSIBILITY

MW GWh

263

1,012

64

269

327

1,281

* Operation of Ngati Tuwharetoa Geothermal Assets geothermal steam supply to industrial customers at Kawerau

7.

MightY River Power Interim Report 31 December 2008

The official opening of the Kawerau Geothermal Power Station in November 2008 marked a notable milestone for Mighty River Power’s strategic focus on geothermal development.

The station started generating in late June 2008 – ahead of time, under budget and producing 10% more energy than originally estimated. Kawerau’s output is sufficient to power 100,000 households and adds an important element of price certainty to industrial users in the region.

development company. GeoGlobal Energy is currently pursuing international opportunities and has secured prospects in Chile.

In the period under review Mighty River Power committed US$6.7m to fund geophysical surveys over a number of areas in Chile and the drilling of an initial exploration well on the Tolguaca permit in southern Chile.

Construction of our next major project, the 132MW Nga Awa Purua Power Station on the Rotokawa field, is well underway with a targeted completion of mid 2010.

Exploratory drilling in the Ngatamariki field is providing encouraging results for a similar scale project.

Hydro Maintaining the current Lake Taupo consent range and the ability to flexibly operate the nine hydro stations are critical components in our ability to deliver a low cost secure power supply. In the face of uncertain hydrology in both the North and South Islands, Lake Taupo level management is a complex task.

Mighty River Power is a 25% shareholder and cornerstone investor in GeoGlobal Energy, a USA based global geothermal

As illustrated in the graph below, the lake level experienced a gradual decline after near record quarterly minimum flows

LAKE TAUPO LEVEL (METRES ABOVE SEA LEVEL)

Lake Taupo 2008 level profile

LAKE TAUPO MAX OPERATING LEVEL

from February and then rapidly filled after record inflows during July-August.

Mighty River Power continued to demonstrate a strong compliance record with all our resource consents and we are pleased that Environment Waikato saw no need to review our hydro resource consents. The Waikato hydro system has a unique position in the New Zealand power supply as it is the only significant renewable resource close to the important demand centre of Auckland that has flexible capacity.

In the face of pressure for water extraction rights from the Waikato River, we were pleased with Environment Waikato’s decision on Variation 6 (relating to the amount of water able to be taken from the Waikato hydro system) which will be defended in any appeal processes.

In November, along with our partners in the project, we were delighted to receive

LAKE TAUPO LEVEL

LAKE TAUPO MIN OPERATING LEVEL

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MightY River Power Interim Report 31 December 2008

the New Zealand Engineering Excellence Awards Supreme Winner for the Arapuni Dam Remediation.

To have won the Supreme Winner Award is a major achievement for Mighty River Power and its partners in the project.

The engineering technique developed is becoming known as the ‘Arapuni method’ within the international engineering community for ‘live’ repair of large concrete dams.

Wind Mighty River Power continues to pursue its interests in wind power generation on several fronts. During the period, we acquired a 20% stake (at a cost of $7.1 million) in Windflow Technologies Ltd, the Christchurch-based manufacturer of small turbines.

Windflow is working on the company’s behalf on the proposed Long Gully wind farm near Wellington, an 8-10MW project which, if consented, would use the midsized New Zealand made Windflow 500 turbine.

We continue to progress our plans for a 280MW to 336MW, 122 turbine, wind farm at Turitea, in the Tararua Range, east of Palmerston North. In December 2008, the Minister for the Environment, Hon. Dr Nick Smith, announced he would be ‘calling in’ the Turitea project to be heard by an independent Board of Inquiry, as “the most transparent and fair way to decide the outcome of this significant wind farm proposal”. The Call In was officially notified in January 2009.

Retail Growth In the retail market, Mercury continued to grow its marketshare, recording a net gain of 6,000 customers from July to December 2008, bringing total customers to 389,680. It also showed strong growth in the gas market, increasing its customer base by 4,000 customers in the second half of 2008. Just six and a half years after entering this business, Mercury now has a 39% share of the market for domestic reticulated gas supply in Auckland, demonstrating the success of its competitive strategy.

Mercury Energy entered the Dunedin region in October 2008 to provide Dunedin consumers with an alternative to established retailers. On the basis of a compelling value proposition, it has acquired over 2,000 customers in a short timeframe. Pleasing growth has also been achieved in Wellington where Mercury now has nearly 9,000 customers since its entry into the market in late 2007 – a doubling in scale since June 2008.

Subsequent to balance date, Mercury Energy announced energy prices being held for four out of five residential customers, however most had to pay increased line charges that are passed from their local lines company. The only electricity price rise put customers on Auckland’s North Shore, West Auckland and north of Auckland on an even footing with those in Central and South Auckland.

Metrix continues to progress the rollout of smart meters. It is working together with a major international meter manufacturer to develop a technology platform that is fully tailored to the New Zealand environment and local operating conditions.

The Mercury Contact Centre won the CRM Consulting Contact Centre Industry Award for the Energy Retail Sector for the fourth time in five years. Mercury had previously won this award in 2004, 2005 and 2006.

Community Starship Children’s Health celebrated Christmas with a $50,000 donation from Mercury Energy. The donation will fund the first year of a major study on minimising brain damage in paediatric intensive care patients. Mercury Energy has been a major sponsor of Starship since 2000.

In July 2008, Starship’s new Mobile Ear Clinic began operating in community centres across Auckland. Proudly donated by the Mercury Energy Star Supporters Club, the $365,000 new facility will enable more than 2,000 extra Auckland children to benefit from specialist ear health services in their community.

For the fifteenth year, Mercury Energy lit up the Auckland Domain for Christmas in the Park. A record crowd of more than 200,000 enjoyed a magical evening of music, dancing, fireworks and the lighting of Mercury Energy’s 20-metre Christmas tree as a highlight.

More than 1,100 people visited Atiamuri Power Station on October 18 to celebrate the stations 50th anniversary, including members of the original project team who worked on the design and construction of the dam and station. These visitors added a unique dimension to the day, sharing some amusing anecdotes and recalling the challenges of major 1950s infrastructure projects.

9.

MightY River Power Interim Report 31 December 2008

Mighty River Power partnered with Sport Waikato to stage the inaugural Waikato-wide Stream to Summit monthlong programme of guided walks. The programme ran through October and was supported by the Department of Conservation who provided guides and specialist commentary on each walk.

We continue to support sport in the Waikato with our sponsorship of the South Waikato and Taupo Sports Awards. We also sponsored and attended the Aotearoa Maori Sports Awards, held in December in Rotorua, and supported the many athletes from Waikato iwi nominated as finalists.

The Future The electricity industry experienced extreme tests during 2008 with severe drought in the Waikato, low in-flows in the South Island, and the unexpected shutdown of part of the capacity of the Cook Strait cable, limiting the scope for electricity to be carried between the North and South Islands. The company weathered that test and has turned in its best-ever six-month operating result.

The foundation for this performance was set with strategic decisions taken earlier in the decade to build a worldclass geothermal business and to expand and create flexibility at the gas-fired Southdown plant.

The company expects that it’s existing asset base and will continue to provide strong operating results into the future to underpin our geothermal development programme at Nga Awa Purua and Ngatamariki, despite the global and economic turmoil.

Creation of lowest cost renewable electricity capacity remains our priority and will be our primary contribution to assisting New Zealand meet the challenging economic conditions in the drive to improve national productivity, while at the same time doing our best to minimise price increases.

Carole Durbin Chair

Doug Heffernan Chief Executive

MightY River Power Interim Report 31 December 2008

Condensed Consolidated Interim Financial Statements For the six months ended 31 December 2008

  11. Consolidated Income Statement 12. Consolidated Statement of Changes in Equity 13. Consolidated Balance Sheet 14. Consolidated Cash Flow Statement 15. Notes to the Financial Statements

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11.

MightY River Power Interim Report 31 December 2008

CONSOLIDATED INCOME STATEMENT For the six months ended 31 December 2008

UNAUDITED

UNAUDITED

AUDITED

6 Months

6 Months

12 Months

31 Dec 2008

31 Dec 2007

30 June 2008

Note

$000

$000

$000

Sales 741,343 Less line and metering charges (173,739) Other revenue 9,835 Total revenue 577,439

Energy costs 253,845 Other expenses

89,047 Total expenses 342,892

Earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF) 234,547

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

1,464,741 (307,303) 14,459 1,171,897

193,008 61,823 254,831

699,059 168,199 867,258

175,127

304,639

Depreciation and amortisation (51,783) Change in the fair value of financial instruments 8 (118,802) Impaired exploration expenditure 2 (10,101) Equity accounted earnings of associate companies 5 2,179

Earnings before net interest expense and income tax (EBIT) 56,040

Interest expense (17,062) Interest income

4,002 Net interest expense (13,060)

Profit before income tax 42,980

Income tax expense 3 (12,258) Net profit for the period 30,722

(39,581) 8,460 (10,789) 2,258

(86,525) (9,665) (28,059) 2,331

135,475

182,721

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

(26,543) 5,683 (20,860)

122,931

161,861

(39,948) 82,983

(50,910) 110,951

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

MightY River Power Interim Report 31 December 2008

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 31 December 2008

foreign

capital

CURRENCY asset cash flow

issued retained TRANSLATION revaluation earnings

$000

$000

hedge

total

RESERVE reserve reserve

equity

$000

$000

$000

$000

Balance as at 1 July 2007 (Audited) 377,561 550,525 0 777,915 4,492 1,710,493 Cash flow hedges gain/(loss) taken to equity, net of taxation Net income/(expense) recognised directly in equity

0 0

0 0

0 0

0 0

(8,224) (8,224)

(8,224) (8,224)

Profit for the period 0 82,983 0 0 0 82,983 Total recognised income and expenses for the period 0 82,983 0 0 (8,224) 74,759 Dividend 0 (56,200) 0 0 0 (56,200) Balance as at 31 December 2007 (Unaudited) 377,561 577,308 0 777,915 (3,732) 1,729,052

Balance as at 1 January 2008 (Unaudited) 377,561 577,308 0 777,915 (3,732) 1,729,052

Revaluation of hydro and co-generation assets, net of taxation 0 0 0 585,200 0 585,200 Equity accounted share of movements in associates’ reserves 0 0 0 0 (12,879) (12,879) Cash flow hedges gain/(loss) taken to equity, net of taxation 0 0 0 0 (75,119) (75,119) Impact of deferred tax rate change 0 0 0 0 3,428 3,428 Net income/(expense) recognised directly in equity 0 0 0 585,200 (84,570) 500,630

Profit for the period 0 27,968 0 0 0 27,968 Total recognised income and expenses for the period 0 27,968 0 585,200 (84,570) 528,598 Dividend 0 0 0 0 0 0 Balance as at 30 June 2008 (Audited) 377,561 605,276 0 1,363,115 (88,302) 2,257,650

Balance as at 1 July 2008 (Audited) 377,561 605,276 0 1,363,115 (88,302) 2,257,650

Equity accounted share of movements in associates’ reserves 0 0 0 0 6,848 6,848 Movements in foreign currency translation reserve 0 0 (38) 0 0 (38) Cash flow hedges gain/(loss) taken to equity, net of taxation 0 0 0 0 105,982 105,982 Net income/(expense) recognised directly in equity 0 0 (38) 0 112,830 112,792

Profit for the period 0 30,722 0 0 0 30,722 Total recognised income and expenses for the period 0 30,722 (38) 0 112,830 143,514 Dividend 0 (55,500) 0 0 0 (55,500) Balance as at 31 December 2008 (Unaudited) 377,561 580,498 (38) 1,363,115 24,528 2,345,664

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

13.

MightY River Power Interim Report 31 December 2008

CONSOLIDATED BALANCE SHEET As at 31 December 2008

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

Note

SHAREHOLDERS’ EQUITY

$000

2,345,664

$000

1,729,052

$000

2,257,650

ASSETS CURRENT ASSETS Cash and cash equivalents 110,642 18,211 34,049 Receivables and prepayments 173,239 131,279 290,670 Inventories 11,949 6,887 6,521 Derivative financial instruments 8 41,382 25,639 42,929 Taxation receivable 0 18,140 17,147 Total current assets 337,212 200,156 391,316 NON-CURRENT ASSETS Property, plant and equipment 4 3,585,414 2,613,981 3,498,704 Intangible assets 24,526 23,519 27,952 Investment and advances to associates 5 83,602 70,945 65,944 Derivative financial instruments 8 13,264 23,953 74,113 Other non-current assets 0 37 0 Total non-current assets

3,706,806 2,732,435 3,666,713 TOTAL ASSETS 4,044,018 2,932,591 4,058,029 LIABILITIES CURRENT LIABILITIES Payables and accruals 120,146 135,704 243,608 Provisions 6 1,620 1,502 1,582 Current portion loans 9 16,274 0 67,461 Derivative financial instruments 8 165,936 27,753 90,249 Taxation payable 43,200 0 0 Total current liabilities 347,176 164,959 402,900 NON-CURRENT LIABILITIES Derivative financial instruments 8 40,903 3,391 Loans 9 644,472 557,946 Deferred tax 7 665,803 477,243 Total non-current liabilities 1,351,178 1,038,580 TOTAL LIABILITIES 1,698,354 1,203,539 NET ASSETS

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

2,345,664

1,729,052

115,794 591,315 690,370 1,397,479 1,800,379 2,257,650

MightY River Power Interim Report 31 December 2008

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CONSOLIDATED CASH FLOW STATEMENT For the six months ended 31 December 2008

UNAUDITED

UNAUDITED

AUDITED

6 Months

6 Months

12 Months

31 Dec 2008

31 Dec 2007

30 June 2008

Note

$000

$000

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers/generation sales 721,019 455,576 Payments to suppliers and employees (477,447) (276,556) Interest received 3,355 2,155 Interest paid (23,992) (20,827) Taxes paid (21,900) (25,647) Net cash provided by operating activities 10 201,035 134,701

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (36,727) (161,911) Proceeds from sale of property, plant and equipment 166 84 Acquisition of associate (7,163) (23,214) Advances to associate 0 0 Advances to associates repaid 2,215 3,084 Acquisition of intangibles (687) (5,317) Acquisition of other non-current assets (25,746) 0 Proceeds from disposal of other non-current assets 0 38 Net cash used in investing activities (67,942) (187,236)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans 0 40,000 Repayment of loans (1,000) 0 Dividends paid (55,500) (56,200) Net cash (used in)/provided by financing activities (56,500) (16,200)

Net increase/(decrease) in cash and cash equivalents held 76,593 (68,735) Cash and cash equivalents at the beginning of the period 34,049 86,946 Cash and cash equivalents at the end of the period 110,642 18,211

Cash balance comprises: Cash 6,058 3,833 Short term deposits 104,584 14,378 Cash balance at the end of the year 110,642 18,211

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

$000

1,051,883 (761,155) 3,367 (44,626) (42,047) 207,422

(285,621) 296 (33,404) (35) 5,519 (14,938) (17,192) 75 (345,300)

141,181 0 (56,200) 84,981 (52,897) 86,946 34,049

9,257 24,792 34,049

15.

MightY River Power Interim Report 31 December 2008

notes to the financial statements For the six months ended 31 December 2008

NOTE 1. ACCOUNTING POLICIES 1) Reporting entity Mighty River Power Limited is a company incorporated in New Zealand, registered under the Companies Act 1993 and is a reporting entity for the purposes of the Financial Reporting Act 1993. The condensed consolidated interim NZ IFRS financial statements have been prepared in accordance with the Financial Reporting Act 1993 and the Companies Act 1993.

The condensed consolidated interim financial statements are for Mighty River Power Limited Group (the “Group”). The consolidated financial statements comprise the Company, its subsidiaries, associates and interests in jointly controlled assets.

Mighty River Power Limited is wholly owned by Her Majesty the Queen in Right of New Zealand (the “Crown”). Consequently, the Company is bound by the requirements of the State-Owned Enterprises Act 1986.

The liabilities of the Company are not guaranteed in any way by the Crown.

The Group’s principal activities are the production of electricity and the selling of energy and energy related services and products to retail and wholesale customers.

2) Basis of preparation (a) Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”) as applicable to interim financial statements and as appropriate to profit-oriented entities.

These condensed consolidated interim financial statements comply with NZ IAS 34 Interim Financial Reporting. These condensed consolidated interim financial statements do not include all the information and disclosures required in the annual financial statements, and should therefore be read in conjunction with the annual financial statements for the year ended 30 June 2008, which have been prepared in accordance with the New Zealand equivalents to International Financial Reporting Standards and comply with International Financial Reporting Standards. (b) Accounting policies The accounting policies and methods of computation are consistent with those of the annual financial statements for the year ended 30 June 2008, as described in those annual financial statements. (c) Estimates and judgements The preparation of interim financial statements in conformity with NZ IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and the

reported amounts of assets and liabilities, income and expenses.

Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below:

Generation plant and equipment The Group’s generation assets are stated at fair value by an independent valuer. The basis of the valuation is the net present value of the future earnings of the assets, excluding any reduction for costs associated with restoration and environmental rehabilitation. The major inputs and assumptions that are used in the valuation model that require judgement include forecast of the future electricity price path, sales volume forecasts, projected operational and capital expenditure profiles, capacity and life assumptions for each generation plant and discount rates.

Retail revenue Management has exercised judgement in determining estimated retail sales for unread gas and electricity meters at balance date.

Specifically this involves an estimate of consumption for each unread meter, based on the customer’s past consumption history.

The estimated balance is recorded in sales and as an accrual balance within receivables and prepayments.

Restoration and environmental rehabilitation Liabilities are estimated for the abandonment and site restoration of areas from which natural resources are extracted. Such estimates are valued at the present value of the expenditures expected to settle the obligation. Key assumptions have been made as to the expected expenditures to remediate based on the expected life of the assets employed on the sites and an appropriate discount rate.

Valuation of Financial instruments Energy contracts are valued by reference to the Group’s financial model for future electricity prices. Foreign exchange and interest rate derivatives are valued based on quoted market prices.

Detailed information about assumptions and risk factors relating to financial instruments and their valuation are included in the annual financial statements. (d) Functional and presentation currency These financial statements are presented in New Zealand Dollars ($), which is the Group’s functional currency. All financial information has been rounded to the nearest thousand. (e) Seasonality of operations The energy business operates in an environment that is

MightY River Power Interim Report 31 December 2008

notes to the financial statements For the six months ended 31 December 2008

dependent on weather as one of the key drivers of supply and demand. Fluctuations in seasonal weather patterns, particularly over the short term, can have a positive or negative effect on the reported result. It is not possible to consistently predict this seasonality and some variability is common. (f) Segment reporting A reportable segment is either a business segment or a geographical segment. The Group operates in one geographical segment being New Zealand.

A business segment is a distinguishable component of the entity that is engaged in providing an individual product or service, or group of products or services, that is subject to risks and returns that are different from those of other business segments and whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete financial information is available.

The Group operates as a vertically integrated energy business that participates in all aspects of the value chain to manage risk and maximise shareholder value as a whole. All parts of the value chain are interdependent on each other with a significant proportion of revenue and/or expenditure between the components being internal. Consequently there are no separately reportable segments.

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17.

MightY River Power Interim Report 31 December 2008

notes to the financial statements For the six months ended 31 December 2008

NOTE 2. IMPAIRED EXPLORATION EXPENDITURE

The Group is undertaking a gas exploration programme. Costs capitalised as property, plant and equipment which relate to exploration efforts that prove to be unsuccessful are expensed to the income statement as impaired exploration expenditure. Impaired exploration expenditure during the six months ended 31 December 2008 was $10.1m and related to the unsuccessful Kaheru and Kai Iwi wells in the gas exploration cash generating unit (31 December 2007:$10.8m, 30 June 2008:$28.1m).

NOTE 3. INCOME TAX EXPENSE

UNAUDITED

UNAUDITED

AUDITED

6 Months

6 Months

12 Months

31 Dec 2008

31 Dec 2007

30 June 2008

$000

Income tax expense Profit before tax 42,980 Prima facie income tax expense at 30% (33% for comparative periods) on profit before tax (12,894) Increase/(decrease) in income tax due to:

• effect of tax rate change on deferred tax 0 • share of associate’s tax paid earnings 654 • other permanent differences (149)

Over provision in prior period 131 Income tax expense attributable to profit from ordinary activities

(12,258)

Represented by:

Current tax expense (53,296) Deferred tax expense recognised in the income statement 41,038 Total

(12,258)

$000

$000

122,931 (40,567)

161,861 (53,414)

0 745 (126)

1,857 769 (268)

0 (39,948)

146 (50,910)

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

(75,086) 24,176 (50,910)

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

$000

$000

$000

Assets acquired at cost 144,979 135,549 238,834 Net book value of assets disposed 277 69 266 Gain/(loss) on disposal (111) 15 30

Realised gain/(losses) on foreign exchange contracts Realised foreign exchange gains of $98.7 million (31 December 2007: losses $55.7 million, 30 June 2008: losses $73.1 million) relating to hedge contracts supporting the development programme for which the underlying transaction has still to occur have temporarily been recognised in the cash flow hedge reserve. When the underlying transaction occurs these gains or losses will be transferred to capital work in progress.

MightY River Power Interim Report 31 December 2008

.18

notes to the financial statements For the six months ended 31 December 2008

NOTE 5. INVESTMENT AND ADVANCES TO ASSOCIATES

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

Balance at the beginning of the period

Additions during the year Equity accounted earnings Equity accounted share of movements in reserves Exchange differences Repayments during the year

Balance at the end of the period

$000

$000

$000

65,944

48,541

48,541

7,163 2,179 6,848 3,725 (2,257)

23,638 2,258 0 0 (3,492)

33,470 2,331 (12,879) 0 (5,519)

83,602

70,945

65,944

NOTE 6. PROVISIONS

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

Balance at the beginning of the period

Provisions made during the year Provisions used during the year Provisions reversed during the year Unwind of discount rate

Balance at the end of the period

$000

$000

$000

1,582

0

0

0 0 0 38

1,441 0 0 61

1,460 0 0 122

1,620

1,502

1,582

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

NOTE 7. DEFERRED TAX

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

$000

Balance at the beginning of the period (690,370) Current period changes in temporary differences affecting tax expense 41,038 Current period changes in temporary differences affecting reserves (16,471)

Effect of change in corporate tax rate on: • income tax expense 0 • asset revaluation reserve 0 • cash flow hedge reserve 0

Balance at the end of the period (665,803)

$000

$000

(476,320)

(476,320)

(2,137) 1,214

22,322 (234,798)

0 0 0

1,854 (79) (3,349)

(477,243)

(690,370)

19.

MightY River Power Interim Report 31 December 2008

notes to the financial statements For the six months ended 31 December 2008

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

CURRENT Interest rate derivative assets Electricity price derivative assets Foreign exchange rate derivative assets

Interest rate derivative liabilities Electricity price derivative liabilities Foreign exchange rate derivative liabilities

$000

$000

$000

32,093 6,267 3,022

19,400 4,455 1,784

14,734 27,628 567

41,382

25,639

42,929

149,523 2,285 14,128

6,510 1,569 19,674

10,382 73,356 6,511

165,936

27,753

90,249

NON-CURRENT Interest rate derivative assets 0 0 0 Electricity price derivative assets 13,264 23,953 74,113 Foreign exchange rate derivative assets 0 0 0

13,264 23,953 74,113

Interest rate derivative liabilities 0 0 0 Electricity price derivative liabilities 40,903 3,188 115,719 Foreign exchange rate derivative liabilities 0 203 75

40,903 3,391 115,794

Interest rate derivatives of (up to 10 years duration) and electricity price derivatives that are traded on the Energy Hedge market (up to 3 years duration), while economic hedges, are not designated as hedges under NZ IAS 39 but are treated as at fair value through the income statment. All other foreign exchange and electricity price derivatives are designated as cash flow hedges under NZ IAS 39.

The changes in fair values of derivative financial instruments recognised in the income statement and equity are summarised below:

income

income

income

statement statement statement Equity Equity Equity unaudited unaudited audited

Unaudited

Unaudited audited

6 months

6 months

12 months

6 months

6 months

12 months

31 dec 2008

31 dec 2007

30 June 2008

31 dec 2008

31 dec 2007

30 June 2008

$000

$000

$000

$000

$000

$000

Interest rate derivatives (121,390) 2,939 (6,468) 21 194 Electricity price derivatives 804 (35) 603 58,918 (6,787) Foreign exchange derivatives (32) 0 32 92,459 (5,651) Income tax on changes taken to equity 0 0 0 (45,419) 4,040

(120,618) 2,904 (5,833) 105,979 (8,204)

Ineffectiveness of cash flow hedges recognised in the income statement 1,816 5,556 (3,832)

927 (114,815) (276) 34,249 (79,915)

Fair value movements of derivative financial instruments recognised in the income statement are non cash movements.

MightY River Power Interim Report 31 December 2008

.20

notes to the financial statements For the six months ended 31 December 2008

NOTE 9. LOANS

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

$000

$000

$000

Current Non-current

16,274 644,472

0 557,946

67,461 591,315

660,746

557,946

658,776

During the six months to December 2008 a NZD denominated bank loan facility has been increased to $150 million (drawings under the facility have been increased to $100 million) with a revised maturity date of 6 December 2012.

The $51 million of drawings under the revolving advances facility have been repaid leaving an available but undrawn balance under the facility of $100 million.

NOTE 10. RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES

UNAUDITED UNAUDITED AUDITED

6 Months

6 Months

12 Months

31 Dec 2008

31 Dec 2007

30 June 2008

$000

$000

$000

Profit for the period 30,722 82,983

Items classified as investing/financing activities • Fixed, intangible and investment asset charges (7,704) (7,314) • Loan charges (651) 188

Non-cash items Depreciation and amortisation 51,783 39,581 Change in the fair value of financial instruments 118,802 (8,460) Impairment of exploration expenditure 10,101 10,789 Unwind of discount on long term provisions 38 61 Share of profits of equity accounted investees (2,179) (2,258) Other non-cash items 383 900

Net cash provided by operating activities before change in assets and liabilities 201,295 116,470

Change in assets and liabilities during the period: • Decrease/(increase) in trade receivables and prepayments 141,457 23,186 • Increase in inventories (5,428) (2,221) • (Decrease)/increase in trade payables and accruals (126,650) (17,040) • Increase in provision for taxation 60,347 12,253 • (Decrease)/increase in deferred taxation (69,986) 2,053

Net cash inflow from operating activities 201,035 134,701

110,951

(20,029) (52)

86,525 9,665 28,059 122 (2,331) (87) 212,823

(117,289) (1,855) 105,915 10,331 (2,503) 207,422

21.

MightY River Power Interim Report 31 December 2008

notes to the financial statements For the six months ended 31 December 2008

NOTE 11. COMMITMENTS AND CONTINGENCIES

Commitments

UNAUDITED

UNAUDITED

AUDITED

31 Dec 2008

31 Dec 2007

30 June 2008

$000

Commitments for future capital expenditure 140,837 Commitments for future operating expenditure 34,070

Contingencies The Group has no material contingent assets or liabilities

$000

41,241 16,576

$000

297,668 17,092

NOTE 12. SUBSEQUENT EVENTS There have been no material events subsequent to 31 December 2008.

MightY River Power Interim Report 31 December 2008

.22

directory

Directors Carole Durbin (Chair) BCom, LLB (Hons), FlnstD, FAMINZ

Company Secretary Tony Nagel LLB, MComLaw (Hons)

John Baird (Deputy Chair) BSc, BA, MA (Hons), Rhodes Scholar, Dip Marketing (UK)

Registered Office Level 14, 23-29 Albert Street, Auckland Telephone 09 308 8200 Facsimile 09 308 8209 Email enquiries@mightyriver.co.nz Website www.mightyriverpower.co.nz

Diana Crossan BA Dr Graham Hill PhD, MA, BSc Trevor Janes BCA (Econ), CA Sandy Maier JD, BA Neil Ranford Dip Tchg, BSc, BE (Hons) Sir Paul Reeves ONZ, GCMG, GCVO, QSO, KST.J, MA, LTh Tania Simpson BA, MMM

Executive Management Doug Heffernan (Chief Executive) BE (Hons), ME, PhD, FIPENZ John Foote (General Manager Development) BSc, BE (Civil) Dan Hoyer (General Manager Geothermal) PhD, MS, BS Olwen Hyslop (Group Human Resource Manager) BSc (Hons), MBA William Meek (Chief Financial Officer) BCom (Hons) James Munro (General Manager Consumer Markets) Fraser Whineray (General Manager Generation) BE CHEM (Hons), MBA (Cambridge), GRADDIP DY.SCI.TECH (Distinction) Neil Williams (Group Strategist & Acting Investment Manager) BA

Auditor The Auditor-General pursuant to section 14 of the Public Audit Act 2001.

Warren Allen of Ernst & Young was appointed to perform the audit on behalf of the Auditor-General.

Solicitors Chapman Tripp Bell Gully Bankers ANZ National Bank ASB Bank Kiwibank Bank of Tokyo Mitsubishi Bank of New Zealand

Mighty River Power LimITed INTERIM Report 31 December 2008