interim report 2008

MIGHTY RIVER POWER LIMITED

31 DECEMBER 2007

INTERIM REPORT

< Paul Ware – Mighty River Power Kawerau Project Manager; Malcolm Campbell – Kawerau Mayor and Stuart Lush

– Mighty River Power Generation Development Manager at the ever-developing Kawerau Site.

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

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

For the six months ended 31 December 2007

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007 .3

Earnings before Interest, Tax, Depreciation, Amortisation and Financial Instruments (EBITDAF) FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

Profit for the Period FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

Operating Cash Flow FOR THE SIX MONTHS TO 31 DECEMBER

($Million)

2007

2005*

2004*

2003*

2006

2007

2005*

2004*

2003*

2006

2007

2005*

2004*

2003*

2006

Total Equity/Total Assets FOR THE SIX MONTHS TO 31 DECEMBER

(%)

175.1

148.1

163.5

118.5

179.4

83.0

54.0

77.3

51.4

37.9

134.7

121.3

123.6

81.6

154.3

58.7

76.8

61.3

62.0

57.0

THE PERIOD IN REVIEW

2007

2005*

2004*

2003*

2006

Net Debt / Net Debt + Equity FOR THE SIX MONTHS TO 31 DECEMBER

(%)

23.9

17.4

32.3

30.1

19.3

2007

2005*

2004*

2003*

2006

* 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.

CHAIR AND CHIEF EXECUTIVE REPORT

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

Our Generation Portfolio –

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

Geothermal generation is unique in that it provides constant renewable energy and is not subject to changes in rainfall and wind like hydro or wind power. It is therefore a major contributor to energy security and will play an increasing role in mitigating the impact of weather related risk of hydro and wind generation.

Geothermal exploration, development and operation is a specialised field requiring a critical mass of technical and management capabilities to ensure world-class performance and to manage the significant risks in geothermal development. Mighty River Power has invested to acquire this specialist capability. We are now looking at how to ensure our capability can best be utilised in the future development of geothermal, both within New Zealand and potentially offshore.

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

Mighty River Power’s development plans involve 500MW of geothermal generation by 2012. Kawerau is the first of these major new developments that are expected to be completed over the next few years.

Key achievements during the six months to 31 December 2007 are as follows:

RotokawaIn conjunction with our joint venture partner, Tauhara North No. 2 Trust, we secured all the required consents for a further 130MW geothermal development of the Rotokawa geothermal field. This $450million new development will be built close to the existing Rotokawa geothermal power station and will connect into existing 220kV transmission lines directly over the field. The plant is expected to generate an average of 1100GWh annually.

4. MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007

On behalf of the Board and management we are pleased to report on Mighty River Power’s performance for the six months to 31 December 2007.

Total Generation Volumes FOR THE SIX MONTHS TO 31 DECEMBER 2007

(GWh)

��

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HYDRO 2109GWh

GEOTHERMAL* 623GWh

CO-GENERATION 407GWh

BIOENERGY* 28GWh

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

MokaiWe completed negotiations with Contact Energy and the Tuaropaki Trust that led to the Trust acquiring 1200ha of land that Contact Energy owned and which lies over some of the existing Mokai geothermal resource, north of Lake Taupo. Through our 25% ownership of the Tuaropaki Power Company, we are working with the Trust on options to develop this resource and to expand the Mokai power station by a further 50-60MW beyond its existing 112MW capacity.

KawerauConstruction of our 90MW, $300million geothermal power station is on track for completion in late 2008. The Kawerau geothermal power station will significantly increase generation capacity in the Bay of Plenty, meeting approximately one-third of residential and industrial demand in the region and providing important economic benefits for the Kawerau region through increased industry and employment confidence.

Nga TamarikiMighty River Power has been granted the majority of consents for the Nga Tamariki geothermal field. We anticipate commencing exploration drilling during 2008. The project is expected to be completed by 2012 with construction of a nominal 80MW geothermal power station.

Trading ConditionsThe dry summer has once again highlighted New Zealand’s reliance on hydro energy. On average, approximately 60% of New Zealand’s annual electricity production is hydro based. During dry periods the electricity system’s reliance on thermal back-up increases significantly.

In the period under review, trading conditions were typified by good hydro inflows in the winter followed by very dry conditions from late spring.

To compensate, we increased production at Southdown significantly over the period and reduced hydro production by 9.5%, compared to the previous comparative period. This allowed us to build storage in Lake Taupo prior to what has been an extreme drought in the Waikato during summer, resulting in a rapid decline in storage levels in the current period.

HydroHydro remains a very significant resource for New Zealand and Mighty River Power.

Hydro generation figures in the last six months were 2,109GWh (compared to 2,329GWh in the previous comparative period), 67% of Mighty River Power’s total generation.

There is increasing demand on water resources around the country. Ongoing access to existing hydro generation is crucial for New Zealand’s electricity security and renewable objectives. The environmental regulator for the Waikato hydro system catchment, Environment Waikato, is currently working through a new water allocation plan. Mighty River Power is actively participating in this process to ensure that the Waikato hydro system continues to make its crucial contribution to New Zealand’s growing electricity needs.

The $20million Arapuni Dam restoration project attracted international interest, as it was the first time a technique of drilling a series of intersecting pile walls was used while the dam remained full and operational, in order to fix historic water seepage under the dam. The project, which repaired fissures in the rock underlying the dam that had existed since its commissioning in 1929, was successfully completed in October and achieved an international first. The technically challenging project was also awarded the Shell Environmental Excellence merit award at the New Zealand Contractors Federation 2007 annual conference which recognised the efforts taken to minimise the environmental impact of the work.

Co-generation The Southdown expansion by 45MW to 170MW in early 2007 has proven to be timely, with the plant operating at full load from October to January to compensate for the poor hydro inflows and calm conditions that have caused very low wind generation at times of daily peak demands.

In the period under review, Mighty River Power made exhaust duct modifications to one of the three gas turbines, which is expected to provide a 2% efficiency gain.

Production at Southdown for the period totalled 407GWh (compared to 188GWh in the previous comparative period), 13% of Mighty River Power’s total generation. Our bio-energy sites contributed 1% of our total generation (28GWh).


WindWind in New Zealand is a world-class renewable resource that is complementary to hydro. We have continued to monitor a number of high quality sites, and are working on securing further access to potential sites. We are also investigating the potential for working with New Zealand Windfarms to facilitate the fast track development of smaller wind farms possibly using New Zealand turbines.

Customer ServiceIn January 2008, Mercury Energy began installation of a new prepay metering solution. The new Smart Meters will provide our prepay customers with the benefits available from the latest metering technology. The new service is easier and more convenient than the previously contracted technology. Prepay customers will have more places and ways in which they can pay, and facilities are available for customers who need to use their meter to pay off existing debt.

In July 2007, Mercury Energy achieved full compliance with the Electricity Commission’s revised guidelines for Vulnerable Customers. The business changes implemented by Mercury Energy mean that in some instances we exceed the Guidelines.

For the fourth year in a row, Mercury Energy’s contact centre has been recognised for its high level of customer service at the Customer Relationship Management Awards, winning the Gold Award for the best contact centre with over 50 seats.

Mercury Energy achieved a milestone of 30,000 gas customers during the six month period, and maintained its electricity customer base at just under 340,000.

Community Through our many community initiatives, iwi and environmental partnerships, we continue to demonstrate our long term commitment to the communities in which we operate and where our people live and work. The principles of Corporate Social Responsibility are well embedded into our company’s values.

Our sponsorship portfolio is focussed on support for community projects and activities.

The Waikato River is at the heart of Mighty River Power hydro assets and we are extremely proud to be principal sponsor of a Waikato Museum exhibition which opened in late October 2007. The exhibition titled: The Mighty River Waikato: from Hinaki to Hydropower, shows how much this extraordinary river has and continues to contribute, its history, the wildlife it supports and the impact of humans. There were approximately 2,000 visitors to the exhibition in its first two months.

The Waikato River Trails Trust completed another 10km of the Atiamuri trail in December. This follows on from the opening in June of the Snowsill and Dunham Creek trails. The new section takes the track 16km along Lake Whakamaru.

In December, the Maungatautari Trust celebrated a major milestone with a kiwi chick hatching at Maungatautari reserve for the first time in over a century. We are glad to be part of such success on the ecological island which was created only five years ago.

Mighty River Power is proud to have assisted Rowing New Zealand to win the rights to host the 2010 World Rowing Championships, bringing the World Championships back to New Zealand for the first time in 32 years. We look forward to 2010 being another success.

As sponsors of Rowing New Zealand’s High Performance Centre and Programme, we would like to congratulate Mahe Drysdale, Emma Twigg and the Men’s Coxless Four for winning the Sportsman of the Year, the Emerging Talent and the Sports Team of the Year, respectively, at the 2007 Halberg Awards. All these athletes and most of the current world champions have graduated through the High Performance Centre and Programme.

Mighty River Power sponsored the Junior Maori Sportsman of the Year award at the national Maori Sports Awards for the fifth consecutive year. The 2007 recipient was Hawke’s Bay Rugby player Zac Guilford.

Financial SummaryThe period’s accounts are the first prepared under the new International Financial Reporting Standards (NZ IFRS). A detailed reconciliation of the movements between NZ IFRS and old GAAP has been provided in the notes to the financial statements.

Due to changes in the application of accounting policy in relation to exchange derivatives, comparison with the previous comparative six months is not meaningful.


Doug HeffernanChief Executive

Carole Durbin Chair


The most meaningful comparison is provided at the earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF). EBITDAF in the period under review was $175.1million, down 2.4% on the previous comparative period. The primary reason for this reduction is the decline in hydro production, and the increased gas use at Southdown.

Our generation development work ramped up with $162million spent on capital projects in the six month period compared to $166million in the full year to June 2007.

A reassessment of the useful life of our hydro assets has been undertaken resulting in an extension in life. This has had the impact of reducing the depreciation charge by $7.3million with a full year accounting benefit expected of $14.5million.

Mighty River Power’s after tax profit was $83million, compared to $38million in the previous comparative period.

The FutureNew Zealand, like many other countries enjoying economic prosperity, is facing significant growth in energy demand. Finding the energy needed to power the economy, while building a sustainable energy future is a challenge shared by the industry and the Government as outlined in the New Zealand Energy Strategy of October 2007.

The extremely dry summer has resulted in lower than normal hydro storage levels for late summer. Whilst it is too early to have a firm view on the supply situation over the coming winter, it is clear that in the absence of significant rainfall in the main hydro catchments meeting winter electricity demands will be challenging.

We will continue to operate all our plants prudently, so as to make the maximum contribution possible to the country’s electricity needs.

Mighty River Power has achieved some significant milestones in the last six months in implementing strategies that have previously been put in place, in some cases up to a decade ago. We are confident that our existing generation portfolio and our geothermal development programme put us in a strong position to help meet the challenge.


ENERGY GROSS MARGIN ANALYSISFor the six months ended 31 December 2007

HALF YEAR ENDED HALF YEAR ENDED

31 DECEMBER 2007 31 DECEMBER 2006

RETAIL1 WHOLESALE2 RETAIL1 WHOLESALE2

$000 $000 $000 $000

REVENUEGross revenue 403.1 153.9 378.6 155.2Less Transmission and distribution costs 164.9 - 154.5 -Net revenue 238.1 153.9 224.1 155.2

COSTSEnergy purchases (158.6) (23.7) (148.2) (12.3)Other (direct costs)/income 16.4 (5.2) 17.6 (9.2)

Energy gross margin 95.93 125.0 93.53 133.7

Generation volumes (GWh)4 - 2,659.3 - 2,695.3Total fixed price variable volumes sales (GWh)5 2,064.3 - 2,063.7 -Average wholesale electricity price ($MWh) - 51.7 - 53.9Average fixed price variable volume price ($MWh) 98.7 - 97.2 -

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

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

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

4. Generation volumes exclude accounted volumes.

5. Does not include volumes associated with electricity financial derivatives.

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


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

10. Consolidated Income Statement

11. Consolidated Statement of Changes in Equity

12. Consolidated Balance Sheet

13. Consolidated Cash Flow Statement

14. Notes to the Financial Statements


CONSOLIDATED INCOME STATEMENTFor the six months ended 31 December 2007

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


UNAUDITED UNAUDITED UNAUDITED

6 MONTHS 6 MONTHS 12 MONTHS

31 DEC 2007 31 DEC 2006 30 JUNE 2007

Note $000 $000 $000

Sales 578,399 539,263 1,048,377Less line and metering charges (155,391) (145,447) (280,921)Other revenue 6,950 6,269 12,569Total revenue 429,958 400,085 780,025

Energy costs 193,008 158,445 336,536Other operating expenses 61,823 62,230 128,024Total operating expenses 254,831 220,675 464,560

Earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF) 175,127 179,410 315,465

Depreciation and amortisation (39,757) (44,190) (84,948)Change in the fair value of financial instruments 8 8,636 (65,744) (61,056)Impaired exploration expenditure 2 (10,789) 0 (19,607)Equity accounted earnings of associate companies 5 2,258 2,132 3,879

Earnings before net interest expense and income tax (EBIT) 135,475 71,608 153,733

Interest expense (15,331) (19,342) (35,248)Interest income 2,787 3,435 8,864Net interest expense (12,544) (15,907) (26,384)

Profit before income tax 122,931 55,701 127,349

Income tax expense 3 (39,948) (17,803) (29,546)Profit for the period 82,983 37,898 97,803

MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2007 .11


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

UNAUDITED

ASSET CASH FLOW

ISSUED RETAINED REAVALUATION HEDGE TOTAL

CAPITAL EARNINGS RESERVE RESERVE EQUITY

$000 $000 $000 $000 $000

Balance as at 1 July 2006 377,561 506,532 725,364 40,361 1,649,818

Cash flow hedges gain/ (loss) taken to equity, net of taxation 0 0 0 (11,729) (11,729)Net income/ (expense) recognised directly in equity 0 0 0 (11,729) (11,729)

Total recognised income and expenses for the period 0 37,898 0 (11,729) 26,169 Dividend 0 (50,400) 0 0 (50,400)Balance as at 31 December 2006 377,561 494,030 725,364 28,632 1,625,587 Balance as at 1 January 2007 377,561 494,030 725,364 28,632 1,625,587 Fair value revaluation of office land and buildings 0 0 1,786 0 1,786 Cash flow hedges gain/ (loss) taken to equity, net of taxation 0 0 0 (25,345) (25,345)Impact of deferred tax rate change 0 0 32,308 147 32,455 Net income/ (expense) recognised directly in equity 0 0 34,094 (25,198) 8,896 Profit for the period 0 59,905 0 0 59,905 Release of asset revaluation reserve for assets taken out of service, net of taxation 0 565 (565) 0 0 Total recognised income and expenses for the period 0 60,470 33,529 (25,198) 68,801 Dividend 0 0 0 0 0 Balance as at 30 June 2007 377,561 554,500 758,893 3,434 1,694,388 Balance as at 1 July 2007 377,561 554,500 758,893 3,434 1,694,388 Cash flow hedges gain/ (loss) taken to equity, net of taxation 0 0 0 (8,224) (8,224) Net income/ (expense) recognised directly in equity 0 0 0 (8,224) (8,224) Profit for the period 0 82,983 0 0 82,983 Total recognised income and expenses for the period 0 82,983 0 (8,224) 74,759 Dividend 0 (56,200) 0 0 (56,200) Balance as at 31 December 2007 377,561 581,283 758,893 (4,790) 1,712,947


CONSOLIDATED BALANCE SHEETAs at 31 December 2007



31 DEC 2007 31 DEC 2006 30 JUNE 2007

Note $000 $000 $000

SHAREHOLDERS’ EQUITY 1,712,947 1,625,587 1,694,388

ASSETSCURRENT ASSETSCash and cash equivalents 3,833 140,232 17,038Short term deposits 14,378 3,014 69,908Receivables and prepayments 131,279 120,325 154,464Inventories 6,887 4,721 4,666Derivative financial instruments 8 25,639 17,038 22,024Taxation receivable 18,140 0 27,478Total current assets 200,156 285,330 295,578

NON-CURRENT ASSETS Property, plant and equipment 4 2,613,981 2,492,474 2,527,051Intangible assets 23,519 12,435 21,638Investment and advances to associates 5 54,840 31,505 32,436Derivative financial instruments 8 23,953 30,855 31,085Other non-current assets 37 75 75Total non-current assets 2,716,330 2,567,344 2,612,285Total assets 2,916,486 2,852,674 2,907,863

LIABILITIES CURRENT LIABILITIES Payables and accruals 135,704 89,770 133,594Provisions 7 1,502 0 0Derivative financial instruments 8 27,753 61,083 78,984Taxation payable 0 14,995 0Total current liabilities 164,959 165,848 212,578 NON-CURRENT LIABILITIES Derivative financial instruments 8 3,391 10,862 7,694Energy contracts 0 1,204 0Loans 557,946 533,117 516,883Deferred taxation 6 477,243 516,056 476,320Total non-current liabilities 1,038,580 1,061,239 1,000,897Total liabilities 1,203,539 1,227,087 1,213,475

NET ASSETS 1,712,947 1,625,587 1,694,388



CONSOLIDATED CASH FLOW STATEMENTFor the six months ended 31 December 2007



31 DEC 2007 31 DEC 2006 30 JUNE 2007

Note $000 $000 $000

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 455,576 446,751 788,932 Payments to suppliers and employees (276,556) (259,121) (468,993)Interest received 2,155 3,435 7,655 Interest paid (20,827) (18,209) (36,094)Taxes paid (25,647) (18,545) (67,555)Net cash provided by operating activities 9 134,701 154,311 223,945 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (161,911) (60,144) (166,483)Proceeds from sale of property, plant and equipment 84 41 5,751 Acquisition of associate (23,214) 0 (300)Advances to associates repaid 3,084 1,935 3,061 Acquisition of intangibles (5,317) (2,818) (12,295)Proceeds from disposal of other non-current assets 38 0 0 Net cash used in investing activities (187,236) (60,986) (170,266) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans 40,000 95,957 300,000 Repayment of loans 0 0 (220,697)Dividends paid (56,200) (50,400) (50,400)Net cash (used in) / provided by financing activities (16,200) 45,557 28,903 Net (decrease)/increase in cash and cash equivalents held (68,735) 138,882 82,582 Cash and cash equivalents at the beginning of the period 86,946 4,364 4,364 Cash and cash equivalents at the end of the period 18,211 143,246 86,946 Cash balance comprises: Cash 3,833 140,232 17,038 Short term deposits 14,378 3,014 69,908 Cash balance at the end of the year 18,211 143,246 86,946



NOTE 1. ACCOUNTING POLICIES1) Reporting entityMighty River Power Limited is a company incorporated in New Zealand, registered under the Companies Act 1993 and is a reporting entity for the purposes of the Financial Reporting Act 1993. The condensed consolidated interim NZ IFRS financial statements have been prepared in accordance with the Financial Reporting Act 1993 and the Companies Act 1993.

The condensed consolidated interim NZ IFRS financial statements are for Mighty River Power Limited Group (the

“Group”). The consolidated NZ IFRS financial statements comprise the Company, its subsidiaries, associates and interests in jointly controlled assets.

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

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

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

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

These condensed consolidated interim financial statements comply with NZ IAS 34 Interim Financial Reporting. These are the Group’s first NZ IFRS condensed consolidated interim financial statements for part of the period covered by the first NZ IFRS annual financial statements and NZ IFRS 1 First Time Adoption of NZ IFRS have been applied. These condensed consolidated interim financial statements do not include all of the disclosures required for full annual financial statements.

These condensed consolidated interim financial statements have been prepared on the basis of NZ IFRS in issue that are effective or available for early adoption at the Group’s first NZ IFRS annual reporting date, 30 June 2008.

The NZ IFRS that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 30 June 2008 are still subject to change and to the issue of additional interpretation(s) and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined only when the first NZ IFRS annual financial statements are prepared at 30 June 2008.

The preparation of the condensed consolidated interim financial statements in accordance with NZ IAS 34 resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under previous GAAP. The accounting policies set out below have been applied consistently to all periods presented in these condensed consolidated interim financial statements. They have also been applied in preparing an opening NZ IFRS balance sheet at 1 July 2006 for the purposes of the transition to NZ IFRS, as required by NZ IFRS 1.

An explanation of how the transition to NZ IFRS has affected the reported financial position and financial performance of the Group is provided in note 11. This note includes reconciliations of equity and profit for comparative periods reported under NZ GAAP (previous NZ FRS) to those reported for those periods under NZ IFRS.

(b) Basis of measurementThe NZ IFRS financial statements are prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified, as noted below.

(c) Estimates and judgementsThe 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:

NOTES TO THE FINANCIAL STATEMENTSFor the six months ended 31 December 2007


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

During the six months ended 31 December 2007 management reassessed its estimates of the remaining useful life of its hydro generation assets (see note 4).

Retail revenueManagement has exercised judgement in determining estimated retail sales for unread gas and electricity meters at balance date. Specifically this involves an estimate of consumption for each unread meter, based on the customers past consumption history.

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

Financial instrumentsEnergy contracts are valued by reference to the Group’s financial model for future electricity prices. Detailed information about assumptions and risk factors relating to financial instruments and their valuation are included in the annual financial statements.

(d) Functional and presentation currencyThese 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 operationsThe energy business operates in an environment that is dependent on weather as one of the key drivers of supply and demand. Fluctuations in seasonal weather patterns, particularly over the short term, can have a positive or negative effect on the reported result. It is not possible to consistently predict this seasonality and some variability is common.

(3) Significant accounting policies(a) Basis of consolidationSubsidiariesSubsidiaries are those entities in which the Group holds a controlling interest either directly, indirectly or beneficially in the equity. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of the acquisition is measured as the fair value of the assets given, equity instruments, issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised in the income statement.

All material inter-company transactions, balances and unrealised surpluses and deficits arising from transactions between Group companies are eliminated on consolidation.

AssociatesAssociates are those entities in which the Company holds an equity interest and over which the Company has the capacity to significantly affect but not unilaterally determine the operating and/or financial policy decisions. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investments in associates includes goodwill identified on acquisition.

The Group’s share of its associates’ post acquisition profits or losses is recognised in the income statement, and its share of post acquisition movements in reserves is recognised in reserves. The cumulative post acquisition movements are adjusted against the carrying amount of the investment.

Provision is made for any impairment in the value of investments in associates where the estimated recoverable amount is less than the carrying value.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.



Jointly controlled assetsJointly controlled assets are joint arrangements in which the Group jointly controls or owns one or more assets and is consequently entitled to a share of the future economic benefit through its share of the jointly controlled asset. The Group’s interests in jointly controlled assets are accounted for by recognising its share of the jointly controlled assets, liabilities incurred jointly, income and expenses in the consolidated financial statements.

Where an entity becomes or ceases to be a Group entity during the year, the results of that entity are included in the net surplus of the Group from the date of acquisition or up to the date of disposal.

(b) Property, plant and equipmentOwned assetsGeneration assets, which include freehold land and buildings and generation plant, are measured at fair value based on periodical valuations by third party valuation experts, less accumulated depreciation and less any impairment recognised after the date of the revaluation. The underlying assumptions are reviewed for reasonableness on an annual basis to ensure that recorded value is not materially different to fair value.

Costs incurred in obtaining a resource consent are capitalised and recognised as a non-current asset where it is probable they will give rise to future economic benefit. These costs are amortised over the life of the consent on a straight-line basis.

Office land and buildings are measured at fair value based on periodical valuations as determined by third party valuation experts, less accumulated depreciation on buildings and less any impairment losses since the last revaluation.

Any surplus on revaluation of an individual item of property, plant and equipment is transferred directly to the asset revaluation reserve unless it offsets a previous decrease in value recognised in the income statement, in which case it is recognised in the income statement. A deficit on revaluation of an individual item of property, plant and equipment is recognised in the income statement in the period it arises where it exceeds any surplus previously transferred to the asset revaluation reserve. Any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Additions to property, plant and equipment stated at valuation subsequent to the most recent valuation are recorded at cost.

All other items of property, plant and equipment are recorded at cost.

The cost of property, plant and equipment purchased comprises the consideration given to acquire the assets plus other directly attributable costs incurred in bringing the assets to the location and condition necessary for their intended service.

The cost of property, plant and equipment constructed by the Group, including capital work in progress, includes the cost of all materials used in construction, direct labour specifically associated and an appropriate proportion of variable and fixed overheads. Financing costs attributable to a project are capitalised at the Group’s specific project finance interest rate, where these meet certain time and monetary materiality limits. Costs cease to be capitalised as soon as an asset is ready for productive use.

Where appropriate, the cost of property, plant and equipment includes site preparation costs, installation costs, and the cost of obtaining resource consents.

Provision is made for any impairment in the value of property, plant and equipment where the estimated recoverable amount is less than the carrying value.

Where property, plant and equipment is disposed of, the surplus or deficit recognised in the income statement is calculated as the difference between the sale price and the carrying value of the property, plant and equipment.

Development of exploration assetsDevelopment costs of successful efforts are capitalised and amortised on a units of production basis over the estimated life of the field commencing from the first year of commercial production. Any subsequent impairment in the value of unamortised development costs is charged to the income statement

Leased assetsThe Group leases certain items of property, plant and equipment.

Leases under which the Group assumes substantially all the risks and rewards incidental to ownership are classified as finance leases and are capitalised. The asset and corresponding liability are recorded at the inception of the lease at the fair value of the leased asset, or if lower, at the present value of the minimum lease payments.



Finance charges are apportioned on a yield to maturity basis over the terms of the respective leases.

The cost of improvements to leasehold property is capitalised and amortised over the estimated useful life of the improvements, or over the unexpired portion of the lease, whichever is shorter.

Capitalised leased assets are depreciated over the shorter of their estimated useful lives or the lease term.

DepreciationDepreciation is provided on a straight-line basis on all property, plant and equipment other than freehold land, capital work in progress and exploration and evaluation assets, so as to write down the assets to their estimated residual value over their expected useful lives.

The annual depreciation rates are as follows: Office land and buildings 1-2%Generation assets: • Hydro 1-15% • Geothermal 5-8% • Co-generation 7-11% • Landfill 5-10%Meters 5-10%Computer hardware and tangible software 20-33%Other plant and equipment 10-33%Motor vehicles 20%

Distinction between capital and revenue expenditureCapital expenditure is defined as all expenditure on the purchase or creation of a new asset, and any expenditure that results in a significant improvement to the original functionality of an existing asset.

Revenue expenditure is defined as expenditure that restores an asset to its original operating capability and all expenditure incurred in maintaining and operating the business.

(c) Exploration and evaluation expenditureExploration and evaluation expenditure incurred by the Group is accounted for using the successful effort method.

Exploration expenditure, which includes geological, geochemical and geophysical costs, is recognised in the income statement in the period incurred except where future benefits are expected to exceed such expenditure.

Land access rights for exploration activities are amortised over the life of the right.

Exploratory drilling costs are initially deferred and are subject to regular review to confirm the ability to develop or otherwise extract value from expenditure. If an exploratory field is appraised as unsuccessful, such costs are charged to the income statement.

(d) Rehabilitation costsEstimations are made for the expected cost of environmental rehabilitation of commercial sites that require some level of reinstatement resulting from present operations. Any liability is recognised when exposure is identified and rehabilitation costs can be reasonably estimated.

(e) InsuranceThe Group’s property, plant and equipment is predominantly concentrated at power station locations which have the potential to sustain major losses through damage to plant and resultant consequential costs.

To minimise the financial impact of such exposures, the major portion of the assessed risk is transferred to insurance companies by taking out insurance policies with appropriate counterparties. Any uninsured loss is expensed to the income statement in the year in which the loss is incurred.

(f) Intangible assetsGoodwillGoodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment.

SoftwareAcquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives.

(g) ImpairmentAssets that have an indefinite useful life, for example land, are not subject to amortisation and are tested annually for impairment. Other assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Evaluation and exploration assets are assessed for impairment when there is an indicator that the carrying amount of the asset may exceed its recoverable amount.



An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash generating units).

Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have been reversed.

(h) InventoriesInventories are stated at the lower of cost or net realisable value. Cost is determined on a weighted average basis and includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location.

(i) Cashflow statementThe following are the definitions of the terms used in the cash flow statement.

• Cash includes cash on hand and bank current accounts.• Investing activities are those activities relating to the

acquisition, holding and disposal of property, plant and equipment and of investments. Investments can include securities not falling within the definition of cash.

• Financing activities are those activities that result in changes in the size and composition of the equity structure of the Group. This includes both equity and debt not falling within the definition of cash. Dividends paid in relation to equity structure are included in financing activities.

• Operating activities include all transactions and other events that are not investing or financing activities.

The cash flow statement includes net cash flows from loan advances as the rollover of loans and deposits is covered by an arranged finance facility.

(j) Financial instrumentsFinancial instruments are recognised in the financial statements when the Group has become party to the contract. They include cash balances, receivables, payables, investments and loans. In addition members of the Group are party to financial instruments to meet future financing needs and to reduce exposure to fluctuations in foreign currency exchange rates and energy prices. These financial instruments include cross-guarantees of related entities guaranteed indebtedness, swaps, options, foreign currency forward exchange contracts and energy contracts.

Receivables and payablesReceivables and payables are initially recorded at fair value and subsequently carried at amortised cost using the effective interest method, less (in the case of trade receivables) any provision for impairment (doubtful debts). A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables.

InvestmentsThe Group classifies its investments in the following categories: financial assets held at fair value through the income statement, held to maturity investments and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the initial classification of its investments at initial recognition.

Realised and unrealised gains and losses on investments classified as financial assets at fair value through the income statement are included in the income statement in the period in which they arise. Investments classified as available for sale are held at fair value and unrealised gains and losses are recognised in equity. Held to maturity investments are carried at amortised cost.

DebtLoans are initially recorded at fair value net of transaction costs incurred. Loans are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the loan using the effective interest method.

Foreign exchange and interest rate derivativesThe Group enters various financial instruments for the purpose of reducing its exposure to fluctuations in interest rates and foreign exchange rates.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to fair value. The method of recognising the resulting gain or loss depends on whether the derivative is recognised as a hedging instrument, and if so, the type of hedge. The Group designates certain derivatives as either: a) hedges of the fair value of recognised assets and liabilities or a firm commitment (fair value hedge); or b) hedges of highly probable forecast transactions or variable interest cash flows on recognised liabilities (cash flow hedge).



Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Ineffectiveness arises where the movement in the fair value of the derivative instrument does not perfectly offset the movement in the fair value or cash flows of the hedged item.

Amounts included in equity are reallocated to the income statement in the periods when the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a liability, the gains and losses previously deferred in equity are transferred and included in the initial measurement of the asset or liability.

Any gains or losses on derivatives that do not qualify for hedge accounting are recognised immediately in the income statement.

Energy contractsThe Group has entered into a number of contracts to manage its exposure to price fluctuations on the electricity spot market. These contracts are in the form of power supply agreements, contracts for difference, and option based instruments. They are not undertaken for speculative purposes. These energy contracts establish the price at which future specified quantities of electricity are purchased, sold or otherwise exchanged.

Energy contracts are a form of derivative and are accounted for on the same basis as other derivatives described above.

The fair value of energy contracts is based on the net present value of anticipated cash flows from each contract.

Energy contracts are entered into at no cost however their fair value for NZ IFRS purposes is derived using a forward curve that is not the same as that used to set the strike price and therefore a valuation difference arises at inception. To eliminate this valuation difference at inception the forward curve used to ascertain fair value is adjusted by a constant dollar amount to return the initial fair value to nil. This dollar adjustment is then applied to the valuation price path for each subsequent valuation period over the life of the energy contract.

(k) Foreign currenciesTransactions in foreign currencies are recognised in the functional currency of the relevant operating unit.

Foreign currency transactions are translated to the functional currency using the spot rate at that transaction date. At balance date monetary assets and liabilities denominated in foreign currencies are translated at the closing rate. Exchange variations arising from these translations and the settlement of these items are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges.

The assets and liabilities of independent foreign operations, whose functional currency is not the New Zealand dollar, are translated at the exchange rates ruling at balance date. Revenue and expense items are translated at the spot rate at the transaction date or a rate approximating that rate. Exchange differences are taken to the foreign currency translation reserve.

(l) Employee entitlementsA liability for employee entitlements is recognised for benefits earned by employees but not yet received at balance date. Where payment is expected to be within twelve months of balance date, the liability is the amount expected to be paid by the Group. Where payment is expected to be longer term the liability is determined by discounting the expected future cash flows at a pre-tax discount rate that reflects current assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

(m) Operating leasesOperating lease payments are representative of the pattern of benefits derived from the leased assets and accordingly are charged to the income statement in the periods in which they are incurred on a straight-line basis over the lease term.

(n) RevenueRevenue recognised in the income statement includes the amounts received and receivable for energy and related energy services supplied to customers in the ordinary course of business. Operating revenue is stated exclusive of:

• distribution costs paid to lines companies as collected from customers, and

• goods and services tax collected from customers.Revenue includes the value of units assessed as being recorded on meters as at balance date, but for which invoices have not yet been rendered.



(o) Income taxThe income tax expense charged to the income statement includes both the current year’s provision and the income tax effect of:

• Taxable temporary differences, except those arising from initial recognition of goodwill; and

• Deductible temporary differences to the extent that it is probable that they will be utilised.

Temporary differences arising from transactions, other than business combinations, affecting neither accounting profit nor taxable profit on initial recognition are ignored.

Deferred tax is not recognised on temporary differences associated with investments in subsidiaries and joint ventures because:

• The parent company is able to control the timing of the reversal of the differences; and

• They are not expected to reverse in the foreseeable future.Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of the assets and liabilities and their carrying amounts in the NZ IFRS consolidated financial statements. A deferred tax asset is only recognised to the extent that there will be future taxable profit to utilise the temporary difference.

(p) Goods and services taxThe income statement and cash flow statement have been prepared so that all components are stated exclusive of GST. All items in the statements of financial position are stated net of GST with the exception of receivables and payables which include GST invoiced.

(q) Capital and reservesCash flow hedge reserveThe cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedginginstruments related to hedged transactions that have not yet occurred.

Revaluation reserveThe revaluation reserve relates to the revaluation of property, plant and equipment.

There have been no changes in share capital during the period.

(r) Segment reportingAn operating segment is a distinguishable component of the Group that is engaged in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete financial information is available.

Mighty River Power operates in one segment, the New Zealand energy industry.

(s) Related partiesThe Group considers its related parties to be key management personnel, its associates and its joint venture partners.

Key management personnel are those people with responsibility and authority for planning directing and controlling the activities of the entity. Key management personnel for the Group are considered to be the Directors and Executive team.



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

NOTE 3. INCOME TAX EXPENSE



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Income tax expense Profit before tax 122,931 55,701 127,349 Prima facie income tax expense calculated at 33% on the profit before tax (40,567) (18,381) (42,025)Increase/(decrease) in income tax due to: • effect of tax rate change on deferred tax 0 0 13,351 • share of associate’s tax paid earnings 745 704 1,280 • other permanent differences (126) (126) (2,115) (Under)/over provision in prior period 0 0 (37)Income tax expense attributable to profit from ordinary activities (39,948) (17,803) (29,546) Represented by: Current tax expense (37,811) (32,418) (44,271)Deferred tax expense recognised in the income statement (2,137) 14,615 14,725 Total (39,948) (17,803) (29,546)

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



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Assets acquired at cost 135,549 61,960 200,068 Net book value of assets disposed 69 20 6,574 Gain/ (loss) on disposal 15 21 (823)

Reassessment of useful life hydro generation assets During the six months ended 31 December 2007 the Group reassessed its estimates of the remaining useful life of its hydro generation assets. Based on this assessment the depreciation charge for the six month period has been reduced by $7.3m.

Realised losses on foreign exchange contracts Realised foreign exchange losses of $55.7m relating to hedge contracts supporting the development programme for which the underlying transaction has still to occur have temporarily been recognised in the cash flow hedge reserve. When the underlying transaction occurs these losses will be transferred to capital work in progress.



NOTE 5. INVESTMENTS AND ADVANCES TO ASSOCIATES



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Balance at the beginning of the period 32,436 31,308 31,308

Additions during the year 23,638 65 300 Equity accounted earnings 2,258 2,132 3,879 Repayments during the year (3,492) (2,000) (3,051)

Balance at the end of the period 54,840 31,505 32,436

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

NOTE 6. DEFERRED TAX



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Balance at the beginning of the period 476,320 536,816 536,816

Current period changes in temporary differences affecting tax expense 2,137 (14,615) (1,374)Current period changes in temporary differences affecting reserves (1,214) (6,145) (13,316)

Effect of change in corporate tax rate on: • income tax expense 0 0 (13,351) • asset revaluation reserve 0 0 (32,308) • cash flow hedge reserve 0 0 (147)

Balance at the end of the period 477,243 516,056 476,320



NOTE 7. PROVISIONS



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Balance at the beginning of the period 0 0 0 Provisions made during the year 1,441 0 0 Unwind of discount rate 61 0 0 Balance at the end of the period 1,502 0 0 Provisions have been recognised for the abandonment and subsequent restoration of areas from which geothermal resources have been extracted.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

CURRENTInterest rate derivative assets 19,400 12,409 19,746 Electricity price derivative assets 4,455 4,621 2,278 Exchange rate derivative assets 1,784 8 0

25,639 17,038 22,024

Interest rate derivative liabilities 6,510 10,424 9,717 Electricity price derivative liabilities 1,569 6,004 330 Exchange rate derivative liabilities 19,674 44,655 68,937

27,753 61,083 78,984

NON-CURRENTElectricity price derivative assets 23,953 30,855 31,085

23,953 30,855 31,085 Electricity price derivative liabilities 3,188 9,175 2,718 Exchange rate derivative liabilities 203 1,687 4,976

3,391 10,862 7,694

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



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



31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Profit for the period 82,983 37,898 97,803

Items classified as investing/financing activities • Fixed, intangible and investment asset charges (7,314) (1,152) (4,735)• Increase in loan charges 188 1,311 1,383

Non-cash items Depreciation & amortisation 39,757 44,190 84,948 Change in the fair value of financial instruments (8,636) 65,744 61,056 Impairment of exploration expenditure 10,789 0 19,607 Share of profits of equity accounted investees (2,258) (2,132) (3,879)Other non-cash items 961 996 6,048

Net cash provided by operating activities before change in assets and liabilities 116,470 146,855 262,231

Change in assets and liabilities during the period: • Decrease in trade receivables and prepayments 23,186 47,308 13,171 • Increase in inventories (2,221) (312) (257)• Decrease in trade payables and accruals (17,040) (38,798) (13,190)• Increase/(decrease) in provision for taxation 12,253 14,243 (28,231)• Increase/(decrease) in deferred taxation 2,053 (14,985) (9,779)

Net cash inflow from operating activities 134,701 154,311 223,945

NOTE 10. COMMITMENTS AND CONTINGENCIESCommitments UNAUDITED UNAUDITED UNAUDITED


31 DEC 2007 31 DEC 2006 30 JUNE 2007

$000 $000 $000

Commitments for future capital expenditure 41,241 178,110 113,817Commitments for future operating expenditure 16,576 14,858 17,382

Contingencies Mighty River Power Limited holds land and interests that may be affected by certain claims that have been brought or are pending against the Crown under the Treaty of Waitangi Act 1975. In the event that the Crown agrees to the return of some or all of the affected land resumption would be effected by the Crown under the Public Works Act 1981 and compensation would be payable to Mighty River Power Limited.



NOTE 11. EXPLANATION OF TRANSITION TO NZ IFRSAs stated in note one, these are the Group’s first condensed consolidated interim financial statements for part of the period covered by the first NZ IFRS annual consolidated financial statements prepared in accordance with NZ IFRS.

The accounting policies set out in note one have been applied in preparing the condensed consolidated interim financial statements for the six months ended 31 December 2007, the financial statements for the year ended 30 June 2007 and the preparation of an opening NZ IFRS balance sheet at 1 July 2006 (the Group’s date of transition).

In preparing its opening NZ IFRS balance sheet and restating the 2007 financial statements, comparative information for the six months ended 31 December 2006 and financial statements for the year ended 30 June 2007, the Group have adjusted amounts previously reported in financial statements prepared in accordance with its old basis of accounting (previous NZ FRS). An explanation of how the transition from previous NZ FRS to NZ IFRS has affected the Group’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.

COMPARATIVE INTERIM COMPARATIVE INTERIM

INCOME STATEMENT INCOME STATEMENT

31 DEC 2006 30 JUNE 2007 EFFECT OF EFFECT OF PREVIOUS TRANSITION PREVIOUS TRANSITION NZ FRS TO NZ IFRS NZ IFRS NZ FRS TO NZ IFRS NZ IFRS

Note $000 $000 $000 $000 $000 $000

Sales 533,849 5,414 539,263 1,038,734 9,643 1,048,377 Less line and metering charges (145,447) 0 (145,447) (280,921) 0 (280,921)Other revenue 5,481 788 6,269 11,041 1,528 12,569 Total revenue 393,883 6,202 400,085 768,854 11,171 780,025 Energy costs 152,243 6,202 158,445 325,365 11,171 336,536 Other operating expenses 62,230 0 62,230 127,980 44 128,024 Total operating expense 214,473 6,202 220,675 453,345 11,215 464,560

Earnings before net interest expense, income tax, depreciation, amortisation and financial instruments (EBITDAF) 179,410 0 179,410 315,509 (44) 315,465

Depreciation and amortisation (43,196) (994) (44,190) (88,293) 3,345 (84,948)Change in the fair value of financial instruments (a) 0 (65,744) (65,744) 0 (61,056) (61,056)Impaired exploration expenditure 0 0 0 (19,607) 0 (19,607)Equity accounted earnings of associate companies 1,820 312 2,132 3,249 630 3,879

Earnings before net interest expense and income tax (EBIT) 138,034 (66,426) 71,608 210,858 (57,125) 153,733

Interest expense (19,342) 0 (19,342) (35,248) 0 (35,248)Interest income 3,435 0 3,435 8,864 0 8,864 Net interest expense (15,907) 0 (15,907) (26,384) 0 (26,384) Profit before income tax 122,127 (66,426) 55,701 184,474 (57,125) 127,349

Income tax expense (d) (47,563) 29,760 (17,803) (72,119) 42,573 (29,546)Profit for the period 74,564 (36,666) 37,898 112,355 (14,552) 97,803



TRANSITION BALANCE SHEET COMPARATIVE INTERIM BALANCE SHEET COMPARATIVE BALANCE SHEET

1 JULY 2006 31 DEC 2006 30 JUNE 2007 EFFECT OF EFFECT OF EFFECT OF PREVIOUS TRANSITION PREVIOUS TRANSITION PREVIOUS TRANSITION NZ FRS TO NZ IFRS NZ IFRS NZ FRS TO NZ IFRS NZ IFRS NZ FRS TO NZ IFRS NZ IFRS

Note $000 $000 $000 $000 $000 $000 $000 $000 $000

SHAREHOLDERS’ EQUITY Issued capital 377,561 0 377,561 377,561 0 377,561 377,561 0 377,561 Retained earnings (a,b,c,d) 419,609 86,923 506,532 443,773 50,257 494,030 482,408 72,092 554,500 Asset revaluation reserve (b,c,d) 1,300,517 (575,153) 725,364 1,300,517 (575,153) 725,364 1,301,459 (542,566) 758,893 Cash flow hedge reserve (a,d) 0 40,361 40,361 0 28,632 28,632 0 3,434 3,434 Total shareholders’ equity 2,097,687 (447,869) 1,649,818 2,121,851 (496,264) 1,625,587 2,161,428 (467,040) 1,694,388

ASSETS CURRENT ASSETS Cash and cash equivalents 2,364 0 2,364 139,807 425 140,232 16,654 384 17,038 Short term deposits 2,000 0 2,000 3,000 14 3,014 69,500 408 69,908 Receivables and prepayments 180,225 (12,590) 167,635 131,774 (11,449) 120,325 166,776 (12,312) 154,464 Inventories 4,409 0 4,409 4,721 0 4,721 4,666 0 4,666 Derivative financial instruments (a) 0 43,071 43,071 0 17,038 17,038 0 22,024 22,024 Taxation receivable 0 0 0 0 0 0 22,548 4,930 27,478 Total current assets 188,998 30,481 219,479 279,302 6,028 285,330 280,144 15,434 295,578

NON-CURRENT ASSETS Property, plant and equipment 2,478,979 (4,426) 2,474,553 2,498,323 (5,849) 2,492,474 2,562,136 (35,085) 2,527,051 Intangible assets 0 11,588 11,588 0 12,435 12,435 0 21,638 21,638 Investment and advances to associates 31,308 0 31,308 31,193 312 31,505 31,806 630 32,436 Derivative financial instruments (a) 0 31,383 31,383 0 30,855 30,855 0 31,085 31,085 Other non-current assets 9,134 (9,059) 75 8,604 (8,529) 75 7,828 (7,753) 75 Total non-current assets 2,519,421 29,486 2,548,907 2,538,120 29,224 2,567,344 2,601,770 10,515 2,612,285 Total assets 2,708,419 59,967 2,768,386 2,817,422 35,252 2,852,674 2,881,914 25,949 2,907,863

LIABILITIESCURRENT LIABILITIESPayables and accruals 138,230 (7,531) 130,699 98,788 (9,018) 89,770 141,951 (8,357) 133,594 Provisions 6,203 (6,203) 0 4,558 (4,558) 0 5,920 (5,920) 0 Derivative financial instruments (a) 0 11,061 11,061 0 61,083 61,083 0 78,984 78,984 Taxation payable 753 0 753 14,995 0 14,995 0 0 0 Total current liabilities 145,186 (2,673) 142,513 118,341 47,507 165,848 147,871 64,707 212,578

NON-CURRENT LIABILITIESDerivative financial instruments (a) 0 3,311 3,311 0 10,862 10,862 0 7,694 7,694 Energy contracts 1,204 0 1,204 1,204 0 1,204 0 0 0 Loans 435,591 (867) 434,724 532,500 617 533,117 516,000 883 516,883 Deferred taxation (d) 28,751 508,065 536,816 43,526 472,530 516,056 56,615 419,705 476,320 Total non-current liabilities 465,546 510,509 976,055 577,230 484,009 1,061,239 572,615 428,282 1,000,897 Total liabilities 610,732 507,836 1,118,568 695,571 531,516 1,227,087 720,486 492,989 1,213,475

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



Notes to the reconciliation of previous NZ GAAP to NZ IFRSa) Fair value of derivative contractsOn transition all derivative contracts (including electricity hedges, interest rate and foreign exchange contracts) will be recorded in the balance sheet at fair value under NZ IFRS and be adjusted against retained earnings on transition. Any subsequent movement in the fair value of these instruments from year to year will have the potential to affect the income statement and the balance sheet, the extent to which will depend on whether hedge accounting is adopted. NZ IFRS is very prescriptive on when a derivative contract can be considered an effective hedge of an underlying position of future cash flow. The Group has therefore adopted hedge accounting practices where practical.

b) Deemed cost adjustmentsNZ IFRS 1 has some specific exemptions available to entities on initial transition to NZ IFRS. A first time adopter may have established a deemed cost under previous GAAP for some or all of its assets and liabilities be measuring them at their fair value because of a specific event. It may use such event-driven fair value measurements as deemed cost for NZ IFRS at the date of the measurement. The Group used this exemption in relation to the fair value exercise undertaken on the acquisition of assets and liabilities on the break-up of ECNZ. The impact of this is a transfer between the asset revaluation reserve and retained earnings.

The total aggregate amount of property, plant and equipment where this exemption has been taken is $514.2m. The aggregate adjustment to the carrying amount reported under previous GAAP is $244.7m.

c) Revaluation of property, plant and equipmentUnder NZ IFRS downward revaluations below cost of individual assets are not permitted to be set off in the reserve against upward revaluations of other assets within the same asset class and are taken to the statement of financial performance. As permitted under transition to NZ IFRS an amount of $25.2 million, resulting from a devaluation of certain generation assets, was reclassified from the asset revaluation reserve to retained earnings.

d) Deferred taxationThe IFRS basis of accounting for deferred taxation is conceptually different to previous NZ GAAP. Under previous NZ GAAP deferred taxation is calculated using an income statement approach whereas under NZ IFRS deferred taxation is calculated based on a balance sheet approach. This method recognises deferred taxation balances where there will be a difference between the carrying value of an asset or liability and its taxation base. The most significant impact for the Group is the recognition of a deferred taxation liability in relation to the revaluation of generation assets and the recognition of the fair value of derivative contracts.

The above changes increased/ (decreased) deferred tax in the Group as follows:

1 JULY 2006 31 DEC 2006 30 JUNE 2007

Note $000 $000 $000

Asset revaluation reserve 355,666 355,666 323,079 Cash flow hedge reserve 19,880 14,103 1,472Retained earnings 132,519 102,761 90,224Other 0 0 4,930Increase in deferred tax asset/ (liability) 508,065 472,530 419,705

There are no material impacts on the cash flow statements.


DirectorsCarole Durbin (Chair)BCom, LLB (Hons), FlnstD, FAMINZ

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

Diana Crossan (Appointed 01.11.07)BA

Dr Graham Hill (Appointed 01.12.07)PhD, MA, BSc

Trevor JanesBCA (Econ), CA

Sandy MaierJD, BA

Neil RanfordDip Tchg, BSc, BE (Hons)

Sir Paul ReevesONZ, MA, GCMG, GCVO, QSO, KST.J, LTh

Tania Simpson (Retired 31.10.07; reappointed 01.01.08)BA, MMM

Patrick Strange (Resigned 15.11.07)BE (Hons), PhD

Executive ManagementDoug Heffernan (Chief Executive)BE (Hons), ME, PhD, FIPENZ

Ken Bugden (Chief Financial Officer)CA

John Foote (General Manager Mercury Energy)BSc, BE (Civil)

Olwen Hyslop (Group Human Resource Manager)BSc (Hons), MBA

William Meek (Investment Manager)BCom (Hons)

James Moulder (General Manager Generation)BA, BCA

Greg Raasch (General Manager Geothermal)BSc, MSc, PE (Prof Engineer)

Neil Williams (Group Strategist)BA

Company SecretaryTony Nagel LLB, MComLaw (Hons)

Registered OfficeLevel 19, 1 Queen Street, Auckland Telephone 09 308 8200 Facsimile 09 308 8209 Email [email protected] Website www.mightyriverpower.co.nz

AuditorThe Auditor-General pursuant to section14 of the Public Audit Act 2001.

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

SolicitorsChapman TrippKensington Swan

BankersANZ National BankASB BankBank of New Zealand

DIRECTORY


MIGHTY RIVER POWER LIMITED INTERIM REPORT 31 DECEMBER 2007

interim report 2008

Documents