Meridian Energy

5 October 2009 Performance evaluation

Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy is $4,762m (nominal WACC 8.8%, asset beta 0.60, TGR 3.0%). Forecast financial model A detailed financial model with explicit forecasts out to 2030 has been completed and is summarised through this report. 12- and 24-month target valuations The 12-month ($4,802m) and 24-month ($4,856m) target valuations for the company have been derived by rolling forward the discounted cashflow model 12 and 24 months respectively and deducting from these values the forecast 12- and 24-month dividends to the Crown. Financial model assumptions and commentary We have assessed the sensitivity of our equity valuation to a wide range of inputs. Broadly, the sensitivities are divided into four categories: generation assumptions, electricity demand, financial and price path. We highlight and discuss a number of key model input assumptions in the report:

Inside Wholesale electricity price path; Electricity demand and pricing; Performance evaluation 2 The New Zealand Aluminium Smelters (NZAS) supply contract; Valuation summary 5 Meridian Energy’s generation development pipeline. Financial model assumptions and commentary 6 Financial statements summary 14 This bespoke research is provided for the use of the New Zealand Treasury. Financial flexibility and generation development 17 Sensitivities 18 Alternative valuation methodologies 19 Performance relative to SCI 20

Analyst Stephen Hudson 649 363 1414 [email protected]

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/research/disclosures.

Macquarie Research Equities - Report Meridian Energy

Performance evaluation Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy is $4,762m (nominal post tax WACC 8.8%, asset beta 0.60, TGR 3.0%). Forecast financial model A detailed financial model with explicit forecasts out to 2030 has been completed and is summarised through this report. We have used actual financial results from FY08 as a base. 12- and 24-month target valuations Our 12-month ($4,802m) and 24-month ($4,856m) target valuations for the company have been derived by rolling forward the discounted cashflow model 12 and 24 months respectively and deducting from these values the forecast 12- and 24-month dividends to the Crown. Sensitivity analysis of main valuation drivers We have assessed the sensitivity of our equity valuation to a wide range of inputs. Broadly, the sensitivities are divided into four categories: generation assumptions, electricity demand, financial and price path. Alternative valuation methodologies We have assessed a comparable company valuation for the company of $4,864 – 5,743m. This is based on the trading valuations of comparable global generator/retailers. This valuation provides a cross check of the equity valuation based on our primary methodology, discounted cashflow. In addition, we have prepared a sum-of-the-parts based valuation for Meridian using European transaction multiple precedents. This valuation is assessed as $8,670 – 10,866m. We think sum-of-the-parts valuations are of limited use due to the limited set of local market comparables and the fundamentally different nature of the European comparables which have been used. Financial model assumptions and commentary We highlight and discuss a number of key model input assumptions in the report: Development pipeline. The company has proposed a number of greenfield wind and hydro generation developments totalling in excess of 1,900 MW. We have explicitly modelled projects which appear to have a high probability of being completed in a reasonable timeframe. These are Te Uku, Project Central Wind and Mill Creek. Retail and SME pricing. As at February 2009, Meridian Energy was pricing the energy component of its mass market electricity volumes at an approximate 3.8% discount to the average market pricing – up from an approximate 3.4% discount two years prior. We have attempted to back out Meridian Energy’s commercial/SME fixed pricing by calculating the commercial/SME pricing discount seen in historical periods (based on pricing information from the MED). On average, from FY01-FY08, commercial pricing was at a 4% discount to mass market pricing. We assumed this discount in our forecasts. NZAS supply contract renewal and pricing. We estimate that up to 5,256 GWh (~44% of total generation volumes in FY08) of energy will be sold to NZAS for its Tiwai Point aluminium smelter under the current contract. 5,256 GWh assumes NZAS purchase the amount available under its contract of 600 MW pa. We have reduced the volume sold in FY09 to 75% of normal volume, reflecting the transformer outage on 9 November 2008. In addition, given the depressed aluminium market, we assume Tiwai Point will operate at ~90% capacity (the take-or-pay level of NZAS’s supply contract) in FY10 and FY11. Post-2012, we assume up to 5,011 GWh of energy is contracted for to NZAS (based on contract volume of 572 MW pa). Pricing for the current contract, which expires at the end of 2012 is believed to currently be ~6.0c/kWh. It is assumed this will increase at CPI until the end of the contract. We have assumed prices post-2012 increase with reference to the market price for NZ electricity, the world price for aluminium and inflation, with each factor having an equal weighting.

5 October 2009 2 Macquarie Research Equities - Report Meridian Energy

Other long-term contract hedges. We have estimated the volume sold by Meridian Energy under other long-term hedge contracts. We put this volume at 2,750 GWh (21% of total generation volumes) over FY09. We have assumed that these volumes are priced in line with forecast wholesale prices. Wholesale electricity price paths. We have reconstructed our wholesale electricity price forecast since the last report (Meridian Energy, 13 June 2008). Based on expected demand and supply (taking into account future projects coming online), we expect that the wholesale electricity price will approach the LRMC of wind generation by 2020 (the year in which other, cheaper, generation alternatives have been exhausted). We consider new thermal generation capacity will be limited (beyond Contact’s Taranaki peakers) due to difficulties in obtaining adequate gas supply, and the availability of cheaper geothermal development options. We estimate the current LRMC of wind as $100/MWh (2009 dollars). We note, however, that this LRMC is highly sensitive to currency, turbine pricing and cost of capital assumptions. Since the 2008 report, we have revised several assumptions in the model. The wholesale and retail price paths have been updated to reflect primarily a delay in the introduction of carbon charges, which are now introduced in FY12 (instead of FY10) as well as increased mass market competition. Included in this model are new generation projects where there is sufficient certainty surrounding the completion of the project. We have revised short-term electricity usage forecasts to reflect the current economic environment. In addition, we have made several changes to the mechanics and assumptions in the model to reflect the latest publicly available information.

Fig 1 Wholesale and retail electricity price path forecasts

Wholesale and retail price paths

300

250

200

150 $NZ

100 Wholesale electricity price 50 Retail electricity price

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Macquarie Research, September 2009

Arc Innovations. The Arc Innovations smart metering business has not been explicitly modelled in our Meridian Energy projections and therefore its DCF-based equity valuation. We do however attempt to make some allowance for the intellectual property value within Arc Innovations including an estimated book value of $75m in the alternative equity valuations. WhisperTech, WhisperGen and Energy for Industry. We have not explicitly modelled the WhisperTech and WhisperGen CHP businesses, and the Energy for Industry subsidiary, as these are not part of Meridian’s core operations. An estimated value for these businesses of $100m is included in the alternative company valuations.

5 October 2009 3 Macquarie Research Equities - Report Meridian Energy

Fig 2 Meridian summary financials (MER: $2.98)

Profit & Loss 2007A 2008A 2009E 2010E

Operating Revenue $m 1775 2603 2979 3015 EBITDAF - Recurring $m 478 371 588 586 Depreciation $m 109 140 144 146 Amortisation $m 8 13 0 0 EBIT - Recurring $m 360 218 444 441 EBIT $m 360 264 444 441 Net Interest Expense $m 56 67 72 82 Pre-Taxation Profit $m 304 198 372 359 Taxation Expense $m 104 69 112 108 Profit after Taxation $m 200 129 260 251 Tax-affected Non -Recurring Items $m 0 31 0 0 Pre Abnormal Profit after Tax $m 200 97 260 251 Adjusted Earnings 1 $m 208 111 260 251 1 Adj for non-recurring items and goodwill amort

Key Assumptions Wholesale Electricity Price $/MWh 54 105 58 63 Net Margin - Own Generation $/MWh 96 92 103 94 Net Margin - Hedge Output $/MWh 47 92 44 44 Own Generation output GWh 12678 11914 12846 13131

Discounted Cashflow Valuation Profit and Loss Ratios 2007A 2008A 2009E 2010E PER (adj Earnings) x 22.9 43.1 18.3 19.0 PV FCFs Available to Owners $m 5761 EPS (adj Earnings) c 13.0 6.9 16.3 15.7 Less Net Debt (inc Associate debt share) $m (999) EPS (Reported) c 12.5 8.0 16.3 15.7 Equity Value $m 4762 DPS c 23.0 18.6 13.0 12.6 Shares Outstanding m 1,600 Revenue Growth % -20% 47% 14% 1% Equity Value per Share $m 2.98 EBIT Growth % -65% -27% 68% -1% EBITDA/Sales % 27% 14% 20% 19% EBIT/Sales % 20% 8% 15% 15% Assumptions Effective tax rate % 34% 35% 30% 30% Risk Free Rate % 6.0% Payout ratio % 177% 270% 80% 80% Asset Beta # 60% EV/EBIT x 16.0 21.8 13.0 13.1 Market Risk Premium % 7.0% EV/EBITDA x 12.1 15.5 9.8 9.8 Target Debt/Value % 20% EV/Revenue x 3.2 2.2 1.9 1.9 Nominal Post-Tax WACC % 8.8% Perpetuity Growth Rate % 3.0% Balance Sheet Ratios ROE % 5% 2% 6% 6% ROA % 5% 3% 6% 6% ROFE % 7% 4% 8% 8% Net Debt $m 585 878 999 993 Net Debt/Equity % 13% 21% 23% 23% Net Interest Cover (EBIT) x 6.3 3.0 6.2 5.4 Price/NTA x 1.1 1.1 1.1 1.1 NTA per share cps 271 260 263 266 EFPOWA m 1600.0 1600.0 1600.0 1600.0

Cashflow Analysis 2007A 2008A 2009E 2010E Balance Sheet 2007A 2008A 2009E 2010E

Pre-taxation Profit $m 304 198 372 359 Depreciation & Amortisation $m 118 153 144 146 Tax (Paid)/Credit $m -112 -69 -112 -108 Cash $m 45 65 0 0 Other $m 0 -32 0 0 Receivables $m 222 478 443 449 Gross Cashflow $m 322 261 405 397 Inventories $m 11 8 8 9 Changes in Working Capital $m 28 78 -73 0 Investments $m 0 3 3 3 Changes in Provisions $m 0 0 0 0 Property, Plant & Equipment $m 6315 6433 6533 6577 Operating Cashflow $m 350 339 332 397 Intangibles $m 50 42 42 42 Acquisitions $m -14 -4 0 0 Other Assets $m 67 169 169 169 Capital Expenditure $m -185 -272 -244 -190 Total Assets $m 6709 7198 7198 7248 Asset Sales $m 10 4 0 0 Payables $m 214 548 440 445 Other $m 0 0 0 0 Short Term Debt $m 0 150 150 150 Investing Cashflow $m -189 -272 -244 -190 Long Term Debt $m 630 793 849 843 Dividend (ordinary) $m 368 298 208 201 Other Liabilities $m 1463 1502 1502 1502 Equity Raised $m 0 0 0 0 Total Liabilities $m 2307 2993 2942 2941 Other $m 0 0 0 0 Shareholders' Funds $m 1600 1600 1600 1600 Financing Cashflow $m -368 -48 -152 -207 Minority Interests $m 12 2 2 2 Total Shareholders' Equity $m 4402 4205 4257 4307 Net Change in Cash (inc FX) $m -207 20 -65 0 Total Funds Employed $m 6709 7198 7198 7248 Source: Company disclosures, Macquarie Research, September 2009

5 October 2009 4 Macquarie Research Equities - Report Meridian Energy

Valuation summary Meridian Energy equity valuation and 12- and 24-month targets

Fig 3 Meridian Energy DCF equity valuation summary Perpetuity growth rate 3.00% Perpetuity Value 11,471 PV (FY09-29) PITRP= PV of Perpetuity 2,008 PV FCF available to owners 5,761 Less Net Debt (inc Associate debt share) 999 Equity Value 4,762 Equity Value - 12 month target valuation ($m) 4,802 Equity Value - 24 month target valuation ($m) 4,856 Shares Outstanding (m) 1600 DCF Equity Value per share 2.98

Assumptions

Corporate Tax Rate 30% Risk free rate 5.98% Asset beta 0.60 Equity beta 0.75 Market Risk Premium 7.00% Target Debt/Venture 20% Target Equity/Venture 80% Cost of Debt 8.25% Tax-adjusted Cost of Debt 5.78% Ungeared Cost of Equity 7.64% Cost of Equity 9.56%

Nominal WACC (%) 8.80% Source: Macquarie Research, September 2009

We have summarised our DCF-based equity valuation ($4,762m) for Meridian Energy above. The summary includes the discount rate and terminal growth assumptions (nominal post tax WACC 8.8%, asset beta 0.6, TGR 3.0%). Additionally, the 12-month ($4,802m) and 24-month ($4,856m) target valuations for the company are set out. These targets have been derived by rolling forward the discounted cashflow model 12 and 24 months respectively and deducting from these values the forecast 12- and 24-month dividends to the Crown.

5 October 2009 5 Macquarie Research Equities - Report Meridian Energy

Financial model assumptions and commentary (i) Wholesale electricity price path scenarios and carbon pricing We have reconstructed our wholesale electricity price forecast since the last report in 2008. Based on expected demand and supply (taking into account future projects coming online), we expect that the wholesale electricity price will approach the LRMC of wind generation by 2020 (the year in which other, cheaper, generation alternatives would have been exhausted). We do not consider new thermal generation will be built in the foreseeable future (beyond Contact’s Taranaki peakers) due to difficulties in obtaining adequate gas supply arrangements. We estimate the current LRMC of wind as $100/MWh (2009 dollars). We note, however, that this LRMC is highly sensitive to currency, turbine pricing and cost of capital assumptions.

Our wholesale price path includes a carbon tax of $15/tonne CO2e from July 2011. We assume the company has no carbon liability (by virtue of its renewable generation base), and that it receives no carbon credits from the government. This is broadly consistent with the recently introduced emissions trading scheme bill. We have not explicitly modelled the precise provisions of the bill as there may be changes as it progresses through the House. (ii) Electricity demand and retail pricing We analyse Meridian’s electricity demand by examining several customer categories: Mass market customers: households, split by those in incumbent areas and non-incumbent areas; Fixed price SMEs: small commercial and industrial (C&I) customers that pay a fixed price; Spot price customers: this category includes large C&I customers that pay the spot price, and hedge contracts entered into by Meridian. Hedge contracts are assumed to be fair value, zero sum contracts at the spot price; NZAS: electricity either physically delivered, or hedged by CFD, to NZAS.

Mass market customers Volume We have analysed the Ministry of Economic Development quarterly mass market electricity pricing data for each retailer. We have split this analysis into incumbency and non- incumbency regions and have separated out the impact on retail pricing from changes to lines charges. We have done this to enable a comparison of the net retail margin for each retailer. The company has an approximate 9% market share in the electricity mass market. This was previously split approximately 70/30 incumbency customers/non-incumbency customers, but this ratio fell to 60/40 in FY08. The company’s market share has been relatively constant over recent years. We assume the company maintains its market share, with total national ICP growth of 1% pa forecast. Predicted usage per user is assumed to be constant at 8,000 kWh pa. We note that Meridian Energy has also recently launched a new online retailing offering – Powershop. The impact of this on the company’s results remains to be seen. Pricing As at February 2009, Meridian Energy was pricing the energy component of its mass market electricity volumes at an approximate 3.8% discount to the average market pricing – up from an approximate 3.4% discount two years prior. We assume Meridian will maintain its current mass market pricing for FY09. In FY10 we assume a 1% nominal drop in mass market pricing – reflecting the behaviour of competitors, external downwards pressure on retail pricing and the current robust state of margins. We assume a return to more normal price increases after FY10, with three years of 2.5% pa price growth, followed by 4% in FY14, FY15 and FY16. Beyond FY16, prices are assumed to grow at 2.5% pa.

5 October 2009 6 Macquarie Research Equities - Report Meridian Energy

Transmission and distribution costs are modelled to grow by CPI – X pa (as per the current thresholds regime for distribution companies), where X represents the current weighted average X factor for distribution companies, or for TransPower. We have assumed the same retail price path for all retailers (adjusting for current relative pricing levels). Fixed price SMEs Volume Fixed price SME volumes have been estimated on an historical basis. It is assumed there is no growth in fixed price SME volumes in FY09 or FY10, reflecting current economic conditions. From FY11 onwards, fixed price SME volumes are assumed to grow at 0.5% pa. Pricing We have attempted to back out Meridian Energy’s SME fixed pricing by calculating the pricing discount to market prices seen in historical periods (based on whole of market pricing information from the MED). On average, from FY01-FY08, commercial pricing was at a 4% discount to mass market pricing. We have assumed this discount in our forecasts. Spot price customers We assume that Meridian has 2,750 GWh of hedge contracts. Any excess generation over and above the total of mass market, fixed price SME, hedge contract and NZAS demand is assumed to be sold at wholesale electricity price. These sales include large commercial and industrial customers, net sales into the wholesale market and hedge (eg, CFD) contracts. GWAP / LWAP factor There are systemic differences between generation prices achieved and load prices paid due to transmission constraints, geographical separation of generation and load centres, and the ability to control generation output relative to timing of load demand. These differences can be separated into a Generation Weighted Average Price (GWAP) factor and Load Weighted Average Price (LWAP) factor. Each factor is referenced to a benchmark pricing node and represents the premium or discount to the benchmark price received for generation (GWAP), or paid for supplying load (LWAP) relative to the benchmark node. We have forecast a GWAP and LWAP for Meridian Energy based on historical analysis and the outlook for transmission constraints and demand growth. This factor is applied on our benchmark wholesale price path to generation earnings and retailing costs. Meridian Energy dry year cover position In a mean hydrology year, Meridian Energy generates around 13,000 GWh pa. We understand that in a 1:20 dry year, national hydro production reduces by around 15% from mean. This variance is obviously not uniform across the country. We understand the company sees its optimal hedge position ranging between 85–90% of mean year production based on a similar 1:20 dry year production variance across Meridian Energy’s hydro systems. The hedge position is assumed to be represented by mass market customers, fixed price SMEs, spot price customers and the NZAS contract.

Fig 4 Wholesale and retail electricity price path forecasts

Period FY08A FY09E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E Period End 30/06/08 30/06/09 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Market gas cost $/GJ 7.5 7.7 7.8 8.0 8.2 8.4 8.6 8.9 9.1 9.3 9.5 9.8 10.0 % change in market gas cost -% 18.11% 3.27% 1.23% 2.35% 2.53% 2.53% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Wholesale electricity price $MWh 105.4 58.3 63.2 68.4 82.1 88.2 94.9 99.9 105.1 110.7 116.6 122.9 129.5 % change in wholesale electricity price GWh 102.25% (44.68%) 8.30% 8.30% 20.00% 7.49% 7.55% 5.26% 5.28% 5.30% 5.33% 5.35% 5.37% Retail electricity price c/kWh 19.5 20.7 20.5 21.0 21.5 22.0 22.9 23.8 24.8 25.4 26.0 26.7 27.4 % change in retail electricity price % p.a. 6.27% 6.13% (1.00%) 2.50% 2.50% 2.50% 4.00% 4.00% 4.00% 2.50% 2.50% 2.50% 2.50% Source: Macquarie Research, September 2009

5 October 2009 7 Macquarie Research Equities - Report Meridian Energy

Fig 5 Meridian Energy customer volumes and pricing

Electricity customer numbers (inc dual fuel)

Cum population growth p.a. -% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Total energised ICPs 1,945,154 1,964,606 1,984,252 2,004,094 2,024,135 2,044,376 2,064,820 2,085,468 2,106,323 2,127,386 2,148,660 2,170,147 2,191,848

Mass market share 9.41% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% Total mass market customers 183,000 188,602 190,488 192,393 194,317 196,260 198,223 200,205 202,207 204,229 206,271 208,334 210,417

Assumed % incumbent/total 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94% 59.94%

Mass market - incumbent 109,682 113,040 114,170 115,312 116,465 117,630 118,806 119,994 121,194 122,406 123,630 124,866 126,115 Usage per user (annualised kWh) 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000

Mass market - non-incumbent 73,318 75,562 76,318 77,081 77,852 78,630 79,417 80,211 81,013 81,823 82,641 83,468 84,302 Usage per user (annualised kWh) 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000

Fixed price SMEs 4,211 4,211 4,211 4,232 4,253 4,274 4,295 4,317 4,338 4,360 4,382 4,404 4,426 Usage per fixed price SME 300 297 296 296 296 296 296 296 296 296 296 296 296

Customer volumes (GWh)

Fixed price volumes Mass market - incumbent 877 904 913 922 932 941 950 960 970 979 989 999 1,009 Mass market - non-incumbent 587 604 611 617 623 629 635 642 648 655 661 668 674 Fixed price SMEs 1,263 1,251 1,244 1,250 1,257 1,263 1,269 1,276 1,282 1,288 1,295 1,301 1,308 Total fixed price volume 2,727 2,759 2,768 2,790 2,811 2,833 2,855 2,877 2,900 2,922 2,945 2,968 2,991 Losses 145 146 147 148 149 150 151 152 154 155 156 157 159 Fixed price electricity purchases 2,872 2,906 2,915 2,937 2,960 2,983 3,006 3,030 3,053 3,077 3,101 3,125 3,150

Spot price volumes Generator hedge contracts 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 Spot price C&I 1,036 3,090 2,788 2,765 2,327 2,850 3,264 3,240 3,217 3,193 3,169 3,145 3,120 Spot price volumes 3,786 5,840 5,538 5,515 5,077 5,600 6,014 5,990 5,967 5,943 5,919 5,895 5,870

Pricing (c/kWh)

Retail electricity price path % change in retail electricity price 6.27% 6.13% (1.00%) 2.50% 2.50% 2.50% 4.00% 4.00% 4.00% 2.50% 2.50% 2.50% 2.50% Retail electricity price 19.5 20.7 20.5 21.0 21.5 22.0 22.9 23.8 24.8 25.4 26.0 26.7 27.4

Fixed prices Change in Mass market - incumbent -% 6.13% (1.00%) 2.50% 2.50% 2.50% 4.00% 4.00% 4.00% 2.50% 2.50% 2.50% 2.50% Mass market - incumbent 18 19 19 19 20 20 21 22 23 23 24 24 25

Change in Lines and transmission charges - incumbent 4.42% 2.46% 0.42% 1.54% 1.72% 1.72% 1.69% 1.69% 1.69% 1.69% 1.69% 1.69% 1.69% Lines and transmission charges - incumbent 7777777778888

Change in Mass market - non-incumbent -% 6.13% (1.00%) 2.50% 2.50% 2.50% 4.00% 4.00% 4.00% 2.50% 2.50% 2.50% 2.50% Mass market - non-incumbent 19 20 20 20 21 21 22 23 24 25 25 26 26

Change in Lines and transmission charges - non-incumbent 6.05% 2.46% 0.42% 1.54% 1.72% 1.72% 1.69% 1.69% 1.69% 1.69% 1.69% 1.69% 1.69% Lines and transmission charges - non-incumbent 7888888888999

Fixed price SMEs - discount to market 7.60% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94% Fixed price SMEs 18 20 20 20 21 21 22 23 24 24 25 26 26

Lines charge - Fixed price SMEs 3.67 3.76 3.78 3.83 3.90 3.97 4.03 4.10 4.17 4.24 4.31 4.39 4.46

Spot prices Spot price 105 58 63 68 82 88 95 100 105 111 117 123 129

Growth in cost to serve 3.09% 3.27% 1.23% 2.35% 2.53% 2.53% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Cost to serve 289 298 302 309 317 325 333 341 350 358 367 376 386 Source: Company data, Macquarie Research, September 2009

5 October 2009 8 Macquarie Research Equities - Report Meridian Energy

(iii) NZAS and long-term contract hedges – pricing and volume We estimate that up to 5,256 GWh (~44% of total generation volumes in FY08) of energy will be sold to NZAS for its Tiwai Point aluminium smelter under the current contract. 5,256 GWh assumes NZAS purchase the amount available under its contract of 600MW pa. We have reduced the volume sold in FY09 to 75% of normal volume reflecting the transformer outage on 9 November 2008. In addition, given the depressed aluminium market, we assume Tiwai Point will operate at ~90% capacity (the take-or-pay level of NZAS’s supply contract) in FY10 and FY11. In FY12 and FY13, we assume a near full offtake of 5,203 GWh of energy is contracted for to NZAS (based on contract volume of 572MW pa). From FY14 onwards, we assume constant volume of 4,961 GWh. Pricing for the current contract, which expires at the end of 2012 is believed to currently be ~6.0c/kWh. It is assumed this will increase at CPI until the end of the contract. We have assumed prices post-2012 increase with reference to the market price for NZ electricity, the world price for aluminium and inflation, with each factor having an equal weighting. We note that the new contract is a pricing agreement rather than a contract for ‘physical’ delivery. This transfers transmission pricing risk to NZAS.

Fig 6 NZAS historical power price 31/12/08 31/12/07 31/12/06 NZAS power purchases $310.1m $299.9m $276.1m Power usage 413 MW 608 MW 604 MW Implied cost / MWh 8.6c/kWh 5.6c/kWh 5.2c/kWh Source: NZAS Annual Report, December 2008

NZAS has claimed force majeure for an NZAS transformer failure which occurred in November. This has resulted in the use of electricity below the take or pay level. NZAS have estimated the value difference between the full take or pay contracted amount and actual usage at approximately $10m as at 31 Dec 2008. NZAS has not recognised this as a liability. Likewise, we do not model this contingency for Meridian, which we estimate at $36m (based on May reinstatement of the transformer). (Source: NZAS Annual Report, December 2008)

5 October 2009 9 Macquarie Research Equities - Report Meridian Energy

Fig 7 Operations

Operating Income

Integrated Generation Average tariff realisation c/kWh 18.1 19.6 19.4 19.8 20.3 20.8 21.7 22.5 23.4 24.0 24.6 25.2 25.9 Transmission and distribution c/kWh 5.4 5.6 5.6 5.7 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.7 Cost to serve c/kWh 2.0 2.1 2.1 2.2 2.2 2.3 2.4 2.4 2.5 2.6 2.6 2.7 2.8 Net margin (ex location factor) c/kWh 10.7 11.9 11.6 12.0 12.3 12.7 13.3 14.0 14.7 15.2 15.6 16.0 16.4

GWAP benefit (cost) c/kWh 0.6 (1.0) (1.3) (1.4) (1.6) (1.1) (1.1) (1.2) (1.3) (1.3) (1.4) (1.5) (1.6) LWAP benefit (cost) c/kWh (2.2) (0.6) (0.9) (1.0) (1.2) (0.9) (0.9) (1.0) (1.1) (1.1) (1.2) (1.2) (1.3) Net Margin c/kWh 9.2 10.3 9.4 9.6 9.4 10.7 11.2 11.8 12.4 12.7 13.0 13.3 13.6

Total fixed price volume GWh 2,727.2 2,759.3 2,768.2 2,789.6 2,811.3 2,833.1 2,855.1 2,877.3 2,899.7 2,922.3 2,945.1 2,968.1 2,991.2 EBITDA - Integrated generation $m 284.8 261.0 267.4 265.4 303.5 320.7 340.1 360.5 371.6 383.0 394.7 406.7

Spot Output GWAP / LWAP % 87.5% 75.3% 69.6% 69.6% 69.6% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0%

Average tariff realisation $/MWh 92.3 43.9 43.9 47.6 57.1 70.6 75.9 79.9 84.1 88.6 93.3 98.3 103.6 Net margin $/MWh 92.3 43.9 43.9 47.6 57.1 70.6 75.9 79.9 84.1 88.6 93.3 98.3 103.6

Spot price volume GWh 3,786.3 5,840.4 5,538.0 5,515.4 5,076.6 5,600.0 6,013.6 5,990.2 5,966.6 5,942.8 5,918.8 5,894.6 5,870.2 EBITDA - spot volumes $m 256.6 243.3 262.4 289.8 395.2 456.5 478.6 501.9 526.4 552.2 579.4 607.9

NZAS contracts PPA price $/MWh 45.0 60.0 60.7 62.2 63.7 65.9 68.1 69.8 71.6 73.5 75.4 77.4 79.4 Total NZAS contract GWh 5,256.0 4,099.7 4,677.8 4,677.8 5,203.4 5,082.0 4,960.6 4,960.6 4,960.6 4,960.6 4,960.6 4,960.6 4,960.6 EBITDA - NZAS contract $m 246.0 284.1 290.8 331.6 334.7 337.6 346.4 355.4 364.6 374.1 383.9 394.0

O&M costs Wind (fixed) $/KW p.a. 27.3 27.7 28.3 29.0 29.8 30.5 31.3 32.0 32.8 33.7 34.5 35.4 Wind warranty (fixed) $/KW p.a. 27.3 27.7 28.3 29.0 29.8 30.5 ------Wind $/MWh 6.5 6.5 6.7 6.9 7.0 7.2 7.4 7.6 7.8 8.0 8.2 8.4 Wind warranty $/MWh 6.5 6.5 6.7 6.9 7.0 7.2 ------Hydro (fixed) $/KW p.a. 11.8 11.9 12.2 12.5 12.9 13.2 13.5 13.8 14.2 14.5 14.9 15.3 O&M $m 28.929.3 30.0 30.7 31.5 32.3 64.3 65.9 67.5 69.2 71.0 72.7

Other costs Site remediation provision $m ------Expensed exploration costs $m ------Development and mitigation costs $m 20.7 20.9 21.4 21.9 22.5 23.1 23.6 24.2 24.8 25.4 26.1 26.7 Unallocated head office costs $m 62.1 62.9 64.3 66.0 67.6 69.3 71.1 72.8 74.7 76.5 78.4 80.4 HVDC costs $m 87.9 89.0 91.1 93.4 130.8 134.0 137.4 140.8 144.3 148.0 151.7 155.4 EBITDA - Electricity $m 341.8 302.2 322.9 343.1 446.3 518.5 522.3 558.6 586.7 616.1 647.0 679.3

EBITDA EBITDA - Electricity $m 341.8 302.2 322.9 343.1 446.3 518.5 522.3 558.6 586.7 616.1 647.0 679.3 NZAS EBITDA $m 246.0 284.1 290.8 331.6 334.7 337.6 346.4 355.4 364.6 374.1 383.9 394.0 Total EBITDA $m 643.4 587.8 586.3 613.7 674.8 781.0 856.1 868.7 914.0 951.3 990.2 1,030.9 1,073.3 Source: Company data, Macquarie Research, September 2009

5 October 2009 10 Macquarie Research Equities - Report Meridian Energy

(iv) Generation assets The financial model sets out Meridian Energy’s generation assets by plant and region. Development projects are not included in the financial projections unless they are sufficiently certain (see below). Our generation output forecasts are driven from assumed availability and capacity factors. Wind capacity factors for new projects are conservatively estimated at 35%. We assume mean hydrology conditions and existing operating level limits at both the country and company level. We do not specifically forecast major maintenance downtime into plant availability factors but instead assume a smoothed maintenance profile (ie average life cycle availability factors). Development pipeline The company has proposed a number of greenfield generation developments (see below). Only those that we have assessed as likely to be developed with sufficient certainty are included in our financial model and DCF-based equity valuation. Non-modelled projects cover a range of projects at various stages of development. These projects will have option value for the company, but we have not attempted to quantify this value.

Fig 8 Meridian Energy generation pipeline Project Type Size (MW) Estimated cost ($m) Completion date

Modelled projects Te Uku Wind 65 160 1H12 Project Central Wind Wind 120 260 1H13 Mill Creek Wind 67 210 1H13 Non-modelled projects Project Hayes Wind 630 ~2,000 ? Project Gumfields Wind 60-90 ~150-250 ? Rototuna Wind up to 500 ? ? North Bank Tunnel Hydro 220-280 700-900 ? Mokihinui Hydro 85-100 ? ? Manapouri discharge Hydro 90 ? ? Mohaka Hydro 44 ? ? MacArthur (Australia) Wind 330 ? ? Source: Meridian Energy, Press, Standard & Poors, September 2009

5 October 2009 11 Macquarie Research Equities - Report Meridian Energy

Fig 9 Meridian Energy generation assets Period FY08A FY09E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E Period End 30/06/08 30/06/09 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Hydro - South Island

Tekapo Annual station capacity MW 185 185 185 185 185 185 185 185 185 185 185 185 185 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 1,621 Capacity factor % 53.5% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% Nominal annual generation GWh 867 936 936 936 936 936 936 936 936 936 936 936 936

Ohau Annual station capacity MW 688 688 688 688 688 688 688 688 688 688 688 688 688 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 6,027 Capacity factor % 46.1% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% 49.8% Nominal annual generation GWh 2,781 3,003 3,003 3,003 3,003 3,003 3,003 3,003 3,003 3,003 3,003 3,003 3,003

Benmore Annual station capacity MW 540 540 540 540 540 540 540 540 540 540 540 540 540 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 4,730 Capacity factor % 41.8% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% 45.1% Nominal annual generation GWh 1,975 2,133 2,133 2,133 2,133 2,133 2,133 2,133 2,133 2,133 2,133 2,133 2,133

Aviemore Annual station capacity MW 220 220 220 220 220 220 220 220 220 220 220 220 220 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 1,927 Capacity factor % 43.2% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% Nominal annual generation GWh 833 900 900 900 900 900 900 900 900 900 900 900 900

Waitaki Annual station capacity MW 90 90 90 90 90 90 90 90 90 90 90 90 90 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 788 788 788 788 788 788 788 788 788 788 788 788 788 Capacity factor % 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2% Nominal annual generation GWh 435 435 435 435 435 435 435 435 435 435 435 435 435

Manapouri Annual station capacity MW 730 730 730 730 730 730 730 730 730 730 730 730 730 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 6,395 Capacity factor % 71.1% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% 72.8% Nominal annual generation GWh 4,546 4,652 4,652 4,652 4,652 4,652 4,652 4,652 4,652 4,652 4,652 4,652 4,652

Total Hydro Capacity MW 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 2,453 Total Hydro Generation GWh 11,437 12,060 12,060 12,060 12,060 12,060 12,060 12,060 12,060 12,060 12,060 12,060 12,060

Wind

Te Apiti Annual station capacity MW 90 90 90 90 90 90 90 90 90 90 90 90 90 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 788 788 788 788 788 788 788 788 788 788 788 788 788 Capacity factor % 40.8% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% 42.9% Nominal annual generation GWh 322 338 338 338 338 338 338 338 338 338 338 338 338

Project White Hill Annual station capacity MW 58 58 58 58 58 58 58 58 58 58 58 58 58 Availability factor % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh 508 508 508 508 508 508 508 508 508 508 508 508 508 Capacity factor % 30.5% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% Nominal annual generation GWh 155 163 163 163 163 163 163 163 163 163 163 163 163

West Wind - Wellington Annual station capacity MW - 143 143 143 143 143 143 143 143 143 143 143 143 Availability factor % -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - 625 1,249 1,249 1,249 1,249 1,249 1,249 1,249 1,249 1,249 1,249 1,249 Capacity factor % -% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% 45.6% Nominal annual generation GWh - 285 570 570 570 570 570 570 570 570 570 570 570

Te Uku Annual station capacity MW - - - - 65 65 65 65 65 65 65 65 65 Availability factor % -% -% -% -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - - - - 285 569 569 569 569 569 569 569 569 Capacity factor % -% -% -% -% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% Nominal annual generation GWh - - - - 110 219 219 219 219 219 219 219 219

Project Central Wind Annual station capacity MW - - - - - 120 120 120 120 120 120 120 120 Availability factor % -% -% -% -% -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - - - - - 526 1,051 1,051 1,051 1,051 1,051 1,051 1,051 Capacity factor % -% -% -% -% -% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% Nominal annual generation GWh - - - - - 202 405 405 405 405 405 405 405

5 October 2009 12 Macquarie Research Equities - Report Meridian Energy

Mill Creek Annual station capacity MW - - - - - 67 67 67 67 67 67 67 67 Availability factor % -% -% -% -% -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - - - - - 293 587 587 587 587 587 587 587 Capacity factor % -% -% -% -% -% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% Nominal annual generation GWh - - - - - 113 226 226 226 226 226 226 226

Total Wind Capacity MW 148 291 291 291 356 543 543 543 543 543 543 543 543 Total Wind Generation GWh 477 786 1,071 1,071 1,181 1,605 1,921 1,921 1,921 1,921 1,921 1,921 1,921

Total generation GWh 11,914 12,846 13,131 13,131 13,240 13,665 13,981 13,981 13,981 13,981 13,981 13,981 13,981 Source: Company data, Macquarie Research, September 2009 (v) Other Arc Innovations smart metering Meridian Energy announced in August 2007 that it plans to install over 112,000 smart meters across Canterbury, replacing existing 40-year-old metering technology. The initiative will be developed in conjunction with its subsidiary Arc Innovations, will take around two years to complete and has an estimated contract cost of around $100m. The smart meters are a two-way communication device that can transmit energy consumption data between customer and retailer. Meridian will be able to communicate pricing signals and other incentives to help manage peak demand periods. Further, consumers may be able to benefit from remote appliance control. Additionally, smart metering technologies generally tend to benefit lines infrastructure owners via delayed capital expenditure where demand across peak times is reduced. As at December 2008, Meridian had over 100,000 smart meters installed in Hawkes Bay and Canterbury. This smart metering project has not been explicitly modelled in our Meridian Energy projections and therefore its DCF-based equity valuation. We do however attempt to make some allowance for the intellectual property value within Arc Innovations including an estimated book value of $75m in the alternative equity valuations. WhisperTech, WhisperGen and Energy for Industry We have not explicitly modelled the WhisperTech and WhisperGen CHP businesses, and the Energy for Industry subsidiary, as these are not part of Meridian’s core operations. An estimated value for these businesses of $100m is included in alternative equity valuations. IFRS Under IFRS, Meridian must mark-to-market the expected cash flows under its new contract with NZAS. We have not modelled any future marking-to-market, consistent with modelling the expected cashflows (EBITDAF) under the contract.

5 October 2009 13 Macquarie Research Equities - Report Meridian Energy

Financial statements summary

Fig 10 Meridian Energy income statement ($NZm)

Revenue $m 2,603.5 2,979.2 3,014.8 3,090.2 3,193.9 3,378.8 3,595.0 3,738.8 3,888.4 3,985.6 4,085.2 4,187.4 4,292.0 Operating Expenses $m 2,232.4 2,391.4 2,428.5 2,476.5 2,519.1 2,597.8 2,738.9 2,870.1 2,974.4 3,034.3 3,095.0 3,156.5 3,218.8 EBITDAF $m 371.1 587.8 586.3 613.7 674.8 781.0 856.1 868.7 914.0 951.3 990.2 1,030.9 1,073.3 Depreciation $m 139.6 144.2 145.8 148.8 154.9 160.5 163.2 164.7 166.2 167.9 169.7 171.5 173.5 Goodwill amortisation $m 13.1 ------EBIT - Recurring $m 218.4 443.6 440.5 465.0 519.9 620.6 692.9 704.1 747.7 783.4 820.6 859.3 899.8 EBIT - Non-Recurring $m 46.0 ------Equity accounted earnings $m (0.1) ------Total EBIT $m 264.3 443.6 440.5 465.0 519.9 620.6 692.9 704.1 747.7 783.4 820.6 859.3 899.8 Net Interest Expense $m 66.7 71.5 81.9 93.9 116.0 136.0 142.6 142.1 140.3 137.7 134.7 132.1 130.7 NPBT $m 197.7 372.0 358.6 371.1 403.9 484.6 550.4 562.0 607.4 645.7 685.9 727.2 769.1 Taxation Expense/ (Credit) $m 69.1 111.6 107.6 111.3 121.2 145.4 165.1 168.6 182.2 193.7 205.8 218.2 230.7 NPAT $m 128.6 260.4 251.0 259.8 282.7 339.2 385.3 393.4 425.2 452.0 480.1 509.1 538.4

EFPO and Ratios

Shares on issue m 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0

Revenue $m 2,603.5 2,979.2 3,014.8 3,090.2 3,193.9 3,378.8 3,595.0 3,738.8 3,888.4 3,985.6 4,085.2 4,187.4 4,292.0 EBITDA $m 371.1 587.8 586.3 613.7 674.8 781.0 856.1 868.7 914.0 951.3 990.2 1,030.9 1,073.3 EBIT - Recurring $m 218.4 443.6 440.5 465.0 519.9 620.6 692.9 704.1 747.7 783.4 820.6 859.3 899.8 EPS c 8.0 16.3 15.7 16.2 17.7 21.2 24.1 24.6 26.6 28.3 30.0 31.8 33.6 EPS (adjusted) c 6.9 16.3 15.7 16.2 17.7 21.2 24.1 24.6 26.6 28.3 30.0 31.8 33.6 CFPS c 16.3 25.3 24.8 25.5 27.3 31.2 34.3 34.9 37.0 38.7 40.6 42.5 44.5

EBITDA margin % 14.3% 19.7% 19.4% 19.9% 21.1% 23.1% 23.8% 23.2% 23.5% 23.9% 24.2% 24.6% 25.0% EBIT margin % 8.4% 14.9% 14.6% 15.0% 16.3% 18.4% 19.3% 18.8% 19.2% 19.7% 20.1% 20.5% 21.0%

EV/Revenue x 2.2x1.9x 1.9x 1.9x 1.8x 1.7x 1.6x 1.5x 1.5x 1.4x 1.4x 1.4x 1.3x EV/EBITDA x 15.5x 9.8x 9.8x 9.4x 8.5x 7.4x 6.7x 6.6x 6.3x 6.1x 5.8x 5.6x 5.4x EV/EBIT x 26.4x 13.0x 13.1x 12.4x 11.1x 9.3x 8.3x 8.2x 7.7x 7.4x 7.0x 6.7x 6.4x PER x 37.0x 18.3x 19.0x 18.3x 16.8x 14.0x 12.4x 12.1x 11.2x 10.5x 9.9x 9.4x 8.8x PER (adjusted) x 43.1x 18.3x 19.0x 18.3x 16.8x 14.0x 12.4x 12.1x 11.2x 10.5x 9.9x 9.4x 8.8x Price/CF x 18.2x 11.8x 12.0x 11.7x 10.9x 9.5x 8.7x 8.5x 8.1x 7.7x 7.3x 7.0x 6.7x

Payout ratio % 269.6% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% DPS c 18.6 13.0 12.6 13.0 14.1 17.0 19.3 19.7 21.3 22.6 24.0 25.5 26.9 Yield % 6.3% 4.4% 4.2% 4.4% 4.7% 5.7% 6.5% 6.6% 7.1% 7.6% 8.1% 8.6% 9.0%

NTA per share c 260.0 263.3 266.4 269.6 273.2 277.4 282.2 287.1 292.5 298.1 304.1 310.5 317.2 Price/NTA x 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x 1.0x 1.0x 1.0x 1.0x 1.0x 0.9x

Net debt $m 878.4 998.9 993.0 1,163.3 1,432.5 1,544.4 1,532.6 1,523.2 1,511.6 1,498.8 1,484.7 1,469.3 1,452.5 Net debt/equity % 20.9% 23.5% 23.1% 26.7% 32.4% 34.4% 33.6% 32.8% 32.0% 31.1% 30.2% 29.3% 28.4% Net debt/debt + equity % 17.3% 19.0% 18.7% 21.1% 24.5% 25.6% 25.2% 24.7% 24.2% 23.7% 23.2% 22.7% 22.1% Net debt/EV % 15.2% 17.3% 17.2% 20.2% 24.9% 26.8% 26.6% 26.4% 26.2% 26.0% 25.8% 25.5% 25.2% Net Interest $m 66.7 71.5 81.9 93.9 116.0 136.0 142.6 142.1 140.3 137.7 134.7 132.1 130.7 Capitalised interest $m 7.2 ------Total Interest $m 73.9 71.5 81.9 93.9 116.0 136.0 142.6 142.1 140.3 137.7 134.7 132.1 130.7 EBIT / interest x 3.0x 6.2x 5.4x 5.0x 4.5x 4.6x 4.9x 5.0x 5.3x 5.7x 6.1x 6.5x 6.9x

Return on assets % 3.1% 6.2% 6.1% 6.3% 6.7% 7.8% 8.6% 8.6% 9.0% 9.4% 9.7% 10.0% 10.4% Return on equity % 2.3% 6.1% 5.8% 6.0% 6.4% 7.6% 8.5% 8.5% 9.0% 9.4% 9.8% 10.2% 10.5% Return on funds employed % 4.3% 8.4% 8.3% 8.4% 8.9% 10.3% 11.4% 11.4% 12.0% 12.4% 12.8% 13.3% 13.7% WACC % 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% ROCE - WACC spread % (4.5%) (0.4%) (0.5%) (0.4%) 0.1% 1.5% 2.6% 2.6% 3.2% 3.6% 4.0% 4.5% 4.9% Source: Company data, Macquarie Research, September 2009

5 October 2009 14 Macquarie Research Equities - Report Meridian Energy

Fig 11 Meridian Energy cashflow statement ($NZm)

Operating activities Pre-taxation profit (excl Associate Inc) $m 197.8 372.0 358.6 371.1 403.9 484.6 550.4 562.0 607.4 645.7 685.9 727.2 769.1 Non-cash interest $m 11.1 ------Depreciation/goodwill amortisation $m 152.7 144.2 145.8 148.8 154.9 160.5 163.2 164.7 166.2 167.9 169.7 171.5 173.5 Tax credit/(paid) $m (69.2) (111.6) (107.6) (111.3) (121.2) (145.4) (165.1) (168.6) (182.2) (193.7) (205.8) (218.2) (230.7) (Gain)/loss on sale of assets $m (31.7) ------Other non-cash items (asset provisions, add minority adjustments) $m 0.5 ------Gross cashflow $m 261.1 404.6 396.8 408.5 437.6 499.7 548.4 558.1 591.4 619.9 649.8 680.6 711.9 (Inc) / dec in working cap. $m 78.3 (72.6) (0.1) (0.3) (0.4) (0.7) (0.8) (0.6) (0.6) (0.4) (0.4) (0.4) (0.4) Inc / (dec) in provisions $m ------Operating cashflow $m 339.3 332.0 396.7 408.2 437.2 498.9 547.6 557.5 590.8 619.5 649.4 680.2 711.5

Investing activities $m ------Capital expenditure $m (271.7) (244.2) (190.0) (370.7) (480.1) (339.5) (227.6) (233.3) (239.1) (245.1) (251.2) (257.5) (263.9) Acquisitions / Investments $m (3.5) ------Asset sales $m 3.6 ------(Loans to) / repaid by other entities $m ------Investing Cashflow $m (271.5) (244.2) (190.0) (370.7) (480.1) (339.5) (227.6) (233.3) (239.1) (245.1) (251.2) (257.5) (263.9)

Financing activities $m ------Equity raised $m ------Debt drawndown / repayments $m 250.0 55.9 (5.9) 170.3 269.1 112.0 (11.8) (9.5) (11.6) (12.8) (14.1) (15.4) (16.8) Dividends paid $m (297.9) (208.3) (200.8) (207.8) (226.2) (271.4) (308.2) (314.7) (340.1) (361.6) (384.1) (407.2) (430.7) Other $m ------Finance Cashflow - ex debt repayments $m (47.9) (152.4) (206.7) (37.5) 43.0 (159.4) (320.0) (324.2) (351.7) (374.4) (398.2) (422.7) (447.5)

Inc / (dec) in net cash held $m 19.9 (64.6) ------Source: Company data, Macquarie Research, September 2009

Fig 12 Meridian Energy balance sheet ($NZm)

Current Assets Cash and Deposit account $m 64.6 ------Accounts receivable $m 478.2 443.2 448.5 459.8 475.2 502.7 534.9 556.3 578.5 593.0 607.8 623.0 638.6 Inventories $m 8.38.5 8.68.8 9.1 9.6 10.2 10.6 11.0 11.3 11.6 11.9 12.2 Income Tax Asset $m 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Other $m 45.545.5 45.545.5 45.5 45.5 45.5 45.5 45.5 45.5 45.5 45.5 45.5 Total Current Assets $m 604.7 505.2 510.6 522.1 537.8 565.8 598.6 620.4 643.1 657.8 672.9 688.4 704.3

Non Current Assets $m Property Plant and Equipment $m 6,432.6 6,532.6 6,576.8 6,798.7 7,124.0 7,303.1 7,367.5 7,436.2 7,509.0 7,586.3 7,667.8 7,753.8 7,844.3 Goodwill and other intangibles $m 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 42.4 Investment Associates $m 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 Other $m 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 115.3 Total Non Current Assets $m 6,593.0 6,693.0 6,737.2 6,959.2 7,284.4 7,463.5 7,528.0 7,596.6 7,669.5 7,746.7 7,828.3 7,914.2 8,004.7

Total Assets $m 7,197.7 7,198.3 7,247.8 7,481.2 7,822.2 8,029.4 8,126.6 8,217.0 8,312.6 8,404.5 8,501.2 8,602.7 8,709.0

Current Liabilities $m ------Current Borrowings $m 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 Accounts Payable $m 547.6 440.2 445.4 456.6 471.9 499.2 531.2 552.4 574.5 588.9 603.6 618.7 634.1 Provisions and other $m 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 48.1 Total Current Liabilities $m 745.5 638.1 643.4 654.5 669.8 697.2 729.1 750.4 772.5 786.8 801.5 816.6 832.1

Non Current Liabilities $m Deferred Tax Liability $m 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 1,329.5 Non Current Borrowings $m 793.2 849.1 843.2 1,013.5 1,282.7 1,394.6 1,382.8 1,373.3 1,361.8 1,349.0 1,334.9 1,319.5 1,302.7 Other $m 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 Total Non Current Liabilities $m 2,247.5 2,303.4 2,297.5 2,467.8 2,737.0 2,848.9 2,837.1 2,827.7 2,816.1 2,803.3 2,789.2 2,773.8 2,757.0

Net Assets $m 4,204.6 4,256.7 4,306.9 4,358.9 4,415.4 4,483.3 4,560.3 4,639.0 4,724.0 4,814.4 4,910.4 5,012.3 5,119.9

Equity Share Capital $m 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 1,600.0 Reserves $m 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 2,713.8 Retained Earnings $m (111.6) (59.5) (9.3) 42.7 99.2 167.1 244.1 322.8 407.8 498.2 594.3 696.1 803.7 Minorities $m 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 Total Equity $m 4,204.6 4,256.7 4,306.9 4,358.9 4,415.4 4,483.3 4,560.3 4,639.0 4,724.0 4,814.4 4,910.4 5,012.3 5,119.9 Source: Company data, Macquarie Research, September 2009

5 October 2009 15 Macquarie Research Equities - Report Meridian Energy

Fig 13 Taxation ($NZm)

Pre-Tax Profit $m 197.7 372.0 358.6 371.1 403.9 484.6 550.4 562.0 607.4 645.7 685.9 727.2 769.1 Less: Equity Earnings $m (0.1) ------Add: Goodwill Amortisation $m 13.1 ------Operating Surplus before Taxation $m 210.9 372.0 358.6 371.1 403.9 484.6 550.4 562.0 607.4 645.7 685.9 727.2 769.1 Tax Expense/(Credit) $m 69.1 111.6 107.6 111.3 121.2 145.4 165.1 168.6 182.2 193.7 205.8 218.2 230.7

Effective Taxation Rate % 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Deferred Taxation $m ------0.0 0.0 - - 0.0 0.0 0.0 Source: Company data, Macquarie Research, September 2009

5 October 2009 16 Macquarie Research Equities - Report Meridian Energy

Financial flexibility and generation development Meridian Energy’s FY09 gearing ratio (net debt/debt + equity) is forecast at approximately 19.0% and EBIT interest cover ratio at 6.2x. We forecast that these ratios will be at 18.7% and 5.4x at FY10. This indicates that the company will have strong financial capacity to proceed with further generation development and retain at least an average 80% payout ratio. We assume that the modelled projects are able to be funded internally and via debt. Beyond the modelled projects, depending on the dividend payout ratio and the rate of development, there may be some funding pressure in the medium term. As highlighted previously, Meridian has a large pipeline of generation developments, with over 350 MW of new hydro generation and over 1,500 MW of wind projects. We outline below our forecast capex for the company out to FY12, as per the development pipeline identified earlier.

Fig 14 Capital expenditure ($NZm)

Period FY08A FY09E FY10E FY11E FY12E Period End 30/06/08 30/06/09 30/06/10 30/06/11 30/06/12

Hydro generation maintenance (transformers, sluice gates, gantry, reconsents) $m - - - - -

Wind generation maintenance (gear boxes, blades, reconsents) $m - - - - - Capitalised interest $m 7.2 - - - - Other resource consenting $m - - - - - Other growth capex $m 264.5 100.0 - - - Te Uku - - 40.0 80.0 40.0 Project Central Wind - - - 65.0 130.0 Mill Creek - - - 52.5 105.0 Total growth capex $m 271.7 100.0 40.0 197.5 275.0

Maintenance capex $m - 144.2 150.0 173.2 205.1

Total capex $m 271.7 244.2 190.0 370.7 480.1 Source: Company data, Macquarie Research, September 2009

5 October 2009 17 Macquarie Research Equities - Report Meridian Energy

Sensitivities We have determined the sensitivity of the equity valuation to changes in key assumptions. The results of these changes are outlined below.

Fig 15 Sensitivities

Capacity factors 3,693 5,830 (-/+ 5%)

Carbon cost 4,570 4,893 ($25/t / $0/t)

Wholesale 4,483 5,050 (-/+ $10/MWh)

Retail 4,629 4,894 (-/+ 0.5c/kWh)

Customer growth 4,761 4,763 (+/- 0.1%)

Usage per customer 4,718 4,805 (-/+ 500kWh pa)

Debt margin 4,686 4,840 (+/- 0.5%)

Market risk premium 4,451 5,107 (+/- 0.5%)

3,262 3,762 4,262 4,762 5,262 5,762 6,262 6,762

Source: Macquarie Research, September 2009

5 October 2009 18 Macquarie Research Equities - Report Meridian Energy

Alternative valuation methodologies We have assessed a comparable company equity valuation for the company of $4,864 – 5,743m. This is based on the trading valuations of comparable global generator/retailers. This valuation provides a cross check of the equity valuation based on our primary methodology, discounted cashflow. Comparable companies were selected for the similarity of their activities and operating environments. The forward (ie, future period) EV/EBITDA, EV/EBIT and PE multiples for each comparable company were calculated, and averages obtained. Applying these average multiples to the relevant metric for Meridian resulted in a cross check of the primary DCF valuation methodology. We show the EV/EBITDA multiple-based valuation below, as this metric is the most appropriate in our view.

Fig 16 Comparable company valuation analysis Multiple FY10 Enterprise value Net Debt Equity value EBITDA Low High Low High Low High Genesis Energy 8.0x 9.0x 269 2,155 2,425 614 1,541 1,811 Meridian Energy 10.0x 11.5x 586 5,863 6,742 999 4,864 5,743 Mighty River Power 10.0x 11.0x 337 3,367 3,704 586 2,781 3,118 Contact Energy 9.5x 486 4,615 1,058 3,558 TrustPower 11.0x 280 3,078 705 2,373 Source: FactSet, Macquarie Research, September 2009

A sum-of-the-parts valuation was also calculated based on European transaction multiple precedents. This values the equity of Meridian at $8,670 – 10,866m, and is presented in figure 17.

Fig 17 Sum-of-the-parts valuation analysis

1 NZD = 0.5€ Genesis Energy Meridian Energy Mighty River Power Contact Energy TrustPower Low High Low High Low High Low High Low High NZ conventional generation 0.5-1.0 (€m/MW) 1,288 2,576 - - 179 358 921 1,842 - - NZ wind 1.4-1.6 (€m/MW) 25 29 414 474 - - - - 451 515 NZ base load hydro/geothermal 1.8-2.2 (€m/MW) 1,796 2,195 8,831 10,793 4,644 5,676 3,884 4,748 1,559 1,905 Renewables WIP 0.25-0.75 (€m/MW) - - 72 215 66 198 129 386 - - Renewables pipeline 0.025-0.050 (€m/MW) - - 13 25 - - 9 18 28 56 Retail load 450-500 (€/cust) 528 586 165 183 343 381 468 520 204 227 Other 175 175 Enterprise Value 3,637 5,386 9,669 11,865 5,232 6,613 5,411 7,513 2,242 2,704 less: Net Debt 614 614 999 999 586 586 1,058 1,058 705 705 Equity value 3,023 4,772 8,670 10,866 4,646 6,027 4,353 6,455 1,537 1,999 An 80% discount has been applied to Huntly capacity reflecting the age of the plant. Source: Macquarie Research, September 2009

5 October 2009 19 Macquarie Research Equities - Report Meridian Energy

Performance relative to SCI We have examined the historical and forecast performance of Meridian Energy relative to the target return on equity target outlined in the Statement of Corporate Intent (SCI). Historical performance has been above the SCI target, as estimated by Macquarie. Performance based on Macquarie estimates is forecast to above SCI targets, as outlined in the 2009-2011 SCI.

Fig 18 Performance versus SCI targets

Period FY07A FY08A FY09E FY10E FY11E FY12E Period End 30/06/07 30/06/08 30/06/09 30/06/10 30/06/11 30/06/12

Return on average shareholders equity SCI target % 12.8% 6.3% 3.3% 5.0% 5.5% n/a Macquarie estimate % 4.6% 2.3% 6.2% 5.9% 6.0% 6.4% Source: Macquarie Research, September 2009

5 October 2009 20 Macquarie Research Equities - Report Meridian Energy

Fig 19 Jun-10 EV/EBITDA Fig 20 Jun-10 EV/EBIT

18x 70x 16x 60x 14x 50x 12x 10x 40x 8x 30x 6x 20x 4x 2x 10x - - EDF AGL Enel EDF EDP AGL Enel EDP Origin Origin E. ON E. ON Contact Contact Iberdrola Iberdrola INFIGEN INFIGEN THEOLIA THEOLIA FPL Group FPL Group TrustPower TrustPower ERG Renew ERG ERG Renew ERG EDP Renovaveis EDP EDP Renovaveis EDP International Power International International Power International Viridis Clean Energy Clean Viridis Viridis Clean Energy Clean Viridis Iberdrola Renovables Iberdrola Iberdrola Renovables Iberdrola EDF Energie Nouvelles Energie EDF EDF Energie Nouvelles Energie EDF Canadian Hydro Developers Hydro Canadian Canadian Hydro Developers Hydro Canadian Scottish and Southern Energy and Southern Scottish Scottish and Southern Energy and Southern Scottish Source: Company disclosures, Macquarie Research, September 2009 Source: Company disclosures, Macquarie Research, September 2009

Fig 21 Gearing (Net debt / EV) Fig 22 Market cap vs EV (NZ$b)

90% 300 80% 250 70% 60% 200

50% 150 40% 100 30% 20% 50 10% - - EDF AGL Enel EDP Origin E. ON EDF Enel AGL EDP Contact Origin E. ON Iberdrola INFIGEN THEOLIA Contact FPL Group TrustPower Iberdrola INFIGEN THEOLIA ERG Renew ERG FPL Group TrustPower ERG Renew ERG EDP Renovaveis EDP International Power International EDP Renovaveis EDP Viridis Clean Energy Clean Viridis Iberdrola Renovables Iberdrola International Power International Viridis Clean Energy Clean Viridis EDF Energie Nouvelles Energie EDF Iberdrola Renovables Iberdrola EDF Energie Nouvelles Energie EDF Canadian Hydro Developers Hydro Canadian Scottish and Southern Energy and Southern Scottish Canadian Hydro Developers Hydro Canadian cottish and Southern Energy and Southern cottish

S Source: Company disclosures, Macquarie Research, September 2009 Source: Company disclosures, Macquarie Research, September 2009

Fig 23 Jun-10 EBITDA margin Fig 24 Jun-10 EBIT margin

80% 45% 70% 40% 60% 35% 30% 50% 25% 40% 20% 30% 15% 20% 10% 10% 5% - - EDF EDF Enel Enel AGL AGL EDP EDP Origin Origin E. ON E. ON Contact Contact Iberdrola Iberdrola INFIGEN INFIGEN THEOLIA THEOLIA FPL Group FPL Group TrustPower TrustPower ERG Renew ERG ERG Renew ERG EDP Renovaveis EDP EDP Renovaveis EDP International Power International International Power International Viridis Clean Energy Clean Viridis Viridis Clean Energy Clean Viridis Iberdrola Renovables Iberdrola Iberdrola Renovables Iberdrola EDF Energie Nouvelles Energie EDF EDF Energie Nouvelles Energie EDF Canadian Hydro Developers Hydro Canadian Canadian Hydro Developers Hydro Canadian Scottish and Southern Energy and Southern Scottish Energy and Southern Scottish Source: Company disclosures, Macquarie Research, September 2009 Source: Company disclosures, Macquarie Research, September 2009

5 October 2009 21 Macquarie Research Equities - Report Meridian Energy

Fig 25 Revenue CAGR (Jun-08 – Jun-10) Fig 26 EBITDA CAGR (Jun-08 – Jun-10)

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

- nmf nmf -

(20%) (20%)

(40%) (40%) EDF EDF Enel AGL Enel AGL EDP EDP Origin Origin E. ON E. ON Contact Contact Iberdrola Iberdrola INFIGEN INFIGEN THEOLIA THEOLIA FPL Group FPL Group TrustPower TrustPower ERG Renew ERG Renew EDP Renovaveis EDP Renovaveis International Power International International Power International Viridis Clean Energy Clean Viridis Viridis Clean Energy Clean Viridis Iberdrola Renovables Iberdrola Renovables Iberdrola EDF Energie Nouvelles Energie EDF Nouvelles Energie EDF Canadian Hydro Developers Hydro Canadian Developers Hydro Canadian Scottish and Southern Energy and Southern Scottish Energy and Southern Scottish Source: Company disclosures, Macquarie Research, September 2009 Source: Company disclosures, Macquarie Research, September 2009

5 October 2009 22 Macquarie Research Equities - Report Meridian Energy Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >5% in excess of benchmark return price movements. adjustments made: Neutral – return within 5% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >5% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, Macquarie – Asia/Europe expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Outperform – expected return >+10% – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property Neutral – expected return from -10% to +10% speculative. revals, appraisal value uplift, preference dividends & Underperform – expected return <-10% minority interests High – stock should be expected to move up or Macquarie First South - South Africa down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Outperform – expected return >+10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Neutral – expected return from -10% to +10% ROA Banks/Insurance = adjusted net profit /average Underperform – expected return <-10% Medium – stock should be expected to move up total assets Macquarie - Canada or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – return >5% in excess of benchmark return Gross cashflow = adjusted net profit + depreciation Neutral – return within 5% of benchmark return Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – return >5% below benchmark return move up or down at least 25–30% in a year. number of shares

Macquarie - USA Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Outperform (Buy) – return >5% in excess of Russell down at least 15–25% in a year. are modelled under IFRS (International Financial 3000 index return * Applicable to Australian/NZ/Canada stocks only Reporting Standards). Neutral (Hold) – return within 5% of Russell 3000 index

return Underperform (Sell)– return >5% below Russell 3000 index return Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 30 September 2009 AU/NZ Asia RSA USA CA EUR Outperform 40.38% 48.53% 40.00% 42.31% 62.86% 40.20% (for US coverage by MCUSA, 0.35% of stocks covered are investment banking clients) Neutral 39.25% 17.08% 45.00% 43.36% 31.90% 39.21% (for US coverage by MCUSA, 0.35% of stocks covered are investment banking clients) Underperform 20.38% 34.40% 15.00% 14.34% 5.24% 20.59% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

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