TRANSPOWER Financial Statements

Six Months ended 31 December 2018 Statement of Comprehensive Income

For the six months ended 31 December 2018

GROUP UNAUDITED RESTATED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 Notes $M $M

Operating revenue 2 516.2 552.8

Operating expenses 3 143.3 139.3 Earnings before interest, tax, depreciation, amortisation, asset write-offs, impairment and changes in the fair value of financial instruments 372.9 413.5 Depreciation, amortisation, write-offs and impairment 132.4 146.8 Net interest expenses 4 94.0 99.3 Earnings before changes in the fair value of financial instruments and tax 146.5 167.4 Gain (loss) in the fair value of financial instruments 9 34.6 28.0 Earnings before tax 181.1 195.4 Income tax expense 50.9 55.0 Net profit 130.2 140.4 Attributable to: Non-controlling interest 0.3 (0.8) Owners of the parent 129.9 141.2

Other comprehensive income (expense) 9 1.1 (15.1) Attributable to: Non-controlling interest – – Owners of the parent 1.1 (15.1)

Total comprehensive income 131.3 125.3 Attributable to: Non-controlling interest 0.3 (0.8) Owners of the parent 131.0 126.1

These statements are to be read in conjunction with the accompanying notes.

Reconciliation of net profit specifying the net impact of fair value movements

Earnings before changes in the fair value of financial instruments and tax 146.5 167.4 Income tax expense excluding changes in the fair value of financial instruments 41.2 47.2 Earnings before net changes in fair values of financial instruments 1 105.3 120.2 Gain (loss) in the fair value of financial instruments 34.6 28.0 Income tax credit (expense) on changes in the fair value of financial instruments (9.7) (7.8) Net profit 130.2 140.4

Transpower New Zealand Limited — Financial Statements 1 Statement of Financial Position

As at 31 December 2018

GROUP UNAUDITED AUDITED 31 DECEMBER 30 JUNE 2018 2018 Notes $M $M ASSETS EMPLOYED Cash and cash equivalents 52.5 76.0 Investments – short term 97.3 149.8 Trade receivables and other assets 7 150.3 137.0 Derivatives and hedge commitment in gain 7 234.2 242.4 NZPCL investment 7 78.9 76.3 Property, plant and equipment 5 4,560.4 4,615.0 Intangibles – long term 369.8 377.4 Capital work in progress 5 135.6 75.0 TOTAL ASSETS EMPLOYED 5,679.0 5,748.9

FUNDS EMPLOYED Liabilities Cash and cash equivalents – 1.0 Trade and other payables 7 76.0 96.6 Current tax liability 10.5 27.1 Deferred income 112.9 97.8 Derivatives and hedge commitment in loss 7 237.1 267.4 Provisions 7 56.4 58.9 Debt 6 3,084.0 3,152.9 NZPCL debt 7 79.9 77.7 Deferred tax 434.2 413.8 Total liabilities 4,091.0 4,193.2

EQUITY Capital 1,200.0 1,200.0 Accumulated surplus 388.8 356.8 Non-controlling interest (0.8) (1.1) Total equity 1,588.0 1,555.7 TOTAL FUNDS EMPLOYED 5,679.0 5,748.9

The board of directors of Limited authorised these financial statements for issue on 27 February 2019. For, and on behalf of, the board

Pip Dunphy Dean Carroll Chair Deputy Chair 27 February 2019 27 February 2019

These statements are to be read in conjunction with the accompanying notes.

Transpower New Zealand Limited — Financial Statements 2 Statement of Changes In Equity

For the six months ended 31 December 2018

GROUP UNAUDITED (RESTATED) NON ORDINARY RETAINED OWNERS OF CONTROLLING SHARES EARNINGS THE PARENT INTEREST TOTAL $M $M $M $M $M Equity at 1 July 2018 1,200.0 356.8 1,556.8 (1.1) 1,555.7

Profit for the period – 129.9 129.9 0.3 130.2 Other comprehensive income – 1.1 1.1 – 1.1 Total comprehensive income – 131.0 131.0 0.3 131.3 Dividends – (99.0) (99.0) – (99.0) Total equity at 31 December 2018 1,200.0 388.8 1,588.8 (0.8) 1,588.0

Equity at 1 July 2017 1,200.0 279.0 1,479.0 2.3 1,481.3 Profit for the period – 141.2 141.2 (0.8) 140.4 Other comprehensive income – (15.1) (15.1) – (15.1) Total comprehensive income – 126.1 126.1 (0.8) 125.3 Dividends – (99.0) (99.0) – (99.0) Total equity at 31 December 2017 1,200.0 306.1 1,506.1 1.5 1,507.6

These statements are to be read in conjunction with the accompanying notes.

Transpower New Zealand Limited — Financial Statements 3 Cash Flow Statement

For the six months ended 31 December 2018

GROUP UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M

CASH FLOW FROM OPERATIONS Receipts from customers 518.2 552.0 Interest received 3.4 2.2 Payments to suppliers and employees (157.9) (159.0) Tax payments (47.6) (35.7) Interest paid (99.2) (98.2) Net cash inflows (outflows) from operations 216.9 261.3

CASH FLOW FROM INVESTMENTS Sale of property, plant and equipment 6.7 0.9 Sale of short term investments 476.0 41.7 Purchase of property, plant and equipment and intangibles (147.8) (131.7) Purchase of short term investments (423.4) (46.3) Net cash inflows (outflows) from investments (88.5) (135.4)

CASH FLOW FROM FINANCING Increase in loans 273.1 293.5 Dividends paid (99.0) (99.0) Repayment of loans (325.0) (293.5) Net cash inflows (outflows) from financing (150.9) (99.0)

Net increase (decrease) in cash held (22.5) 26.9 Opening balance brought forward 75.0 28.3 Closing net cash carried forward 52.5 55.2

Closing net cash carried forward comprises: Cash and on-call deposits 52.5 12.2 Short-term deposits with original maturity less than three months – 43.0

These statements are to be read in conjunction with the accompanying notes.

Transpower New Zealand Limited — Financial Statements 4 Reconciliation of net profit (loss) with net cash flow from operations

GROUP UNAUDITED RESTATED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M

Net profit (loss) 130.2 140.4

Add (deduct) non-cash items: Change in fair value of financial instruments (34.8) (22.2) Depreciation, amortisation and write-offs 132.4 146.8 Deferred tax 20.4 12.5 Capitalised interest (3.2) (2.8)

Movements in working capital items: (Increase) / decrease in trade and other receivables (13.3) (11.3) (Decrease) / increase in trade and other payables, interest payable and deferred income 4.3 (2.9) (Decrease) / increase in taxation payable (16.6) 0.9 (Decrease) / increase in provisions (2.5) (0.1) Net cash flow from operations 216.9 261.3

These statements are to be read in conjunction with the accompanying notes.

Transpower New Zealand Limited — Financial Statements 5 Notes to the Financial Statements

1. Transpower Group information

Reporting entity and statutory base Transpower New Zealand Limited (Transpower) is a State-Owned Enterprise registered in New Zealand under the Companies Act 1993. The financial statements are in New Zealand dollars and are of Transpower and its subsidiaries (together, the Group). The Group is the owner and operator of New Zealand’s national electricity grid. The Group is a for-profit entity in accordance with XRB A1 Application of the Accounting Standards Framework.

Basis of preparation The financial statements included in this half yearly report have been prepared in compliance with NZ IAS 34 Interim Financial Reporting and IAS 34 Interim Financial Reporting and should be read in conjunction with the 2017/18 audited annual financial statements. The accounting policies used in preparation of these financial statements are consistent with those used in preparation of the 2017/18 audited annual financial statements with the exception of two new accounting standards adopted. The 2017/18 audited annual financial statements can be viewed at www.transpower.co.nz. Transpower’s operations are not considered seasonal or cyclical in nature.

Restatement of 2017 Statement of Comprehensive Income The adoption of NZ IFRS 9 has led to the restatement of the 2017 Statement of Comprehensive Income. The valuation impact of credit spreads on debt are now presented as part of other comprehensive income, rather than profit or loss. Consequently, net profit has increased by $15.1 million with a corresponding decrease to other comprehensive income; total comprehensive income remains unchanged.

New standards adopted during the period During the period, Transpower adopted two standards, NZ IFRS 9 Financial Instruments and NZ IFRS 15 Revenue from contracts with customers. NZ IFRS 9–the main impact of this standard is that the valuation impact of credit spreads on debt is now presented as part of other comprehensive income, previously presented in profit or loss. The classification or measurement of financial assets and liabilities remains unchanged. NZ IFRS 15–There are new guiding principles which affect when, how and how much revenue is recognised in Transpower’s financial statements. As of the date of transition, there is no material impact on the financial statements.

Measurement basis The measurement basis adopted in the preparation of these financial statements is historical cost except as modified for certain investments, held for sale assets, financial assets and financial liabilities. Transpower discloses an alternative measure of profit, which is earnings before net changes in fair values of financial instruments. Transpower discloses this information as it provides a different measure of underlying performance to the IFRS mandated profit measures, which are also disclosed. The directors consider that this additional profit measure is useful additional information for users of the financial statements. Transpower has consistently reported an alternative profit on this basis since the adoption of IFRS.

New standards not yet adopted Transpower has elected not to early adopt the following standards (or revisions to standards), considered to be relevant to the financial statements, but not yet effective. NZ IFRS 16 Leases, effective from 1 July 2019 On adoption of NZ IFRS 16, all leases for lessees (with certain exemptions) will come onto the balance sheet. A right of use asset will be created with a materially offsetting liability. The right of use asset will be depreciated. The liability will decrease over time with an imputed interest expense being recognised. Accordingly, the profit or loss impact is a decrease in leasehold expenditure and an increase in depreciation expense and imputed interest expense. Management are in the process of examining all lease contracts. It is expected that the majority of lease commitments disclosed in note 3 of the annual report, discounted to present value, would be capitalised as an asset and an offsetting liability created. An estimated range, is that the asset and liability created would be $100-150 million with the net profit or loss difference (between old and new standard) in any given year being +/- $3 million.

Transpower New Zealand Limited — Financial Statements 6 Notes to the Financial Statements

2. Operating revenue

GROUP UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M

Transmission revenue HVAC interconnection 340.1 345.0 HVAC connection 64.7 63.4 EV (rebate) charge–HVAC (10.6) 12.6 HVDC 75.6 63.8 EV (rebate) charge–HVDC 0.5 10.8 Other regulated transmission 2.2 1.9 Customer investment contracts 13.4 13.9 Other transmission 3.3 14.1 489.2 525.5 Other revenue System operator 20.6 20.2 Other 6.4 7.1 27.0 27.3 Total operating revenue 516.2 552.8

Government-related transactions Transpower, being a State-Owned-Enterprise, transacts with other government-related entities. The most significant transactions and balances (greater than $15 million) are as follows:

UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M Limited–revenue 59.6 58.1 Electricity Authority–revenue 21.0 20.4 80.6 78.5

Description Transmission revenue

Transmission revenue consists of charges for the transmission of electricity from the point of generation to the point of supply, being high voltage alternating current (HVAC) interconnection, connection and high voltage direct current (HVDC).

Customer investment contracts are contracts entered into with customers to build grid connection assets. Transpower recognises the revenue over the life of the asset.

Other revenue System operator – System operator income relates to payments received for the provision of real-time services to ensure the short term security of the New Zealand electricity system.

Transpower New Zealand Limited — Financial Statements 7 Notes to the Financial Statements

3. Operating expenses

GROUP UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M Grid Maintenance HVAC substations maintenance 21.9 18.7 HVDC substations and cables maintenance 4.3 4.8 HVAC lines maintenance 18.6 14.7 HVDC lines maintenance 0.5 0.5 Transmission related rates 3.8 3.9 Other 3.5 3.1 52.6 45.7 IST maintenance and operations Support and maintenance 4.4 5.0 Outsourced services 7.1 7.3 Licenses 4.5 4.3 IST leases 3.8 4.6 19.8 21.2 Other operating expenses Investigations 6.7 9.0 Ancillary service costs 2.2 1.3 Employee benefits 56.3 52.7 Capitalised salary costs (11.2) (9.5) Salary transferred to investigations (2.9) (3.3) Operating lease and rental costs 2.4 1.9 Industry levies 5.0 5.0 Insurance 2.1 2.1 Other business support costs 10.3 13.2 70.9 72.4 Total operating expenses 143.3 139.3

Description Maintenance includes inspection, servicing and repair costs. Other grid maintenance expenses include maintenance support, communication system and training for service providers and third parties. Investigations includes work that the Group conducts prior to the commencement of a capital project, updates to maintenance standards and demand response costs. Other business support costs include such items as legal fees, office equipment, communications, vehicles, travel, consultants, contractors, donations and study grants.

Transpower New Zealand Limited — Financial Statements 8 Notes to the Financial Statements

3. Operating expenses (Cont.)

Fees paid to external auditor

GROUP UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $000 $000 Audit of financial statements Audit and reviews of financial statements 254 254

Other services Training courses 54 40 Trust deed requirements 11 11 Remuneration benchmarking report 6 6 Financial model assurance 21 7 92 64 Total fees paid to external auditor 346 318

4. Net interest expenses

GROUP UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M Interest revenue Interest received 3.4 2.2 3.4 2.2 Interest expenses Interest paid and associated fees 97.0 100.9 Capitalised interest (3.2) (2.8) Imputed interest 3.6 3.4 97.4 101.5 Total net interest expenses 94.0 99.3

Description Capitalised interest is based on Transpower’s forecast weighted average cost of borrowing, which, for the six months to December 2018 was 6.59% (six months to December 2017: 6.88%). Imputed interest arises on deferred income and the unwind of the discount of future cash flows related to provisions.

Transpower New Zealand Limited — Financial Statements 9 Notes to the Financial Statements

5. Non current assets

GROUP HVAC TRANSMISSION LINES HVDC TRANSMISSION LINES HVAC SUBSTATIONS HVDC SUBSTATIONS & SUBMARINE CABLES COMMUNICATIONS ADMINISTRATION ASSETS PROPERTY, TOTAL PLANT AND EQUIPMENT IN WORK CAPITAL PROGRESS

$M $M $M $M $M $M $M $M At 31 December 2018

Cost 2,606.6 147.5 2,526.4 870.0 367.4 186.8 6,704.7 135.6 Accumulated depreciation (669.0) (54.6) (760.6) (343.8) (199.4) (116.9) (2,144.3) – Net book value 1,937.6 92.9 1,765.8 526.2 168.0 69.9 4,560.4 135.6

31 December 2018 reconciliation

Opening net book value (1 July 2018) 1,958.8 96.7 1,765.1 542.4 177.6 74.4 4,615.0 75.0 Additions / transfers 19.8 0.5 43.8 2.0 5.1 2.8 74.0 60.6 Disposals / transfers (7.6) (2.3) (7.1) – (0.7) (0.8) (18.5) – Depreciation (33.4) (2.0) (36.0) (18.2) (14.0) (6.5) (110.1) – Closing net book value 1,937.6 92.9 1,765.8 526.2 168.0 69.9 4,560.4 135.6

At 30 June 2018

Cost 2,596.4 149.7 2,493.5 868.0 363.7 184.8 6,656.1 75.0 Accumulated depreciation (637.6) (53.0) (728.4) (325.6) (186.1) (110.4) (2,041.1) – Net book value 1,958.8 96.7 1,765.1 542.4 177.6 74.4 4,615.0 75.0

30 June 2018 reconciliation

Opening net book value (1 July 2017) 1,937.3 98.1 1,738.5 575.6 179.2 60.7 4,589.4 75.9 Additions / transfers 91.1 2.7 109.3 3.3 29.3 24.4 260.1 281.4 Disposals / transfers (2.2) (0.1) (6.4) (0.1) (0.3) (0.5) (9.6) (282.3) Impairment (1.8) – (2.0) – – – (3.8) – Depreciation (65.6) (4.0) (74.3) (36.4) (30.6) (10.2) (221.1) – Closing net book value 1,958.8 96.7 1,765.1 542.4 177.6 74.4 4,615.0 75.0

At 31 December 2017

Cost 2,524.5 148.9 2,442.7 866.1 354.7 199.8 6,536.7 88.5 Accumulated depreciation (605.7) (51.1) (701.2) (307.6) (184.7) (130.8) (1,981.1) – Net book value 1,918.8 97.8 1,741.5 558.5 170.0 69.0 4,555.6 88.5

31 December 2017 reconciliation

Opening net book value (1 July 2017) 1,937.3 98.1 1,738.5 575.6 179.2 60.7 4,589.4 75.9 Additions / transfers 16.4 1.7 44.3 1.1 5.8 16.3 85.6 122.2 Disposals / transfers (2.7) – (2.6) – – (0.8) (6.1) (109.6) Depreciation (32.2) (2.0) (38.7) (18.2) (15.0) (7.2) (113.3) – Closing net book value 1,918.8 97.8 1,741.5 558.5 170.0 69.0 4,555.6 88.5

Transpower New Zealand Limited — Financial Statements 10 Notes to the Financial Statements

5. Non current assets (Cont.)

Description Property, plant and equipment Administration assets include computer hardware, plant, equipment, furniture and motor vehicles. Key judgements Transpower has exercised judgement in the following four areas: 1. Determining the useful life of property, plant and equipment and finite life intangible assets. Transpower uses assistance from independent engineers. For transmission line assets, a determining factor in the life assumption is proximity to the coast. 2. Whether or not an item is capital in nature and the appropriate component level of asset at which to depreciate 3. Determining the appropriate time to commission an asset and commence depreciation 4. Whether there are any regulated assets that ought to be impaired

6. Debt

GROUP UNAUDITED AUDITED 31 DECEMBER 30 JUNE 2018 2018 $M $M Current debt Short term debt 274.0 – Current portion of long term debt 373.8 330.1 Total current debt 647.8 330.1

Long term debt New Zealand Domestic Bonds 1,080.1 1,409.0 Euro Medium Term Notes 80.0 78.2 Australian Medium Term Notes 523.4 547.1 US Private Placement Notes 1,126.5 1,118.6 2,810.0 3,152.9 Less current portion of long term debt (373.8) (330.1) Total long term debt 2,436.2 2,822.8 Total debt 3,084.0 3,152.9

Description Debt is reported at fair value and therefore reflects value movements, from the date of debt issuance to 31 December 2018, due to interest rate and exchange rate fluctuations. Long Term Debt issuances and repayments during the period During the six months to 31 December 2018 Transpower repaid NZD 325m of bonds, maturing 30 November 2018 with a coupon of 5.14%. No long term debt was issued in the six months to 31 December 2018. Key judgements A key judgement has been made in relation to the fair values of debt and derivatives. Fair values are determined by discounting cash flows based on the relevant yield curve. The yield curve is adjusted to reflect the credit risk of the counterparty to the transaction or the credit risk of Transpower. These valuations are considered level two in the IFRS three-level valuation hierarchy.

Transpower New Zealand Limited — Financial Statements 11 Notes to the Financial Statements

6. Debt (Cont.)

Debt at face value as amended by foreign exchange derivatives

GROUP UNAUDITED AUDITED 31 DECEMBER 30 JUNE 2018 2018 $M $M Short term debt 273.1 – Current portion of long term debt 373.4 325.0 Total current debt 646.5 325.0

New Zealand Domestic Bonds 1,025.0 1,350.0 Euro Medium Term Notes 73.1 73.1 Australian Medium Term Notes 506.9 506.9 US Private Placement Notes 1,013.2 1,013.2 2,618.2 2,943.2 Less current portion of debt (373.4) (325.0) Total long term debt 2,244.8 2,618.2 Total debt 2,891.3 2,943.2

Face value is the dollar principal amount Transpower will pay at debt maturity, including the fixed New Zealand dollar amount of foreign exchange derivatives on foreign currency debt.

7. Statement of financial position short term long term split

Transpower has elected to present its statement of financial position based on liquidity in accordance with NZ IAS 1. The table below presents the short term and long term assets and liabilities where this distinction is not otherwise apparent in the financial statements.

31 December 2018 GROUP SHORT TERM LONG TERM TOTAL SHORT TERM LONG TERM TOTAL ASSET ASSET ASSET (LIABILITY) (LIABILITY) (LIABILITY) $M $M $M $M $M $M

Trade receivables, payables and other 130.9 19.4 150.3 (75.4) (0.6) (76.0) Derivatives and hedge commitment 33.9 200.3 234.2 (105.4) (131.7) (237.1) NZPCL investment/debt – 78.9 78.9 – (79.9) (79.9) Provisions – – – (21.0) (35.4) (56.4)

30 June 2018 Trade receivables, payables and other 112.6 24.4 137.0 (95.7) (0.9) (96.6) Derivatives and hedge commitment 38.3 204.1 242.4 (104.3) (163.1) (267.4) NZPCL investment/debt – 76.3 76.3 – (77.7) (77.7) Provisions – – – (23.1) (35.8) (58.9)

Transpower New Zealand Limited — Financial Statements 12 Notes to the Financial Statements

8. Segment reporting

The Group has one reportable segment - transmission. The transmission segment activities include the transmission of electricity from the point of generation to the point of connection.

This segment has external revenue derived from New Zealand customers, and its assets are based in New Zealand.

The Group has no other reportable segments. The balance of the financial information (that is not the transmission segment) is reported as other in the table below.

The material portions of the other balance is made up of the following discrete activities:

• System operator - the provision of real time services to ensure the short term security of the New Zealand electricity system.

• RRL - established in 2001 to provide insurance services to the Group.

Segment results are determined based on information provided to the Chief Operating Decision Maker. They are calculated using the avoidable cost allocation methodology (ACAM).

TRANSMISSION OTHER ADJUSTMENTS TOTAL UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED 6 MONTHS 6 MONTHS 6 MONTHS 6 MONTHS 6 MONTHS 6 MONTHS 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 2018 2017 2018 2017 2018 2017 2018 2017 $M $M $M $M $M $M $M $M

External revenue 486.1 522.4 26.7 27.3 3.4 3.1 516.2 552.8

The adjustment is:

2018 2017 EXPLANATION $M $M Financial statements include imputed interest in non-operating expenses, net interest External revenue 3.4 3.1 expenses (note 4) rather than revenue

Transpower New Zealand Limited — Financial Statements 13 9. Change in fair value of financial instruments

GROUP UNAUDITED RESTATED UNAUDITED 6 MONTHS 6 MONTHS 31 DECEMBER 31 DECEMBER 2018 2017 $M $M FAIR VALUE THROUGH PROFIT OR LOSS

Accounting hedges Foreign exchange forward contracts–hedge accounted (0.9) 1.4 Hedge commitment 0.9 (1.4) – – Other Foreign debt 9.4 (40.8) Cross currency interest rate swaps (15.7) 39.2 NZD interest rate swaps 36.0 23.0 Investments 0.3 0.7 NZD debt 4.6 5.9 34.6 28.0 Total fair value gain (loss) 34.6 28.0

FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

Foreign debt 6.5 (14.8) NZD debt (5.0) (6.2) Gross fair value gain (loss) 1.5 (21.0) less income tax credit (expense) (0.4) 5.9) Total other comprehensive income (expense) 1.1 (15.1)

Description The Group experiences fair value movements through movements in underlying interest rates and exchange rates on debt and derivatives and movements in credit spread. The Group generally seeks to fix interest rates with interest rate derivatives to provide certainty of interest rates and costs during Regulatory Control Periods. This means that, prima facie, a decrease in market interest rates will result in the Group sustaining fair value losses, and conversely, an increase in market interest rates will result in fair value gains. Fair value movements are split between those going through profit and loss and those going through other comprehensive income. The movement through other comprehensive income relates to the change in credit spread only on Transpower debt. The fair value of debt and derivatives are determined by converting currency exposures and discounting cash flows based on the relevant yield curve. The yield curve is adjusted to reflect the credit risk of the counterparty to the transaction or the credit risk of Transpower. These valuations are considered level two in the IFRS three-level valuation hierarchy. There have been no movements between levels during the period.

Transpower New Zealand Limited — Financial Statements 14 Notes to the Financial Statements

9. Change in fair value of financial instruments (Cont.)

Fair values in statement of financial position For cash and cash equivalents, accounts payable and receivables, fair values are materially similar to their cost due to the short term nature of these items. The following items are recorded at fair value:

GROUP UNAUDITED RESTATED AUDITED 31 DECEMBER 30 JUNE 2018 2018 $M $M

ASSET (LIABILITY) ASSET (LIABILITY) Investments 97.3 149.8 Derivatives and hedge commitment in gain 234.2 242.4 NZPCL investment 78.9 76.3 Derivatives and hedge commitment in loss (237.1) (267.4) Debt (3,084.0) (3,152.9) NZPCL debt (79.9) (77.7)

Transpower New Zealand Limited — Financial Statements 15 Notes to the Financial Statements

10. Contingencies

(i) Guarantees

NZPCL

In November 2009, the Group partially terminated the 2003 cross-border lease in respect of the majority of the HVAC transmission assets in the South Island. As a result of the partial termination, Transpower has consolidated a special-purpose vehicle, NZPCL.

NZPCL has a USD deposit with a financial institution and a USD loan from another financial institution. The cash flows from the deposit and loan offset. No consideration was transferred. The loan to NZPCL is guaranteed by Transpower.

The substance of the transaction is such that Transpower rather than the non-controlling interest would be responsible for any shortfall between the value of the asset and the liability. The likelihood of losses in respect of these matters is considered to be remote. Debt

Transpower has given a negative pledge covenant to certain debt holders that, while any debt issued remains outstanding, we will not, subject to certain exceptions, create or permit to exist any charge or lien over any of our assets.

(ii) Economic gain (loss) account

Transpower operates its revenue-setting methodology within an economic value (EV) framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. Under Commerce Commission regulations, Transpower is required to pass onto or claim from customers the economic value of the net balance of any historical gains or losses incurred prior to 30 June 2012 over the regulatory periods until June 2020. Historical balances are those that pre-date the input methodologies developed by the Commission. In addition to the historical balances, further economic gains or losses arising from the beginning of Regulatory Control Period 1, which commenced on 1 July 2012, are required to be passed on or claimed from customers in the following pricing year.

The balances and expected cash flows from the EV accounts for HVAC and HVDC customers at 30 June 2018 are set out below.

HVAC HVDC TOTAL 30 June 2018 balance $M $M $M Pre-input methodology EV balances to be recovered (paid) 1 July 2018 to 31 March 2020 (13.8) 27.5 13.7 Post-input methodology EV balances to be recovered (paid) 1 July 2018 to 31 March 2019 (12.2) 0.7 (11.5) Post-input methodology EV balances to be recovered (paid) 1 April 2019 to 31 March 2020 (2.5) (3.1) (5.6) Total to be recovered (paid) (28.5) 25.1 (3.4)

30 June 2017 balance Pre-input methodology EV balances to be recovered (paid) 1 July 2017 to 31 March 2020 (21.5) 42.9 21.4 Post-input methodology EV balances to be recovered (paid) 1 April 2018 to 31 March 2019 (16.2) 0.9 (15.3) Post-input methodology EV balances to be recovered (paid) 1 April 2019 to 31 March 2020 (15.0) 0.4 (14.6) Post-input methodology EV balances to be recovered (paid) 1 July 2017 to 31 March 2018 19.6 (1.0) 18.6 Total to be recovered (paid) (33.1) 43.2 10.1

(iii) Various other lawsuits, claims and investigations

Various other lawsuits, claims and investigations have been brought or are pending against the Group. The directors of Transpower cannot reasonably estimate the adverse effect (if any) on the Group if any of the foregoing claims are ultimately resolved against the Group’s interests.

Transpower New Zealand Limited — Financial Statements 16 Notes to the Financial Statements

11. Net tangible assets per share

GROUP UNAUDITED UNAUDITED AUDITED 31 DECEMBER 31 DECEMBER 30 JUNE 2018 2017 2018 $M $M $M Net assets (equity) 1,588.0 1,507.6 1,555.7 Less intangibles (369.8) (381.9) (377.4) Total net tangible assets 1,218.2 1,125.7 1,178.3 Net tangible assets per share ($) 1.02 0.94 0.98

The non-GAAP measure above is disclosed to comply with NZX Debt market listing rule 2.3 (f).

12. Subsequent events

On 27 February 2019 the board of directors approved the payment of a half year dividend of $66.0 million to be paid on 20 March 2019. The dividend will be fully imputed.

In addition, on 22 February Transpower announced it is considering an offer of unsecured, unsubordinated fixed rate bonds to New Zealand retail investors and to institutional investors.

The directors are not aware of any other matter or circumstance since 31 December 2018 that has significantly or may significantly affect the operations or financial statements of Transpower or the Group.

Transpower New Zealand Limited — Financial Statements 17