NEW ZEALAND Meridian Energy Performance evaluation Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy (MER) is $6,531m (nominal WACC 8.6%, 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 in this report. Inside Financial model assumptions and commentary

Performance evaluation 2 We discuss a number of key model input assumptions in the report including: Valuation summary 6 ƒ Wholesale and retail electricity price paths; Financial model assumptions 8 ƒ Electricity purchase to sales price ratio pre and post the HVDC link upgrade; Financial statements summary 18 ƒ HVDC link charging regime; Financial flexibility and generation ƒ Electricity demand growth by customer type; development 21 ƒ The impact of the Electricity Industry Act (EIA) asset transfer and VAS’; Sensitivities 22 ƒ The New Zealand Aluminium Smelters (NZAS) supply contract; Alternative valuation methodologies 23 Relative disclosure 24 ƒ MER’s generation development pipeline. Appendix – Valuation Bridge 26 Equity valuation sensitivities are provided on key variables. Alternative valuation methodology We have assessed a comparable company equity valuation for the company of $5,179m-$5,844m. This is based on the current earnings multiples of listed

comparable generator/retailers globally. This valuation provides a cross-check of the equity valuation based on our primary methodology, discounted cashflow. This valuation range lies below our primary valuation due, in part to the positive net present value of modelled development projects included in our primary valuation.

Relative disclosure

We have assessed the disclosure levels of MER’s financial reports and presentations over the last financial period against listed and non-listed companies operating in the electricity generation and energy retailing sector in New Zealand.

This bespoke research is provided for the use of the New Zealand

Treasury.

* Benmore Power Station (pictured) Stephen Hudson +64 9 363 1414 [email protected]

8 November 2011 Macquarie Securities (NZ) Limited Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/disclosures.

Macquarie Research Meridian Energy

Performance evaluation Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy is $6,531m (nominal post tax WACC 8.6%, 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 in this report. We have used actual financial results from FY11 as a base. Sensitivity analysis of main valuation drivers We have assessed the sensitivity of our equity valuation to a 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 equity valuation for the company of $5,179m- $5,844m. The band is based on the average multiple for generators that are considered to be the closest comparable companies to Meridian Energy (Contact Energy and TrustPower). We then applied a band to this multiple to account for MER’s higher renewable generation bias and its relatively large pipeline of generation development options (at the upper end) and its high relative historic earnings volatility (at the lower end). The band involves subjective judgement, as only some of these factors can be isolated and quantified. Renewable generation companies globally are generally accorded a higher capitalisation multiple than conventional generators reflecting the value of a free- or low-fuel position when electricity price paths are positively sloped. This multiple has been compressed in recent years as perceived risks over renewable generation incentives have heightened. NZ generators trade at a premium to their international counterparts partly due this country’s low reliance on incentive regimes. This valuation provides a cross-check of the equity valuation based on our primary methodology, discounted cashflow. This valuation range lies below our primary valuation, due in part to the positive net present value of modelled development projects included in our primary valuation. Financial model assumptions and commentary We highlight and discuss a number of key model input assumptions in the report: Wholesale and retail electricity price paths: We have reconstructed our wholesale electricity price path forecast since the 2010 commercial valuation report. Based on expected demand and supply (taking into account future projects coming online), we continue to think that the wholesale electricity price path will approach the LRMC of wind generation by 2021 (the year in which other, cheaper, generation alternatives would be exhausted). We estimate the current LRMC of wind at $90/MWh (2011 dollars); this is lower than the previously estimated $100/MWh primarily due to a higher LT NZD/EUR assumption and a lower EUR denominated capital cost. Nearer term, prices are expected to generally fall somewhat short of LRMC-based prices given a flat demand outlook (although this will be dependent on hydrology conditions). Our retail price path for Meridian has lifted marginally despite a shift down in our wholesale price path. This reflects a slightly higher target long-run industry retail margin of around 6% and the modelling of separate retail price paths for gentailers (previously a uniform price path). Overall, we forecast that long-run wholesale and retail prices increase by an average 7% pa and 3% pa, respectively. The difference is mainly explained by the current low wholesale prices and relatively low network cost growth.

8 November 2011 2 Macquarie Research Meridian Energy

Fig 1 Wholesale and retail electricity price path forecasts

$NZ 300.0 Wholesale electricity price 2011 ($/MWh) Retail electricity price 2011 ($/MWh) Wholesale electricity price 2010 ($/MWh) 250.0 Retail electricity price 2010 ($/MWh)

200.0

150.0

100.0

50.0

- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Macquarie Research, November 2011

NZ Emissions Trading Scheme (ETS) pricing forecasts: We have assumed the following NZ ETS pricing obligations for the stationary energy sector. Note, the current ETS legislation has the energy, transport and industrial sectors stepping up to a full obligation in 2013. A Government-appointed review panel recommended in September this year to slow this by phasing it in three steps in 2013, 2014 and 2015; this would effectively ease the price impact on households and businesses.

Fig 2 Stationary energy NZ ETS pricing 2012 2013 2014 2015 2016 2017 2018

Proposed Surrender obligation % 50 67 83 100 100 100 100 Proposed Price cap $/NZU 25.00 30.00 35.00 40.00 45.00 50.00 reviewable Effective Proposed Price cap $/NZU 12.50 20.10 29.05 40.00 45.00 50.00 reviewable Macquarie price forecast - real $/NZU 12.50 20.10 20.10 20.10 20.10 20.10 20.10 Source: ETS Review 2011 Final Report, Macquarie Research, November 2011

Macquarie Securities has taken a more conservative view on the sector’s obligations capping price at $20.10/NZU (real) from 2013. This is due to uncertainty over the international carbon pricing framework from 2013 (i.e. when the first commitment period under the Kyoto Protocol comes to an end on 31 December 2012). Electricity Purchase to Sales Price Ratio: There are systemic differences between generation prices achieved and load prices paid due, primarily, to transmission constraints, geographical separation of generation and load centres, the ability to control generation output and the timing of load demand. These differences can be separated into a Generation Weighted Average Price (GWAP) factor and Load Weighted Average Price (LWAP) factor. 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 to our benchmark wholesale price path to generation earnings and retailing costs. Note, our forecast ratio falls from 2012 as increased HVDC link capacity becomes available but then begins to rise slowly from 2015. Note, a smaller DC link tends to increase the spread of price difference between the North and South Islands (in dry and wet).

8 November 2011 3 Macquarie Research Meridian Energy

Electricity Industry Act: Macquarie Securities has attempted to capture the impact of the physical and virtual asset swaps (VAS) impact contained in the Electricity Industry Act (EIA). We have modelled a three-year progressive ramp-up for the Meridian Energy-GEN 15 year VAS (effective 1 January 2011) to an ultimate volume of 450GWh. We have assumed a three-year progressive ramp-up to the 15-year Meridian Energy-MRP swap to an ultimate volume of 700GWh. The VAS contracts are assumed to have been priced at fair value. On 1 June 2011, Meridian Energy sold Tekapo A and B power stations and related assets to Genesis Power for $820.2m, resulting in a gain on sale of $174.8m. We have stepped down our TOU, SME and mass market volumes over a two-year period in proportion to Meridian Energy’s pre-EIA volume mix. Mean hydrology, operating costs, HVDC/AC charges and capital expenditure forecasts have been adjusted to reflect the sale. Our estimate of Meridian Energy’s target hedge ratio remained unchanged. Hydrology risk profile post EIA: MER’s mean hydro generation falls by approximately 970GWh as a result of the sale of the Tekapo A and B stations. The company’s mean generation including wind is estimated at 13,000GWh. On a P75/25 hydrology output, FY13 pre-tax earnings are estimated to change by approximately +/-$35m. The increase in capacity of the high voltage direct current (HVDC) inter-island link from 2012 and 2014 is expected to reduce earnings volatility. HVDC charging regime review: Under Transpower’s current pricing regime (Transmission Pricing Methodology or “TPM”), the cost of the HVDC link is allocated to South Island generators on the basis of each generator’s share of injection into the grid in the South Island. A review of the TPM has been recently initiated by the Electricity Authority (EA). There are currently two options before the EA’s Board on the issue: ⇒ Progressively shift the HVDC link to interconnection charging (over, say, 10-15 year period), with South Island generators ultimately benefitting; ⇒ Maintain the current HVDC charging methodology but with reduced incentives that currently influence market behaviour. A decision is expected by March 2012 at the latest and is subject to judicial review or appeal on matters of law. We provide an equity valuation sensitivity to the review outcome. NZAS contracted volumes: We have incorporated our interpretation of MER’s New Zealand Aluminium Smelters (NZAS) contract volumes and pricing into our forecasts. NZAS is 79.4 per cent owned by Rio Tinto Alcan (Rio Tinto) and 20.6 per cent owned by Sumitomo Chemical Company. Rio Tinto, as part of a strategic review, has recently identified a number of aluminium assets for divestment including NZAS. We understand that on a divestment of NZAS, there is no fundamental change to the operation of the 2013-2030 contract. Development Pipeline: As highlighted previously, Meridian has a large pipeline of domestic and offshore renewable energy generation development options (approximately 1400 MW) at various stages of advancement. The Te Uku wind farm was commissioned in March 2011 and is included in our DCF equity valuation. We have incorporated the Victoria, Australia- based Macarthur wind project in our equity valuation at its estimated book value. The Mill Creek and Central Wind projects are fully modelled in our discounted cashflow equity valuation.

8 November 2011 4 Macquarie Research Meridian Energy

Fig 3 Meridian Energy summary financials (MER: $4.08) Profit & Loss 2010A 2011A 2012E 2013E

Operating Revenue $m 2062 2053 2128 2326 EBITDAF $m 642 660 665 688 Depreciation $m (174) (209) (210) (272) Amortisation $m (14) (15) 0 0 EBIT – Recurring $m 465 447 455 417 EBIT $m 386 506 455 417 Net Interest Expense $m (108) (122) (96) (126) Pre-Taxation Profit $m 277 384 358 291 Taxation Expense $m (93) (81) (100) (81) Profit after Taxation $m 184 303 258 209 Adjustments after income tax $m 80 (59) 0 0 expense Adjusted Earnings1 $m 264 244 258 209 1. Adjusted for significant one-off items and the change in the fair value of financial instruments

Key Assumptions GWAP $/MWh 51.9 41.6 48.5 56.2 Total generation GWh 13,862 13,697 12,825 12,926 LWAP/GWAP x 1.17 1.24 1.16 1.16 FPVV GWh 1,596 1,619 1,573 1,620 Retail electricity price growth % 4.10% 0.15% 3.06% 3.05%

Discounted Cashflow Valuation Profit and Loss Ratios 2010A 2011A 2012E 2013E PER (adj Earnings) x 24.8 24.8 26.7 25.3 PV FCFs Available to Owners $m 7,414 EPS (adj Earnings) c 24.8 26.7 25.3 31.2 Plus: Book Value of international $m 323 EPS (Reported) c 11.5 18.9 16.1 13.1 assets Less Net Debt $m (1,205) DPS c 22.1 42.7 12.1 9.8 Equity Value $m 6,531 Revenue Growth % 9.0% (0.4%) 3.6% 9.3% Shares Outstanding m 1,600 EBIT Growth % 68.5% 31.3% (10.2%) (8.3%) Equity Value per Share $ 4.08 EBITDAF/Sales % 31.1% 32.1% 31.3% 29.6% EBIT/Sales % 18.7% 24.7% 21.4% 17.9% Assumptions Effective tax rate % 33.6% 21.1% 28.0% 28.0% Risk Free Rate % 5.50% Payout ratio % 134.0% 279.9% 75.0% 75.0% Asset Beta # 0.60 EV/EBIT x 20.1 15.3 17.0 18.6 Market Risk Premium % 7.0% EV/EBITDA x 12.1 11.7 11.6 11.2 Target Debt/Value % 20% EV/Revenue x 3.8 3.8 3.6 3.3 Nominal Post-Tax WACC % 8.56% Perpetuity Growth Rate % 3.0% Balance Sheet Ratios ROE % 5% 5% 5% 4% ROA % 5% 5% 5% 5% ROFE % 7% 7% 7% 6% Net Debt $m 1,553 1,205 1,739 1,925 Net Debt/Equity % 31% 24% 35% 38% Net Interest Cover (EBIT) x 4 453 Price/NTA x 0.8 0.8 0.8 0.7 NTA per share cps 542 526 541 557 EFPOWA m 1,600 1,600 1,600 1,600

Cashflow Analysis 2010A 2011A 2012E 2013E Balance Sheet 2010A 2011A 2012E 2013E

Pre-taxation Profit $m 277 384 358 291 Cash $m 54 368 - - Depreciation & Amortisation $m 174 209 210 272 Receivables $m 199 241 250 273 Tax (Paid)/Credit $m (93) (81) (100) (81) Inventories $m 6 334 Other $m 83 (77) - - Investments accounted for $m 0 444 using equity method Gross Cashflow $m 441 435 468 481 Property, Plant & Equip. $m 8,207 7,721 8,318 8,554 Changes in Working Capital $m 10 (67) (1) (3) Intangibles $m 50 47 47 47 Changes in Provisions $m - - 0 0 Derivative Financial $m 183 54 54 54 Instruments Operating Cashflow $m 452 369 467 478 Other Assets $m 15 21 21 21 Acquisitions/Investments $m (263) (20) - - Total Assets $m 8,716 8,460 8,697 8,957 Capital Expenditure $m (207) (252) (807) (508) Payables $m 202 217 225 246 Asset Sales $m 12 822 - - Short Term Debt $m 284 298 298 298 Other $m - - - - Long Term Debt $m 1,323 1,275 1,440 1,627 Investing Cashflow $m (458) 558 (807) (508) Derivative Financial $m 191 254 254 254 Instruments Dividend (ordinary) $m (353) (684) (194) (157) Other Liabilities $m 1,592 1,449 1,449 1,449 Debt drawndown / (repayment) $m 367 72 165 186 Total Liabilities $m 3,645 3,529 3,702 3,909 Other $m - - -- Shareholders' Funds $m 1,600 1,600 1,600 1,600 Financing Cashflow $m 13 (612) (28) 29 Retained Earnings $m (216) (61) 3 55 Total Shareholders' Equity $m 5,071 4,931 4,996 5,048 Net Change in Cash (inc FX) $m 7 314 (368) - Total Funds Employed $m 8,716 8,460 8,697 8,957 Source: Company data, Macquarie Research, November 2011

8 November 2011 5 Macquarie Research Meridian Energy

Valuation summary Meridian Energy equity valuation

Fig 4 Meridian Energy DCF equity valuation summary Perpetuity growth rate 3.0% Perpetuity Value 14,874 PV (FY12-29) 4,291 PV of Perpetuity 3,123 PV FCF available to owners 7,414 Plus: book value of international assets 323 Less Net Debt (1,205) Equity Value 6,531 Shares Outstanding (m) 1,600 DCF Equity Value per share 4.08

Assumptions

Corporate Tax Rate 28% Risk free rate 5.5% Asset beta 0.60 Equity beta 0.75 Market Risk Premium 7.0% Target Debt/Venture 20% Target Equity/Venture 80% Cost of Debt 8.25% Tax-adjusted Cost of Debt 5.94% Ungeared Cost of Equity 7.37% Cost of Equity 9.21%

Nominal WACC (%) 8.56% Source: Company data, Macquarie Research, November 2011

We have summarised our DCF-based equity valuation ($6,531m) for Meridian Energy (above) and key sensitivities (below). The valuation summary includes the discount rate and terminal growth assumptions (nominal post tax WACC 8.6%, asset beta 0.6, TGR 3.0%). Risk free rate. We have estimated the risk free rate using the yield of the 10 Year New Zealand Government Bond rate as an approximation. An average yield was used to prevent any distortion arising from shocks in the spot rate. The risk free rate estimated as at 4 October 2010 was 5.50%. Selection of MRP. We have used a post investor tax market risk premium of 7%, consistent with the estimation Macquarie Research uses for other New Zealand-listed companies and the estimation used in the regulation of electricity lines businesses in New Zealand. Long term gearing. We have assumed an appropriate long-term gearing level for the calculation of a discount rate based on the company’s published targets (where available) and historical levels of gearing. We provide an equity valuation sensitivity to this assumption later in the report. Asset betas. We have estimated the asset beta of the company through comparable company analysis. The asset beta approximation was calculated by taking an average of the unlevered asset betas of appropriate listed companies with similar business operations.

8 November 2011 6 Macquarie Research Meridian Energy

Fig 5 Sensitivities

5,500 6,000 6,500 7,000 7,500 8,000

Capacity factors 6,301 6,760 (-/+ 1%)

HVDC cost 6,531 7,575 (base case, cost amortisation)

Wholesale electricity prices 6,496 6,583 (-/+ $10MWh)

Retail electricity prices 6,364 6,698 (-/+ 0.5c/kWh)

Residential customer growth 6,451 6,617 (+/- 0.5%)

Residential usage per customer 6,443 6,618 (-/+ 500kWh pa)

Debt margin 6,422 6,642 (+/- 0.5%)

Market risk premium 6,095 7,016 (+/- 0.5%)

Target Gearing 6,238 6,531 (30%/20%)

LWAP 6,390 6,671 (+/- 1% point)

NZAS base price escalation 6,021 7,114 (+/- 1% point)

Maintenance capex cost inflation 6,477 6,582 (+/- 0.5% point)

Source: Macquarie Research, November 2011

8 November 2011 7 Macquarie Research Meridian Energy

Financial model assumptions (i) Wholesale and retail electricity price paths We have reconstructed our wholesale electricity price path forecast since the 2010 commercial valuation report. Based on expected demand and supply (taking into account future projects coming online), we continue to think that the wholesale electricity price path will approach the LRMC of wind generation by 2021 (the year in which other, cheaper, generation alternatives would be exhausted). We do not think new thermal generation will be built in the foreseeable future (beyond Contact Energy’s and Todd Energy’s peakers) due to difficulties in obtaining adequate gas supply arrangements. We estimate the current LRMC of wind at $90/MWh (2011 dollars); this is lower than the previously estimated $100/MWh primarily due to a higher LT NZD/EUR assumption and a lower EUR denominated capital cost. Nearer term, prices are expected to generally fall somewhat short of LRMC-based prices, given a flat demand outlook (although this will be dependent on hydrology conditions).

Fig 6 Wholesale and retail electricity price path forecasts

$NZ 300.0 Wholesale electricity price 2011 ($/MWh) Retail electricity price 2011 ($/MWh) Wholesale electricity price 2010 ($/MWh) 250.0 Retail electricity price 2010 ($/MWh)

200.0

150.0

100.0

50.0

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

Source: Macquarie Research, November 2011

We do not place a high reliance on ASX market-traded futures pricing ($90/MWh for Otahuhu futures wholesale settlement price across 2012 averaged around $90/MWh in August 2011), given that market’s limited liquidity. NZ electricity demand (ex Tiwai) for the 12 months to August 2011 is down around -0.7% pcp. Christchurch network demand is down 15.2% since the 22 February earthquake (to 1 September) and remains about 10-15% below pre-quake levels. Macquarie expects this demand to begin to recover in 2H12 as the reconstruction of Canterbury begins but there remains material uncertainty around the timing of reconstruction due to ongoing aftershocks in the region and consequently lower insurance availability. Our retail price path for Meridian has lifted marginally despite a shift down in our wholesale price path. This reflects a slightly higher target long-run industry retail margin of around 6% and the modelling of separate retail price paths for gentailers (previously a uniform price path).

8 November 2011 8 Macquarie Research Meridian Energy

Fig 7 Relative mass market pricing – (ICP-weighted, energy only)

Premium/(Discount)

25% Contact Energy Genesis Energy Mercury Energy Meridian Energy Trustpower

20%

15%

10%

5%

0%

-5%

-10%

-15% Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11

Source: MED, Macquarie Research, November 2011

Overall, we forecast that long run wholesale and retail prices increase by an average 7% pa and 3% pa respectively. The difference is mainly explained by the current low wholesale prices and relatively flat network costs. (ii) Electricity Purchase to Sales Price Ratio There are systemic differences between generation prices achieved and load prices paid due, primarily, to transmission constraints, geographical separation of generation and load centres, the ability to control generation output and the 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 to our benchmark wholesale price path to generation earnings and retailing costs. Note, our forecast ratio falls from 2012 as increased HVDC link capacity becomes available but then begins to rise slowly from 2015. Note, a smaller DC link tends to increase the spread of price difference between the North and South Islands (in dry and wet). (iii) NZ Emissions Trading Scheme (ETS) pricing forecasts We have assumed the following NZ ETS pricing obligations for the stationary energy sector. Note, the current ETS legislation has the energy, transport and industrial sectors stepping up to a full obligation in 2013. A Government appointed review panel recommended in September this year to slow this by phasing it in three steps in 2013, 2014 and 2015; this would effectively ease the price impact on households and businesses.

8 November 2011 9 Macquarie Research Meridian Energy

Fig 8 Stationary energy NZ ETS pricing 2012 2013 2014 2015 2016 2017 2018

Proposed Surrender obligation % 50 67 83 100 100 100 100 Proposed Price cap $/NZU 25.00 30.00 35.00 40.00 45.00 50.00 reviewable Effective Proposed Price cap $/NZU 12.50 20.10 29.05 40.00 45.00 50.00 reviewable Macquarie price forecast - real $/NZU 12.50 20.10 20.10 20.10 20.10 20.10 20.10 Source: ETS Review 2011 Final Report, Macquarie Research, November 2011

The Panel also recommends that the price cap, currently set at $25 per NZU, should be increased by $5 per annum from 2013 up to a cap of $50/NZU by 2017 (reviewable thereafter). Under current legislation, the one-for-two obligation and price cap are currently due to end completely in 2012. Macquarie Securities has taken a more conservative view on the sector’s obligations capping price at $20.10/NZU (real) from 2013. This is due to uncertainty over the international carbon pricing framework from 2013 (i.e. when the first commitment period under the Kyoto Protocol comes to an end on 31 December 2012). (iv) Electricity demand by segment We analyse Meridian’s electricity demand by examining several customer categories: ƒ Mass market customers; ƒ Fixed price SMEs: small commercial and industrial (C&I) customers that pay a fixed price rate; ƒ TOU customers: this category includes large C&I customers that pay spot prices fixed, typically, for 1-3 years; and ƒ CFD and NZAS contracted energy sales

Mass market customers The company has an approximate 14.6% (at September 2011) market share in the electricity mass market. The company’s market share has increased steadily over the past year (13.3%), largely as a result of Powershop’s increased customer base. We assume the company will maintain its market share, with total national ICP growth of 0.9% pa forecast. Predicted usage per user is assumed to be constant at 8,000 kWh pa. Note, historical 10-year and 25-year mass market volume growth has averaged 1.6% pa (i.e. for both periods). Fixed price SME and TOU volumes Fixed price SME and TOU volumes have been estimated on an historical basis. From FY16 onwards, fixed price SME volumes are assumed to grow at 3.0% pa. Historical 10-year and 35-year SME volume growth rates have averaged 3.8% pa and 3.2% pa, respectively. Total sales are constrained by the 1:20 dry-year production variance we estimate across Meridian Energy’s hydro systems, and we adjust TOU volumes to meet this constraint. Note that historical 10-year and 35-year industrial volume growth rates have averaged -0.4% pa and 2.5% pa, respectively. Note, in respect of 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). We have assumed a 15% price discount in our forecasts.

Fig 9 Wholesale and retail electricity price path forecasts FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21

Wholesale electricity price 2011 $MWh 47.8 53.9 62.4 71.4 81.5 92.7 97.3 102.1 107.2 112.5 118.1 Retail electricity price 2011 $MWh 212.8 219.3 226.0 232.8 239.7 246.9 254.4 262.1 270.1 278.3 286.8 Wholesale electricity price 2010 $MWh 65.2 65.8 71.6 77.6 85.5 94.4 104.3 115.5 127.9 130.7 133.9 Retail electricity price 2010 $MWh. 212.2 216.5 221.9 227.4 233.1 238.9 244.9 251.0 257.3 263.8 270.3 Source: Company data, Macquarie Research, November 2011

8 November 2011 10 Macquarie Research Meridian Energy

Fig 10 Meridian Energy – Retail FY11A FY12EFY13E FY14E FY15E FY16E FY17E FY18E FY19EFY20E FY21E 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 30/06/21

Customers - electricity Retail customers # 196,637 202,536 208,612 210,519 212,444 214,132 215,834 217,550 219,279 221,022 222,596 Usage per user (annualised kWh) kWh 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 Retail volume GWh 1,573 1,620 1,669 1,684 1,700 1,713 1,727 1,740 1,754 1,768 1,781 Losses GWh 69 7173 74 75 75 76 76 7778 78

Other FPVV/SME volume GWh 4,212 4,288 4,378 4,495 4,630 4,768 4,911 5,059 5,211 5,367 5,528 Losses GWh 185 188192 197 203 209 215 222 228235 242

Total retail sales GWh 5,785 5,908 6,047 6,179 6,329 6,481 6,638 6,799 6,965 7,135 7,309 Losses GWh 254 259265 271 277 284 291 298 305313 320 Total GWh 6,039 6,1676,312 6,450 6,607 6,766 6,929 7,097 7,270 7,448 7,629

Wholesale volumes TOU sales GWh 1,739 1,741 1,743 1,745 1,746 1,748 1,750 1,752 1,753 1,755 1,757 Losses GWh 76 7676 76 77 77 77 77 7777 77 Total GWh 1,816 1,8181,819 1,821 1,823 1,825 1,827 1,828 1,830 1,832 1,834

Pricing - electricity Retail electricity price path % change in retail electricity price % p.a. 3.1% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.4% Retail electricity price c/kWh 21.9 22.6 23.3 24.0 24.7 25.4 26.2 27.0 27.8 28.7 29.4

Retail prices Change in energy component % 3.5% 2.5% 3.1% 3.3% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 2.5% Energy component c/kWh 13 14 14 15 15 16 16 17 17 18 19

Change in distribution price component % 2.6% 4.2% 3.1% 2.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Distribution component c/kWh 6 7 7 7788 8 888

Change in transmission price component % 1.6% 3.2% 2.1% 1.7% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Transmission component c/kWh 2 2 2 2222 2 222

SMEs - discount to market % (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) (15.0%) SMEs c/kWh 11 1212 12 13 13 14 14 1515 16

Lines charge - SMEs c/kWh 4 455555 5 555

TOU (Spot) price path Wholesale price $/MWh 54 62 71 81 93 97 102 107 112 118 121 LWAP benefit (cost) % 104.0% 104.0% 104.0% 104.5% 105.0% 105.5% 106.0% 106.5% 106.5% 106.5% 106.5% Electricity Price $/MWh 56 65 74 85 97 103 108 114 120 126 129 Source: Company data, Macquarie Research, November 2011

Fig 11 Meridian Energy – Operations FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21

Revenue Generation 976 1,105 1,247 1,404 1,550 1,620 1,692 1,768 1,848 1,931 1,979 Retail 1,103 1,171 1,245 1,322 1,408 1,484 1,566 1,652 1,741 1,836 1,919 Energy related services revenue 23 24 25 25 26 27 28 29 30 31 32 Other revenue 21 22 22 23 23 24 25 25 26 27 27 EFI 5 5 6 6 6 6 6 7 7 7 7 2,128 2,326 2,545 2,780 3,014 3,162 3,317 3,481 3,652 3,832 3,965 Expenses Energy related costs (749) (865) (989) (1,144) (1,322) (1,410) (1,504) (1,605) (1,705) (1,811) (1,880) Energy Transmission and Distribution (467) (517) (539) (562) (582) (601) (622) (647) (674) (707) (741) Employee Costs (92) (94) (99) (102) (106) (110) (114) (118) (122) (126) (131) Other operating Expenses (154) (161) (171) (180) (186) (192) (199) (206) (213) (220) (228) (1,463) (1,638) (1,799) (1,988) (2,196) (2,313) (2,439) (2,576) (2,714) (2,865) (2,979) EBITDA 665 688 746 792 818 848 879 905 938 967 986 Depreciation and Amortisation (210) (272) (326) (358) (360) (361) (363) (365) (367) (369) (371) EBIT 455 417 420 434 458 487 515 540 571 598 615 Source: Company data, Macquarie Research, November 2011

8 November 2011 11 Macquarie Research Meridian Energy

(v) NZAS and long-term contract hedges – pricing and volume We have incorporated our interpretation of MER’s New Zealand Aluminium Smelters (NZAS) contract volumes and pricing into our forecasts. Essentially, 572 MW (continuous) is priced from January 2013 at a base price around 10% higher than the base price (i.e., energy only) under the existing supply contract. This base price is subject to escalation with reference to a multi-year average NZ electricity market price, the world price for aluminium, and a component as a proxy for price inflation. The base price for the current NZAS contract, which expires at the end of 2012, is believed to currently be ~6.5c/kWh (CY10). It is assumed this will increase at CPI until the end of the contract.

Fig 12 NZAS historical electricity costs (energy only) 31/12/2010 31/12/2009 31/12/2008 31/12/2007 31/12/2006

NZAS power purchases $m 343.0 292.7 310.1 299.9 276.1 Power usage MW 603 576 413 608 604 Implied cost/MWh - energy only kWh 6.5 5.8 8.6 5.6 5.2 Source: NZAS annual accounts, Macquarie Research, November 2011

NZAS is 79.4 per cent owned by Rio Tinto Alcan (Rio Tinto) and 20.6 per cent owned by Sumitomo Chemical Company. Rio Tinto, as part of a strategic review, has recently identified a number of aluminium assets for divestment including NZAS. We understand that on a divestment of NZAS, there is no fundamental change to the operation of the 2013-2030 contract. Should the process result in the closure of the asset, we understand that a three year ramp down in the contracted volumes would occur. The outcome of the recently initiated review on NZAS is uncertain but at this stage Macquarie does not consider a closure prior to 2030 likely. (vi) Generation assets and pipeline 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 by assumed availability and capacity factors. 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 (i.e., 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. The Te Uku wind farm was commissioned in March 2011 and is included in our DCF equity valuation. We have incorporated the Victoria, Australia-based Macarthur wind project in our equity valuation at its estimated book value. The Mill Creek and Central Wind projects are fully modelled in our discounted cashflow equity valuation.

8 November 2011 12 Macquarie Research Meridian Energy

Fig 13 Meridian Energy generation pipeline

Project Type Location Size Estimated Status/Completion (MW) cost ($m)

Modelled projects Central Wind Wind Nth Isl, NZ 120 340 2H14 Mill Creek Wind Nth Isl, NZ 60 228 2H13 Macarthur Wind Vic, Aus 420 Na 1H14

Non-modelled projects Hayes Wind Sth Isl, NZ 630 ~2,000 Environment Court North Bank Hydro Sth Isl, NZ 260 830 Water consent held Mokihinui Hydro Sth Isl, NZ 100 Na Environment Court Hurunui Wind Sth Isl, NZ 76 Na Consultation Hunter Downs Irrigation Wind Sth Isl, NZ na Na Environment Court (water rights) Pukaki (Gate 18) Hydro Sth Isl, NZ 35 Na Consents held Mt Mercer (Australia) Wind Vic, Aus 130 Na Preconstruction design Jacobs Corner Solar Ca, USA 20-60 Na Feasibility San Luis Solar Co, USA 40-120 Na Investigations Popua Solar Tonga 1 Na Feasibility Source: Meridian Energy, Press, Standard & Poor’s, November 2011

(vii) Electricity Industry Act The Electricity Industry Act came into force on 1 October 2010 and is focused on improving competition in the industry, promoting reliability of electricity supply and improving governance in the sector through the establishment of the Electricity Authority. The key components of the legislation and its impact are summarised below. ƒ Asset and virtual asset swaps between all three SOE gentailers to effect greater fuel and geographic diversity across generation portfolios (as outlined below). The ultimate objective in this regard is to promote nation-wide retail electricity competition, particularly in the South Island; ƒ Allowing lines businesses back into retailing subject to certain controls; ƒ Establishment of a liquid hedge market so that generators and retailers, especially new entrants, and businesses generally, can better manage volatile spot prices; ƒ Reducing barriers to retail entry by reducing the complexity of line tariffs; and ƒ Establishing a fund to encourage consumers to discover and react to relative pricing (e.g. ‘What’s my Number’ campaign)

Fig 14 Illustrative impact of EIB on mass market shares Mean Mighty River Genesis Meridian Non-SOEs output Power5 Energy6 Energy7

(GWh) Nth Isl Sth Isl Nth Isl Sth Isl Nth Isl Sth Isl Nth Isl Sth Isl (ICPs) (ICPs) (ICPs) (ICPs) (ICPs) (ICPs) (ICPs) (ICPs) Pre-swap mass market ICPs4 40786433643 51344915171 95255 150247442702 321521 Pre-swap mass market share5 28% 6% 35% 3% 7% 29% 30% 62% Physical asset swaps 1. Tekapo A and B to GEN from MER 1000/7001 28824 -28824 2. Whirinaki assignment 0 Virtual asset swaps3 1. MER-GEN 450 -19688 18529 19688 -18529 2. MER-MRP 700 -30625 28824 30625 -28824

Mass market customer switches -30625 28824 -19688 47353 50313 -76176 0 0 Post-swap mass market share5 26% 12% 34% 12% 10% 14% 30% 62% 1. Mean output of Tekapo stations de-rated by 30% to account for 'very-dry' year variation 2. Assume Sth Isl retail customers average consumption 8,500 KWh; Nth Isl 8,000 KWh. TOU and SME market assumed to bear 65% of switching. 3. 15 year duration; impact is post 3 year ramp-up 4. As at August 2010 5. Includes Bosco 6. Includes Energy Online 7. Includes Powershop; excludes Energy Direct ICPs Source: Macquarie Research, November 2011

8 November 2011 13 Macquarie Research Meridian Energy

Macquarie Securities has attempted to capture the impact of the physical and virtual asset swaps (VAS) impact contained in the legislation. We have modelled a three-year progressive ramp-up for the Meridian Energy-GEN 15 year VAS (effective 1 January 2011) to an ultimate volume of 450GWh. We have assumed a three-year progressive ramp-up to the 15-year Meridian Energy-Mighty River Power swap to an ultimate volume of 700GWh. The VAS contracts are assumed to have been priced at fair value. On 1 June 2011, Meridian Energy sold Tekapo A and B power stations and related assets to Genesis Power for $820.2m resulting in a gain on sale of $174.8m. To assist Meridian Energy to re-profile its generation volume commitments, the Sale and Purchase agreement included a short-term hedge which requires Genesis Energy to sell a portion of the electricity output from the Tekapo stations to Meridian Energy, at market prices, with the hedge volume declining over four years to zero. We have stepped down our TOU, SME and mass market volumes over a two-year period in proportion to Meridian Energy’s pre-EIA volume mix. Mean hydrology, operating costs, HVDC/AC charges and capital expenditure forecasts have been adjusted to reflect the sale. Our estimate of Meridian Energy’s target hedge ratio remained unchanged. Other EIB changes The legislation also introduces measures aimed at improving security of electricity supply. These include: ƒ The removal of the reserve energy scheme put in place in 2003 and ensuring that the Whirinaki power station is operated commercially; ƒ The introduction of a requirement on retailers to compensate consumers when public conservation campaigns are put in place; ƒ Additionally, there is provision for a floor to be applied to spot prices during campaigns and other supply emergencies. On industry governance, the legislation replaces the Electricity Commission with an independent Electricity Authority (EA) focused on enforcing and developing electricity market rules and contracting for key market operation services. (viii) Hydrology risk spread post EIA MER’s mean hydro generation falls by approximately 970GWh as a result of the sale of the Tekapo A and B stations. The company’s mean generation including wind is estimated at 13,000GWh. On a P75/25 hydrology output, FY13 pre-tax earnings are estimated to change by approximately +/-$35m. The installation of new AC/DC converter equipment at Benmore and Haywards substations will increase in capacity of the high voltage direct current (HVDC) inter-island link from 2012 and 2014. All else being equal, this is expected to reduce earnings volatility but there are other dynamics which are working against this. MER’s Water Management Agreement with Genesis Energy, in respect of the operation of the Tekapo stations and the Waitaki hydro scheme, is likely to impact on hydro variability but it is too early to determine the potential magnitude. (ix) HVDC charging regime review Most transmission and distribution costs are modelled as pass-throughs growing 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.

8 November 2011 14 Macquarie Research Meridian Energy

Fig 15 Forecast MER HVDC charges under current TPM ($m) HVDC revenue Inc Pole 3 MER Gross MER Share MER Rebate MER net DC requirement requirement HVDC charge (per TPM) charge

FY11 85 0 62 73% 24 38 FY12 117 69 78 67% 23 56 FY13 157 111 105 67% 21 84 FY14 158 116 106 67% 20 86 FY15 163 123 109 67% 19 91 FY16 164 124 110 67% 17 92 FY17 162 122 109 67% 16 92 FY18 162 122 108 67% 15 93 FY19 167 126 112 67% 14 97 FY20 174 131 116 67% 13 103 Source: Transpower, Macquarie Research, November 2011

Under Transpower’s current pricing regime (Transmission Pricing Methodology or “TPM”), the cost of the HVDC link is allocated to South Island generators on the basis of each generator’s share of injection into the grid in the South Island. Macquarie Securities’ estimate of the gross HVDC charge for MER is summarised below. These forecasts are based on the current pricing regime and include Transpower’s estimate of additional costs relating to the $672m HVDC link upgrade project (outlined later). A review of the TPM has been recently initiated by the Electricity Authority (EA). There are currently two options before the EA’s Board on the issue: ⇒ Progressively shift the HVDC link to interconnection charging (over, say, 10-15 year period), with South Island generators ultimately benefitting; ⇒ Maintain the current HVDC charging methodology but with reduced incentives that currently influence market behaviour. A decision is expected by March 2012 at the latest and is subject to judicial review or appeal on matters of law. Macquarie Securities has assessed the sensitivity of our MER equity valuation estimate to the first option based on reduced net charges (see later sensitivity section). Note, it is uncertain whether MER will continue to receive rebates on the introduction of a new Financial Transmission Rights (FTRs) instrument which could be accompanied by a decision to cease paying rentals to DC payers. (x) Other Arc Innovations We have not explicitly modelled the Arc Innovations business but have included the asset’s estimated book value at June 2011 ($20m) in the MER equity valuation. WhisperTech, WhisperGen and Energy for Industry We have not explicitly modelled the WhisperTech and WhisperGen CHP businesses or the Energy for Industry subsidiary, due to their materiality to the valuation and availability of information. Mt Millar wind farm The Mt Millar wind farm is included in the MER equity valuation as an ‘international asset’ at its estimated book value at June 2011 ($238m). US solar The US solar asset, CalRenew 1-, is included in the MER equity valuation as an ‘international asset’ at the estimated book value at June 2011($35m).

8 November 2011 15 Macquarie Research Meridian Energy

IFRS Under IFRS, Meridian must mark-to-market the expected cashflows 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. Non-recurring operating costs Macquarie Research estimates that there were approximately $24m of non-recurring pre-tax earnings included in MER’s reported FY11 EBITDAF. These were largely related to a settlement with NZAS following a take-or-pay dispute ($28m) and Canterbury earthquakes related operating costs ($4m). We have not attempted to quantify the earthquakes’ indirect earnings impact through lower national demand and consequent price reductions.

8 November 2011 16 Macquarie Research Meridian Energy

Fig 16 Meridian Energy generation assets

FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21 Tekapo Annual station capacity MW ------Availability factor % 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 ------Capacity factor % -% -% -% -% -% -% -% -% -% -% -% Nominal annual generation GWh ------Ohau Annual station capacity MW 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% 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 Capacity factor % 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% 52.3% Nominal annual generation GWh 3,151 3,151 3,151 3,151 3,151 3,151 3,151 3,151 3,151 3,151 3,151 Benmore Annual station capacity MW 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% 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 Capacity factor % 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% 48.3% Nominal annual generation GWh 2,284 2,284 2,284 2,284 2,284 2,284 2,284 2,284 2,284 2,284 2,284 Aviemore Annual station capacity MW 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% 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 Capacity factor % 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% 47.5% Nominal annual generation GWh 916 916 916 916 916 916 916 916 916 916 916 Waitaki Annual station capacity MW 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% Potential supply GWh 788 788 788 788 788 788 788 788 788 788 788 Capacity factor % 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% 67.6% Nominal annual generation GWh 533 533 533 533 533 533 533 533 533 533 533 Manapouri Annual station capacity MW 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% 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 Capacity factor % 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% Nominal annual generation GWh 4,775 4,775 4,775 4,775 4,775 4,775 4,775 4,775 4,775 4,775 4,775 Total Hydro Capacity MW 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268 Total Hydro Generation GWh 11,659 11,659 11,659 11,659 11,659 11,659 11,659 11,659 11,659 11,659 11,659 Wind Generation Te Apiti Annual station capacity MW 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% Potential supply GWh 788 788 788 788 788 788 788 788 788 788 788 Capacity factor % 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% 33.9% Nominal annual generation GWh 267 267 267 267 267 267 267 267 267 267 267 Project White Hill Annual station capacity MW 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% Potential supply GWh 508 508 508 508 508 508 508 508 508 508 508 Capacity factor % 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% 31.7% Nominal annual generation GWh 161 161 161 161 161 161 161 161 161 161 161 West Wind - Wellington Annual station capacity MW 143 143 143 143 143 143 143 143 143 143 143 Availability factor % 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 1,253 1,253 1,253 1,253 1,253 1,253 1,253 1,253 1,253 1,253 1,253 Capacity factor % 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% 40.2% Nominal annual generation GWh 503 503 503 503 503 503 503 503 503 503 503 Te Uku Annual station capacity MW 64 64 64 64 64 64 64 64 64 64 64 Availability factor % 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 561 561 561 561 561 561 561 561 561 561 561 Capacity factor % 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% 41.9% Nominal annual generation GWh 235 235 235 235 235 235 235 235 235 235 235 Project Central Wind Annual station capacity MW - - 120 120 120 120 120 120 120 120 120 Availability factor % -% -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - - 526 1,051 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% 38.5% Nominal annual generation GWh - - 202 405 405 405 405 405 405 405 405 Mill Creek Annual station capacity MW - 60 60 60 60 60 60 60 60 60 60 Availability factor % -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - 263 526 526 526 526 526 526 526 526 526 Capacity factor % -% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% Nominal annual generation GWh - 101 202 202 202 202 202 202 202 202 202 Total Wind Capacity MW 355 415 535 535 535 535 535 535 535 535 535 Total Wind Generation GWh 1,166 1,267 1,571 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 Total Capacity MW 2,623 2,683 2,803 2,803 2,803 2,803 2,803 2,803 2,803 2,803 2,803 Total Generation GWh 12,825 12,926 13,230 13,432 13,432 13,432 13,432 13,432 13,432 13,432 13,432 Source: Company data, Macquarie Research, November 2011

8 November 2011 17 Macquarie Research Meridian Energy

Financial statements summary

Fig 17 Meridian Energy income statement ($NZm) FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21 Revenue $m 2,128 2,326 2,545 2,780 3,014 3,162 3,317 3,481 3,652 3,832 3,965 Operating Expenses $m (1,463) (1,638) (1,799) (1,988) (2,196) (2,313) (2,439) (2,576) (2,714) (2,865) (2,979) EBITDAF $m 665688 746 792 818 848 879 905 938 967 986 Depreciation $m (210)(272) (326) (358) (360) (361) (363) (365) (367) (369) (371) Goodwill amortisation $m ------EBIT - Recurring $m 455 417 420 434 458 487 515 540 571 598 615 EBIT - Non-Recurring $m ------Total EBIT $m 455 417 420 434 458 487 515 540 571 598 615 Net Interest Expense $m (96) (126) (146) (175) (152) (127) (100) (71) (42) (15) 7 NPBT $m 358291 274 260 306 360 415 469 530 583 621 Taxation Expense/ (Credit) $m (100) (81) (77) (73) (86) (101) (116) (131) (148) (163) (174) NPAT $m 258209 197 187 220 259 299 338 381 420 447 Adjustments after income tax expense $m ------Adjusted NPAT $m 258 209 197 187 220 259 299 338 381 420 447 EFPO and Ratios Shares on issue m 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 Revenue 2,128 2,326 2,545 2,780 3,014 3,162 3,317 3,481 3,652 3,832 3,965 EBITDAF $m 665688 746 792 818 848 879 905 938 967 986 EBIT - Recurring $m 455 417 420 434 458 487 515 540 571 598 615 EPS c 16.113.1 12.3 11.7 13.8 16.2 18.7 21.1 23.8 26.3 28.0 EPS (adjusted) c 16.1 13.1 12.3 11.7 13.8 16.2 18.7 21.1 23.8 26.3 28.0 CFPS c 29.330.1 32.7 34.1 36.3 38.8 41.4 43.9 46.8 49.3 51.1 EBITDAF margin % 31.3% 29.6% 29.3% 28.5% 27.1% 26.8% 26.5% 26.0% 25.7% 25.2% 24.9% EBIT margin % 21.4% 17.9% 16.5% 15.6% 15.2% 15.4% 15.5% 15.5% 15.6% 15.6% 15.5% EV/Revenue x 3.63.3 3.0 2.8 2.6 2.4 2.3 2.2 2.1 2.0 2.0 EV/EBITDAF x 11.611.2 10.4 9.8 9.5 9.1 8.8 8.5 8.2 8.0 7.8 EV/EBIT x 17.018.6 18.4 17.8 16.9 15.9 15.0 14.3 13.5 12.9 12.6 PER x 25.331.2 33.1 34.9 29.6 25.2 21.8 19.3 17.1 15.5 14.6 PER (adjusted) x 25.3 31.2 33.1 34.9 29.6 25.2 21.8 19.3 17.1 15.5 14.6 Price/CF x 13.913.6 12.5 12.0 11.3 10.5 9.9 9.3 8.7 8.3 8.0 Payout ratio % 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% DPS c 12.19.8 9.3 8.8 10.3 12.1 14.0 15.8 17.9 19.7 21.0 Yield % 3.0%2.4% 2.3% 2.1% 2.5% 3.0% 3.4% 3.9% 4.4% 4.8% 5.1% NTA per share c 541 557 581 565 549 532 516 500 493 501 509 Price/NTA x 0.750.73 0.70 0.72 0.74 0.77 0.79 0.82 0.83 0.81 0.80 Net debt $m 1,739 1,925 2,233 1,906 1,572 1,228 875 513 142 (238) (624) Net debt/equity % 34.8% 38.1% 43.8% 37.1% 30.2% 23.3% 16.4% 9.5% 2.6% (4.2%) (10.9%) Net debt/debt + equity % 25.8% 27.6% 30.5% 27.0% 23.2% 18.9% 14.1% 8.6% 2.5% (4.4%) (12.2%) Net debt/EV % 22.5% 24.9% 28.9% 24.6% 20.3% 15.9% 11.3% 6.6% 1.8% (3.1%) (8.1%) Net Interest $m (96) (126) (146) (175) (152) (127) (100) (71) (42) (15) 7 EBIT / interest x 4.7 3.3 2.9 2.5 3.0 3.8 5.2 7.6 13.7 40.0 (92.0) Return on assets % 5.3% 4.7% 4.5% 4.8% 5.2% 5.7% 6.2% 6.8% 7.2% 7.5% 7.5% Return on equity % 5.2% 4.1% 3.9% 3.6% 4.2% 4.9% 5.6% 6.2% 6.9% 7.5% 7.8% Return on funds employed % 6.7% 6.0% 5.7% 6.2% 6.8% 7.5% 8.3% 9.1% 10.1% 11.1% 12.0% WACC % 8.6%8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% ROCE - WACC spread % (1.8%) (2.6%) (2.8%) (2.4%) (1.8%) (1.1%) (0.3%) 0.5% 1.5% 2.6% 3.5% Source: Company data, Macquarie Research, November 2011

8 November 2011 18 Macquarie Research Meridian Energy

Fig 18 Meridian Energy cashflow statement ($NZm) FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21 Operating activities Net Income before tax $m 358 291 274 260 306 360 415 469 530 583 621 Tax credit/(paid) $m (100) (81) (77) (73) (86) (101) (116) (131) (148) (163) (174) Depreciation/goodwill amortisation $m 210 272 326 358 360 361 363 365 367 369 371 Other $m ------Gross cashflow $m 468 481 523 545 580 621 662 703 748 789 818 (Inc) / dec in working cap. $m (1) (3) (3) (3) (3) (2) (2) (2) (2) (2) (2) Inc / (dec) in provisions $m 0 0 0 0 0 0 0 0 0 0 0 Operating cashflow $m 467 478 520 542 577 619 660 700 746 787 817 Investing activities Capital expenditure $m (807) (508) (680) (75) (78) (80) (83) (86) (89) (92) (95) Acquisitions / Investments $m ------Asset sales $m ------Other $m ------Investing Cashflow $m (807) (508) (680) (75) (78) (80) (83) (86) (89) (92) (95) Financing activities Debt drawndown / (repayment) $m 165 186 308 (327) (334) (344) (353) (361) (215) - - Dividends paid $m (194) (157) (148) (140) (165) (194) (224) (253) (286) (315) (336) Finance Cashflow - ex debt repayments $m (28) 29 160 (467) (500) (538) (577) (615) (501) (315) (336) Inc / (dec) in net cash held $m (368) ------156 380 386 Source: Company data, Macquarie Research, November 2011

Fig 19 Meridian Energy balance sheet ($NZm) FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21

Current Assets Cash and Cash Equivalents $m ------156536922 Trade and other receivables $m 250 273 299 326 354 371 389 408 429 450 465 Inventories $m 34455556666 Current tax receivable $m ------Other $m 1515 15 15 15 15 15 15 15 15 15 Total Current Assets $m 268 291 317 345 373 391 409 429 605 1,006 1,408 Non Current Assets Property Plant and Equipment $m 8,318 8,554 8,908 8,625 8,343 8,062 7,781 7,502 7,224 6,947 6,671 Goodwill and other intangibles $m 47 47 47 47 47 47 47 47 47 47 47 Equity Accounted Joint Ventures $m 44444444444 Derivative Financial Instruments $m 42 42 42 42 42 42 42 42 42 42 42 Other $m 19 19 19 19 19 19 19 19 19 19 19 Total Non Current Assets $m 8,430 8,666 9,020 8,737 8,455 8,173 7,893 7,614 7,336 7,059 6,783 Total Assets $m 8,697 8,957 9,337 9,082 8,828 8,564 8,303 8,043 7,941 8,065 8,191 Current Liabilities Current Borrowings $m 298 298 298 298 298 298 298 298 298 298 298 Accounts Payable $m 225 246 269 294 319 334 351 368 386 405 419 Provisions $m 00000000000 Derivative Financial Instruments and $m current tax payable 18 18 18 18 18 18 18 18 18 18 18 Other $m 3737 37 37 37 37 37 37 37 37 37 Total Current Liabilities $m 578 599 622 647 671 687 703 721 739 758 772 Non Current Liabilities Deferred Tax Liability $m 1,412 1,412 1,412 1,412 1,412 1,412 1,412 1,412 1,412 1,412 1,412 Non Current Borrowings $m 1,440 1,627 1,935 1,608 1,274 930 577 215 - - - Term Payables $m 36 36 36 36 36 36 36 36 36 36 36 Derivative Financial Instruments $m 236 236 236 236 236 236 236 236 236 236 236 Total Non Current Liabilities $m 3,124 3,310 3,618 3,292 2,957 2,613 2,260 1,899 1,684 1,684 1,684 Net Assets $m 4,996 5,048 5,097 5,144 5,199 5,264 5,339 5,423 5,519 5,624 5,736 Equity Share Capital $m 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 1,600 Reserves $m 3,3923,392 3,392 3,392 3,392 3,392 3,392 3,392 3,392 3,392 3,392 Retained Earnings $m 3 55 105 152 207 271 346 431 526 631 743 Other $m 11111111111 Total Equity $m 4,996 5,048 5,097 5,144 5,199 5,264 5,339 5,423 5,519 5,624 5,736 Source: Company data, Macquarie Research, November 2011

8 November 2011 19 Macquarie Research Meridian Energy

Fig 20 Meridian Energy taxation ($NZm) FY11A FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E 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 30/06/21

Pre-Tax Profit $m 358 291 274 260 306 360 415 469 530 583 621 Add: Goodwill Amortisation $m ------Operating Surplus before Taxation $m 358 291 274 260 306 360 415 469 530 583 621 Tax Expense/(Credit) $m (100) (81) (77) (73) (86) (101) (116) (131) (148) (163) (174) Effective Taxation Rate % 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% Source: Company data, Macquarie Research, November 2011

8 November 2011 20 Macquarie Research Meridian Energy

Financial flexibility and generation development Meridian Energy’s FY11 gearing ratio (net debt/debt + equity) and EBIT interest coverage ratio were 25.8% and 4.7x, respectively. We forecast that these ratios will be 27.6% and 3.3x in FY12. These ratios continue to indicate that the company will have strong financial capacity to proceed with further generation development and to maintain an average long-term 75% payout ratio. We assume that the modelled projects are able to be funded internally and via debt. Note, gearing is forecast to peak at 30.5% in FY13. As highlighted previously, Meridian has a large pipeline of domestic and offshore renewable energy generation development options (approximately 1400 MW) at various stages of advancement. We outline below our forecast capex for the company out to FY13, as per the development pipeline identified earlier. Note, maintenance capex has declined from the FY10 level as a half-life refurbishment programme at Benmore is now complete.

Fig 21 Capital Expenditure ($NZm) FY11A FY12A FY13A FY14E FY15E FY16E 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16

Growth capex $m 757 448 610 - - - Maintenance capex $m 50 60 70 75 78 80 Total capex $m 807 508 680 75 78 80 Source: Statement of Corporate Intent (commencing 2011), Macquarie Research, November 2011

8 November 2011 21 Macquarie Research 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 22 Sensitivities

5,500 6,000 6,500 7,000 7,500 8,000

Capacity factors 6,301 6,760 (-/+ 1%)

HVDC cost 6,531 7,575 (base case, cost amortisation)

Wholesale electricity prices 6,496 6,583 (-/+ $10MWh)

Retail electricity prices 6,364 6,698 (-/+ 0.5c/kWh)

Residential customer growth 6,451 6,617 (+/- 0.5%)

Residential usage per customer 6,443 6,618 (-/+ 500kWh pa)

Debt margin 6,422 6,642 (+/- 0.5%)

Market risk premium 6,095 7,016 (+/- 0.5%)

Target Gearing 6,238 6,531 (30%/20%)

LWAP 6,390 6,671 (+/- 1% point)

NZAS base price escalation 6,021 7,114 (+/- 1% point)

Maintenance capex cost inflation 6,477 6,582 (+/- 0.5% point)

Source: Macquarie Research, November 2011

8 November 2011 22 Macquarie Research Meridian Energy

Alternative valuation methodologies We have assessed a comparable company equity valuation for the company of $5,179m- $5,844m. The band is based on the average multiple for generators that are considered to be the closest comparable companies to Meridian Energy (Contact Energy and TrustPower). We then applied a band to this multiple to account for MER’s higher renewable generation bias and its relatively large pipeline of generation development options (at the upper end) and its high relative historic earnings volatility (at the lower end). The band involves subjective judgement, as only some of these factors can be isolated and quantified. Renewable generation companies globally are generally accorded a higher capitalisation multiple than conventional generators reflecting the value of a free- or low-fuel position when electricity price paths are positively sloped. This multiple has been compressed in recent years as perceived risks over renewable generation incentives have heightened. NZ generators trade at a premium to their international counterparts partly due this country’s low reliance on incentive regimes. This valuation provides a cross-check of the equity valuation based on our primary methodology, discounted cashflow. This valuation range lies below our primary valuation, due in part to the positive net present value of modelled development projects included in our primary valuation.

Fig 23 Comparable company valuation analysis Multiple FY12 Enterprise value Net Debt Equity value ($m) EBITDA Low High Low High Low High Meridian Energy 9.6x 10.6x 665 6,384 7,049 1,205 5,179 5,844 1 Meridian Energy (adj) 9.1x 10.1x Contact Energy 9.9x 524 5,210 1,195 4,015 TrustPower 10.3x 301 3,106 797 2,309 1. Capitalisation multiples adjusted for $323m non-earning international assets valued at estimated book value Source: Bloomberg, Factset, Macquarie Research, November 2011

8 November 2011 23 Macquarie Research Meridian Energy

Relative disclosure We have summarised below Meridian Energy’s disclosures of key financial and valuation forecast variables over the past 12 months. This assessment is set against those of comparable listed companies and State Owned Enterprises operating in NZ.

Fig 24 Meridian Energy relative disclosure Variable disclosure Genesis Meridian Mighty River Contact Energy Energy Power Energy TrustPower

Generation

By fuel √ √ √ √ √ Production (GWh) By station √

Prices GWAP ($/MWh) √ √ √ √ √

Fuel √ NA √ NA Direct costs ($m) Energy √ √ √ Ancillary services (net)

Maintenance √ √ √ Operating costs ($m) Other √

Capital expenditure ($m) Maintenance √ √ √ √

Capex ($m) √ √ √ √ Greenfield prospects Opex ($m) Capacity factor (%) √ √ √ √ √

Electricity Supply

Fixed price variable volume (GWh) √ √ √ √ √ Volume by price exposure Spot (GWh) √ √ √ √ √ CFD - net (GWh) √ √ √

Mass market (ICPs) Customer breakdown SME (ICPs) TOU (ICPs)

Mass market Energy use per customer (MWh) SME TOU

Mass market Tariffs ($/MWh) SME TOU

Cost to serve √ Ancillary services (net) √ Other costs ($m) LWAP ($/MWh) √ √ √ Transmission and Distribution. costs √ √ √ √ √

Gas Supply

Mass market NA NA Customer breakdown (no.) SME NA NA Corporate NA NA

Mass market NA NA Energy use per customer SME fixed NA NA (GJ/cust.) SME/Corporate spot NA NA

Direct NA √ NA Operating costs ($m) Other NA √ NA Source: Company data, Macquarie Research, November 2011

8 November 2011 24 Macquarie Research Meridian Energy

Fig 24 EV/EBITDA (Jun-12) Fig 25 EV/EBIT (Jun-12)

12x 18x 16x 10x 14x 8x 12x 10x 6x 8x 4x 6x 4x 2x 2x - - AGL EDF Enel SSE AGL Enel EDF EDP EDP SSE Origin EDP EDP E. ON Origin E. ON Contact NextEra Iberdrola Contact NextEra Transalta Iberdrola Transalta TrustPower Enel Green TrustPower Enel Green China Datang China DatangChina EDP Renovaveis EDP EDP Renovaveis EDP International Power International International Power Huaneng Renewable Huaneng Renewable Huaneng

Source: Bloomberg, Factset, Macquarie Research, November 2011 Source: Bloomberg, Factset, Macquarie Research, November 2011

Fig 26 Gearing (Net debt / EV) Fig 27 Market cap / EV (Jun-12)

70% 100% 60% 90% 80% 50% 70% 40% 60% 30% 50% 20% 40% 30% 10% 20% -% 10% -% Enel EDF SSE EDP EDP Origin E. ON Contact AGL EDF Enel NextEra SSE Iberdrola EDP EDP Transalta Origin E. ON TrustPower Contact NextEra Enel Green Iberdrola Transalta China Datang TrustPower Enel Green EDP Renovaveis China Datang International Power International EDP Renovaveis EDP Huaneng Renewable International Power International Huaneng Renewable Huaneng

Source: Bloomberg, Factset, Macquarie Research, November 2011 Source: Bloomberg, Factset, Macquarie Research, November 2011

Fig 28 EBITDA margin (Jun-12) Fig 29 EBIT margin (Jun-12)

100% 45%

90% 40%

80% 35% 70% 30% 60% 25% 50% 20% 40% 15% 30% 10% 20% 10% 5% nmf nmf nmf nmf -% -% Enel EDF AGL SSE Enel EDF AGL SSE EDP EDP EDP EDP Origin E. ON Origin E. ON Contact NextEra Contact Iberdrola NextEra Iberdrola Transalta Transalta TrustPower TrustPower Enel Green Enel Green China Datang China Datang EDP Renovaveis EDP EDP Renovaveis EDP International Power International Power Huaneng Renewable Huaneng RenewableHuaneng

Source: Bloomberg, Factset, Macquarie Research, November 2011 Source: Bloomberg, Factset, Macquarie Research, November 2011

8 November 2011 25 Macquarie Research Meridian Energy

Appendix – Valuation Bridge We set out the key changes to our 2010 equity valuation for Meridian Energy below.

Fig 30 Meridian Energy equity valuation bridge (2010-2011)

6700

6600 6,531

8 6500 6,463 70 70 178 3 163 6400 44

123 6300 521

6200 221

6100

35 6000

5900 FY10 FY11 Other Capex dividend rates LWAP/GWAP Less: Special Less: generation Usage per user per Usage Retail price path price Retail Customer growth Customer Tekapo sale price sale Tekapo Other revenueOther (EFI) O&M from new wind from O&M Wholesale price path price Wholesale Source: Macquarie Research, November 2011

8 November 2011 26 Macquarie Research 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 >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards).

Macquarie - USA Recommendations – 12 months Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from 3000 index return Fundamental Analyst recommendations Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 September 2011 AU/NZ Asia RSA USA CA EUR Outperform 57.35% 65.88% 56.94% 46.54% 74.68% 47.85% (for US coverage by MCUSA, 11.63% of stocks covered are investment banking clients) Neutral 31.99% 20.68% 31.94% 50.00% 23.42% 34.66% (for US coverage by MCUSA, 9.30% of stocks covered are investment banking clients) Underperform 10.66% 13.45% 11.11% 3.46% 1.90% 17.49% (for US coverage by MCUSA, 0.47% of stocks covered are investment banking clients)

Company Specific Disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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