NEW ZEALAND Meridian Energy Performance evaluation Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy (MER) is $6,463m (nominal WACC 8.6%, asset beta 0.60, TGR 3.0%). We have assumed, in this estimate, that MER receives $750m for its Tekapo A and B assets.

Forecast financial model Inside A detailed financial model with explicit forecasts out to 2030 has been completed and is summarised in this report. Performance evaluation 2 Financial model assumptions and commentary Valuation summary 5 We have assessed the sensitivity of our equity valuation to a range of inputs. Financial model assumptions and Broadly, the sensitivities are divided into four categories: generation commentary 7 assumptions, electricity demand, financial and price path. Financial statements summary 15 We highlight and discuss a number of key model input assumptions in the report: Financial flexibility and generation ƒ Wholesale electricity price path; development 18 ƒ Electricity demand and pricing; Sensitivities 19 ƒ The New Zealand Aluminium Smelters (NZAS) supply contract; Alternative valuation methodologies 20 Relative disclosure 21 ƒ MER’s generation development pipeline. Alternative valuation methodology ƒ We have assessed a comparable company equity valuation for the company of $4,942m-$6,198m. 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. ƒ This valuation range lies below our primary valuation due, in part, to the recent de-rating of global renewable energy multiples (absolutely and vis-a-vis conventional generators). Relative disclosure ƒ 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. Stephen Hudson +64 9 363 1414 [email protected]

1 November 2010

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

Macquarie Research Meridian Energy

Performance evaluation Meridian Energy equity valuation Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy is $6,463m (nominal post tax WACC 8.6%, asset beta 0.60, TGR 3.0%). We have assumed, in this estimate, that MER will receive $750m for its Tekapo A and B assets. 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 FY08 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 $4,942m- $6,198m. This is based on the current earnings multiples of listed comparable generator/retailers globally. The band is based on the average multiple for selected global generators with a bias toward conventional generation ranging to the average multiple for selected global renewable generators. Macquarie has then applied a relatively arbitrary premium to this range to account for MER’s renewable generation bias and its pipeline of generation development options. 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 recent de-rating of global renewable energy multiples (absolutely and vis- a-vis conventional generators). A sum of the parts valuation may provide another useful cross-check but is heavily dependent on the electricity transfer price assumed. Financial model assumptions and commentary We highlight and discuss a number of key model input assumptions in the report: Development pipeline. The company has proposed a number of greenfield wind and hydro generation developments totalling in excess of 1,300 MW in New Zealand. We have explicitly modelled projects which appear to have a high probability of being completed in a 1-5 year timeframe. For our purposes, these are Te Uku, Project Central Wind and Mill Creek. MER has an equity funding exposure to the Macarthur wind farm project of around A$150m over FY11. We have not explicitly modelled this due to limited project information. Retail and SME pricing. As at August 2010, Meridian Energy was pricing the energy component of its mass market electricity volumes at an approximate 8.4% discount to the average market pricing – up from an approximate 2.9% discount a year ago. We have attempted to back out Meridian Energy’s commercial/SME fixed pricing by calculating the commercial/SME pricing discount seen in historical periods (based on pricing information from the MED). We assume a 15% discount in pricing our forecasts. NZAS supply contract renewal and pricing. 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.

1 November 2010 2 Macquarie Research Meridian Energy

Fig 1 NZAS historical power price 31/12/2009 31/12/2008 31/12/2007 31/12/2006

NZAS power purchases $292.7m $310.1m $299.9m $276.1m Power usage 576 MW 413 MW 608 MW 604 MW Implied cost / MWh – energy only 5.8c/kWh 8.6c/kWh 5.6c/kWh 5.2c/kWh Source: Macquarie Research, October 2010

Source: NZAS Annual Report, December 2009

Wholesale electricity price paths. We have adjusted our wholesale electricity price forecast since the last MER performance evaluation report – Meridian Energy: Performance Evaluation (published 5 October 2009) - see below graph. Based on expected demand and supply (taking into account future projects coming online), we continue to expect the wholesale electricity price to approach the LRMC of wind generation by 2020 (the year in which other, cheaper, generation alternatives have been exhausted). We think new thermal generation capacity will be limited (beyond Contact’s Taranaki peakers) due to difficulties in obtaining adequate gas supply and to the availability of cheaper geothermal development options. We estimate the current LRMC of wind at $100/MWh (2010$). We note, however, that this LRMC is highly sensitive to currency, turbine pricing and cost of capital assumptions. The price paths have been updated to reflect expected weakness in wholesale prices over the next two years, primarily due to lower expected load growth. We assess the impact of the EIA reforms on pricing and volume later in this report.

Fig 2 Wholesale and retail electricity price path forecasts

$NZ Wholesale electricity price FY10 ($/MWh) Retail electricity price FY10 (c/kWh) 300.0 Wholesale electricity price FY09 ($/MWh) Retail electricity price FY09 (c/kWh)

250.0

200.0

150.0

100.0

50.0

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

Source: Macquarie Research, October 2010

We recognise that the rate of growth in the retail price path falls short of that of wholesale prices as currently modelled and, as such, is conservatively struck. Electricity Industry Act. Macquarie Securities has attempted to capture the impact of the physical and virtual asset swaps (VAS) impact contained in the legislation. We have assumed a three-year progressive ramp-up for the Meridian Energy-GEN swap to an ultimate volume of 450 GWh. We have assumed a three-year progressive ramp-up to the Meridian Energy-MRP ultimate swap volume of 700 GWh. The Tekapo A and B transfer is assumed to be effective 1 November 2010 and priced at the mid-point of the valuation range indicated in the Office of the Minister of Energy and Resources cabinet paper dated 9 December 2009 (i.e., $700m-800m). We have stepped down our TOU, SME and mass market volumes proportionately for FY11- 13 to reflect the Tekapo A and B station mean output (de-rated for a ‘very-dry’ year).

1 November 2010 3 Macquarie Research Meridian Energy

The VAS contracts are assumed to be priced at fair value.

Fig 3 Meridian Energy summary financials (MER: $4.04) Profit & Loss 2009A 2010A 2011E 2012E Operating Revenue $m 1892 20622108 2121 EBITDAF $m 512 642628 599 Depreciation $m (150) (174)(188) (185) Amortisation $m (13) (14)0 0 EBIT - Recurring $m 361 465441 413 EBIT $m 229 386441 413 Net Interest Expense $m (101) (108)(119) (86) Pre-Taxation Profit $m 128 277322 327 Taxation Expense $m (39) (93)(95) (92) Profit after Taxation $m 89 184 227 235 Adjustments after income tax $m 132 80 0 0 expense Adjusted Earnings1 $m 221 264227 235 1. Adjusted for significant one-off items and the change in the fair value of financial instruments

Key Assumptions GWAP $/MWh 46.0 52.259.3 59.9 Total generation GWh 12,237 13,86213,216 13,005 LWAP/GWAP x 1.33 1.221.18 1.18 FPVV GWh 1,810 1,7471,623 1,563 Retail electricity price growth % 4.42% 2.62% 2.00% 2.00%

Discounted Cashflow Valuation Profit and Loss Ratios 2009A 2010A 2011E 2012E PER (adj Earnings) x 29.2 24.528.5 27.5 PV FCFs Available to Owners $m 6,976 EPS (adj Earnings) c 29.2 24.5 28.5 27.5 Plus: Book Value of international $m 260 EPS (Reported) c 5.6 11.5 14.2 14.7 assets Plus: Special dividend from sale of $m 750 DPS c 1.9 22.1 34.8 11.8 Tekapo Receivable $m 30 Revenue Growth % (27.2%) 9.0% 2.2% 0.6% Less Net Debt $m (1,553) EBIT Growth % (14.3%) 68.5% 14.3% (6.3%) Equity Value $m 6,463 EBITDAF/Sales % 27.1% 31.1% 29.8% 28.2% Shares Outstanding m 1,600 EBIT/Sales % 12.1% 18.7% 20.9% 19.5% Equity Value per Share $ 4.04 Effective tax rate % 30.2% 33.6% 29.5% 28.0% Payout ratio % 13.6% 134.0%245.4% 80.0% Assumptions EV/EBIT x 34.9 20.7 18.1 19.3 Risk Free Rate % 5.50% EV/EBITDA x 15.6 12.412.7 13.3 Asset Beta # 0.60 EV/Revenue x 4.2 3.93.8 3.8 Market Risk Premium % 7.0% Target Debt/Value % 20.0% Balance Sheet Ratios Nominal Post-Tax WACC % 8.56% ROE % 5% 5% 5% 5% Perpetuity Growth Rate % 3.0% ROA % 5% 5% 6% 5% ROFE % 7% 7%8% 7% Net Debt $m 1,204 1,5531,103 1,117 Net Debt/Equity % 28% 31%23% 23% Net Interest Cover (EBIT) x 4 4 4 5 Price/NTA x 0.9 0.70.8 0.8 NTA per share cps 446 542492 496 EFPOWA m 1,600 1,6001,600 1,600

Cashflow Analysis 2009A 2010A 2011E 2012E Balance Sheet 2009A 2010A 2011E 2012E

Pre-taxation Profit $m 128 277 322 327 Cash $m 48 54 - - Depreciation & Amortisation $m 150 174 188 185 Receivables $m 188 199 204 205 Tax (Paid)/Credit $m (31) (93) (95) (92) Inventories $m 7 6 6 6 Other $m 123 83 - - Investments accounted for using $m 2 0 0 0 equity method Gross Cashflow $m 370 441 414 421 Property, Plant & Equipment $m 6,743 8,207 7,458 7,519 Changes in Working Capital $m (57) 10 (0) (0) Intangibles $m 44 50 50 50 Changes in Provisions $m - - 0 0 Derivative Financial Instruments $m 127 183 183 183 Operating Cashflow $m 314 452 414 421 Other Assets $m 18 15 15 15 Acquisitions/Investments $m (16) (263) - - Total Assets $m 7,177 8,716 7,917 7,978 Capital Expenditure $m (484) (207) (188) (246) Payables $m 170 202 206 207 Asset Sales $m 24 12 750 - Short Term Debt $m 123 284 284 284 Other $m - - 30 - Long Term Debt $m 1,129 1,323 819 833 Investing Cashflow $m (477) (458) 592 (246) Derivative Financial Instruments $m 140 191 191 191 Dividend (ordinary) $m (30) (353) (556) (188) Other Liabilities $m 1,331 1,592 1,592 1,592 Debt drawndown / (repayment) $m 169 367 (504) 14 Total Liabilities $m 2,893 3,645 3,145 3,160 Other $m - - -- Shareholders' Funds $m 1,600 1,6001,600 1,600 Financing Cashflow $m 139 13 (1,060) (175) Retained Earnings $m (51) (216) (516) (469) Total Shareholders' Equity $m 4,284 5,0714,771 4,818 Net Change in Cash (inc FX) $m (24) 7 (54) - Total Funds Employed $m 7,177 8,716 7,917 7,978 Source: Company data, Macquarie Research, October 2010

1 November 2010 4 Macquarie Research Meridian Energy

Valuation summary Meridian Energy equity valuation

Fig 4 Meridian Energy DCF equity valuation summary

Perpetuity growth rate 3.00% Perpetuity Value 11,381 PV (FY10-29) 4,382 PV of Perpetuity 2,594 PV FCF available to owners 6,976 Plus: book value of international assets 260 Plus: special dividend from sale of Tekapo 750 Plus: Receivable 30 Less Net Debt (1,553) Equity Value 6,463 Shares Outstanding (m) 1,600 DCF Equity Value per share 4.04

Assumptions Corporate Tax Rate 28% Risk free rate 5.50% 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, October 2010

We have summarised our DCF-based equity valuation ($6,463m) 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. A 6 month average yield was used to prevent any distortion arising from shocks in the spot rate. The risk free rate estimated as at 1st 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.

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.

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.

1 November 2010 5 Macquarie Research Meridian Energy

Fig 5 Sensitivities

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

Capacity factors 6,211 6,715 (-/+ 1%)

Carbon cost 6,470 6,568 ($25/t /$0/t)

Wholesale electricity prices 6,391 6,549 (-/+ $10MWh)

Retail electricity prices 6,163 6,763 (-/+ 0.5c/kWh)

Customer growth 6,459 6,467 (+/- 0.1%)

Usage per customer 6,439 6,487 (-/+ 500kWh pa)

Debt margin 6,375 6,553 (+/- 0.5%)

Market risk premium 6,112 6,853 (+/- 0.5%)

LWAP 6,370 6,556 (+/- 1% point)

NZAS base price escalation 6,152 6,815 (+/- 1% point)

Maintenance capex cost inflation 6,326 6,590 (+/- 0.5% point)

Greenfield development timing1 6,159 6,363 (+/- 1 year)

Source: Macquarie Research, October 2010

1 November 2010 6 Macquarie Research Meridian Energy

Financial model assumptions and commentary (i) Wholesale electricity price path scenarios and carbon pricing We have reconstructed our wholesale electricity price forecast since the last report in 2008. Based on expected demand and supply (taking into account future projects coming online), we think that the wholesale electricity price will approach the LRMC of wind generation by 2020 (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’s Taranaki peakers) due to difficulties in obtaining adequate gas supply arrangements. We estimate the current LRMC of wind at $100/MWh (2009 dollars). We note, however, that this LRMC is highly sensitive to currency, turbine pricing and cost of capital assumptions.

Our wholesale price path includes a carbon tax of $15/tonne CO2e from July 2011. We assume the company has no carbon liability (by virtue of its renewable generation base) and that it receives no carbon credits from the government. This is broadly consistent with the recently enacted emissions trading scheme bill. (ii) Electricity demand and retail pricing 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 NZAS: electricity either physically delivered, or hedged by CFD, to NZAS.

Mass market customers Volume We have analysed the Ministry of Economic Development’s quarterly mass market electricity pricing data for each retailer. We have separated out the impact on retail pricing from changes to lines charges. We have done this to enable a comparison of the net retail margin for each retailer. The company has an approximate 9% market share in the electricity mass market. The company’s market share has been relatively constant over recent years. 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). Pricing As at August 2010, Meridian Energy was pricing the energy component of its mass market electricity volumes at an approximate 8.4% discount to the average market pricing – up from an approximate 2.9% discount a year ago. For FY11 and FY12, we assume a 2% nominal increase in MER’s mass market pricing – close to the level of price increases expected across key competitors. We assume a return to more normal price increases after FY12, with 2.5% pa price growth.

1 November 2010 7 Macquarie Research Meridian Energy

Transmission and distribution costs are modelled to grow by CPI – X pa (as per the current thresholds regime for distribution companies), where X represents the current weighted average X factor for distribution companies, or for Transpower. We have assumed the same retail price path for all retailers (adjusting for current relative pricing levels). Fixed price SME and TOU volumes Volume 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. 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. GWAP / LWAP factor There are systemic differences between generation prices achieved and load prices paid due to transmission constraints, geographical separation of generation and load centres, and the ability to control generation output relative to timing of load demand. These differences can be separated into a Generation Weighted Average Price (GWAP) factor and Load Weighted Average Price (LWAP) factor. Each factor is referenced to a benchmark pricing node and represents the premium or discount to the benchmark price received for generation (GWAP), or paid for supplying load (LWAP) relative to the benchmark node. We have forecast a GWAP and LWAP for Meridian Energy based on historical analysis and the outlook for transmission constraints and demand growth. This factor is applied to our benchmark wholesale price path to generation earnings and retailing costs.

Fig 6 Wholesale and retail electricity price path forecasts FY10A FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Wholesale electricity price $MWh 59.0 65.2 65.8 71.6 77.6 85.5 94.4 104.3 115.5 127.9 130.7 % change in wholesale electricity price % p.a. 1.16% 10.51% 0.91% 8.84% 8.33% 10.23% 10.39% 10.54% 10.67% 10.80% 2.14% Retail electricity price c/kWh 20.8 21.2 21.6 22.2 22.7 23.3 23.9 24.5 25.1 25.7 26.4 % change in retail electricity price % p.a. 2.62% 2.00% 2.00% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Source: Macquarie Research, October 2010

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Fig 7 Meridian Energy - Retail FY10A FY11EFY12E FY13E FY14E FY15E FY16E FY17E FY18EFY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Customers - electricity Retail customers # 185,262 172,665 167,117 168,454 169,987 171,534 173,095 174,670 176,260 177,864 179,482 Usage per user (annualised kWh) kWh 9,429 9,400 9,350 9,300 9,250 9,200 9,150 9,150 9,150 9,150 9,150 Retail volume GWh 1,747 1,623 1,563 1,567 1,572 1,578 1,584 1,598 1,613 1,627 1,642 Losses GWh 121 113109 109 109 110 110 111 112113 114

Other FPVV/SME volume GWh 4,076 3,851 3,773 3,841 3,921 4,026 4,147 4,271 4,399 4,531 4,667 Losses GWh 170 160157 160 163 168 173 178 183189 194

Total retail sales GWh 5,823 5,474 5,335 5,407 5,494 5,604 5,730 5,869 6,012 6,159 6,309 Losses GWh 291 273266 269 273 277 283 289 295302 309 Total GWh 6,114 5,7475,601 5,676 5,766 5,881 6,013 6,158 6,307 6,460 6,618

Wholesale volumes TOU sales GWh 1,835 1,720 1,664 1,665 1,667 1,669 1,670 1,672 1,674 1,675 1,677 Losses GWh 128 120116 116 116 116 116 116 116116 117 Total GWh 1,963 1,8401,779 1,781 1,783 1,785 1,786 1,788 1,790 1,792 1,793

Pricing - electricity Retail electricity price path % change in retail electricity price % p.a. 2.6% 2.0% 2.0% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Retail electricity price c/kWh 20.8 21.2 21.6 22.2 22.7 23.3 23.9 24.5 25.1 25.7 26.4

Retail prices Change in retail price component % 1.7% 1.4% 0.8% 2.7% 2.7% 2.7% 2.7% 2.7% 2.6% 2.6% 2.6% Energy component c/kWh 13 13 13 13 14 14 14 15 15 16 16

Change in distribution price component % 4.1% 3.1% 4.0% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Distribution component c/kWh 6 6 7 7777 7 888

Change in transmission price component % 4.2% 2.1% 3.0% 1.5% 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 1111 11 12 12 12 13 1313 14

Lines charge - SMEs c/kWh 4 444555 5 555

TOU (Spot) price path Wholesale price $/MWh 59 65 66 72 78 85 94 104 115 128 131 LWAP benefit (cost) % 108.4% 107.0% 107.0% 107.0% 107.0% 107.0% 107.0% 107.0% 107.0% 107.0% 107.0% Electricity Price $/MWh 64 70 70 77 83 91 101 112 124 137 140 Source: Company data, Macquarie Research, October 2010

Fig 8 Meridian Energy - Operations FY10A FY11EFY12E FY13E FY14E FY15E FY16E FY17E FY18EFY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Revenue Generation 960 1,0211,044 1,123 1,239 1,373 1,489 1,629 1,785 1,959 2,002 Retail 1,086 1,0471,035 1,080 1,130 1,188 1,252 1,322 1,398 1,478 1,544 Energy related services revenue 16 17 18 19 20 20 21 22 23 24 25 Other revenue 22 23 24 25 25 26 26 27 28 28 29 2,085 2,1082,121 2,246 2,413 2,607 2,788 3,000 3,234 3,490 3,600

Expenses Electricity expense (792) (834) (862) (935) (1,011) (1,125) (1,256) (1,405) (1,573) (1,764) (1,824) Carbon charge ------Transmission and distribution expense (280) (281) (283) (293) (304) (316) (329) (344) (360) (376) (393) Employee costs (87) (91) (97) (100) (104) (108) (112) (116) (121) (125) (130) Cost to serve (29) (41) (42) (43) (45) (46) (48) (49) (51) (53) (55) O&M from new wind generation - - (2) (6) (12) (16) (17) (17) (18) (19) (20) Other operating expenses (134) (121) (128) (133) (138) (143) (148) (154) (160) (166) (172) (1,439) (1,480)(1,523) (1,622) (1,727) (1,870) (2,025) (2,201) (2,398) (2,619) (2,710)

EBITDA 645 628599 625 686 737 763 799 835871 891

Depreciation and Amortisation (174) (188) (185) (206) (237) (256) (259) (261) (264) (267) (270)

EBIT 471 441413 419 450 481 504 538 571604 621 Source: Company data, Macquarie Research, October 2010

1 November 2010 9 Macquarie Research Meridian Energy

(iii) 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 ~5.5c/kWh (normalised for the impact of the NZAS transformer failure). It is assumed this will increase at CPI until the end of the contract. NZAS had claimed force majeure for an NZAS transformer failure which occurred in November 2008. This outage resulted in the use of electricity below the take or pay level. NZAS has estimated the value difference between the full take or pay contracted amount and actual usage at approximately $57m as at 31 December 2009. Meridian Energy and New Zealand Aluminium Smelters (NZAS) announced recently that they reached a negotiated and confidential settlement of arbitration proceedings concerning liability payment for electricity. Macquarie Securities has made an allowance for a receivable in our forecasts and equity valuation. (iv) Generation assets The financial model sets out Meridian Energy’s generation assets by plant and region. Development projects are not included in the financial projections unless they are sufficiently certain (see below). Our generation output forecasts are driven by assumed availability and capacity factors. Wind capacity factors for new projects are conservatively estimated at around 39%. 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.

Fig 9 Meridian Energy generation pipeline Project Type Size (MW) Estimated cost ($m) Completion date

Modelled projects Te Uku Wind 64 247 2H12 Project Central Wind Wind 120 340 2H14 Mill Creek Wind 67 228 2H13 Non-modelled projects Project Hayes Wind 630 ~2,000 ? North Bank Tunnel Hydro 220-280 700-900 ? Mokihinui Hydro 85 ? ? Hurunui Wind Wind 120 ? ? Hunter Downs Irrigation Wind ? ? ? MacArthur (Australia) Wind 420 ? ? Mt Mercer (Australia) Wind 130 ? ? Source: Meridian Energy, Press, Standard & Poor’s, October 2010

1 November 2010 10 Macquarie Research Meridian Energy

(v) Electricity Industry Act Key assumptions On 23 September, the Electricity Industry Bill passed through Parliament. The Act implements the final decisions of Government following the 2009 Ministerial review of the sector. The legislation which came into force on 1 October 2010 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. 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.

Fig 10 Illustrative impact of EIB on mass market shares - 15% South Island mass market turned over; 3% of North Island 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 407864 33643 513449 15171 95255 150247 442702 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 -1968818529 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%

Total North Island churn 3% Total South Island churn 15% 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. Assume 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, October 2010

Macquarie Securities has attempted to capture the impact of the physical and virtual asset swaps (VAS) impact contained in the legislation. We have assumed a three-year progressive ramp-up for the Meridian Energy-GEN swap to an ultimate volume of 450 GWh. We have assumed a three-year progressive ramp-up to the Meridian Energy-MRP ultimate swap volume of 700 GWh. The Tekapo A and B transfer is assumed to be effective 1 November 2010 and priced at the mid-point of the valuation range indicated in the Office of the Minister of Energy and Resources cabinet paper dated 9 December 2009 (i.e., $700m-800m).

1 November 2010 11 Macquarie Research Meridian Energy

We note that Genesis Energy appears to have predicated its retail market strategy based on its post EIB position, and some pricing and volume effects have already occurred. By way of example, GEN’s respective pricing in Dunedin, Invercargill and across the Otagonet network is around 20%, 8% and 17% lower than incumbent pricing. We note that non-SOE companies are incumbent retailers in these regions. We have stepped down our TOU, SME and mass market volumes proportionately over FY11- 13 to reflect the Tekapo A and B station mean output (de-rated for a ‘very-dry’ year). The VAS contracts are assumed to be priced at fair value. 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 focused on enforcing and developing electricity market rules and contracting for key market operation services. Macquarie Securities has not attempted to model any changes resulting from these provisions.

1 November 2010 12 Macquarie Research Meridian Energy

Fig 11 Meridian Energy generation assets

FY10A FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Tekapo Annual station capacity MW 185 62 ------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 1,621 540 ------Capacity factor % 59.8% 59.8% -% -% -% -% -% -% -% -% -% Nominal annual generation GWh 969 323 ------

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 % 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% 50.1% Nominal annual generation GWh 3,022 3,022 3,022 3,022 3,022 3,022 3,022 3,022 3,022 3,022 3,022

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 % 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% Nominal annual generation GWh 948 948 948 948 948 948 948 948 948 948 948

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 % 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% 63.4% Nominal annual generation GWh 500 500 500 500 500 500 500 500 500 500 500

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 % 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% 80.3% Nominal annual generation GWh 5,134 5,134 5,134 5,134 5,134 5,134 5,134 5,134 5,134 5,134 5,134

Total Hydro Capacity MW 2,453 2,330 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268 2,268

Total Hydro Generation GWh 12,857 12,211 11,888 11,888 11,888 11,888 11,888 11,888 11,888 11,888 11,888

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 % 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% 41.2% Nominal annual generation GWh 325 325 325 325 325 325 325 325 325 325 325

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 % 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% 36.0% Nominal annual generation GWh 183 183 183 183 183 183 183 183 183 183 183

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 % 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% Nominal annual generation GWh 497 497 497 497 497 497 497 497 497 497 497

Te Uku Annual station capacity MW - - 64 64 64 64 64 64 64 64 64 Availability factor % -% -% 50.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Potential supply GWh - - 280 561 561 561 561 561 561 561 561 Capacity factor % -% -% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Nominal annual generation GWh - - 112 224 224 224 224 224 224 224 224

Project Central Wind Annual station capacity MW - - - - 120 120 120 120 120 120 120 Availability factor % -% -% -% -% 50.0% 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 Capacity factor % -% -% -% -% 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

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

Total Wind Capacity MW 291 291 355 422 542 542 542 542 542 542 542

Total Wind Generation GWh 1,005 1,005 1,117 1,342 1,658 1,860 1,860 1,860 1,860 1,860 1,860

Total Capacity MW 2,744 2,621 2,623 2,690 2,810 2,810 2,810 2,810 2,810 2,810 2,810 Total Generation GWh 13,862 13,216 13,005 13,230 13,546 13,748 13,748 13,748 13,748 13,748 13,748 Source: Company data, Macquarie Research, October 2010

1 November 2010 13 Macquarie Research Meridian Energy

(v) Other Arc Innovations We have not explicitly modelled the Arc Innovations business due to its materiality to the MER equity valuation and availability of information. 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. US solar The US solar assets are included in the MER equity valuation as an ‘international asset’ at their estimated book value. 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 $20m of non-recurring operating costs incurred by MER over FY10. These were largely related to acquisition activity, head office cost rationalisation and legislation-related costs. We have re-based our forecasts accordingly.

1 November 2010 14 Macquarie Research Meridian Energy

Financial statements summary

Fig 12 Meridian Energy income statement ($NZm) FY10A FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Revenue $m 2,062 2,108 2,121 2,246 2,413 2,607 2,788 3,000 3,234 3,490 3,600 Operating Expenses $m (1,420) (1,480) (1,523) (1,622) (1,727) (1,870) (2,025) (2,201) (2,398) (2,619) (2,710) EBITDAF $m 642 628 599 625 686 737 763 799 835 871 891 Depreciation $m (174) (188) (185) (206) (237) (256) (259) (261) (264) (267) (270) Goodwill amortisation $m (14) ------EBIT - Recurring $m 465 441 413 419 450 481 504 538 571 604 621 EBIT - Non-Recurring $m (80) ------Total EBIT $m 386 441 413 419 450 481 504 538 571 604 621 Net Interest Expense $m (108) (119) (86) (90) (98) (113) (97) (81) (63) (45) (28) NPBT $m 277 322 327 329 352 367 406 457 508 558 593 Taxation Expense/ (Credit) $m (93) (95) (92) (92) (99) (103) (114) (128) (142) (156) (166) NPAT $m 184 227 235 237 253 265 293 329 366 402 427

Adjustments after income tax expense $m 80 ------Adjusted NPAT $m 264 227 235 237 253 265 293 329 366 402 427

EFPO and Ratios Shares on issue m 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600 1600

Revenue 2,062 2,108 2,121 2,246 2,413 2,607 2,788 3,000 3,234 3,490 3,600 EBITDAF $m 642 628 599 625 686 737 763 799 835 871 891 EBIT - Recurring $m 465 441 413 419 450 481 504 538 571 604 621 EPS c 11.5 14.2 14.7 14.8 15.8 16.5 18.3 20.6 22.9 25.1 26.7 EPS (adjusted) c 16.5 14.2 14.7 14.8 15.8 16.5 18.3 20.6 22.9 25.1 26.7 CFPS c 27.6 25.9 26.3 27.7 30.6 32.6 34.5 36.9 39.4 41.8 43.5

EBITDAF margin % 31.1% 29.8% 28.2% 27.8% 28.4% 28.3% 27.4% 26.6% 25.8% 25.0% 24.7% EBIT margin % 18.7% 20.9% 19.5% 18.6% 18.6% 18.4% 18.1% 17.9% 17.7% 17.3% 17.2%

EV/Revenue x 3.9 3.8 3.8 3.6 3.3 3.1 2.9 2.7 2.5 2.3 2.2 EV/EBITDAF x 12.4 12.7 13.3 12.8 11.6 10.8 10.5 10.0 9.6 9.2 9.0 EV/EBIT x 20.7 18.1 19.3 19.1 17.8 16.6 15.9 14.9 14.0 13.2 12.9 PER x 35.1 28.5 27.5 27.3 25.5 24.4 22.1 19.6 17.7 16.1 15.1 PER (adjusted) x 24.5 28.5 27.5 27.3 25.5 24.4 22.1 19.6 17.7 16.1 15.1 Price/CF x 14.6 15.6 15.4 14.6 13.2 12.4 11.7 10.9 10.3 9.7 9.3

Payout ratio % 134.0% 245.4% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% 80.0% DPS c 22.1 34.8 11.8 11.8 12.7 13.2 14.6 16.5 18.3 20.1 21.3 Yield % 5.5% 8.6% 2.9% 2.9% 3.1% 3.3% 3.6% 4.1% 4.5% 5.0% 5.3%

NTA per share c 542 492 496 504 518 510 503 496 489 482 485 Price/NTA x 0.75 0.82 0.82 0.80 0.78 0.79 0.80 0.82 0.83 0.84 0.83

Net debt $m 1,553 1,103 1,117 1,186 1,354 1,158 959 756 549 339 127 Net debt/equity % 30.6% 23.1% 23.2% 24.4% 27.5% 23.3% 19.1% 14.8% 10.6% 6.5% 2.4% Net debt/debt + equity % 23.4% 18.8% 18.8% 19.6% 21.6% 18.9% 16.0% 12.9% 9.6% 6.1% 2.3% Net debt/EV % 19.4% 13.8% 14.0% 14.9% 17.0% 14.5% 12.0% 9.5% 6.9% 4.2% 1.6% Net Interest $m (108) (119) (86) (90) (98) (113) (97) (81) (63) (45) (28) EBIT / interest x 4.3 3.7 4.8 4.7 4.6 4.2 5.2 6.7 9.1 13.3 22.2

Return on assets % 5.4% 5.6% 5.2% 5.2% 5.4% 5.9% 6.3% 6.8% 7.3% 7.8% 8.0% Return on equity % 5.2% 4.8% 4.9% 4.9% 5.2% 5.3% 5.8% 6.5% 7.1% 7.7% 8.0% Return on funds employed % 7.0% 7.5% 7.0% 6.9% 7.2% 7.8% 8.4% 9.2% 10.0% 10.8% 11.4% 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 % (1.5%) (1.1%) (1.6%) (1.6%) (1.4%) (0.7%) (0.1%) 0.6% 1.4% 2.3% 2.8% Source: Company data, Macquarie Research, October 2010

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Fig 13 Meridian Energy cashflow statement ($NZm) FY10A FY11EFY12E FY13E FY14E FY15E FY16E FY17E FY18EFY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Operating activities Net Income before tax $m 277 322 327 329 352 367 406 457 508 558 593 Tax credit/(paid) $m (93) (95) (92) (92) (99) (103) (114) (128) (142) (156) (166) Depreciation/goodwill amortisation $m 174 188 185 206 237 256 259 261 264 267 270 Other $m 83 ------Gross cashflow $m 441 414 421 443 490 521 551 591 630 669 697 (Inc) / dec in working cap. $m 10 (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) Inc / (dec) in provisions $m - 0 0 0 0 0 0 0 0 0 0 Operating cashflow $m 452 414 421 443 490 521 551 590 630 669 697

Investing activities Capital expenditure $m (207) (188) (246) (322) (455) (113) (118) (124) (130) (137) (144) Acquisitions / Investments $m (263) ------Asset sales $m 12 750 ------Other $m - 30------Investing Cashflow $m (458) 592 (246) (322) (455) (113) (118) (124) (130) (137) (144)

Financing activities Debt drawndown / (repayment) $m 367 (504) 14 69 168 (196) (199) (203) (207) (210) (55) Dividends paid $m (353) (556) (188) (190) (203) (212) (234) (263) (293) (322) (341) Finance Cashflow - ex debt repayments $m 13 (1,060) (175) (121) (35) (408) (433) (466) (499) (532) (396)

Inc / (dec) in net cash held $m 7 (54) ------157 Source: Company data, Macquarie Research, October 2010

Fig 14 Meridian Energy balance sheet ($NZm) FY10A FY11EFY12E FY13E FY14E FY15E FY16E FY17E FY18EFY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Current Assets Cash and Cash Equivalents $m 54 ------157 Trade and other receivables $m 199 204 205 217 233 252 269 290 312 337 348 Inventories $m 6 66 7 7 8 8 9 910 11 Current tax receivable $m ------Other $m 12 1212 12 12 12 12 12 1212 12 Total Current Assets $m 272 222 223 236 252 271 289 311 334 359 527

Non Current Assets Property Plant and Equipment $m 8,207 7,458 7,519 7,635 7,853 7,710 7,569 7,432 7,298 7,168 7,041 Goodwill and other intangibles $m 50 50 50 50 50 50 50 50 50 50 50 Equity Accounted Joint Ventures $m 0 0 0 0 0 0 0 0 0 0 0 Derivative Financial Instruments $m 172 172 172 172 172 172 172 172 172 172 172 Other $m 14 14 14 14 14 14 14 14 14 14 14 Total Non Current Assets $m 8,444 7,695 7,755 7,872 8,090 7,946 7,806 7,668 7,535 7,404 7,278

Total Assets $m 8,716 7,917 7,978 8,107 8,342 8,218 8,095 7,979 7,868 7,764 7,805

Current Liabilities Current Borrowings $m 284 284 284 284 284 284 284 284 284 284 284 Accounts Payable $m 202 206 207 220 236 255 273 293 316 341 352 Provisions $m 1 11 1 1 1 1 1 11 1 Derivative Financial Instruments and $m 39 39 39 39 39 39 39 39 39 39 39 current tax payable Other $m 32 3232 32 32 32 32 32 3232 32 Total Current Liabilities $m 557 562 563 575 591 610 628 649 672 697 708

Non Current Liabilities Deferred Tax Liability $m 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560 Non Current Borrowings $m 1,323 819 833 902 1,070 873 675 472 265 55 - Term Payables $m 53 53 53 53 53 53 53 53 53 53 53 Derivative Financial Instruments $m 152 152 152 152 152 152 152 152 152 152 152 Total Non Current Liabilities $m 3,088 2,584 2,598 2,667 2,835 2,638 2,439 2,236 2,030 1,819 1,765

Net Assets $m 5,071 4,771 4,818 4,865 4,916 4,969 5,028 5,093 5,167 5,247 5,332

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 3,685 3,685 3,685 3,685 3,685 3,685 3,685 3,685 3,685 3,685 3,685 Retained Earnings $m (216) (516) (469) (421) (371) (318) (259) (193) (120) (40) 46 Other $m 2 22 2 2 2 2 2 22 2 Total Equity $m 5,071 4,771 4,818 4,865 4,916 4,969 5,028 5,093 5,167 5,247 5,332 Source: Company data, Macquarie Research, October 2010

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Fig 15 Meridian Energy taxation ($NZm) FY10A FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 30/06/10 30/06/11 30/06/12 30/06/13 30/06/14 30/06/15 30/06/16 30/06/17 30/06/18 30/06/19 30/06/20

Pre-Tax Profit $m 277 322 327 329 352 367 406 457 508 558 593 Add: Goodwill Amortisation $m (14) ------Operating Surplus before Taxation $m 264 322 327 329 352 367 406 457 508 558 593 Tax Expense/(Credit) $m (93) (95) (92) (92) (99) (103) (114) (128) (142) (156) (166)

Effective Taxation Rate % 33.6% 29.5% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% Source: Company data, Macquarie Research, October 2010

1 November 2010 17 Macquarie Research Meridian Energy

Financial flexibility and generation development Meridian Energy’s FY10 gearing ratio (net debt/debt + equity) and EBIT interest coverage ratio were 23.4% and 4.3x, respectively. We forecast that these ratios will be 18.8% and 3.7x in FY11. We assume that $550m of the $750m Tekapo A and B station proceeds will be returned to the Crown through a special dividend in FY11. These ratios continue to indicate that the company will have strong financial capacity to proceed with further generation development and to maintain an average 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 21.6% in FY14. As highlighted previously, Meridian has a large pipeline of generation developments, with over 350 MW of new hydro generation and over 1,500 MW of wind projects. We outline below our forecast capex for the company out to FY13, as per the development pipeline identified earlier. Note, maintenance capex declines from the FY10 level as a half-life refurbishment programme at Benmore is now complete.

Fig 16 Capital Expenditure ($NZm) FY08A FY09A FY10A FY11E FY12E FY13E 30/06/08 30/06/09 30/06/10 30/06/11 30/06/12 30/06/13

Growth capex $m 269 476 207 98 149 220

Maintenance capex Maintenance capex $m 105 112 132 90 97 102 Total capex $m 374 589 339 188 246 322 Source: Company disclosures, Macquarie Research, October 2010

1 November 2010 18 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 17 Sensitivities

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

Capacity factors 6,211 6,715 (-/+ 1%)

Carbon cost 6,470 6,568 ($25/t /$0/t)

Wholesale electricity prices 6,391 6,549 (-/+ $10MWh)

Retail electricity prices 6,163 6,763 (-/+ 0.5c/kWh)

Customer growth 6,459 6,467 (+/- 0.1%)

Usage per customer 6,439 6,487 (-/+ 500kWh pa)

Debt margin 6,375 6,553 (+/- 0.5%)

Market risk premium 6,112 6,853 (+/- 0.5%)

LWAP 6,370 6,556 (+/- 1% point)

NZAS base price escalation 6,152 6,815 (+/- 1% point)

Maintenance capex cost inflation 6,326 6,590 (+/- 0.5% point)

Greenfield development timing1 6,159 6,363 (+/- 1 year)

Source: Macquarie Research, October 2010

1 November 2010 19 Macquarie Research Meridian Energy

Alternative valuation methodologies We have assessed a comparable company equity valuation for the company of $4,942m- $6,198m. This is based on the current earnings multiples of listed comparable generators/retailers globally. The band is based on the average multiple for selected global generators with a bias toward conventional generation ranging to the average multiple for selected global renewable generators. We then applied a relatively arbitrary premium to this range to account for MER’s renewable generation bias and its pipeline of generation development options. This valuation provides a cross-check of the equity valuation based on our primary methodology, discounted cashflow. This valuation range is below our primary valuation due, in part, to the recent de-rating of global renewable energy multiples (absolutely and vis-a-vis conventional generators). A sum of the parts valuation may provide another useful cross-check but is heavily dependent on the electricity transfer price assumed.

Fig 18 Comparable company valuation analysis Multiple FY11 Enterprise value Net Debt Equity value ($m) EBITDA Low High Low High Low High Genesis Energy 8.1x 10.1x 265 2,147 2,677 902 1,245 1,775 Meridian Energy 9.1x 11.1x 628 5,715 6,971 773 4,942 6,198 Mighty River Power 8.6.x 10.6x 403 3,466 4,272 971 2,495 3,301 Contact Energy 9.8x 497 4,891 1,281 3,610 TrustPower 10.6x 292 3,096 733 2,363 Source: Capital IQ, FactSet, Macquarie Research, October 2010

1 November 2010 20 Macquarie Research Meridian Energy

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

Fig 19 Meridian Energy relative disclosure

Disclosure Level1 Genesis Meridian Mighty River Energy Energy Power Contact Energy TrustPower

Generation

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

Prices GWAP ($/MWh) √ √ √ √ √

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

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

Capital expenditure Maintenance ($m) √ √ √

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 (MWh) Energy use per customer SME (MWh) TOU (MWh)

Mass market ($/MWh) Tariffs SME ($/MWh) TOU ($/MWh)

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

Gas Supply

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

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

Direct ($m) NA √ NA Operating costs Other ($m) NA √ NA Source: Company disclosures, Macquarie Research, October 2010

1 November 2010 21 Macquarie Research Meridian Energy

Fig 20 EV/EBITDA (Jun-11) Fig 21 EV/EBIT (Jun-11)

20x 45x 18x 40x 16x 35x 14x 30x 12x 25x 10x 20x 8x 15x 6x 10x 4x 2x 5x - - AGL EDF EDP Enel EDF AGL EDP Enel E. ON E. ON Origin Origin Contact INFIGEN Contact THEOLIA INFIGEN THEOLIA Iberdrola Iberdrola ERG Renew ERG Renew TrustPower TrustPower NextEra Energy NextEra Energy EDP Renovaveis EDP EDP Renovaveis EDP International Power International Power International Iberdrola Renovables Iberdrola Iberdrola Renovables Iberdrola EDF Energie Nouvelles EDF Energie Nouvelles TransAlta Corporation TransAlta Corporation Scottish and Southern Energy Southern and Scottish Scottish and Southern Energy Southern and Scottish

Source: Company disclosures, Macquarie Research, October 2010 Source: Company disclosures, Macquarie Research, October 2010

Fig 22 Gearing (Net debt / EV) Fig 23 Market cap vs EV (NZ$b)

1x 1x

1x 1x 1x 1x 1x 1x 1x 0x 1x 0x 0x 0x 0x 0x 0x 0x - - AGL EDF EDF AGL EDP EDP Enel Enel E. ON E. ON Origin Origin Contact Contact INFIGEN THEOLIA INFIGEN THEOLIA Iberdrola Iberdrola ERG Renew ERG Renew TrustPower TrustPower NextEra Energy NextEra Energy EDP Renovaveis EDP EDP Renovaveis EDP International Power International International Power International Iberdrola Renovables Iberdrola EDF EnergieNouvelles Iberdrola Renovables Iberdrola TransAlta Corporation EDF Energie Nouvelles TransAlta Corporation Scottish and Southern Energy and Southern Scottish Scottish and Southern Energy Southern and Scottish

Source: Company disclosures, Macquarie Research, October 2010 Source: Company disclosures, Macquarie Research, October 2010

Fig 24 EBITDA margin (Jun-11) Fig 25 EBIT margin (Jun-11)

1x 0x

1x 0x

1x 0x

1x 0x

0x 0x

0x 0x

0x 0x

0x 0x

- - AGL EDF EDP EDF AGL EDP Enel Enel E. ON E. ON Origin Origin Contact Contact INFIGEN THEOLIA INFIGEN THEOLIA Iberdrola Iberdrola ERG Renew ERG Renew TrustPower TrustPower NextEra Energy NextEra Energy EDP Renovaveis EDP EDP Renovaveis EDP International Power International Power Iberdrola Renovables Iberdrola EDF Energie Nouvelles Iberdrola Renovables Iberdrola TransAlta Corporation EDF Energie Nouvelles TransAlta Corporation Scottish and Southern Energy Southern and Scottish Scottish and Southern Energy Southern and Scottish

Source: Company disclosures, Macquarie Research, October 2010 Source: Company disclosures, Macquarie Research, October 2010

1 November 2010 22 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 >5% in excess of benchmark return price movements. adjustments made: Neutral – return within 5% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >5% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, Macquarie – Asia/Europe expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Outperform – expected return >+10% – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property Neutral – expected return from -10% to +10% speculative. revals, appraisal value uplift, preference dividends & Underperform – expected return <-10% minority interests High – stock should be expected to move up or Macquarie First South - South Africa down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Outperform – expected return >+10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Neutral – expected return from -10% to +10% ROA Banks/Insurance = adjusted net profit /average Underperform – expected return <-10% Medium – stock should be expected to move up total assets Macquarie - Canada or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – return >5% in excess of benchmark return Gross cashflow = adjusted net profit + depreciation Neutral – return within 5% of benchmark return Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – return >5% below benchmark return move up or down at least 25–30% in a year. number of shares

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

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

Recommendation proportions – For quarter ending 30 September 2010 AU/NZ Asia RSA USA CA EUR Outperform 51.06% 64.41% 55.07% 46.58% 66.99% 50.00% (for US coverage by MCUSA, 13.73% of stocks covered are investment banking clients) Neutral 34.15% 17.31% 36.23% 48.40% 28.71% 36.81% (for US coverage by MCUSA, 11.76% of stocks covered are investment banking clients) Underperform 14.79% 18.28% 8.70% 5.02% 4.31% 13.19% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

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1 November 2010 24 Macquarie Research Meridian Energy

Appendix 1

Meridian Energy equity valuation – pre Electricity Industry Act

Macquarie Research’s discounted cashflow-based equity valuation for Meridian Energy is $6,469m (enterprise value $7,992m) assuming a nominal WACC of 8.6%, asset beta 0.60 and TGR 3.0%.

Meridian Energy DCF equity valuation summary

Perpetuity growth rate 3.0% Perpetuity Value 12,566 PV (FY10-29) 4,868 PV of Perpetuity 2,864 PV FCF available to owners 7,732 Plus: book value of international assets 260 Plus: proceeds from sale of Tekapo 0 Plus: settlement receivable 30 Less Net Debt (1,553) Equity Value 6,469 Shares Outstanding (m) 1,600 DCF Equity Value per share 4.04 Assumptions Corporate Tax Rate 28.0% Risk free rate 5.50% Asset beta 0.6 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 2010

This valuation is calculated after excluding the impact from the Electricity Industry Act (EIA) modeled and summarised through this report. We note the following:

1. The virtual asset swaps contained in the EIA were assumed to be transacted at fair value; 2. The Tekapo A and B station physical asset swap impacted, inter alia, generation output, direct and indirect costs, maintenance capital expenditure and the group LWAP/GWAP ratio.

1 November 23